Book No. 13 Accountancy Financial Sybcom Final

13
S.Y.B.Com.
ACCOUNTANCY AND FINANCIAL

MANAGEMENT PAPER -II
(Revised Syllabus w.e.f Academic Year 2014-15)

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CONTENTS
Unit No. Title Page No.
1. Final Accounts of Partnership Firms I 01

2. Partnership Final Accounts II 08
3. Partnership Final Accounts III 22
4. Piecemeal Distribution 96
5. Amalmagation of Firms I 146
6. Amalmagation of Firms II 155
7. Accounting with the use of Accounting Software 209
8. Fire Insurance Claims 216
9. Redemption of Preference Shares Part I 236
10. Redemption of Preference Shares Part II 250
11. Redemption of Debentures I 313
12. Redemption of Debentures II 322
13. Accounting with the use of Accounting Software 360
vvvv
I
Syllabus
S.Y.B.Com.
Accountancy and Financial Management Paper - II
With Effect from the Academic Year 2014-2015
SECTION - I
Modules at a Glance
Sr. Modules No. of
No. Lectures
1 Partnership Final Accounts based on 18
Adjustment of Admission or Retirement /
Death of a Partner during the Year
2 Piecemeal Distribution of Cash 14
3 Amalgamation of Firms 14
4 Accounting with the use of Accounting Software 14
Total 60
Sr.
No.
1 Partnership Final Accounts based on Adjustment of
Admission or Retirement
Simple final accounts questions to demonstrate the effect on final
Accounts when a partner is admitted during the year or when
partner
Retires / dies during the year
Allocation of gross profit prior to and after admission / retirement
/ death when stock on the date of admission / retirement is not
given and apportionment of other expenses based on time /
Sales/other given basis
Ascertainment of gross profit prior to and after
admission/retirement / death when stock on the date of admission /
retirement is given and apportionment of other expenses based on
time / Sales / other given basis
Excluding Questions where admission / retirement / death takes
place in the same year
II
2 Piecemeal Distribution of Cash

Excess Capital Method only
Asset taken over by a partner
Treatment of past profits or past losses in the Balance sheet
Contingent liabilities / Realization expenses/amount kept aside
for expenses and adjustment of actual Treatment of secured
liabilities
Treatment of preferential liabilities like Govt. dues / labour dues etc
Excluding: Insolvency of partner and Maximum Loss Method
3 Amalgamation of Firms
Realization method only
Calculation of purchase consideration Journal/ledger accounts of
old firms Preparing Balance sheet of new firm Adjustment of
goodwill in the new firm
Realignment of capitals in the new firm by current
accounts / cash or a combination thereof
Excluding
Common transactions between the amalgamating firms
4 Accounting with the use of Accounting Software
• Cost Centre, Cost Categories
• Inventory- Creation of groups, Creation of stocks, Stock
Categories
• Inventory vouchers-Stock Journal, Manufacturing Journal,
Godown
• Management, Batch wise Management
III
SECTION II
Modules at a Glance
Sr. Modules No. of
No. Lectures
5 Fire Insurance Claims 15
6 Redemption of Preference Shares 15
7 Redemption of Debentures 15
8 Accounting with the use of Accounting Software 15
Total 60
Sr.
No.
5 Fire Insurance Claims
Computation of loss of stock by fire
Ascertainment of claim as per the insurance policy
Excluding loss of profit and consequential loss
6 Redemption of Preference Shares
Company Law / Legal Provisions for redemption of
preference shares in Companies Act
Sources of redemption including divisible profits and proceeds of
fresh issue of shares
Premium on redemption from security premium and profits of
company
Capital Redemption Reserve Account - creation and use
7 Redemption of Debentures
Redemption of debentures by payment from sources including out
of capital and / or out of profits.
Debenture redemption reserve and debenture redemption sinking
fund excluding insurance policy.
Redemption of debentures by conversion into new class of
shares or debentures with options- including at par, premium and
discount.
8 Accounting with the use of Accounting Software
Advance accounting and Inventory Vouchers: Purchase and Sales
Order, Reorder, Delivery Notes, Budgeting and Controls,
Invoice-Product Invoice and Service Invoice
Shortcut Keys: Special key Combination, Special Functional key
Combination
Management Information System (MIS)
IV
Reference Books
Sr. Title of the Authors Publisher

No. Reference Book
1 Introduction to T.S. Grewal S. Chand and Co. (P)
Accountancy Ltd., New Delhi
2 Advanced Shukla and Grewal S. Chand and Co. (P)
Accounts Ltd., New Delhi
3 Advanced R.L. Gupta and S. Chand and Co. (P)
accountancy Ltd., New Delhi
M. Radhaswamy
4 Modern Mukerjee and Hanif Tata Mc. Grow Hill and
Accountancy Co. Ltd., Mumbai
5 Financial Lesile ChandWichk Pretice Hall of India Adin
Accountancy Bakley (P) Ltd.
6 Financial Dr. Dinesh D. Multi-Tech. Publishing
Accounting for Harsalekar Co. Ltd., Mumbai
Management Texts
and Cases
7 Financial P.C.Tulsian Tata Mc. Grow Hill and
Accounting Co. Ltd., Mumbai
8 Accounting R.N. Anthony and Richard Irwin Inc.
Principles J.S. Reece
9 Financial J.R. Monga, Girish Mayur Paper Back
Accounting Ahuja and Ashok
Shehgal
10 Advanced M.C. Shukla, T. S. S. Chand and Co. (P)
Accounts Grewal and Gupta Ltd., New Delhi
11 Compendium of Institute of Chartered
Statement and Accountants of
Standard of India, New Delhi
Accounting
12 Indian Accounting Ashish Tata Mc. Grow Hill and
Standard Bhattacharya Co. Ltd., Mumbai
13 Financial Williams Tata Mc. Grow Hill and
Accounting Co. Ltd., Mumbai
14 Indian Accounting Dolphy Desouza Snow White Publications
Standards and US Ltd.
GAAP
15 Company Shrinivasan Anand Taxman
Accounting
Standards
V
PATTERN OF QUESTION PAPER FOR 100 MARKS
MAXIMUM MARKS – 100 DURATION – 3 HRS
SECTION I
1. In all there will be 4 questions.

2. No. of questions to be solved 3.
3. Question No. 1 will be compulsory having no option carrying 18
marks.
4. Question No. 2 having no option carrying 16 marks.
5. Question No. 3 & 4 each having internal options, each carrying
16 marks.
6. Not more than one question shall be on Theory.
7. Question No. 1 and 2 shall be the practical problems only.
8. Question No. 2 will be of objective type.
SECTION II
1. In all there will be 4 questions.

2. No. of questions to be solved 3.
3. Question No. 5 will be compulsory having no option carrying 18
marks.
4. Question No. 6 having no option carrying 16 marks.
5. Question No. 7 & 8 each having internal options, each carrying
16 marks.
6. Not more than one question shall be on Theory.
7. Question No. 5 and 6 shall be the practical problems only.
8. Question No. 6 will be of objective type.
1
1
FINAL ACCOUNTS OF PARTNERSHIP
FIRMS I
Unit Structure :
1.0 Objective
1.2 Introduction
1.3 Partnership Deed
1.4 Partnership Final Account
1.5 Profit and Loss Appropriation Accounts
1.6 Guarantee of Profits to / Or by a Partner
1.7 Joint Life Policy
1.0 OBJECTIVE OF THE UNIT
After studying the unit the student will be able to :

• Define the meaning of Partnership Deed.
• Transfer the Trial Balance.
• Describe the Accounting Procedure and the treatment to
various adjustments in Final Accounts.
• Calculate the Interest on Capital and Interest on Drawings.
• Solve the practical problems.
1.1 INTRODUCTION
A Partnership is defined by section 4 of the Indian

Partnership Act 1932, as “The relation between persons who have
agreed to share profits of business carried on by all or by any of
them acting for all: Persons who have entered into Partnership are
individually called as Partners and collectively called as a firm.
1.1.1 There are three important characteristics of Partnership
1) There should be AGREEMENT between two or more persons.

2) This agreement must be to SHARE the profits of the business.
3) The business must be carried on by all the partners or by any
one of the partner acting for all of them.
2
1.2 PARTNERSHIP DEED
We have seen above that Partnership is created by an

AGREEMENT. It is not necessary to have a written agreement.
However written agreement is desirable because it can avoid
dispute in future. The Deed of Partnership is a document in writing
which contains the important terms that the partners have agreed
among themselves. The partnership deed should be properly
drafted and stamped as required by Stamp Act.
1.2.1 Partnership deed specific:-

In case of specific Provision in the Partnership deed
(which may be oral or written), the appropriation (or distribution) of
Profit is done accordingly.
1.2.2 Partnership deed is silent (or absence of Partnership

deed):-
In this case, following provisions of section 13 of the Indian
Partnership Act, 1932 would be applicable:-
1) Interest on capital - Not Allowed.
2) Interest on capital - Such interest is payable only if allowed by
the partnership deed. Out of profits.
3) Interest on drawings - Not Allowed.
4) Salary to Partners - Not Allowed.
5) Commission to Partners - Not Allowed.
6) Interest on Partners loan - 6% p.a. allowed.
7) Profit/ or Loss Sharing ratio - Equal for all Partners (Even if
Partner’s capital may be unequal).
1.3 PARTNERSHIP FINAL ACCOUNTS
Each partner should know the financial performance of the

business for the year. Each partner has unlimited liability and
therefore, he should also know the state of affairs (i.e. Assets and
Liabilities) on a particular date. The accounts of a partnership
business are prepared on the basis of double entry as well as
accrual basis. The accounts consider outstanding expenses,
prepaid expenses, outstanding Income, etc. to determine profit (or
loss) during the accounting year.
The final accounts of partnership firm includes:-

1) Trading Account to disclose the Gross Profit (or Gross Loss)
during the accounting year.
2) Profit and Loss Account to disclose Net Profit (or Net Loss)
during the accounting year.
3
3) Profit and Loss Appropriation Account to disclose the

distribution of Net Profit (or Net Loss) among partners after
considering interest on partners capital, interest on drawing,
salary to partners etc. If there is no appropriation, then the net
profit from the Profit and Loss Account is transferred to Capital.
4) Balance Sheet to disclose the Assets and Liabilities at the end
of the accounting year.
5) Manufacturing Account may be prepared (in addition to Trading
Account) to disclose Cost of Goods produced and other
elements of cost taking figure in Manufacturing Account shows
cost of production, which should be transferred to Trading
Account.
6) Partners Capital Accounts are prepared separately and then the
closing balance is transferred to the Balance Sheet. When
Partners Capital A/c, If Partner’s Capital A/c are fixed, it is
transferred to Current Account.
1.4 PROFIT AND LOSS APPROPRIATION A/C
This is a special Account prepared in case of only

PARTNERSHIP firm. It shows how the Net profit/Net Loss has
been distributed (Appropriated) amongst Partners.
Note: In case of Partnership firm any remuneration paid or payable

to partners in the form of salary, rent. Interest on capital,
commission etc. is treated as distribution of profit and not as
business expense. Therefore the above expenses if paid or
payable to partners shall not be debited to Profit and Loss Account
but shall be debited to Profit and Loss Appropriation A/c.
Thus this A/c will be debited by:

1) Net Loss (transferred from credit side of Profit & Loss Account)
2) Salaries, Rent, Interest on Capital, Commission etc. to Partners
This A/c will be credited by

1) Net Profit (transferred from the Debit side of Profit & Loss A/c)
2) Interest on Drawing charged to Partners.
The difference in this account will show the Final Net

Profit/Loss which can distributed amongst the partners in their profit
sharing ratio.
If the Credit side is heavier-profit to be distributed

If the Debit side is heavier –Loss transferred to Partners
Account
4
1.4.1 INTEREST ON CAPITAL OR SALARY ETC
Interest or Salary is payable only out of the Profit (i.e. on

appropriation of Profit). Therefore,
1) In case of loss, no interest or Salary is allowed.
2) In case if Profit is less than Interest, etc then such interest
etc. is limited to the extent of profit.
However, the partner may decide to waive such intimation

(by specific provision in the partnership deed) that interest, etc. is
allowed even (if there is a loss) then the amount of loss is
increased and such increased (entire) loss is shared by the partner
in the profit (and loss) sharing ratio.
1.4.2 INTEREST ON DRAWINGS
The partner may be charged Interest on the Drawing. So as

to make distribution of profit more equitable, Interest on Drawing is
charged on the different amounts withdrawn on the different dates
during the accounting year. The interest on drawings is calculated
by the Product Method or the Average Due Date Method. Usually,
when a partner draws a fixed amount monthly, then the interest on
drawings is calculated as follows:-
Withdrawals Interest on total Drawings

a) Beginning of each month
(e.g. 1st January ,1st February For 6.5 month
… 1st December
b) Middle of each month (not
given) (e.g. 15th January, 14th For 6 month
February,…. 15th December)
c) End of each month (e.g. 31st
January, 28th February, 31st For 5.5 month
December)
1.5 GUARANTEE OF PROFITS TO/OR BY A PARTNER
According to the partnership deed, one or few partners are

guaranteed a minimum amount of profit, therefore, such partner
would receive guaranteed (minimum) profit or profit as per profit
sharing ratio which ever is higher.
The different types of guarantee arrangements are as follows:-
1) A Partner is given an undertaking that his share in profits

(including salary, interest on capital etc) will not be below a certain
amount. Such guarantee may be given by one partner or by all
other remaining partners. Usually, in such a case in future, when
5
the concerned Partner’s share of profit exceeds the minimum limits

then the excess profit (above minimum limit) is refunded (to the
extent profits overdrawn in the past)
2) A partner guarantees that the profit of the firm would above a

certain figure in such case the profit is lower, then the guarantor
partner’s account is debited and profit and loss Appropriation A/c is
credited.
3) A partner guarantees that, if particular partner’s share of profit

exceeds a certain amount, then he would suffer to the extent of
difference (i.e. to the extent of profit above certain amount the
guarantor partner would receive less profits).
1.6 JOINT LIFE POLICY
The object of taking life policy on the lives of the partner is to

insure against the chances or disturbance in the business due to
death of any one of the partners. The amount payable to the legal
representative of the deceased partner is paid out of the policy
amount received from the Insurance Company; otherwise, the
assets may have to be sold, which may result in the disturbance to
or closure of the business. The firm can take one Joint Policy on
the life of all partners, or otherwise, it may take separate policies on
the life of each partner.
Accounting treatment may be one of the following three ways:-
1.6.1 Premium paid is treated as expense of the firm and

debited to Profit and Loss A/c when amount is received it is
credited to Partners Capital in their profit sharing ratio
1.6.2 When premium paid is treated as assets: - In this case

premium paid is debited to Joint Life Policy A/c. Joint Life Policy
A/c is kept at surrender value, on date of balance-sheet. The
balance in Policy A/c in excess of surrender value is treated as loss
and transferred to P & L A/c. When amount received on surrender
of policy or maturity of policy, is credited to Joint Life Policy A/c.
Balance in Joint Life Policy being profit credited to Partners Capital
A/c in their profit sharing ratio.
1.6.3 When premium paid treated as asset and Joint life

policy reserve is maintained. In this case premium paid is
debited to Joint Life Policy A/c at the end of the year Joint Life
Policy Reserve is created to the extent of premium paid by debiting
to Profit and Loss A/c and crediting to Joint life policy reserve a/c.
Both Joint Life Policy and Joint Life Policy Reserve A/c are brought
down to surrender value by debiting Joint Life Policy Reserve A/c
crediting Joint Life Policy A/c. At the end of the year Joint Life
6
Policy is shown on Assets side of the Balance Sheet. Joint Life

Policy Reserve a/c is shown on the Liability side of the Balance
Sheet.
On the maturity of the policy or when policy is surrendered

following entries are passed.
When Joint Life Policy premium paid

a) Joint Life Policy A/c ……Dr.
To Bank A/c
b) For transferring to Profit & Loss A/c (equal to premium paid)

Profit & Loss A/c ……Dr.
To Joint Life Policy Reserve A/c
c) For bring balance in Joint life policy to surrender value

Joint Life Policy Reserve A/c ….. Dr.
To Joint Life Policy A/c
Above entries are repeated every year, if joint life policy

surrendered or matured.
On maturity of policy/surrender following entries are passed.

a) Bank A/c …..Dr.
To Joint Life Policy A/c
b) For excess amount received

Joint Life Policy A/c…….Dr
To Joint Life Policy Reserve A/c
c) For transferring Joint life policy Reserves to Partners Capital A/c

in their profit sharing ratio.
Joint Life Policy Reserve A/c…..Dr
To All Partners Capital A/c
Check Your Progress :

Define
• Partnership Deed
• Profit and Loss Appropriation Account
• Joint Life Policy
Fill in the Blanks
• Any salary paid or payable to a Partner is treated as
____________________________________
• If Any Commission is paid or payable to a Partner shall be
debited to -------------------------------------------------------------.
7
• When the Joint Life Policy Premium paid is treated as

Expenses of the firm it is to be debited to -------------------------
• Variable expenses related to sales are to be divided in the
-----------------------------------Ratio.
State whether True or False
• In case of Partnership Firm any Interest paid on Capital of a
Partner is treated as Expenses of the firm.
• In case of Loss, no Interest or Salary is allowed.
• No Interest is to be payable to a New Partner before
Admission.
8
2
PARTNERSHIP FINAL ACCOUNTS - II
Unit Structure
2.0 Objectives
2.1 Adjustment to Final Accounts
2.2 Revaluation Assets and Liabilities on Admission or
Retirement of Partner
2.3 Adjustment Relating to Reserves / Goodwill
2.4 Hidden Adjustments
2.5 Proforma of Final Accounts
2.6 Accounting Procedure
2.0 OBJECTIVES
After studying the unit the students will be able to:

• Understand the adjustments and journal entries and effets of
the adjustments to Final Accounts.
• Revaluate assets and liabilities on admission and retirement
of the partner.
• Understand the adjustments related to Goodwill and
Reserves.
9
2.1 ADJUSTMENT TO FINAL ACCOUNTS :
Adjustment Journal Entries Effect in P & L A/c or Effect in Balance Sheet

P & L Adj. A/c
1. Outstanding or Salary/s a/c - Dr. Add to the expenses, Show on the Liability
Unpaid expenses e.g. To Outstanding Salary A/c e.g. salary side as Outstanding
Salary Outstanding. Salary.
2. Outstanding Income Interest Receivable A/c - Dr. Add to the Income on Show on the Assets Side
or Income not received or To Interest A/c credit side, e.g. from as Outstanding Interest.
Income Receivable or Interest
Income Earned but not
Received e.g. Interest
due but not received.
Show on the Assets Side
3. Prepaid Expenses or Prepaid Insurance A/c – Dr. Deduct from that as Prepaid Insurance.
Expenditure paid in To Insurance A/c expenditure on debit side
advance or Unexpired e.g. from Insurance.
Insurance e.g. Prepaid
Insurance. Deduct from the Debtors
on Assets Side.
4. Bad Debts written off. Bad Debts A/c - Dr. Show on the debit side as
To Sundry Debtors A/c. addition to the bad debts
given in trial balance. Show on the Liability
Side as Interest
10
5. Income Received in Interest (Income) A/c - Dr. Deduct from the Income Received in Advance.
Advance, e.g. Interest To Interest Received in on credit side e.g. from
for three months Advance. Interest Received. Deduct from that assets
Received in Advance. on the assets side e.g.
Show on the debit side as from machinery.
6. Depreciation on Fixed Depreciation a/c - Dr. depreciation on
Assets (like depreciation To Machinery a/c. machinery.
on machinery.) Deduct from Creditors on
Liability Side.
7. Reserve for Discount on Reserve for Dis. On Cr. A/c-Dr. Show on the Credit Side.
Creditors. To Discount Received A/c.
Deduct from the Debtors.
Show separately on the
8. Reserve for Discount on Discount Allowed A/c - Dr.
Debit side.
Debtors. (Calculate at To Reserve for discount on
given % on the balance of Debtors A/c
Debtors after deducting
Bad Debts and R.D.D. Deduct from the Bank
given in the adjustments.) A/c and Add to the
Debtors on the Assets
-- Side
9. Bills Receivable Debtors A/c - Dr.
Discounted is To Bank A/c.
Dishonoured.
11
10. Writing off differed P & L A/c - Dr. Debit Side of P & L A/c Deduct from that
Revenue Expenditure e.g. To Preliminary Expenses A/c Account on the Assets
Write Off Preliminary Side e.g. from
Expenses. Preliminary Expenses
A/c.
11. Bill Receivable Debtors A/c - Dr. -- Deduct from BIR & Add
dishonored is remained to To Bills Receivable A/c. to Debtors on the assets
be adjusted. side.
12. Sundry Debtors include a Bad Debts A/c - Dr. Show on the Debit Side as Deduct from the Debtors
Debtor for Dishonor Bill To Debtors A/c Bad Debts. on the Asset Side.
and half the amount is
irrecoverable.
Deduct from the Capital
13. Goods withdrawn by the Drawings A/c - Dr. Show on the credit side of A/c of the Partner on the
Partner. To Trading A/c Trading A/c. Liability Side.
14. Goods Purchased Purchases A/c - Dr. Add to Purchases on Add to the Creditors on
remained to be recorded To Creditors A/c Debit side of the Trading the Liability Side.
though included in Stock. A/c.
12
15. Goods sold are included -- Deduct from the Closing Deduct from the
in the closing stock as it Stock on the credit side of Closing Stock on the
was not delivered. Trading A/c Assets Side.
16. Sale includes goods sent At Selling Price: (a) Deduct from sale on (a) Deduct from Debtors
on sale or return basis. Sales A/c – Dr. credit side of Trading A/c on Assets Side at sales
To Debtors A/c at selling price to the price.
At Cost Price: extent it is not approved (b) Add to the Closing
Stock with Customers A/c-Dr. by customers. Stock at cost on Assets
To Trading A/c (b) Add to the Closing Side.
Stock at cost on credit
side of Trading A/c.
(a) Show on the credit --

17. Goods distributed as free Advertisement A/c – Dr. side of Trading A/c.
samples. To Trading A/c (b) And on the debit side --
of P & L A/c. as
Advertisement.
18. Wages paid for Machinery A/c – Dr. Deduct from the Wages Add to the Machinery on
installation of Machinery To Wages A/c on the debit side of the Assets Side.
debited to Wages A/c. Trading a/c.
13
19. Loss of goods by fire and Insurance Claim A/c – Dr. (a) Show on credit side of Show on the Assets Side
Insurance Company Loss by Fire A/c – Dr. Trading A/c the total loss. the amount of claim
Admitted Claim. To Trading A/c. (b) Show on debit side of Admitted by the
P & L A/c the actual loss Insurance Company.
i.e. Amt. of goods lost by
fire Less Amt. Of claim
Admitted by the Insurance
Co.
20. Legal charges paid for Property A/c – Dr. Deduct from the legal Add to the Property
Acquisition of property To Legal Charges A/c expenses on debit side of acquired on Assets Side.
debited to Legal Expenses P & L A/c
A/c
21. Interest on Partner’s Interest on Capital A/c – Dr. Show on the debit side of Add to Capital on the
capital. To Partners Capital A/c P & L Appropriation A/c. Liability Side.
22. Salary to Partner. P & L Appropriation A/c – Dr. Show on the debit side of Add to the Capital A/c of
To Partners Capital A/c P & L Appropriation A/c. the Partner.
23. Interest on Partner’s Partners Cap. A/c – Dr. Show on the credit side of Deduct from the Capital.
Drawing To P & L Appropriation A/c P & L Appropriation A/c
14
24. Closing Stock. (a) Stock of Material A/c – Dr. (a)Stock of Raw Material On Assets Side.
Work In Progress A/c – Dr. on the credit side of
To Manufacturing A/c Manufacturing A/c
(b) Stock of Finished Goods (b) of Work In Progress as On Assets Side.
A/c – Dr. above.
To Trading A/c (c) of Finished Goods on On Assets Side.
credit side of the Trading
A/c.
25. Commission to Manager Managers Commission Show on the debit side of Show on the Liability
as % Net Profit. A/c – Dr. P & L A/c. Side as Outstanding
To Outstanding Comm. A/c Commission
26. Goods received as free Trading A/c – Dr. (a) Show on the debit side --
sample, and included in To P & L A/c of Trading A/c.
Closing Stock. (b) Show on the credit --
side of P & L A/c.
15
2.2 REVALUATION ASSETS AND LIABILITIES ON

ADMISSION OR RETIREMENT OF PARTNER
• Increase in value of Assets.
Fixed Assets A/c Dr.

To Revaluation A/c
• Decrease in value of fixed Assets
Revaluation A/c Dr.

To Fixed Assets A/c
• Increase in liabilities ( unrecorded)
Revaluation A/c Dr.
To Sundry Liabilities A/c
• Decrease in Liabilities
Sundry Liabilities A/c Dr.
To Revaluation A/c
• Transferring Revaluation Profit to Old Partners in old

ratio.
Revaluation A/c Dr.

To Old Partners Capital A/c
• Transferring Loss on Revaluation to Old Partners

Capital A/c in old ratio
Old partners Capital A/c Dr.

To Revaluation A/c
Note:
i) Revaluation A/c is also known as profit & Loss Adjustment A/c.
ii) Revaluation of Assets etc. may not be included in syllabus.
However not specially excluded also.
2.3 ADJUSTMENT RELATING TO RESERVES/

GOODWILL :
2.3.1 Reserves appearing in Balance Sheet. These reserve

belongs to old partner therefore should be transferred to Old
Partners Capital A/c.
General Reserve A/c Dr.
16
Adjustment relating Goodwill.
Full value of Goodwill is raised and Appears in Balance Sheet.
Goodwill A/c Dr.
To old Partners Capital A/c [in Old Ratio]
2.3.2 Goodwill was raised and written off
(not appearing in Balance Sheet)
Incoming Partners Capital A/c Dr.
(Credited in Sacrificing Ratio)
(Sacrificing Ratio = Old Ratio – New Ratio)
2.3.3 After admission of New Partner

Goodwill written off
All Partners Capital A/c ….. Dr. [In new P.S.R.]
To Goodwill A/c
2.3.4 Incoming partner bring his share of Goodwill in cash.

a) Cash A/c – Dr.
To Goodwill A/c
b) Goodwill A/c – Dr.
[in sacrificing ratio]
2.3.5 Goodwill amount paid in Cash by new partner privately

No entry in book of Accounts.
2.4 HIDDEN ADJUSTMENTS :
Sometimes, details given in Trial Balance indicate amount of

expenses or income are to be adjusted.
Trial Balance on 31.12.13 Adjustment effects
Dr. Cr.
a) 10% Bank Loan 200000 a) Bank int. for 6 months
[1st July 08] 10% on 200000=
Bank Interest 5,000 200000 x10% 6/12=10000
Out Standing Interest =
Rs. 5000 to be provided
17
b) Salaries (11 months) b) Per Month’s Salary
22,000 = 22000/11 = Rs. 2000
Provide Outstanding
Rs. 2000
c)12% Govt. Security 97,000 c) Amount of interest

[Face Value =100000 X 12%
Rs. 100000] = Rs. 12000
Interest on Govt. 6,000 Accrued Interest
Securities =12000-6000
=Rs.6000 to be accounted.
Interest on Investment is
always calculated or Face
Value.
D) Furniture 60000 d) Furniture sold at loss of

(Opening Bal ance) of Rs. 7000(25000-18000)
Sale of Furniture 18000 i) Deduct Rs.25000
[W.D.V. Rs.25000] from Furniture
ii)Loss on sale of Furniture
Rs. 7000 Debit to P & L
A/c
2.5 PROFORMA OF FINAL ACCCOUNTS :
2.5.1
Dr. Trading A/c for the year ended…. Cr.
Particulars Rs. Particulars Rs.

To Opening tock X By Sales: Cash X
To Purchases X Credit X
Less Purchase Return X X Less: Sales Return (X) X
To Carriage X By Goods Lost by
To Wages X Fire etc : (at cost) X
To Direct Expenses X By Closing Stock X
To Gross Profit C/d X
XX XX
18
2.5.2
Profit & Loss A/c for the ended
Particulars Basis Before After Particulars Basis Before After

Admission Admission Admission Admission
To salaries T X X By Gross S X X
To Insurance T X X Profit T X X
To T X X By T X X
Administrative Interest
Exp. T X X By Rent S X X
To S X X X X
Depreciation S X X By
To S X X Discount
Commission S X X By Net
To Bad Debts S X X Loss C/d
To Discount X X
To
Advertisement
To Travelling
Exp.
To N.P. C/d.
2.5.3
Profit and Loss Appropriation A/c
Before After Before After

Admission Admission Admission Admission
To Partner Salaries By G.P.B/fd X X
Old Partner T X X By Interest on
New Partner -- -- X Drawings -- --
To Interest on New Partner - -- X
Capital Old T X X Old Partner T X X
New -- -- X
To Net Profit
Before Admi. Old Ratio x X
After Admi. New Ratio x X
XX XX XX XX
19
2.5.4
BALANCE SHEET AS ON
Liabilities Rs. Rs. Assets Rs. Rs.

Partners Capital A/c Fixed Assets
X X Goodwill X
Y X Other Fixed Assets X
Z X X - Depreciation X X
Partners Current Investment X
Accounts X X Stock X
Z X X S. Debtors X
- New Bad debts (X)
Bank Loans X X
Sundry Creditors X - New R.D.D. (x) X
Bills Payable X
Outstanding Expenses X Bills Receivable X
Income Received in Advance X Cash & Bank Balance x
Y’s Current A/c X
XX XX
2.6 ACCOUNTING PROCEDURE
1) When New Partner is admitted on 1st day of the year or on

Last day of the year, usual final A/c should be prepared i.e.
division in Profit & Loss A/c, Profit & Loss Appropriation A/c
is not required.
2) Similarly in case of Retirement/Death of a partner on 1st day
or last day of the year, there is no need of preparing Profit &
Loss A/c and Profit& Loss Appropriation A/c in columnar
form before retirement and after retirement of partner.
3) In both of above cases, it is usual Partnership Final A/c.
4) In case of Admission on Retirement or Death of Partner in
between the year - Either prepare Final Accounts on that
date to find out Profit or Loss upto change in partnership i.e.
Close the books of Accounts on that date.
5) However it may not be possible to close books of accounts
on the date of Admission or Retirement or Death of the
Partner. Partners continue same books of accounts up to the
end of the year. In such case Profit & Loss A/c as well as
Profit and Loss Appropriation A/c are prepared in columnar
form i.e. Before Change in Partnership and After Change in
Partnership then following accounting procedure is followed.
• Prepare Trading A/c to ascertain Gross Profit.
• Ascertain Time Ratio i.e. number of months before admission
and after admission of partner.
20
• Simarly ascertain Sales Ratio.
These ratios are required to divide various Income and
Expenses as follow :
• Income/Discount Earned/Gross Profit credit to P & L A/c in
Sales Ratio.
• Interest Earned divide in Time Ratio.
• Various Fixed Expenses divide in Time Ratio e.g. Salaries,
Insurance, Rent, Interest paid, Depreciation etc.
• Various Variable Expenses related with Sales divide in Sales
Ratio e.g. Carriage Outwards, Bad Debts, written off,
Advertisement, Commission, and Depreciation on Delivery Van
etc.
• If details about expenses/income are given for dividing
expenses/income should be considered on e.g. Plant was
purchased after admission, then Depreciation on New Plant
should be debited to II column only (i.e. After Admission] and
deducted from Plant in Balance Sheet.
• Ascertain Net Profit/Loss separately, (say Before Change and
After Change) and transfer it to Profit and Loss Appropriation
A/c.
• Interests on Capital if any ascertain before Admission/After
Admission of Partner. Debit it to appropriate column and credit
to Partners Capital A/c [no interest is payable to new partner
before admission] same way any Salaries to Partner, etc.
account in respective column.
• Net Profit before admission transfer to Old Partner in old ratio, a
Net Profit after admission of partner transfer to All partner in
New Ratio.
• Transferee balance in Partner Capital Accounts to Balance
Sheet.
• However in case of Retirement of partner same procedure
should be followed for division of expenses or income. Then Net
Profit before retirement should be ascertained and transferred to
Old Partners Capital Accounts. If Balance in Retiring Partners
Capital A/c transferred to Loan A/c, Retiring Partners Loan A/c
may carry interest. Calculate the Interest and debit it to P & L
A/c in II column (i.e. After Retirement). Net Profit after
retirement should be transferred to Continuing Partners Capital
A/c in new profit sharing ratio. Same procedure should be
followed in case of death of partner. However balance in
Capital A/c of Diseased Partner should be transferred to
Executors Loan A/c and shown in the Balance Sheet on Liability
Side.
21
CHECK YOUR PROGRESS:
1. Fill in the Blanks
• Wages paid for installation of Machinery must be debited
to---------------------------------------------------------
• Reserves appearing in the Balance Sheet belongs to the
-------------------------------------------------------------.
• If the Incoming Partner is bringing his share of Goodwill in
Cash the Journal Entries will be
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
----------------------------------------
• Variable expenses related to sales are to be divided in the
-----------------------------------Ratio.
• Net Profit/Loss before admission should transferred to the
--------------------Partners in their Old Profit Sharing Ratio.
State whether True or False
• Outstanding Insurance is to be shown on the Assets Side of
the Balance Sheet.
• When New Partner is admitted on the 1st day of year,
division in Profit and Loss A/c, Profit and Loss Appropriation
A/c is required.
• No Interest is payable to a New Partner before Admission.
• Net Profit after admission of partner is transferred to All
partner in Old Profit Sharing Ratio.
• If any Interest is allowed on Retiring Partners Loan A/c such
amount of Interest is to be debited it to P & L A/c in After
Retirement column.
2. Show both the effects of following adjustments and give the
Journal Entry.
• In the Trial Balance Legal Expenses are Rs. 10,000.Legal
Charges Rs. 5,000 paid are included in the Legal Expenses.
• In the Trial Balance there are Purchases of Rs. 2,00,000
which included purchase of Furniture of Rs. 20,000.
• Goods costing Rs. 10,000 are lost by fire and Insurance
Company admitted a claim of Rs. 8,000.
• Trade Expenses accrued but not entered in the books
amounted Rs. 2,500.
• Bills Receivable includes a dishonored bill.
22
3
PARTNERSHIP FINAL ACCOUNTS III
Unit Structure
3.0 Objectives
3.1 Illustration
3.0 OBJECTIVES
After studying the unit students will be able to solve the

practical problems related to Partnership Final Accounts.
3.1 ILLUSTRATIONS
Illustration no.1 [Admission of Partner]

Trial balance as on 31st December, 2013
Particulars Rs.Dr. Rs. Cr.
Gross Profit 300000
Creditors 75000
Bills Payable 35000
Outstanding Expenses 12000
Interest Received 12000
A’s Capital 100000
B’s Capital 200000
C’s Capital (admitted 1st May, 2013 200000
Salaries 24000
Advertisement 60000
Stock 125000
Debtors 175000
Rent 36000
Bad Debts 18000
Cash & Bank Bal. 96000
Fixed Assets 400000
934000 934000
A & B sharing ratio of 2:1 Admitted C on 1st May, 2013 and agreed
to share P & L in a ratio of 2:1:1. Sales before C admission were
100000 out of total for the year Rs. 500000.
23
Depreciate Fixed Assets @ 10% p.a.
Provide interest on capital 6% p.a. You are required to prepare
Final A/c of the firm.
Solution:
Profit and Loss A/c
Dr. For the year ended 31st December, 2013 Cr.
Particulars 4 mths. 8 mths. Particulars 4 mths. 8mths.
Rs. Rs. Rs. Rs.
To Salaries 8,000 16,000 By Gross Profit 60,000 2,40,000
To Advertisement 12,000 48,000 By Interest 4,000 8,000
To Rent 12,000 Received
To Bad Debts 3,600 14,400
To Dep. On Fixed 13,333 26,667
Assets
To Net Profit (Bal. 15,067 1,18,933
C/d) 64,000 2,48,000 64,000 2,48,000
Profit and Loss Appropriation A/c.

For the year ended 31st December, 2013
Dr. Cr.
Particulars 4 mths. 8 mths. Particulars 4 mths. 8 mths.
To Interest on Capital By Net profit b/d 15067 118933

A 2000 4000
B 4000 8000
C -- 8000
To Net Profit
transferred A & B
In 2:1 ratio. 9067
To New profit
transferred to A,B
& C in 2:1:1 ratio. 98933
15067 118933 15067 118933
Balance sheet
as on 31st December, 2013
Liabilities
Rs. Rs. Assets Rs. Rs.
Capital A 1,61,511 Closing Stock 1,25,000

B 2,39,756 Debtors 1,75,000
C 2,32,733 6,34,000 Fixed Assets 4,00,000
Creditors 75,000 Less Dep. 40,000 3,60,000
Bills Payable 35,000 Cash and Bank 96,000

Outstanding 12,000 Bal.
Expenses
7,56,000 7,56,000
24
Working Note:
Partners Capital A/c
Dr. Cr.
Particulars A B C Particulars A B C
By Bal. B/d 100000 200000 200000
By Interest on
To Bal.C/d 161511 239756 232733 Capital 6000 12000 8000
By Net Profit (4 6044 3023 --

mths)
By Net Profit (8 49467 24733 24733

Mths)
161511 239756 232733 161511 239756 232733
Illustration-2 [Admission of Partner in between the year]

Trial Balance as on 31st December, 2013
Particulars Dr. Cr.
Rs. Rs.
Gross Profit 3,60,000
Salaries 36000
Rent 12000
Printing and Stationery 9000
Bad Debts 18000
Discount 24000
Sales Commission 30000
Sundry Debtors 210000
Sundry Creditors 40000
Bills Receivable and Bills Payable 120000 35000
Land and Building 200000
Plant and Machinery 150000
A’s Capital 100000
B’s Capital 150000
C’s Capital [1st July, 2013] 200000
Advertisement 24000
Bank Fixed Deposits 100000
909000 909000
25
Adjustments:-
1) A and B sharing profit & losses in the ratio of 2:1 admitted C on

1st July, 2013 and agreed to share in the ratio of 2:1:2.
2) As per partnership deed (old and New) partners were entitled to
interest on capital @ 6% p.a. A’s remuneration Rs. 12000 p.a.
and C Rs. 20000 p.a.w.e.f. 1st July 2013
3) Depreciate land and bldg by 5%. Plant and machinery by 20%
p.a.
4) Plant includes, plant worth Rs. 50000 purchased on 1st July,
2013
5) Fixed Deposits carry interest at 12% p.a. from 1st Oct 2013
6) Sales up 30th June, 2013 amounted to Rs. 200000 out of total
sales for the year 500000.
You are required to prepare P and L A/c, P and L

Appropriation A/c for the year ended 31st December, 2013 and
Balance Sheet as on 31st December, 2013.
Solution:
Profit and Loss A/c
Particulars 1 Jan to 1 July to Particulars 1 Jan to 1 July
30 June 31 Dec. 30 June 31 Dec.
To Salaries 18000 18000 By Gross Profit 144000 216000

To Rent 6000 6000 (2:3 ratio)
To Printing & 4500 4500 Bu Discount 9600 14400
Stationery By Interest on __ 3000
To Bad Debts 7200 10800 F.D.
To Sales 12000 18000 (from 1st Oct
Commission 2001)
To Advertisement 9600 14400
To Depreciation On:
Land & Bldg 5000 5000
Plant & Machinery 10000 15000
To Net Profit c/d 81300 141700
153600 233400 153600 233400

26
Profit & Loss Appropriation A/c
Particulars 1 Jan 1 July Particulars 1 Jan 1 July

to to 31 to 31 Dec.
30 Dec. 30
June June
To Interest on Capital By Net 81300 141700

A 3000 3000 Profit b/d
B 4500 4500
C -- 6000
To Partners Salary
A 6000 6000
C -- 10000
To net profit transferred to
Cap.
Upto 30th June A & B in 2:1 67800
st
From 1 July A, B, C, in 2:1:2 112200
81300 141700 81300 141700
Balance Sheet
As on 31st December, 2013
Partners Capital A/c Land & Building 200000

A 208080 Less: Depreciation 10000 190000
B 204040 Plant and Machinery 150000
C 260880 673000 Less: Depreciation 25000 125000

Sundry Creditors 40000 Bills Receivable 120000
Bills Payable 35,000 10000
Bank Fixed Deposits
3000
Add: Interest Accrued 103000
748000 748000
27
Partners Capital A/c.
A B C Particulars A B C
To Bal. carried to By Bal. B/d 100000 150000

Balance Sheet By Cash & bank -- -- 200000
208080 204040 260880 By Interest on
Capital 6000 9000 6000
By Salaries 12000 -- 10000
By Net Profit
upto 30th June
2008 45200 22600
from 1st July 44880 22440 44080
208080 204040 260880 208080 204040 260880
Illustration 3 [Admission of Partner]

Rana and Balu were partners sharing profits and Losses in the ratio
of 3:2 with effect from 1-10-2013 kaka joins as a third partner. The
new profit sharing ratio was 2:2:1
The following is their trial balance as on 31-3-2014
Particulars Debit Credit

Rs. Rs.
Drawing & Capital - Rana 15,000 3,00,000

- Balu 10,000 2,00,000
- Kaka 5,000 1,50,000
Opening Stock (1-4-2013) 30,000 --
Purchases & Sales 9,00,000 14,00,000
Wages 1,40,000 --
Furniture 2,00,000 --
General Exp. 60,000 --
Selling Exp. 14,000 --
Debtors & Creditors 6,26,000 2,50,000
Cash & Bank Balance 3,50,000 --
Amount brought by kaka (for his share of Goodwill) -- 50,000
23,50,000 23,50,000
28
Other Information:
(a) Stock on 31-3-2014 was Rs. 180000
(b) Purchases from 1-4-2013 to 30-9-2013 were Rs. 4, 00,000.
(c) Sales from 1-4-2013 to 30-9-2013 were Rs. 6, 00,000
(d) Wages from 1-4-2013 to 30.09.2013 were 60,000.
(e) Stock on 30-9-2013 was Rs. 80,000.
(f) Furniture worth Rs. 1,00,000 was Purchased on 1-1-2014.
Write off depreciation on Furniture at 20% p.a.
(g) Interest on Partner’s Capital is to be provided at 12% p.a.
(h) No interest is to be charged on Partner’s Drawings.
You are required to prepare:-
(i) P & L A/c and P & L Appropriation A/c with columns for
(01-4-2013 to 30-9-2013) and (01.10.2013 to 31.03.2014).
(ii) Balance sheet as on 31-03-2014
[M.U. Apr., 03] and
Solution:
(In the book of Rana, Balu & Kaka)
Trading and P & L Appropriation A/c.
For the year ended 31-3-2014
Dr. Cr.
1-4-13 1-10-13 1-4-13 1-10-13
Particulars to to Particulars to to
30-9-13 31-3-14
30-9-13 31-3-14
To Opening Stock 30,000 80,000 By Sales 6,00,000 8,00,000

To Purchases 4,00,000 5,00,000 By Closing stock 80,000 1,80,000
To Wages 60,000 80,000
To Gross profit 1,90,000 3,20,000
6,80,000 9,80,000 6,80,000 9,80,000
To General Exp. (2) 30,000 30,000
To Selling Exp. (2) 6,000 8,000 By Gross Profit b/d 1,90,000 3,20,000
To Depre. Furniture (3) 10,000 15,000
To Net Profit c/d 1,44,000 2,67,000
1,90,000 3,20,000 1,90,000 3,20,000
To Interest on Cap.12% By Net Profit b/d 1,44,000 2,67,000

Rana 18,000 18,000
Balu 12,000 12,000
Kaka -- 9,000
To Partners Capital A/cs
Rana (3/5) (2/5) =1,59,600 68,400 91,200
Balu (2/5) (2/5) = 1,36,800 45,600 91,200
Kaka (-) (1/5) = 45,600 -- 45,600
1,44,000 2,67,000 1,44,000 2,67,000
29
Dr. Partners Capital A/c Cr.
Particulars Rana Balu Kaka Particulars Rana Balu Kaka
Rs. Rs. Rs.
To Drawings 15,000 10,000 5,000 By Balance b/d 3,00,000 2,00,000 --

To Balance 5,30,600 3,50,800 1,99,600 By Bank (1) -- -- 1,50,000
C/d (Bal. fig) By Interest (1) 36,000 24,000 9,000
(d)
By Goodwill 50,000 -- --
By P & L Appr. 1,59,600 1,36,800 45,600
5,45,600 3,60,800 2,04,600 5,45,600 3,60,800 2,04,600
Balance Sheet as on 31-3-2014
Liabilities Rs. Assets Rs.
Partners Capital Furniture 2,00,000

Rana 5,30,600 Less: Dep. 25,000 1,75,000
Balu 3,50,800 Debtors 6,26,000
Kaka 1,99,600 10,81,000 Stock 1,80,000
Creditors 2,50,000 Cash & Bank 3,50,000
13,31,000 13,31,000
Note :- (1) Sacrifice Ratio (Old Partners)

Profit-Share Ratio Rana Balu Kaka
(a) Old 3 : 2
3 2
i.e.    
5 5
(b) New 2 : 2 : 1
2 2 1

i.e.      
5 5 5
1 1
(c) Sacrifice = (a) – (b)  
5 5
(d) Therefore, Kaka has to pay Rana on account of Goodwill no

entry is Passed, since Interest on Capital is calculated on Rs.
1, 50,000 kaka for 6 months
(2) Allocation of Expenses Basis

(a) General Expenses TIME
(b) Selling Expenses SALES
30
(3) Depreciation on Furniture
Depreciation @ 20% p.a.
Furniture A/c Rs Upto 1-10-13 After 1-10-13 Total

Opening Bal. (1-04-13) (Bal. fig) 1,00,000 10,000* 10,000* 20,000*
Addition 1-1-09 1,00,000 -- 5,000** 5,000**
Closing Bal. (31-3-14) 2,00,000 10,000* 15,000 25,000
Illustration : 4
[Admission of Partner]
The following is the Trial Balance of a firm as on 31st December,

2013.
Debit Rs. Credit Rs.

Purchases 1,56,000 Capital A/c:
Return Inward 2,400 Sonu 30,000
Stock 24,000 Kalu 30,000
Drawings: Motu 30,000
Sonu 12,000 Sales 2,94,000
Kalu 12,000 Return Outward 2,000
Motu 12,000 R.D.D. 8,800
Salary 27,000 Bank Loan 20,000
Off. Exp. 16,500 Creditors 76,500
Bad Debts 2,100 Bills payable 8,700
Carriage Inwards 4,500
Carriage Outwards 6,750
Debtors 1,00,000
Bills Receivables 3,250
Bank Balance 8,000
Cash Balance 2,500
Investment 25,000
Premises 50,000
machinery 36,000
5,00,000 5,00,000
On 1st July 2013 Sonu retired and the following adjustments were
agreed upon:
a) Goodwill of Rs. 90,000/- was brought into the books of

accounts.
b) Furniture worth Rs. 20,000/- was purchased on 31-3-2013 but
the invoice was not recorded in the books.
c) Balance in sonu account after making all adjustments was to be
transferred to his Loan account carrying interest @ 16%.
31
d) Closing stock was valued at Rs. 42,000/-.
e) Depreciate Machinery by 10%, Premises by 5% and Furniture
by 5% p.a.
f) Provide interest on capital at 10% p.a. Prepare Trading and
Profit and Loss Account for the year ended 31-12-2013 and a
Balance sheet as on that date.
[Modified M.U. Apr.,05]
Solution : (In the Books of Sonu, Kalu, & Motu)
Trading, P & L and P & L Appropriation. A/c

Dr. for the year ended 31st Dec. 2013 Cr.
To Opening Stock 24,000 By Sales 2,94,000
To Purchases 1,56,000 Less: Returns (2,400) 2,91,600
Less: Returns (2,000) 1,54,000 By Closing Stock 42,000
To Carriage Inward 4,500
To GP c/d 1,51,100
3,33,600 3,33,600
To Salary 27,000 By Gross Profit 1,51,100
To Office Expenses 16,500
To Bad Debts 2,100
To Carriage Outward 6,750
To Deprecation
Machinery 3,600
Premises 2,500
Furniture 750 6,850
To Net Profit 91,900
1,51,100 1,51,100
32
HY1 HY2 HY1 HY2
Rs. Rs. Rs. Rs.
To Interest on Capital By Net Profit
(91,900 X ½) 45,950 45,950
Sonu 1,500= 1,500 --
Kalu 3,000= 1,500 1,500
Motu 3,000= 1,500 1,500
To Interest A’s Loan- 5066

(63,317 x 16% x 6 mths)
To Net Profit
Transfer to Capital A/cs.
A 13,817= 13,818
B 32,758= 13,816 18,942
C 32,758= 13,816 18,942
45,950 45,950 45,950 45,950
i) Half year, HY1 = 1st Jan. 2013 to 30 June 2013.

HY2 = 1st July 13 to 31st December, 2013.
ii) It is assumed that monthly sales were uniform throughout the
year.
Balance Sheet As on 31st Dec., 2013
Bank Loan 20,000 Cash 2,500
Bank 8,000
Creditors 76,500
Debtors 1,00,000
Add: Purchase of 20,000 96,500 Less: R.D.D 8,800 91,200
Furniture B/R 3,250
Closing stock 42,000
Bill payable 8,700 Investment 25,000
Premises 50,000
Sonu’s Loan A/c 63,318
Less:
Add: O/s Interest
5,066 68,384 Depreciation (2,500) 47,500
Machinery 36,000
Capitals:
Less:
Kalu 83,758 Depreciation (3,600) 32,400
Furniture 20,000
Motu 83,758 1,67,516
Less:
Depreciation (750) 19,250
Goodwill 90,000
3,61,100 3,61,100
Dr. Capitals A/c Cr.

Particulars Sonu Balu Kaka Particulars Sonu Balu Kaka
To Drawing 12,000 12,000 12,000 By Balance b/d 30,000 30,000 30,000
To Loan A/c 63,318 83,758 83,758
By Goodwill 30,000 30,000 30,000
By Int. on 1,500 3,000 3,000

capital
By P/L A/c 13,818 32,758 32,758
75,318 95,758 95,758 75,318 95,758 95,758

33
Illustration – 5 [Admission of a partner]
A and B were partners in business sharing profit and losses,

A two-third and B one-third. Interest on Fixed Capital was credited
@ 5% p.a. No. interest was charged on drawings. Accounts were
made upto 31st March of each year.
On January 1, 2014 C was admitted as partner and from that

date all P and L were to be shared, A six-tenth B three-tenth, C
one-tenth. Before ascertaining the partners shares of P and L C
was to be credited with a salary at the rate of Rs. 6000 p.a.
Provisions regarding interest on capital and drawings remained
unaltered.
It was agreed that C’s total share of profits including his

salary and interest on capital, should be guaranteed by A at
minimum rate of Rs. 15000 p.a. Any apportionment of profit for a
particular period should be made as to gross profit on the basis of
sales and as to expenses, with the expectation of general expenses
on the basis of time.
The Trial Balance extracted from the books on 31 st March 14

was as follows-
Particulars Dr. Cr.
Capital Account: A 48,000

B 24,000
C (cash paid in Jan 1st, 2014) 8,000
Current Account: A 30,000
B 15,000
C 3,000
Delivery Van at cost 10,000
Pro. For Dep. thereon at 31st March, 2014 4,000
Furniture and Fittings at cost 24,000
Pro. For Dep. thereon at 31st March, 2014 3,000
Sales (Nine months, to Dec 31st) Rs. 2,40,000/- 3,36,000
Purchases 2,22,000
Stock March 31st 2013 48,000
General Exp. (9 months To Dec. 2013 Rs. 4,550) 10,400
Salaries 24,000
Heating and Lighting 2,200
Rent and Rates 9,600
Creditors 15,000
Debtors 20,000
Balance at Bank 19,800
4,38,000 4,38,000
On 31st March, 2014 the stock was valued at Rs. 47000,

rates paid in advance amounted to Rs. 600; Rs. 800 is to be
provided for electricity consumed to that date.
34
Included in the sundry debtors was an amount of Rs. 6000
for goods invoiced on sale or return on 1st February 2014 which
were still unsold on 31st March 2014. The cost of these goods
which were not included in the stock was Rs. 3000.
Depreciation is to be provided @ 20% p.a., on the cost of the

delivery van at 2 ½ % p.a., on the cost of furniture and fittings.

(a) Trading and P and L A/c for the year ended 31st March 2014
and
(b) Balance Sheet as on that date: Ignore Taxation.
Solution:-
M/s A, B and C
Trading and P and L Account for the year ended
31st March 2014
Dr. Cr.
Particulars Rs. Amt. Particulars Rs. Rs. Amt.
Amt.

To Purchases 2,22,000 By Stock in 47,000
To Gross Profit 1,10,000 hand: 3,000 50,000
3,80,000 With Customer 3,80,000
c/d
Upto 1st Jan Upto 1st Jan.

Dec. 14 Dec. 14
31st 2013 st
31 Mar. 31st 2013 31st
Rs. 14 Rs. Mar. 14
Rs. Rs.
To Salaries 18,000 6,000 By Gross 80,000 30,000
To General Exps. 4,550 5,850 Profit
(240:90)
To Heating and Lighting 2,250 750
To Rent and Rates
To Depreciation on:- 6,750 2,250
Delivery Van
Furniture & fixtures 1,500 500
46,500 14,500
80,000 30,000 80,000 30,000

35
To Interest on By Net 46,500 14,500

Capital:- profit b/d
A 1,800 600
B 900 300
C 100
To Salary to artners C 1,500
To Profit:-
A 2/3 6
/10
1 3
B /3 /10 29,200 7,200
1
C - /10 14,600 3,600
1,200
46,500 14,500 46,500 14,500
Note : Rs. 6000 goods with customer on approval basis have been
deducted both sales and debtors.
Balance Sheet as at 31st March, 2014

Capital Account:- Fixed Assets:
A 48,000 Delivery Van cost 10,000
B 24,000 Less:
6,000 4,000
C 8,000 80,000 Depreciation
Current Account:- 7,85

A 0 Furniture and 24,000
B 4,400 Fixtures cost 3,600
750 13,000 20,400
C Less:
Depreciation
Current Assets:
Stock in hand 50,000
with customer
Debtor 14,000
Creditors 15,000 Cash at Bank 19,800
Expenses Unpaid 800 Prepaid Rates 600
108800 108800
36
Partners Current Account
Dr. Cr.
To 30,000 15,000 3,000 By Interest 2,400 1,200 100

Drawings By Salary 1,500
To Partner 950 By Net 29,200 14,600 --
c (to Make Profit Upto
up Rs. 31-12-2014
3750 for By Net 7,200 3,600 1,200
Mths) Profit After
To Jan 1st
Balance 7,850 4,400 750 By C/A’s 950
C/d A/c
38,800 19,400 3,750 38,800 19,400 3,750
Illustration – 6 [final A/c of professional firm]
Dr. Gandhi and Dr Gujar were partners (sharing P and L in

3:2 ratio). On 1-10-2013 they admitted Dr. Jani as a partner. Dr.
Jani brings Rs. 40000 as Goodwill for his 1/5th share.
The trial balance on 31-12-2013 was as follows:-
Particulars Dr. Cr.
Drawings and Capital

Dr. Gandhi 15,000 60,000
Dr. Gujar 10,000 40,000
Jani (Goodwill brought on 1-10-2013) 40,000
Client’s deposits received 10,000
Equipments and furniture 1,80,000
Office and administration expenses 72,000
Rent 21,000
Salaries 40,000
Cash and Bank 1,02,000
Fees earned 3,00,000
Provisions against out standings fees) 50,000
1-1-2013)
Outstanding Fees (on 31-12-2013) 60,000
5,00,000 5,00,000
37
Adjustments:-
1) Provide 10% depreciation on Equipment and Furniture.
2) The business has handled 50% more work in each of the
months of the last quarter compared with the previous
months.
3) Outstanding Fees 31-12-2013 includes Rs. 45000 for fees to
be collected for the period in the last quarter of 2013. All
outstanding fees should be provided.
4) Rent has been increased by Rs. 500 p.m. from 1-7-2013
5) A clerk was appointed at Rs. 1000 p.m. from 1-9-2013
Prepare Final accounts for the year ended 31st December 2013
Solution:-
In the books of Dr. Gandhi, Dr. Gujar and Dr. Jani
Profit and Loss A/c.
For the year ended 31st December 2013
Dr. Cr.
Particulars Upto After Particulars Upto After
30-9 1-10 30-9 1-10
To Office and 54,000 18,000 By Fees earned 2,00000 1,00,000

Administration (notes 3)
To Rent (Note 1) 15,000 6,000 By Provision for

outstanding fees
To salaries (Note 28,000 12,000 (1.1.2013 Rs.
2) 500000 35,000
Less : (31-12-2012
To Depreciation on 13,500 4,500 Rs. 15000
equipments (15000=60000-
45000)
And furniture 45,000
To Provision for
outstanding fees
To Partners
Capital A/c (profit)
(bal. Fig.) 74,700 6,960
Dr. Gandhi (3/5 & 49,800 4,640

12/25)
Dr. Gujar (2/5 & 2,900

8/25)
Dr. Jani 5/25
2,35,000 1,00,000 2,35,000 1,00,000

38
Balance Sheet as at 31st December, 2013

Capital Equipment & 1,80,000
Account:- Furniture
Dr. Gandhi 1,50,660 Less:
Dr. Gujar Depreciation
1,00,440 (18,000) 1,62,000
Dr. Jani Cash & Bank
2,900 2,54,000 1,02,000
Client Outstanding
Deposit Fees
10,000 60,000
Received Less:
Provision (60,000) --
2,64,000 2,64,000
Working Note:
Dr. Cr.
Particulars Gandhi Gujar Jani Particulars Gandhi Gujar Jani
To Drawings 15000 10000 By Bal. B/d 60000 40000 40000

To Goodwill 40000 By Goodwill 24000 16000
To Balance 150660 100400 2900 By Profit 81600 54440 2990
c/d
(bal. Fig.)
165660 110440 42900 165660 110440 42990
(1) Rent 21,000

Less: Increased (500 x 6 mths 3,000
----------
Rent (without increase 18,000
======
Therefore, Rent= 18000/12 Rs. 1500 per Mth.
(a) Rent (from 1-1-2013 to 1-9-2008)
1-1-2008 to 30-6-2013 (1500 x 6 mths.) 9,000
1-7-2013 to 30-9-2013 (2000 * 3 mths.) 6,000
-----------
Total 15,000
=======
(b) Rent (from 1-10-2013 to 31-12-2013
(2000* 3 mths.) 6,000
=======
39
(2) Salaries
Salaries 40,000
Less: Clerk appointed (1000 x 4 mths.) 4,000
Salaries (without appointment) 36,000
=====
Therefore, Salaries = Rs. 36000/12=Rs. 3000 per mth.
(a) Salaries (from 1-1-2013 to 30-9-2013)

1-1-2013 to 31-8-2013 (3000 x 8 mths.) 24,000
1-9-2013 to 30-9-2013 (4000 x 1 mths.) 4,000
-----------
Total 28,000
======
(b) Salaries (from 1-10-2013 to 31-12-2013) -----------

1-10-2013 to 31-12-2013 (4000 x 3 mths.) 12,000
=======
(3) Fees Earned

Lets assume, average monthly work in first three quarters
be 2x per month. Therefore, average monthly work in last
Quarter = 3x per months.
Work (01-01-2013 to 30-9-2013) = 2x for 9 mths. = 18x
Work (01-10-2013 to 31-12-2013) = 3x for 3 mths. = 9x
Therefore, Work upto 30-9-2013 and after 01-10-2013 is in
2:1.
(4) Goodwill Adjustment
As the new profit sharing ratio is not specified, the sacrifice
by old partners (Gandhi and Gujar) is in old profit sharing
ratio (i.e. 3:2). The entry passed is
Jani’s capital A/c……………Dr. 40,000
To Gandhi capital A/c 24,000
To Gujar Capital A/c 16,000
(5) New profit sharing ratio
(a) Partner Gandhi = 3/5 of (1-1/5) = 12/25
(b) Partner Gujar = 2/5 of (1-1/5) = 8/25
(c) Partner Jani = 1/5 = 5/25
Therefore, Gandhi : Gujar: Jani: 12:8:5
Illustration – 7 [Admission of A partner in between the year]

M/s Kunal & Co. having Deepak and Ram (sharing profits
and losses in 2:1) decided to admit Amit, as partner from 1-1-2014.
The new profit-sharing of the partner was Deepak: six-tenth; Ram :
three-tenth; and Amit: One-tenth.
According to the partnership deed, interest @ 10% p.a., is

payable on fixed capital: No interest was charged on drawings.
40
The capital should be prepared on 31st March each year Deepak
and Ram admitted Amit on following terms and conditions:-
(1) Amit should get salary of Rs. 9000 p.a.

(2) Amit’s share of profits (including salary and interest on
capital should be guaranteed by Deepak at a minimum of
Rs. 16000 p.a., from the date of admission.
(3) Apportionment of expenses should be made on the basis
average sales, except from miscellaneous expenses and
administrative expenses.
(4) Goodwill of the firm was valued at Rs. 100000 and it should
be raised in the books.
The Trial balance on 31st March, 2014 was as follows:-
Particulars Dr. Cr.

Rs. Rs.
Current and Capital Accounts:
Deepak 60000 96000
Ram 30000 48000
Amit (Capital Brought on 14-2-2014) 6000 16000
Cost and Provision for Depreciation
On Office furniture 20000 8000
On Delivery Vans 48000 18000
Purchases and Sales 400000 610000
Debtors and Creditors 60000 20000
Stock on 1-4-2013 90000
st
Miscellaneous expenses (upto 31 December Rs. 20000
11900)
Rent, Rates and Taxes 44000
Carriage outward 17000
Cash & Bank 11000
Goodwill 10000
816000 816000
In addition following information is to be considered:-

1) Stock on 31-3-2014 Rs. 34000.
2) Rent, Rates and Taxes outstanding on 31-3-2014 Rs. 4000.
3) Carriage outward paid in advance on 31-3-2014 Rs. 2000.
41
4) Sales and Debtors includes goods sent on “sales or return”
basis on 01-03-14 of Rs. 25000 (Cost Rs. 15000) On 31-3-14.
(i) 50% of goods accepted by customers.
(ii) 10% of goods no intimation from customer but period
of approval expired on 25th March 2014.
(iii) Balance goods, period of approval not expired.
5) Average monthly sales for the months of January, March, May
to July, September to December were half, compared to
average monthly sales of the remaining months.
6) On 31-3-2014 partners decided that partners fixed capital
should be in 8 (Deepak); 4 (Ram); 1 (Amit). For this purpose,
Amit’s capital should be considered as base. The shortfall in
case on Ram, should be adjusted through introduction of cash
by Ram. However shortfall of Deepak should be transferred to
his current a/c. The necessary cash was brought by Ram on
31-3-2014 for which no entry was passed.
7) Provide 10% depreciation on Office furniture and on delivery
vans.
Prepare Trading and Profit and Loss Account for the year ended
31st March, 2014 and the Balance Sheet on that date.
Solution :
In the books of Kumar and Co. Trading Account
for the year ended 31st March, 2014
Dr. Cr.
Particulars AMT. Particulars Amt.
To Opening Stock 90000 By Sales 610000

To Purchases 400000 Less: Sales or Return 10000 600000
To Gross Profit 150000 By Closing Stock 34000
(bal. Fig.) Add: Sales or Return 6000 40000

at cost
640000 640000
42
Profit and Loss A/c
Dr. For the year ended 31st March 2014 Cr.
Particulars Upto 31-12 After 1-1 Particulars Upto 31-12 After 1-1
Rs. Rs. Rs. Rs.
To Misc. Exp 11,900 8,100 By Gross Profit b/d 1,10,000 40,000
To Rent, Rates & 36,000 12,000 (sales)
Taxes
(44000 + 4000)
To Carriage 11,000 4,000
Outward
(170000-2000)
(sales)
To Dep. On 900 300
Furniture (time)
To Dep. On 2,200 800
Delivery Van
(sales)
To Net Profit 48,000 14,800
(bal. Fig.)
Total Rs. 1,10,000 40,000 1,10,000 40,000
To Salary -- 2,250 By Net Profit b/d 48,000 14,800
(9000*3/12)
To Interest on
Capital: 7,200 2,400
@ 10% on 96000
3,600 1,200
@ 10% on 48000
@ 10% on 16000 -- 200
for 1.5 mths.

(from 14-2-2014)
To Partners
Capital A/c
(profit)
Deepak( 2/3 and 24,800 4,575
note 4)
Ram 1/3 and
12,400 2,625
3/10)
Amit (-) and
-- 1,550
note 4
Total Rs. 48,000 14,800 48,000 14,800

43
Partners Current Accounts
Particulars Deepak Ram Amit Particulars Deepak Ram Amit
To Bal. B/d 60000 30000 6000 By Goodwill 60000 30000

To Deepak’s (2:1) [note 6]
Capital By Salary 2250
Account By Interest 9600 4800 200
(note 5). 32000 -- -- on Capital
To Bal. C/d 6975 19825 By Profit 29375 15025 1550
By Bal. C/d 2000
Total Rs. 98975 49825 6000 Total Rs. 98975 49825 6000
Balance Sheet
As on 31st March 2014
Liabilities AMT. AMT. Assets AMT. AMT.
Partners Capital Office Furniture 20000
A/c Less: Pro. For Dep. 9200 10800
Deepak 128000 (note 3)
Ram 64000 Delivery Vans 48000
Amit 16000 208000 Less: Pro. For Dep. 21000 27000
Partners Current (note 3)

60000
A/c Debtors
10000
Deepak Less: Sales of 50000
6975
Ram 19825 Return 11000
26800
Cash and Bank 16000
Creditors Add: Brought by 27000
20000
Outstanding Ram 10000
4000
Rent, Rates and Goodwill 90000
Add: Raised 34000 100000
Taxes
6000
Stock
Add: sales or 40000
Return
Carriage-outward 2000
paid in adv.
Partners Current 2000
A/c Amit
258800 258800
44
Working Note:-
1) Sale or Return Goods:
(a) 50% of the goods accepted by the customer and 10% of the
goods for which no intimation is received but period of
approval has expired should be considered as a sale. These
goods are already include in sales and debtors & therefore
no adjustment entry is required for 60% of the goods.
(b) Balance 40% (i.e. 100%-50%-10%) goods, for which period
of approval is not expired cannot be considered as sale.
Therefore
(i) Cancel sales (i.e. less from sales and less from
debtors) = 40% for Rs. 25000=Rs. 10000
(ii) Include in closing stock = 40% of 15000 (cost) = Rs.
6000 (i.e., at cost and market value, whichever is less).
2) Sales ratio:
Let us assume sales for remaining months=2x each.
Sales for specified months = x each.
Sales from 1-4-2008 to 31-12-2008 (9 months)
Apr May Jun July Aug Sep Oct Nov Dec Total
2x +x +x +2x +x +x +x +x +x =11x
Sales from 1-1-2009 to 31-3-2009 (3 months)
Jan Feb Mar Total
X +2x +x =4x
Therefore, Sales 9 months : months :11:4.
(3) Depreciation :
Method of depreciation is not specified and therefore dep. is
provided on reducing balance method.
Particulars Off.Fumit. Delivery van
Cost 20,000 48,000

Less: Pro For Dep. (1-4-2013) 8,000 18,000
W.D.V. 12,000 30,000
Less: Depreciation @ 10% 1,200 3,000
W.D.V. on 31-3-2014 10,800 27,000

45
(4) Gurantee of Profit (by Deepak to Amit)
Gurantee (for 3 months i.e, 01-01-2013 to 31-03-2013)
Total amount receivable by Amit
Salary (9000 x 3/12) 2250
Add: Interest on capital (on Rs. 16000 @ 10% from
14.2.2009 200
Add: Profit [1/10 of (14800-6050)] 875
3325
Add: Shortfall to be borne by Deepak (Bal.Fig) 675
Total amount receivable by Amit 4000
Therefore, Total profit Amit=875+675=Rs. 1550.

Profit of Deepak:
Profits [6/10 of (14800-6050)] 5250
Less: Shortfall of Amit 675
Total profit of Deepak 4575
(5) Fixed capital adjustments:

Fixed capital of Amit 16000
Therefore, Fixed capital of Deepak (16000x8/1) 128000
Therefore, Fixed capital of Ram (16000x4/1) 64000
(a) Shortfall of Deepak
Shortfall of Rs. 32000 (i.e, 128000-96000) should be
debited to Deepak’s current account.
(b) Shortfall of Ram
Shortfall of Rs. 16000(i.e., 64000-48000) should be
brought in cash by Ram.
Therefore, cash balance increased by Rs. 16000
(6) The Journal Entry to raise Goodwill is
Goodwill A/c ------- Dr. 90000
To Deepak’s Current A/c (⅔) 60000
To Rams Current A/c (⅓) 30000
46
Illustration : 8
Following is the Trial Balance of a firm as on 31st Dec. 2013

Drawing : X 15,000 Capita’s X 24,000
Y 7,500 Y 12,000
Z 1,500 Z (including Goodwill) 5,000
Furniture 10,500 Sales 1,80,000
Purchases 1,10,000 Creditors 13,500
Stock 25,000
General Expenses 5,200
Salary 12,000
Rent & Rates 5,900
Debtors 31,000
Bank 10,900
2,34,500 2,34,500
Adjustments:
1) X and Y were partners sharing profits and losses equally.
2) Mr. Z was admitted to the partnership on 1st July, 2013.
3) On 31st December, 2013 stock was valued at Rs. 23,500.
4) Rent & Taxes paid in advance Rs. 900.
5) General Exp. Were outstanding Rs. 750.
6) Depreciate Furniture @ 10% p.a.
7) Share of Goodwill of new partner was valued at Rs. 1,000 on
1st July, 2013 and is yet to be adjusted
8) Interest on capital to be charged at the rate of 10% p.a.
You are required to prepare Trading, Profit and Loss
Account for the year ended on 31st December, 2013 and
Balance sheet as of that date.
[Modified, M.U. Oct., 08]
47
Solution :
(In the Books of X, Y, Z)
Trading and Profit and Loss A/c.
For the year ended 31st Dec., 2013
Dr. Cr.
To Purchases 1,10,000 By Closing Stock 23,500
To Gross Profit c/d 68,500
2,03,500 2,03,500
68,500
To General Expenses 5,200 By Gross Profit
5,950
Add: Outstanding 750
12,000
To Salary
To Rent & Taxes 5,900
5,000
Less: Prepaid 900
To Depreciate Furniture
1,050
@ 10% p.a
44,500
To Net Profit (full year)
68,500 68,500
Dr. P & L Appropriation A/c (Year 2013) Cr.

Jan- July- Jan- July-
June Dec June Dec
Rs. Rs. Rs. Rs.
To Interest on Capital By P & L 22,250 22,250
A/cs. (50% of 44,500
A (full year) 1,200 1,200 each)
B (full year) 600 600 [N.P. B/d]
C (6 months) 200
To Balance Profit 10,225 6,750

A 10,225 6,750
B -- 6,750
C
(b) 20,450 20,250
22,250 22,250
(a)+(b) 22,250 22,250
Interest + Profit = 19,375
A (11,425 + 7,950) = 18,175
B (10,825 + 7,350) = 6,950
C ( Nil + 6,950)
44,500 44,500
48
Dr. Cr.
RS. Rs. Rs. Rs. Rs. Rs.
To Drawing 15,000 7,500 1,500 By Balance b/d 24,000 12,000 5,000
To Goodwill -- -- 1,000 By Goodwill 500 500 --
To Balance C/d 28,875 23,175 9,450 By P & L Appro. 19,375 18,175 6,950
43,875 30,675 11,950 43,875 30,675 11,950
Balance Sheet of A, B, & C

As at 31st Dec., 2013
Capitals: Furniture 10,500
A 28,875 Less: Deprn. (1,050) 9,450
B 23,175 Prepaid Rent 900
C 9,450 61,500 Debtors 31,000
Outstanding Exp. 750 Bank 10,900
Sundry Creditors 13,500 Closing Stock 23,500
75,750 75,750
Note :
In the absence of any information / Instruction, it is assumed
that
(a) Profit Sharing Ratio before and after Admission of C as a
partner is equal
(b) Interest on Drawings is to be ignored.
(c) Sales and other expenses were uniform throughout year.
49
ILLUSTRATIONS: 9 [Admission of partner, when stock on date
of admission given]
A, B were sharing in the ratio of 3:2 admitted C as on 1st Oct. 2013

for 1/6 share
Trial Balance as on 31st March 2014 was as under.
Particulars Dr. Rs. Cr. Rs.

Capital A/c
A 2,00,000
B 1,50,000
C (1.10.2013) 2,00,000
Stock (01.04.13) 40,000
Purchases (upto 30.09.13 Rs. 1,00,000] 250,000
Sales (upto 30.09.13 Rs. 250000) 595000
Salaries 20,000
Rent 30,000
Insurance (for the year 30.06.14) 12,000
Bills Receivable 2,00,000
Sundry Debtors / Sundry Creditors 1,10,000 40,000
Plant and machinery 4,00,000
Wages [upto 30.13.08 Rs. 20,000] 50,000
Commission [2% on sales] 6000
Land & Building 1,50,000
Cash on bank 28000
General Reserve (1.04.13) -- 1,50,000
Bank overdraft --
Office Expenses 54000 15,000
13,50,000 13,50,000
You are given following information

1) Stock as on 30th Sept. 13 Rs. 60,000 and as on 31.03.14 Rs.
125000
2) Depreciate Land &Building @5% p.a. and Plant & Machinery
@20% p.a.
3) Plant includes, Plant costing Rs. 2, 00,000 purchased on 1st
Jan. 2014.
4) Salaries to Partner A-Rs.24, 000 p.a. & C Rs. 1,000 p.m.
5) Rent was increased by Rs. 2,000 p.m. from 01.10.13.
6) C’s Capital includes Rs. 40,000 brought in as his share in
Goodwill.
7) Fixed Capital of Partners should be Rs. 6,00,000 in their
Profit/Loss sharing ration.
Prepare final Accounts of the firm.
50
Solutions:
In the books of M/s A, B, C, & Co.
Trading A/c Profit & Loss A/c for the year ended 31st March 2014
Dr. Cr.
Particular 1.4.13 to 1.10.13 Particulars 1.4.13 1.10.08
30.9.13 (6 to to to
m) I 31.3.14 30.9.13 31.3.14
II (6 m) I II (6 m)
To Opening stock 40000 60000 By Sales 250000 345000

To Purchases 1,00,000 150000 By closing stock 60000 125000
To Wages 20000 30000
To Gross profit 150000 230000
310000 470000 310000 470000
To Salaries 10000 10000 By Gross Profit 150000 230000
To Rent 12000 18000 B/d
To Insurance 3000 6000
To Commission 5000 6900
To Office 27000 27000
Expenses
To Depreciation
Land &Bldg. 3750 3750
plant & Machinery 20000 30000
To Net Profit b/d 69250 128350
150000 230000 150000 230000
st
Profit & Loss Appropriation A/c for the year ended 31 March 14
Dr.. Cr.
Particulars I II Particular I II
To Partners By N.P. B/fd. 69,250 128350

Salaries A 12000 12000
C -- 6000
To N.P. transfer
to A & B in 3:2 57250 -
ratio
To N.P. transfer
to A,B,C in - 110350
3:2:1 ratio
69250 128350 69250 128350
51
Partner’s Capital A/c
Dr.. Cr.
To Goodwill -- -- 40000 By Bal. B/d 200000 150000 200000
To Partners By Gen. Res. 90000 60000 --
Current A/c 127525 85683 84392 By Salaries 24000 -- 6000
(Bal. fig.) By Goodwill 24000 16000 --
To Bal C/fd 300000 200000 100000 By N. Profit Upto
30/6/08
A, B in 3:2 from 34350 22960 --
1 Oct. to A, B, C
in 3:2:1 55175 36783 18392
427525 285683 224392 427525 285683 224392
Working Notes:
1) New P.S. Ratio: C was admitted for 1/6 share
6 −1
Bal. 1- 1/6 = = 5/6 to old partners
6
Partners in old ratio
A = 3/5 x 5/6 b= 2/5 x 5/6 C = 5/5 x 1/6
= 15 = 10 =5
A: B: C = 3: 2: 1
Balance Sheet as on 31st March 2014

Partners Capital Land & Building 150000

A 300000 Dep. (7520) 142500
B 200000 Plant & Machinery 400000
C 100000 600000 Less: Dep. 50000 350000
Partners C/A Sundry Debtors 110000
A 127525 Bills Receivable 200000
B 85683 Closing stock 125000
C 84392 297600 Prepaid Insurance 3000
Sundry creditors 40000 Cash 28000
Bank O.D. 15000
Commission 5900
Payable
958500 958500
52
2) Rent Rs. 30,000 I II
Increase Rs. 2,000 p.m. from 01.01.13
2,000 x 3 -- 6000
Bal. Rent (30,000-6,000)
= 24000 in Time Ratio 6m, 6m, 12000 12000
12000 18000
3) Insurance Rs. 12,000 p.a. from 1st July 13 to 30th June 14. i.e.
Rs.1000 p.m.
I 01 July 13 to 30 Sept. 13 i.e 3 months = 1,000 x 3 = 3,000
II 10 Oct. 13 to 31st Mar. 14 i.e. 6 months = 1,000 x 6 = 6,000
9,000
Prepaid from 1st April to 30th June 14 3000
4) Commission on sales @ 2% Rs.

I Commission = 2,50,000 x 2% = 5,000
II Commission= 3,45,000 x 2% = 6,900
11,900
Less paid (given in Trial Balance) 6,000
Outstanding com. Payable 5,900
5) Dep. On plant machinery @ 20% p.a.

i) On new plant purchased on 1.10.13 I II
2,00,000 x 20% x 3/12 10,000
ii) Bal Plant [400000 – 200000]
200000 x 20% = 40000 in
Time Ratio 20,000 20,000
Total Depreciation 20,000 30,000
6) Closing Stock on 30/06/13 Rs. 60,000 becomes Opening Stock

on 01.07.13.
53
Illustration : 10 [ retirement of partner in between the year]
X, Y & Z sharing in the ratio of 5:3:2 X retired on 1st Oct. 2013 B &
C continue business sharing equally.
Following Balances are as on 31st Dec. 2013
Particulars Dr. Cr.
Rs. Rs.
Opening Stock 40000
Sales 600000
Discount 9000
Purchases 260000
Wages 20000
Salaries 24000
Rent 10000
Bad Debts 15000
Insurance 4000
Sundry Expenses 10000
Capiral’s AIC’s:
X’s 200000
Y’s 150000
Z’s 100000
Land & Building 200000
Plant & Machinery 150000
Building Under construction 326000
1059000 1059000
Adjustments:
1) Outstanding Salary Rs. 4000 & outstanding Rent Rs. 2000 to be
provided.
2) Sales upto X’s retirement amounted Rs. 400000.
3) As per Partnership deed:
a] Provide interest on capital @ 6% p.a
b] Partners salary x’s Rs. 20000 p.a. & z’s Rs. 500 per mth.
c] X was entitled for commission of 1% on net sales.
4) Closing Stock on 31st Dec. 13 valued at Rs. 50000.
54
5) Depreciate Land & Building by 5% & Plant & Machinery 10%
p.a.
6) Balance due to Z on his retirement to be transferred to his loan
a/c carrying interest at 12% p.a.
Ascertain balance payable to Mr. A on 31 Dec. 2013.
Prepare Trading, P & L A/c for the year ended 31st Dec. 2013 &
Balance Sheet as on 31st Dec. 2013.
Trading a/c
For the year ended 31st Dec. 2013
Dr. Cr.
Particulars AMT. AMT. Particulars AMT. AMT.
To Purchases 260000
To Wages 20000
To Gross Profit c/d 330000 By Closing Stock 50000
650000 650000
Profit & Loss A/C.
For the year ended 31st Dec. 2013.
Dr. Cr.
Particulars 9 mth. 3 mth. Particulars 9 mth. 3 mth.
To Salaries (24000+ 21000 7000 By Gross Profit o/d 220000 110000
O/S-4000) (in sales ratio 2 1)
To Rent (10000+ 9000 3000 By Discount 6000 3000
O/S 2000)
To Bad Debts 10000 5000
To Insurance 3000 1000
To Sundry Expenses 7500 2500
To Depreciation on:
Building 7500 2500
Plant & Machinery 11250 3750
To Interest on Loan -- 8535
(@ 12% p.a. on
Rs.284500) 3 mth.
2,26,000 1,13,000 2,26,000 1,13,000

55
Profit & Loss Appropriation A/c.
for the year ended 31st December, 2013
Dr. Cr.
To Interest on Capital By Net Profit bid 156750 79715

X 9000 --
Y 6750 2250
Z 4500 1500
To Partners Salary:
X 15000 --
Z 4500 1500
To A’s Commission 4000 --

To Net Profit Transferred to
A,B,C in 5:3:2 ratio 113000
B & C equally 74465

156750 79715 156750 79715
Balance Sheet
As on 31st Dec. 2013
Liabilities AMT AMT. Assets AMT. AMT.
Partners capital A/c: Land & Bldg. 200000

Y 230132 Less: Depreciation 10000 190000
Z 171833 401965 Bldg. Under 326000
construction
Z’s loan :
Bal. transferred from capital 284500 Plant & Machinery 150000
Add. O/s Interest for 3
months 8535 Less: Depreciation 15000 135000
293035
O/s Rent 2000 Closing Stock 50000

O/s Salary 4000
701000 701000
56
Dr. Cr.
Particulars X Y Z Particulars X Y Z
To X Loan a/c By Bal. B/d 200000 150000 100000
(Bal By Interest on 9000 9000 6000
Transferred) 284500 -- Capital 6000
By Salaries 15000
By Commission 4000
To Bal. B/d -- 230132 171833 By Net Profit 56500 33900 22600
(Upto Sep)
By Net Profit -- 37232 37233
(1 Oct to 31
Dec.)
284500 230132 171833 284500 230132 171833
Working Notes:-
1] Time ratio ABC partners 1st Jan. 2013 to 31st Sep. 2013 = 9
months.
B & C partners 1st Oct. to 31st Dec. 2013 = 3 months.
Therefore time ratio = 3:1.
2] Sales ratio from 1st Jan. 2013 to 30th Sep. 2013 Rs. 400000.
Sales from 1st Oct. 2013 to 31st Dec. 2013 Rs. 200000
Therefore Sales ratio = 2:1.
3] Salaries, rent, insurance, depreciation, sundry exp., are
allocated on time basis as these are related with time.
4] Gross Profit, discount received, bad debts allocated on sales
basis as these are related with turnover.
Illustration: 11 [Death of a Partner]

The Partnership agreement of T & Z provides that
(a) Profit & losses shall be shared equally.
(b) Interest at 5% p.a., shall be allowed on capital but no interest
is to be charged on drawings.
(c) On the death of one of the partner:
[1] The survivor shall pay out the interest of the
deceased partner & purchase his share.
[2] The value of the Goodwill shall be the profits of the
proceeding three years.
[3] The assets are to be taken on the date of death at
their value. T died on 1st April 2014.
57
The stock on 31.3.13 was valued at Rs. 28740.
The following trial balance was extracted from the books as on 31st
March 2014.
Particulars Dr. Cr.
Rs. Rs.
T’s Capital 40000
Z’s Capital 20000
T’s Drawings 4500
Z’s Drawings 3500
Salaries 7550
Rent & Rates 2630
Purchases 114700
Stock (1.04.13) 27490
Traveler’s Commission & Expenses 5800
Wages 16360
Sales 163840
Sales Return 490
Cash at Bank 5520
Furniture & Fixtures 2000
Sundry Creditors. 18000
General Expenses 3750
Discount 350
2,42,190 2,42,190
The profits of the preceding three completed years to 30th Sep.

were Rs. 15000. Rs. 20000 and Rs. 13000 respectively.
Prepare Trading & P & L A/c & Balance Sheet as at 31 st

March 2014 & a statement showing the amount payable to the
Executors of T
58
Solution
M/s T & Z
Trading and P & L Account for the year ended 31st March 2014.
Dr. Cr.
Particulars AMT AMT. Particulars AMT. AMT.

To Purchases 114700 Less: Sales Return 490 163350
To Wages 16360
To Gross Profit c/d 33540 By Closing Stock 28740
192090 192090
33540
7550 By Gross Profit b/d 350
To Salaries
2630 By Discount
To Rent & Rates
To General Expenses 3750
To Traveler’s Commission 5800
& Expenses
To Interest on Capital for 6
months
T 1000
Z 500 1500
To Net Profit transferred to
Capital A/c
T 6330
Z 6330
12660
33890 33890
Note: As Profit & Loss A/c is prepaid on date of death of partner T,

Therefore there is no need of preparing Profit & Loss A/c in two
columns i.e. Before Death and After Death of Partner
59
M/s T & Z
Balance Sheet as at 31st March, 2014

Capital: T 40,000 Plant & Machinery 21,500
Add: Interest 1,000 Furniture & Fixtures 2,000
Profit 6,330 Stock 28,740
47,330 Debtors 26,400
Less: Drawings 4,500 42,830 Bank 5,520
20,000
Capital : Z
500
Add: Interest
6,330
Profit 26,830
3,500
Less : Drawings 23,330
Sundry Creditors 18,000
84,160 84,160
Amount payable to Executor’s of T Rs.

Balance to his Capital A/c 42,830
His share in Goodwill 24,000
66,830
Note:-
Value of Goodwill 3 year’s profit
Total Value of Goodwill Rs. (15000+20000+13000)
Rs. 48,000
1
T’s share of Goodwill ( /2 x 48,000) Rs. 24,000
Because Z has to purchase the share of T The journal entry will be:
Z’s Capital A/c-------------------------Dr. 24,000
To T’s Capital A/c 24,000
60
Illustration: - 12 [Death of a Partner in between the year].
K, R & T were sharing in the ratio of 3:2:5 T died on 1st July 2013.
Business was continued & K & R were sharing equally same books
of a/c were continued and following.
Trial balance was extracted as on 31st March, 2014.
Particulars Dr. Cr.
Rs. Rs.
Gross Profit 360000
Salaries 18000
Rent 15000
Insurance 9000
Land & Building 300000
12% Investment 100000
Interest on Investment 6000
K’s Capital 200000
R’s Capital 270000
T’s Capital 350000
Sundry Debtors/Creditors 200000 150000
Bills Receivable/Payable. 75000 60000
Cash 15000
Stock 404000
1396000 1396000
Additional Information:
1] Provide outstanding salary Rs. 2,000
2] Rent was paid Rs. 1,000 per month for the premises
acquired on 1st Oct. 2013.
3] Depreciate Land & Building @ 5% & Plant & Machinery 10%
p.a.
4] Plant includes Plant costing Rs. 1, 00,000 acquired on 1 st
Jan. 2014.
5] As per partnership deed:

a] Retiring partners or in case of death of partners
balance should be transferred to loan, Carrying
Interest 18% p.a.
61
b] Goodwill valued Rs. 120000.
c] Provide interest on capital @ of 6% p.a.
6] Sales were Rs. 300000 upto 1st July out of total sales for the
year Rs. 1500000, Prepare P & L A/c, P & L Appropriation
A/c for the year ended 31st March 2014 & Balance Sheet as
on that date.
Solution:-
Profit and Loss A/c
for the year ended 31st March 2014
Dr. Cr.
To Salaries (8000+ o/s 2000) 5000 15,000 By-Gross Profit b/d 72000 288000
To Rent 6000 (in sales ratio 1:4)
To insurance 2250 6750 By income from 3000 9000
To Depreciation 3750 11250 Investment
Land & Building 4000 14500
Plant -- 59279
To Int. on T’s executors loan A/c 60000 184221
To Net Profit C/d
75000 2,97,000 75000 297000
Profit & Loss Appropriation A/C.

for the year ended 31st March 2014
Dr. Cr.
To Interest on Capital By Net Profit b/d 60000 184221
K’s 3000 9000
R’s 4050 12150
T’s 5250 --
To Net Profit Transferred to

Capital
A,B,C in 3:2:5 47700
A & B equally 1:1 163071
60000 184221 60000 184221
62
Balance Sheet
As on 31st March 2014
Partners Capital Bal. Goodwill 120000
K’s 343845 Land & Building 300000
R’s 401276 745121 Less: Depreciation 15000 285000
Outstanding Salaries 2000 Plant & Machinery 260000
Creditors 150000 Less: Depreciation 18500 241500

Bills Payable 60000 Prepaid rent 9000
T’s executor 439100 12% Investment 100000
Add: Interest at 18% 59279 Interest Accrued On 6000
498379
p.a. for 9 mths. Investment
Bills Receivable 75000
Cash 15000
stock 404000
1455500 1455500
Partners Capital A/C.

Dr. Cr.
Particulars K R T Particulars K R T
To T’s By Bal B/d 200000 270000 350000
executor loan By Goodwill 36000 24000 60000
A/c (bal. -- -- 439100 By Interest on 12000 16200 5250
Transferred) Capital
To Bal. C/d 343845 401276 By Net Profit 14310 9540 23850
(upto 30 June)
By Net Profit 81535 81536 --
(upto 31
March)
343845 401276 439100 343845 401276 439100
Note:- In case of death/Retirement of partner.

I) P & L A/c, P & L app. A/c should be closed upto date of
death of Partner, N.P. should be transferred to old partner in
their old ratio.
II) Balance in Retiring / deceased partner should be transferred
to Loan A/c. Interest on loan A/c required to calculate &
debit to Profit & Loss A/c. Then duly net profit should
calculated and transfer to continuing partner’s capital A/c. in
their new Ratio.
63
Illustration 13 :
Jinal and Sameer were in partnership in a wholesale

business sharing profits in the proportion of 3:2. As from 1 st April
2013 they admitted Jatin into partnership giving him one-sixth of the
profits. Jatin brought in Rs. 80,000 in cash of which Rs. 30,000
were considered as being in payment for his share of goodwill and
remainder as his capital.
The following Trial Balance was extracted from the books
as on 31st March, 2014

Sales 2,15,725
Purchases 1,25,730
Discount Received 2,150
Discount Allowed 3,125
Reserve for doubtful debts 1,200
Sundry debtors 40,200
Sundry creditors 32,540
Stock (1st April 2013) 42,820
Carriage inward 3,250
Sundry expenses 7,840
Motor vehicles 50,000
Land and Building 80,000
Cash in hand 5,040
Telephone expenses 3,240
Postage and Stationary 2,690
Rent, rates and insurance 3,200
Bad debts 400
Investments 60,000
Capital accounts Jinal 65,000
Sameer 35,000
st
Cash paid by Jatin on 1 April 2013 80,000
Jinal 5,000
Sameer 4,000
Jatin 2,000
Bank overdraft 6,920
Total 4,38,535 4,38,535
64
You are required to prepare the firm’s trading and Profit and Loss
Account for the year ending 31st March, 2014 and Balance Sheet as
on that date having regard to the following information :
1. Stock on 31st March 2014 was Rs. 42,250.
2. Sundry debtors include item of Rs. 1,200 due from a customer

on account of sales, who has become insolvent.
3. Depreciate Land & Building and Motor vehicles at 5% p.a. and

20% p.a. respectively.
4. Reserve for doubtful debts is to be maintained at 5% on the

sundry debtors.
5. Goods of to the value of Rs. 800 have been destroyed by fire

and the insurance company has admitted the claim for Rs. 600
only.
65
Books of Jinal, Samir and Jatin

Trading A/c for the year ended 31 - 03 - 2014
Rs. Rs. Rs. Rs.

To opening Stock 42,820 By Sales 2,15,725
To Purchases 1,25,730 By Goods destroyed 800
by fire
To Carriage inwards 3,250
To Gross Profit 86,975 By closing Stock 42,250
2,58,775 2,58,775
Profit and Loss Account

Rs. Rs. Rs. Rs.
To discount Allowed 3,125 By Gross Profit 86,975
To old Bad Debts 400 By Discount Received 2,150
Add : New B.D. 1,200
Add : New RDD 1,950
Less : Old RDD (1,200) 2,350
To Sundry Expenses 7,840
To Telephone Expanses 3,240
To Postage & Stationery 2,690
To Rent, rates & Insurance 3,200
66
To Depreciation
Land & Building 4,000
Motor Vehicle 10,000 14,000
To loss by fire 200
To Net Profit
Jinal 26,240
Sameer 17,493
Jatin 8,747 52,480
89,125 89,125
Capital Account
Jinal Sameer Jatin Jinal Sameer Jatin

Rs. Rs. Rs. Rs. Rs. Rs.
To Goodwill 30,000 By Balance b/d 65,000 35,000 80,000
To Drawings 5,000 4,000 2,000 By Goodwill 18,000 12,000
To Balance c/d 1,04,240 60,493 56,747 By Net Profit 26,240 17,493 8,747
1,09,240 64,493 88,747 1,09,240 64,493 88,747
67
Balance Sheet as on 31 - 03 - 2014

Capital Land & Building 80,000
Jinal 1,04,240 Less Depreciation 5% (4,000) 76,000
Sameer 60,493 Motor Vehicles 50,000
Jatin 56,747 2,21,480 Less Depreciation 20% (10,000) 40,000
Investments 60,000
Closing Stock 42,250
Debtors 40,200
Trade Creditors 32,540 Bad Debts 1,200
39,000
Bank Overdraft 6,920 Less : RDD 1,950 37,050
Cash Balance 5,040
Insurance Claim 600
2,60,940 2,60,940
68
Illustration 14 :
Bhavana, Ravina and Kangana carried on a retail business

in partnership, sharing profits and losses in the ratio 2:1:2.

Particulars Debit Rs. Credit Rs.

Capital A/c Bhavana 90,000
Ravina 52,000
Kangana 66,000
Plant & Machinery 1,50,000
Investments in govt. securities 50,000
Sales Returns 5,000
Sales 5,65,000
Furniture & Fittings 47,000
Motor Vehicles 60,000
Purchases 2,80,000
st
Stock as on (1 April 2013) 46,000
Salaries and Wages 62,000
Office and Trade Expenses 40,200
Rent, Rates and Insurance 15,500
Professional charges 3,500
Debtors / Creditors 51,600 87,000
Provision for Doubtful Debts 500
Drawings : Bhavana 12,000
Ravina 6,000
Kangana 19,000
Bills receivables / Bills payable 18,300 36,200
Printing & Stationery 6,900
Loan from bank 1,20,000
10,16,700 10,16,700
69
You are given the following additional information :
1. Stock on 31st March 2014 was valued at Rs. 66,500.

2. A debtor of Rs. 1,600 is to be written off and provision against
the remaining debtors should be made at 5%.
3. Provide for the following outstanding expenses as on 31st
March, 2014 : Printing & Stationary Rs. 2,400 Salaries and
Wages Rs. 8,000.
4. Insurance prepaid as on 31st March, 2014 Rs. 2,500.
5. Depreciate Land & Building by 5%, Furniture and Fittings by
10%, Plant & Machinery & Motor Vehicles by 20%.
You are required to prepare :

1. The Trading and Profit and Loss A/c. for the year ended 31st
March, 2014.
2. The Balance Sheet as on that date.
70
In the Books of Bhavana, Ravina & Kangana

Trading A/c for the year ended 31st March, 2014
Rs. Rs. Rs. Rs.

To opening Stock 46,000 By Sales 5,65,000
To Purchases 2,80,000 Less : Returns 5,000 5,60,000
To Gross Profit 3,00,500 By closing Stock 66,500
6,26,500 6,26,500
Profit and Loss Account for the year ended 31st March, 2014
Particulars Rs. Rs. Particulars Rs. Rs.

To Old Bad Debts By Gross Profit b/d 3,00,500
+ New bad debts 1,600
+ New RDD 2,500
- New RDD (500) 3,600
To Salaries 62,000
Add : o/s 8,000 70,000
To Rent, Rates, Insurance 15,500
Less : Prepaid (2,500) 13,000
To Office & Trade 40,200
71
Expenses
To Professional Charges 3,500
To Printing & Stationary 6,900
Add : o/s 2,400 9,300
To Dep
Building 5,000
Plant 30,000
Motor Vehicles 12,000
Furniture 4,700 51,700
To Net Profit
Bhavana 43,680
Ravina 21,840
Kangana 43,680 1,09,200
3,00,500 3,00,500
72
Partners Capital Account
Particulars Bhavana Ravina Kangana Particulars Bhavana Ravina Kangana

Rs. Rs. Rs. Rs. Rs. Rs.
To Drawings 12,000 6,000 19,000 By Balance b/d 90,000 52,000 66,000
To Balance c/d 1,21,680 67,840 90,680 By Net Profit 43,680 21,840 43,680
1,33,680 73,840 1,09,680 1,33,680 73,840 1,09,680
Balance Sheet as on 31st March, 2014
Capital A/c’s Land & Building 1,00,000
Bhavana 1,21,680 Less : Dep 5,000 95,000
Ravina 67,840 Plant & Machinery 1,50,000
Kangana 90,680 2,80,200 Less : Dep 30,000 1,20,000
Furniture 47,000
Bank loan 1,20,000 Less : Dep 4,700 42,300

73
Creditors 87,000 Motor Vehicles 60,000
Bills payable 36,200 Less : Dep 12,000 48,000
O/s Expenses Investments 50,000
Printing & Stationery 2,400 Debtors 51,600
Salaries & Wages 8,000 10,400 Less : New BD 1,600
50,000
Less : New RDD 2,500 47,500
Balance at bank 43,700
Bills Receivable 18,300
Stock 66,500
Prepaid insurance 2,500
5,33,800 5,33,800
74
Illustration 15 :
Karan and Aditya were in a partnership in a retail business

sharing profits in the proportion of 3:2. As from 1st April 2013 they
admitted Ashish into partnership giving him one - fifth of the profits.
Ashish brought in Rs. 32,000 in cash of which Rs. 6,000 were
considered as being in payment for his share of goodwill and

Debit Credit Rs.

Rs.
Purchases 27,160
Sales 41,265
Sales Returns 525
Purchases Returns 410
Sundry Debtors 44,020
Bills Payable 1,195
Office Salaries 980
Furniture 2,050
Postage, stationery and insurance 1,393
Rent, rates and taxes 420
Bad debts 40
Prepaid insurance 24
Outstanding wages 120
Rent accrued but not paid 90

75
Capital accounts (1st April 2013)
Karan 21,500
Aditya 21,000
Cash paid by Ashish on 1st April 2013 32,000
Current accounts :
Karan 5,500
Aditya 5,200
Ashish 6,200
Cash in hand 20,444
Total 1,31,653 1,31,653
You are required to prepare the firm’s Trading and Profit and
Loss Account for the year ending 31st March, 2014 and Balance
Sheet as on that date having regard to the following information :
1. Stock at the end was Rs. 20,000.

2. Sundry debtors include item of Rs. 500 for goods supplied to
Karan and item of Rs. 100 due from customer on account of
sales, who was become insolvent.
3. Depreciation on furniture is to be changed at 10% per annum.
sundry debtors.
5. Goods to the value of Rs. 500 have been destroyed by fire and
the insurance company has admitted the claim for Rs. 200 only.
6. Bills receivable include a dishonored bill of Rs. 500.
76
In the Books of Karan and Aditya

Trading A/c for the year ended 31st March, 2014
Purchase Rs. Rs. Particulars Rs. Rs.

To opening Stock 3,972 By Sales 41,265
To Purchases 27,160 Less : Returns 525 40,740
Less Returns 410 26,750
To Carriage Inwards 1,718 By Goods lost by fire 500
To Gross Profit 28,800 By closing Stock 20,000
61,240 61,240
Profit and Loss Account for the year ended 31st March, 2014
Particulars Rs. Rs. Particulars Rs. Rs.

To Old Bad Debts 64 By Gross Profit b/d 28,800
+ New bad debts 100
+ New RDD 2,196
- New RDD 1,520 840
To Salaries 980
To Postage, stationary 1,393
Insurance
77
To Rent 420
To dep on Furniture 205
To loss by Fire 300
To Net Profit
Karan 11,838
Aditya 7,892
Ashish 4,932 24,662
28,800 28,800
Partners Current Account
Particulars Karan Aditya Ashish Particulars Karan Aditya Ashish

To Balance b/d 5,500 5,200 12,200 By Goodwill 3,600 2,400
To Goods taken 500 By Net Profit 11,838 7,892 4,932
To Balance c/d 9,438 5,092 By Balance c/d 7,268
15,438 10,292 12,200 15,438 10,292 12,200
78

Capital A/c’s Furniture 2,050
Karan 21,500 Less : Dep 205 1,845
Aditya 21,000 Insurance claim 200
Ashish 32,000 74,500 Sundry Debtors 44,020
Less : Karan 500
Current Accounts Less : New bad debts 100
Karan 9,438 Add : B R Dishounr 500
Aditya 5,092 14,530 Less new RDD 2,196 41,724
Sundry Creditors 12,553 Less : Dishonored 500 11,507
Bills Payable 1,195 Cash 20,444
O/s Wages 120 Closing Stock 20,000
O/s Rent 90 Current A/c of Aashish 7,268
1,02,988 1,02,988
Working Notes :
1. New Profit Sharing Ratio Karan Aditya Ashish
Old Ratio 3/5 2/5
New Partner 1/5
Remaining in old 3/5 × 4/5 2/5 × 4/5
New Ratio 12/25 8/25 5/25
79
EXERCISES
Theory Questions
1. Define partnership. what are the main features of partnership?
2. Write short note on Profit & Loss Appropriation A/c of a firm.
3. Explain the adjustments in accounts when a new partner is
admitted.
4. Explain division of expenses based on Time Ratio
5. Distinguish between Fixed Capitals and fluctuating Capitals.
6. Write short notes
a) Fixed capital accounts of the partners.
b) Interest on Drawings by the partners.
c) Salary or commission payable to partners.
d) Calculation of new profit sharing ratio on admission of
partner.
7. What are rules applicable in the absence of partnership Deed.
a) Interest on Drawings
b) Profit sharing ratio.
c) Interest on partners loan
d) Salary to partner
e) Interest on capital
8. OBJECTIVE:
A) Choose the appropriate word.
i) Partnership is a legal relationship between persons according

the ------------------------
a) Contract Act
b) Companies Act
c) The Indian partnership Act, 1932
d) Income Tax Act 1961.
ii) The profit sharing ratio among the partner may be --------------
from the ratio to share losses.
a) Equal
b) Same
c) In the Capital ratio
d) Different
80
iii) The maximum number of persons permitted to form a

partnership for Banking business are ------------ partners.
a) 7 b) 15 c) 10 d) 20
iv) The partnership can not be formed to share ------------------ only.

a) profit b) losses c) profit & loss d) Non of the above.
v) The persons who have agreed to carry on the partnership

business are individually known as ---------------
a) firm b) partners c) Directors d) Creditors
vi) It is a ----------------- relationship between persons created

through the partnership Act, 1932.
a) Natural b) Legal c) oral d) Faithfull.
vii) The partnership agreement can be ------------- or written.

a) Oral b) Written as well as oral c) Registered
d) un registered.
viii) In the partnership business the partner’s are collectively called

as ------------------
a) Company b) Association c) Firm d) Partners
ix) To admit a new partner with consent to --------------- partners.

a) Existing b) Majority c) Newly admitted d) One partner
x) In absence of agreement, partners share profit on loss in --------

a) capital ratio b) Equally c) Current Account ratio
d) Time devoted for business.
xi) --------- number of partners allowed in case of Retail business

a) maximum 10 b) maximum 20 c) minimum 50 d) minimum 10
xii) The minor partner cannot be personally liable to share -------- of

the firm
a) commission b) profits c) losses d) none of above
xiii) In absence of agreement Interest on Loan, at ---------- % p.a. is

payable by the firm
a) 12% p.a. b) Nil c) 6% d) As per Bank rate.
xiv) Partners can contribute capital either in Cash/Bank or------------

a) only cash b) in kind c) cash plus in kind d) by cheque
[Ans. I-c, ii-d, iii-c, iv-b, v-b, vi-b, vii-a, viii-c, ix-a, x-b, xi-c, xii-c, xiii-c, xiv- b]
81
B) Fill in the Blanks.
I. The persons who have agreed to carry on partnership

business are -----------known as partners and ----------- called
as a ------------
II. The partnership can not be formed to do --------------
business.
III. The partners may share profit and Loss of the firm --------
ratio.
IV. It is not necessary that partners should contribute ---------- in
profit sharing ratio.
V. A ----------- partner is not personally liable to share the losses
of the firm.
VI. In the absence of a partnership agreement interest on
--------should not be paid to partners.
VII. It is not necessary that partners should contribute --------------
in profit sharing ratio.
VIII. Maximum numbers of partners in insurance business--------
persons.
IX. A particular partner may not share ---------- of firm at all.
X. In the ----------- of a partnership Deed, each partner have free
access of all partnership records, Books and Accounts.
[Ans. I) Individual ii) illegal iii) different iv) capital v) minor vi) capital vii)
capital viii) Ten ix) losses x) absence].
C) Substitute the following in a single WORD/Term.
I. Written Agreement of partners.

II. Credit balance in Trading A/c
III. A partner not taking part of in partnership business.
IV. A statement showing financial status of a business.
V. Debit balance in profit & Loss A/c
VI. Part of sundry Debtors irrecoverable.
VII. Expenses accrued but not paid
VIII. Expenses paid in advance.
IX. Any remuneration paid or payable to partner’s, then it is
necessary to prepare a special A/c.
X. A partner draws a fixed amount at the end of each month,
interest is calculated for months.
82
XI. Policy on the lives of the Partner is to insure against
changes of disturbance in the business due to death of any
partner
XII. A method in which Partner’s Current Accounts are opened
XIII. A partner who only lends his name to the firm.
XIV. In the absence of partnership Deed, which provisions /rates
are applicable.
[Ans. I-Partnership Deed, ii) Gross profit iii) Dormant partner, iv) Balance
sheet, v) net loss, vi) Bad debts vii) outstanding expenses. Viii) prepaid
expenses ix) profit & loss appropriation x) 5.5 month xi) joint life policy xii)
fixed capital xiii) nominal partner xiv) the Indian partnership Act 1932.
D) Match the following items in column A and column B.
I)
Column A Column B
i) Opening stock a) Trading A/c credit side

ii) Carriage paid on plant b) carriage outwards.
purchased c) 1932
iii) carriage paid on goods sold d) 1956
iv) partnership Act e) Trading A/c debit side
f) plant & machinery
[Ans. I-e, ii-f, iii-b, iv- 1932]
II)
Column A Column B
i) Partnership a) Liability side

ii) Active Partner b) Trading A/c
iii) Outstanding Expenses c) Unlimited Liability
iv) Salaries & Wages d) Working partner
v) Goodwill e) Profit & Loss A/c
f) Intangible assets
[Ans. I-c, ii- d, iii-a, iv- e, v-f]

83
III)
Column A Column B
i) Return Inwards a) Land & Building

ii) Fixed Assets b) No need of current A/cs.
iii) Reserve for Bad Debts c) Sales Return
iv) Fluctuating Capital method d) Sundry debtors
e) Liability side.
[Ans. I-c, ii-a, iii-d, iv-b]
IV)
Column A Column B
i) Closing stock a) Gross Profit

ii) Trading A/c b) Profit / Losses shares equally
iii) Partnership Agreement silent c) Assets
iv) Partners Salaries d) Profit & loss Appropriation
v) Dormant Partner A/c
e) Nominal Partner
f ) Sleeping Partner
[Ans. I-e, ii-a, iii-b, iv-d, v-f]
V)
Column A Column B
i) Retirement of Partner a) Executor’s Loan A/c

ii) Goodwill b) Profit & Loss Appropriation
A/c
iii) Partnership Agreement c) Sales Ledger Balances.
iv) Interest on Capital d) Retiring partners loan A/c
v) Doubtful of bad debts e) Intangible Assets.
f) Partnership Deed.
g) Tangible Assets.
[Ans. I-d, ii-e, iii-f, iv-b, v-c]

84
9. PROBLEMS
Final Accounts
EX.1
Shraddha and Sneha carried on business sharing profits and
losses in the proportion of 1:9. The partnership agreement
provided:
a) Interest be allowed at 15% p.a on capital.

b) Shraddha is entitled to get salary Rs.5000 per quarter of a
year.
c) Ignore interest on drawings and current account.
Trial Balance as on 31st Dec, 2013
Particulars Dr. Particulars Cr.

Salaries to employees 72,000 Gross Profit for the year 2,17,000
Partner’s Salary 15,000 Carriage Inward Payable 3,000
Rent 12,000 Bills Payable 20,000
Furniture 74,000 Sundry Creditors 35,000
Motor Car 1,11,000 Interest free loan from 145,000
(Balance on 1.1.13 Reema
Rs.1,20,000)
Depreciation at 10% p.a. 15,000 Shraddha’s Fixed Capital 20,000
upto 30.9.13 Account
Insurance 10,000 Sneha’s Fixed Capital 1,80,000

account
Bad Debts 3,000
st
Stock on 31 December 13 2,10,000
Bank Balance 6,500
Cash on Hand 3,500
Shraddha’s Current 7,200
Account
Sneha’s Current Account 7,800
Interest on Capital 18,000
Total 6,20,000 Total 6,20,000

85
Other Information:-
A. Partner’s current accounts were as under-
Particulars Shraddha Sneha
Opening Balance -- --
Add: Interest credited for 9 months at 1800 16,200
12% p.a.
Add: Salary for 9 months 15,000 --
16,800 16,200
Less: Withdrawals (24,000) (24,000)

7,200 7,800
Balance as per Trial Balance
B. Fixed Assets are depreciated at the rate of 10% p.a. Provide

balance of depreciation for the year.
C. Through oversight interest on Fixed Capital was provided at
the rate of 12% instead of 15% p.a. as per partnership
agreement.
a) Profit and loss account and Profit and Loss Appropriation

Account for the year ended 31st December, 2013.
b) Balance Sheet as on 31st December, 2013.
Ex.2
A and B are partners sharing profits and losses in the ratio

3:2. On 1st October, 2013 they admitted C as a partner on
the following terms:-
a) The new profit ratio to be A-60%; B-30%; C-10%
b) Goodwill of the firm is to be valued at Rs. 27,000/- on 30th
September 2013. No account for goodwill should be opened
in the books of the firms, adjustments, if any, for the same
should be carried out in the capital accounts of the partners.
c) C’s share to be guaranteed by A at the minimum rate of Rs.
36,000 p.a.
d) Apportion gross profit on the basis of sales, Expenses on the
basis of time.
e) No interest is to be credited or charged on partners capital or
current account. The trial balance of the firm as on 31st
March, 2014 was as follows before adjusting goodwill.
86
Particulars Dr. Rs. Particulars Cr. Rs.
Purchases 1,77,660 Creditors 15,000
Salaries 63,000 Capital Accounts:
Debtors 51,180 A 30,000
Drawings B 30,000
A 15,000 C 6,000
B 7,500 Sales (upto 30-9-13 Rs.
1,20,000) 3,06,000
C 7,200 Loan from Edulji ( at
Balance with Bank 33,360 12% p.a. taken on 31- 39,000
1-14)
Electricity Deposit 450
Selling Expenses 5,400
Office Expenses 900
Delivery Van
(Purchased on 30-6-13) 33,750
Furniture at cost
(Purchased on 1-4-13) 9,000
Rent & Rates 18,000
Electricity office 3,600
Total Rs. 4,26,000 4,26,000
You are required to prepare a Balance Sheet as on 31 st

March, 2014 and Trading and Profit and Loss Account for the year
ended on that date after considering the following
i) Stock on 31-3-14 was Rs. 60,000.
ii) Accrued expenses but not yet paid: Rent Rs. 5500/-, Selling
expenses Rs. 1750/-, Office expenses Rs. 1500/-
iii) Sales & Debtors include goods sent on sale or approval
basis Rs. 12000 but not yet approved as on 31.3.14 These
goods were invoiced at a profit of 100% on cost price.
iv) Depreciation is to be provided: Delivery van @ 20% p.a.,
Furniture @ 10% p.a.
Ex. No.3
Prepare Trading, Profit and Loss Account for the year ended
31st March, 2014 and the Balance Sheet as on that date from the
following information available from the books of HR & Co.
87
a) Trial Balance as on 31st March 2014

Premises 2,00,000 Capital A/c ‘H’ 1,20,000
Machinery & Equipment 1,50,000 ‘R’ 1,00,000
Bank Balance 35,000 Current A/c ‘H’ 20,000
Bills Receivable 40,000 Sales 11,12,000
Current A/c ‘R’ 15,000 Commission 35,000
Sales Returns 25,000 Bills Payable 45,000
Purchases 6,90,000 Sundry Creditors 2,85,000
Sundry debtors 3,40,000 ‘C’s A/c 75,000
Stock in Trade 80,000
Salaries 40,000
Distribution Expenses 64,000
Sundry Expenses. 76,000
10% Bonds 37,000
Total Rs. 17,92,000 17,92,000
b) Additional Information:
1. Stock in trade on 31st March, 2014 was Rs. 75,000
2. Outstanding salaries as on 31st March 2014 was Rs. 4,.300 and
prepaid insurance included in office expenses was Rs. 2,000.
3. Depreciate premises @ 5% and Machinery & Equipment @
10%
4. Sales include Rs. 20,000 being goods sent on sale or return
basis, the cost of which was Rs. 15,000. Approval was received
for 50% of the goods sent. Sales also include Rs. 10,000 being
sale proceeds of equipment of the book value of Rs. 8,000
realized on 1-4-2013.
5. Sundry Debtors include Rs. 20,000 on account of dishonoure of
a Bill Receivable accepted by a customer. Only 50% of the
amount is likely to be recovered. On the balance debtors 5%
provision for doubtful debts is to be created.
6. H and R shared Profits and Losses in the ratio 2:1.
7. C was admitted as a partner on 1-10-2014 and deposited Rs.
75,000 with the firm as his capital. ‘C’s is entitled to share 25%,
of the Profit/Losses of the firm. The net profit between the pre
admission and post-admission period is to be on time basis.
88
Ex. 4
Ashok and Ketan are equal partners. Their trial balance
as on 31st Mar., 2014 is as follows:
Particulars Dr.Rs. Cr. Rs.
Ashok Capital 2,16,000
Ketan’s Capital 66,000
Opening Stock 43,800
Office Rent (Rs.2000 per month) 23,100
Purchase and Sales 1,19,400 2,16,000
Provident Fund and Provident Fund Investments 24,000 25,000
Debtors and Creditors 84,000 48,000
Discount 1,800 1,200
Furniture 6,000
Drawings : Ashok 15,000
Ketan 15,000 30,000
Returns Outward 3,000
Dead Stock 1,500
Demurrage 600
Freight and Duty 3,000
Advertisements 10,000
Bad Debts Reserve 6,000
Cash and Bank 12,000 58,800
Sunil’s Loan (1-10-2013) 30,000
Plant and Machinery 83,250
Land and Buildings 2,10,000
Depreciation on Plant & Machinery 6,750
Contribution to Provident Fund 1,800
Insurance Premium (incl. Rs. 3,600 paid for the year ended 9,000
30-9-2014)
Bills Payable 25,200
6,95,200 6,95,200
you are required to prepare final accounts for the year ended 31st
March, 2014 after taking into account the following adjustments:
(1) The closing stock was valued at Rs. 110,000
(2) Provide Depreciation on furniture at 10% p.a.
(3) Of the Sundry Debtors Rs. 1,800 are bad and should
be written off. Also maintain a reserve for doubtful debts at
5% on debtors.
(4) Goods of the value Rs. 6,000 had been received on 25 th
March, 2014 but the purchase invoice was omitted to be
recorded in the purchase book.
(5) Goods valued at Rs. 4,300, withdrawn for personal use by
Ketan, were recorded as credit sales in the sales book as
Rs. 6000.
Ex.5
Ram and Bharat were in partnership in a business sharing
profits in proportion of 2:3. As from 1st January 2014 they admitted
Kran in to partnership giving him one-fifth of the profits. Kran
brought in Rs. 30,000 in cash of which Rs. 10000 were considered
as being in payment for his share of goodwill and remainder as his
capital.
89
The following Trail Balance was extracted from the books as on
31st March 2014.
Purchases and sales 1,71,625 3,62,650

Returns 5,250 4,125
Customer and Creditors 90,200 25,525
Bills Receivable & Bills Payables 20,070 11,950
Carriage Inward 15,000 --
Carriage Outward 2,175 --
Stock (01.04.13) 39,725 --
Outstanding Carriage Inward -- 1,200
Bad debts 400 --
Salaries 9,795 --
Furniture 5,000 --
Shop Fittings 15,500 --
Postage and Insurance 3,240 --
Trade Expenses 2,690 --
Rent, Rates and Taxes 4,200 --
Loan to Vishnu (from 01-01-2014) @ 56,000
15% p.a. --
Prepaid Insurance 240 --
Rent [from 1.10.13 to 31.03.14] -- 6100
Cash in hand 4,440 --
Current A/c
Ram 5,000 --
Bharat 4,000 --
Kran 2,000 --
Capital A/c
Ram -- 15,000
Bharat -- 10,000
Cash paid by Kran 30,000
Computer 40,000
Loan I.C.I.C.I. Bank @ 12% p.a. -- 30,000
4,96,550 4,96,550
90
You are required to prepare the firm’s Trading and Profit and
Sheet as on that date having regard to the following information.
1) Stock at the end was Rs. 35000.
2) Depreciation on Computer and Furniture is to be charged 10%
p.a.
3) One-fifth of the Shop fittings to be written off.
4) Goods worth Rs. 2800 have been destroyed fire and the
Insurance Co. has admitted the claim for Rs. 1,600 only.
5) Bills receivable include a dishonoured bill for Rs. 4,000/-
6) Debtors include Rs. 3,000 for goods costing Rs. 2,000, supplied
to Bharat and item of Rs. 3,000 due from Customer on account
of sales, who has become insolvent.
7) Net Sales upto 31.12.2013 were Rs. 2, 83,520.
Hint :
[Net sale = 362650 – Sales Return 5250 – Goods taken by
Bharat Rs. 3,000.
= Rs. 3, 54,400
∴ Sales Ratio = 2, 83,520: 70,880
= 4:1]
91
Example 12 :
Siddhanth and Sankalp were in a partnership in a retail

business sharing profits in the proportion of 3:1. as from 1st April
2013 they admitted Ved into partnership giving him one-fifth of the
profits. Ved brought in Rs. 50,000 in cash of which Rs. 20,000 were
considered as being in payment for his share of goodwill and


Purchase and Sales 1,01,620 2,02,650
Discount allowed and received 5,250 4,120
Sundry debtors and creditors 40,200 17,630
Bills receivable and bills payable 20,070 11,950
Sundry Expenses 9,800
Motor vehicles 5,000
Land and Building 15,500
Telephone expenses 3,240
Postage and stationary 2,690
Rent, rates and insurance 4,440
Bad debts 400
Investments 76,000
Capital accounts
Sankalp 35,000
Siddhanth 30,000
st
Cash paid by Ved on 1 April 2013 50,000
Drawings
Sankalp 5,000
Siddhanth 4,000
Ved 2,000
Cash in hand 4,440
Total 3,56,550 3,56,550
92
You are required to prepare the firm’s trading and Profit and
1. Stock at the end was Rs. 20,000.

2. Sundry debtors include item of Rs. 300 for goods supplied to
Ved and item of Rs. 1,000 due from customer on account of
sales, who has become insolvent.
3. Depreciation on Motor vehicles is to be changed at 20% p.a.
and Land and Building at 5% p.a.
sundry debtors.
5. Goods to the value of Rs. 1,000 have been destroyed by fire
and the insurance company has admitted the claim for Rs. 600
only.
6. Bills receivable include a dishonored bill of Rs. 1,100.
7. Land and Building to be depreciated by 5%.
Example 13 :
Hardik and Yatish carried on a retail business in partnership

under the name Yatrik Associates sharing profits and losses in the
ratio 5:3.
Trial Balance of Yatrik Associates as on 31st March, 2014

R.D.D. 1,980
Loan taken 3,20,000
Sales 9,50,000
Opening Stock 87,585
Purchase 2,99,745
Wages 27,465
Goodwill 1,20,000
Sundry Expenses 16,340
Discount allowed 3,275
Hardik Drawings 4,200
Yatish Drawings 10,170
Debtors 87,765
93
Hardiks Capital 60,000

Yatish Capital 1,30,000
Creditors 76,775
Outstanding Expenses 3,475
Plant and Machinery 4,55,375
Land and Building 2,57,735
Furniture 44,730
Carriage Inwards 16,235
Carriage Outwards 18,325
Office rent 27,525
Salaries 65,565
Repairs 2,355
Bad debts 3,225
Free Sample 18,375
Prepaid Expenses 2,310
Cash in hand 9,120
Salesman Commission 23,200
Discount Received 6,345
Commission Received 13,215
Bank Balance 30,000
16,24,015 16,24,015
You are required to prepare the firm’s trading and Profit and
1. Stock on 31st March 2014 was Rs. 1,42,250.

2. Sundry debtors include item of Rs. 2,765 due from a customer
on account of sales, who has become insolvent.
3. Depreciate Land & Building and Plant and Machinery and
Furniture at 5% p.a., 10% p.a. and 20% p.a. respectively.
sundry debtors.
5. Goods to the value of Rs. 1,845 have been destroyed by fire
and the insurance company has admitted the claim for Rs.
1,000 only.
94
Example 14 :
Teena, Meena and Beena carried on a retail business in
partnership, sharing profits and losses in the ratio 5:3:2.
The Trial Balance of the firm as at 31st December 2013 was as
follows

Capital A/c’s Teena 80,000
Meena 50,000
Beena 30,000
Current A/c’s Teena 16,000
Meena 12,000
Beena 8,000
Sales 4,65,000
Trade Creditors 37,000
Furniture & fittings 22,000
Freehold Premises (Purchased during 60,000
the year)
Leasehold Premises 45,000
Addition and Alterations to leasehold 25,000
premises
Purchase 2,80,000
Stock as on (1st January 2013) 42,000
Office and Trade Expenses 45,200
Rent, Rates and Insurance 10,500
Professional charges 3,500
Debtors 20,600
Provision for Doubtful Debts 500
Drawings : Teena 17,000
Meena 11,000
Beena 9,000
Bills payable 15,200
Bills receivables 18,300
Printing & Stationary 6,900
Loan from bank 10,000
7,23,700 7,23,700
95
You are given the following additional information :
1. Stock on 31st December, 2013 was valued at Rs. 46,000

2. A debtor of Rs. 600 is to be written off and provision against the
remaining debtors should be made at 5%.
3. Provide for the following outstanding expenses as on 31st
December 2013 :
a) Office and Trade Expenses Rs. 2,400 Salaries and Wages
Rs. 6,000.
b) Rates prepaid as on 31st December 2013 Rs. 2,500.
4. Depreciate furniture and fittings by 10%.
5. Professional charges include Rs. 2,500 fees paid in respect of
the acquisition of the leasehold premises, which are to the
capitalized.

1. The Trading and Profit and Loss A/c. for the year ended 31st
December, 2013.
2. The Balance Sheet as on that date.
3. Partners Current Accounts.
96
4
PIECEMEAL DISTRIBUTION
Unit Structure :
4.0 Objective
4.1 Introduction
4.2 Classification of Liabilities
4.3 Order of Payment of Cash to Partners
4.4 Important Points
4.5 Illustrations on Piecemeal Distribution
4.6 Exercise
4.0 OBJECTIVE
After studying the unit the student will be able to:

• Classify the Liabilities of the business.
• Describe the methods of allocation of cash among the
partners.
• Solve the practical problems.
4.1 INTRODUCTION
In the previous chapter we have studied Dissolution of

Partnership Firm. On dissolution of the firm business of the firm is
closed, all the assets of the firm are sold and all the liabilities of the
firm are paid off. The surplus remaining thereafter is paid to the
partners against their loan account and their capital account
balances. Here we assume that all these transactions take place
on the same day. But in practice it takes time to dispose off all the
assets. The payment of liabilities has to be done as and when the
cash is available. It has to be in a specific order. This recovery of
assets in installments and payment of liabilities in installments is
called as PIECEMEAL DISTRIBUTION OF CASH.
4.2 CLASSIFICATION OF LIABILITIES
1. External Liabilities
2. Internal Liabilities
3. Partner’s Capital Accounts
97
4.2.1 External Liabilities

These are amounts payable to outside parties. These are
further classified into
a. Preferential Liabilities:
These include amounts payable in priority to all liabilities.

These are Government dues like Income Tax, Sales Tax, Excise
Duties etc. Employees’ Dues like outstanding wages, outstanding
salaries, provident fund dues, etc.
Dissolution expenses : These are the expenses incurred for the

purpose of successful carrying out of dissolution like payment for
preparation of dissolution deed, advertisement and brokerage for
disposal of assets.
b. Other Liabilities :
These are further classified into :
Secured liabilities : These are liabilities / loans secured against

some or all the assets of the firm. If it is secured by a charge on a
specific asset then amount realized by sell of that particular asset
shall be utilized for payment of these liabilities. For example bank
overdraft secured against stock, mortgage loan against land and
buildings. If these liabilities are not secured against a specific asset
but on all the assets in general then amount realized shall be first
utilized to pay off these liabilities.
Unsecured Liabilities : These are liabilities incurred during the

normal course of business for which no security is given. For
example sundry creditors, bills payable, loan from spouse of
partner, etc. these liabilities are paid when all above liabilities are
paid in full. If the amount available with the firm is not sufficient to
pay all these liabilities, then the amount is paid in the ratio of their
out standings.
4.2.2 Internal liabilities
Partners loans: If a partner has given any loan to the firm then it
will be paid after all the above liabilities have been paid in full but
before anything is paid to partners against their capital accounts. If
two or more partners have given loans to the firm and cash
available is insufficient to pay these loans in full then the amount
will be paid in the ratio of outstanding balance of the loan.
98
4.2.3 Partners Capital Account
After all the above liabilities are paid the cash available is
paid to partners against their capital account by adopting any one
of the following two methods.
Excess Capital Method (Highest Relative Capital Method/Quotient

Method) Maximum Loss Method (Not in the syllabus)
4.2.3.1 Excess Capital Methods / Proportionate Capital Method-
This method is applied where the partners have not

contributed their capitals in the profit sharing ratio. Some partner
have contributed more capitals than other partners. Hence it is
required to pay such partners before other partners are paid. The
method of calculating surplus capitals is as follows –
Step No. Particulars
I Computation of Adjusted Capital:

Take capital account balances as per Balance Sheet
Add: General Reserve/Reserve funds/Profit and Loss
A/c Credit Balance in Profit Sharing Ratio
Less: Profit and Loss A/c Debit Balance
II Write Profit Sharing Ratio
III Find Capital Contribution per unit of profit i.e. Step I / Step II
IV Find out the partners with lowest capital contribution per unit
of profit. Taking his capital as base find out Proportionate
Capital of all the partners.
V Find out the Excess Capital – Step I - Step IV (Adjusted

Capital – Proportionate Capital)
If there’re more than two partners then do the same process
again
VI Write Profit Sharing Ratio
VII Find capital contribution per unit of profit – Step V / Step VI
VIII Find out the partners with lowest capital contribution per unit
of profit. Taking this capital as base find out proportionate
capital of all the partners.
IX Find out the Excess Capital – Step V -- Step VIII

99
4.3 ORDER OF PAYMENT OF CASH TO PARTNERS:
After cash is paid for all internal and external liabilities cash should
be paid to partners against their capital accounts as follows : (Step
No. IX, Step No. VIII, Step No. IV)
a) Pay to the partner who is having ultimate excess. (Step No.

IX)
b) Pay out the excess amount of other partners in their Profit

Sharing Ratio. (Step No. VIII)
c) After the payment of excess capital, the capitals of the

partners will be in their profit sharing ratio. (Step No. IV) All
the available cash should be paid in Profit sharing ratio.
d) If any partner is taken over any asset then it should be

assumed that he brings necessary cash in the firm. It should
be added in the cash available and then total available cash
should be distributed among the partners as above.
e) The balance left unpaid represents loss on realization.

Payment more than the dues represents profit on realization.
4.4 IMPORTANT POINTS
a) If any reserve is to be created for dissolution / realization

expenses, it should be created by setting aside cash after
payment of Government and Employees’ dues. If finally
actual expenses are less than the reserve, the excess
should be distributed among the partners.
b) If there is any contingent liability (like bill discounted with the

bank not yet matured) cash should be set aside after
payment of all external liabilities, but before making any
payments to the partners. If the liability arises it should be
paid from the cash reserved. If the liability does not arise, the
cash kept in reserve will be distributed among the partners
when it becomes certain that the liability is not to be paid.
c) If nothing is mentioned about security of a liability the same

should be treated as unsecured.
d) In case of a secured liability, payment should be made for

such liability only if the asset charged for that liability is
realized. However if any other asset is realized then the
secured liability should be treated at par with other
100
unsecured liabilities and payment should be made

proportionately.
CHECK YOUR PROGRESS
1. Define the following terms:

• Preferential liabilities
• Adjusted Capital
• Piecemeal Distribution of Cash
• Internal Liabilities
2. Fill in the blanks:

• In Piecemeal Distribution amounts realized from assets are
distributed in the order ---------------------
• Excess capital Method is applied where the partners have
not contributed there capitals in the ------------------
• Preferential Liabilities include Government dues
like----------------------------------------------.
• If two or more partners have given loans to the firm and the
cash is in sufficient for full payment then the loans will be
paid in the ----------------------------------ratio
3. Calculate the Adjusted Capital from the following:

X,Y and Z are sharing profits and losses in the ratio 3:2:1.The
Capital Account is showing credit balances of Rs. 60,000, 20,000
and 30,000 respectively ,General Reserve is Rs. 60,000 and P&L
A/c Debit Balance Rs. 12,000.
4.5 ILLUSTRATIONS ON PIECEMEAL DISTRIBUTION
Illustration 1:
P, Q, R are partners sharing profits and losses in the ratio of 4:2:1.

they decided to dissolve the partnership as on 31st March 2014
when their Balance Sheet was as follows:
Balance Sheet
Creditors 23,200 Cash in hand 680
General Reserve 37,800 Investment 60,000
Bank Overdraft 65,000 Stock 2,56,600
Capital : P 1,60,000 Debtors 90,800
Q 3,20,000 Machinery 65,200
R 2,60,000 Furniture 9,800
Building 3,82,920
8,66,000 8,66,000
101
All creditors have to be paid off Rs.4800/- have to be

provided for realization expenses. Thereafter all cash received
should be distributed among the partners. The amounts were
realized in installments as follows –
Rs.
1st 60,000
2nd 32,320
3rd 4,60,000
4th 1,83,680
The actual realization expenses were Rs.2400/-. Prepare a

statement showing distribution of cash as per Excess Capital
Method.
Solution :
(In the books of P, Q & R a Partnership Firm)
Statement of Excess Capital
P Q R Total Order
Rs. Rs. Rs. Rs.
Capital 1,60,000 3,20,000 2,60,000

Add : General 21,600 10,800 5,400 2,65,500
Reserve
A. Adjusted 1,81,600 3,30,800 2,65,400
Capital
(TotalRs.777800)
B. Profit Sharing 4 2 1
Ratio
C. (A/B) = Capital 45,400 1,65,400 2,65,400
Per Unit
D. Proportionate (1,81,600) (90,800) (45,400) 3,17,800 III
Capital
(P’s capital as
Base)
E. Excess Capital NIL 2,40,000 2,20,000
(A-D)
F. Excess Capital 1,20,000 2,20,000
per Profit Unit
G. Proportionate 2,40,000 1,20,000 3,60,000 II
Excess Capital
H. Final Excess NIL 1,00,000 1,00,000 I
Capital
(E-G)
Total 7,77,800
102
Payment order:
(1) Pay 1st Rs.100000/- to R.
(2) Then Rs.240000 and Rs.120000 to Q and R respectively.
(3) Then to P, Q and R in their profit sharing ratio 4:2:1.
Statement showing Piecemeal Distribution of Cash
Particulars Cash Bank Creditors P Q R

Rs. O/D Rs. Rs. Rs. Rs.
Balance 680 65,000 23,200 1,81,600 2,30,800 2,65,400
1st Realisation
Realisation Exp. 60,000
Prov.
(4,800)
Paid O/D & 55,880
Creditors (55,880) (41,180) (14,700)
Proportionately
Balance due ---- 23,820 8,500 1,81,600 23,080 26,540

IInd Realisation
Paid O/D & 32,320
Creditors
(32,320) (23,820) (8,500)
Balance due - - - 1,81,600 2,30,800 2,65,400

IIIrd Realization- 4,60,000
Paid to C Final
Excess (1,00,000) (1,00,000)
Balance 3,60,000 - - - 2,30,800 1,65,400

(-) Paid to B and (3,60,000) (2,40,000) (1,20,000)
C (2:1)
Balance - 1,81,600 90,800 45,400

IVth Realization
Add : Realization 1,83,680
Exp. Prov not
required 2,400
1,86,080
Paid to all (4:2:1) 1,86,080 (1,06,330) (53,166) (27,964)
Balance (Loss on -
Realisation)
=131720 75,270 37,634 18,816
103
Illustration 2:-
ABC dissolved their firm on 31st Dec 2013 when their Balance
Sheet as follows :-

Capital Sundry Assets 264000
A 60000
B 48000
C 40000 148000
Partner’s Loan:
A 20000
B 16000 36000
264000 264000
Partners shared Profit and Loss in the ratio 2:1:1

Assets were realized as follows.
1st = 50,000, 2nd = 98,000, 3rd = 80,000
Show Piecemeal Distribution of Cash.
Working Note – Statement showing Excess Capital

Step No. Particulars Formula A B C
I Balance b/d 60000 48000 40000
II Profit Sharing Ratio - 2 1 1
III Unit Value
(Capital contribution / I ÷ II 30000 48000 40000
Profit)
IV Proportionate Capital X II 60000 30000 30000
V Excess Cap I - IV - 18000 10000
VI Profit Sharing Ratio 1 1
VII Unit Value V ÷ VI - 18000 10,000
VIII Proportionate Capital X VI 10000 10000
IX Excess Capital V -VIII - 8000 -
Payment Chart
A B C
I (9) - 8000 -
II (8) - 10000 10000
III (4) 60000 30000 30000
60000 48000 40000

104
Solution :
Date Particulars Cash Total Claims Sundry Partners Loan Partners Capital
Cr. A B A B C
01/01/09 Balance b/d - 264000 80000 20000 16000 60000 48000 40000
1st Cash Realised 50000
Less : Paid to (50000) (50000) (50000) - - - - -
Creditors
2nd Balance - 214000 30000 20000 16000 60000 48000 40000
Cash Realised 98000
Less : Paid to (30000) (30000) (30000) - - - - -
Creditors
Balance 68000 184000 - 20000 16000 60000 48000 40000
Less: Paid to Partners (36000) 36000 - 20000 16000 - - -
Loan
Balance 32000 148000 - - - 60000 48000 40000
Less : Paid to B (8000) (8000) - - - - (8000) -
Balance 24000 140000 - - - 60000 40000 40000
Less : Paid to B & C (20000) (20000) - - - - (10000) (10000)
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Balance 4000 120000 - - - 60000 30000 30000
Less : Paid to A,B & C (4000) (4000) - - - (2000) (1000) (1000)
Balance - 116000 58000 29000 29000

Cash Realized 80000
Less : Paid to all in (80000) (80000) 40000 20000 20000
Profit Sharing Ratio
Loss on realization - 36000 18000 9000 9000
105
Illustration 3:-
ABC were in partnership sharing profits and losses equally. They

agreed to dissolve their partnership on 30th June 2013. When their
balance sheet was as under.

Creditors 38000 Bank 3600
Capital Debtors 69000
A 60000 Stock 75400
B 45000 Plant & Machinery 25000
C 30000 135000
173000 173000
The realizations were as follows :-
Debtors Plant Stock Expenses

July 30000 10000 37000 3000
Aug 20000 8500 23000 2000
Sept 10000 - 1000 -
On 30th Sept remaining debtors amounting to Rs.9000/- were taken

over by B at 50% of book value.
Prepare statement showing Piecemeal Distribution of Cash.
106
Date Particulars Cash Total claim Creditors Capital

A B C
01/07/13 Balance b/d 3600 173000 38000 60000 45000 30000
Less : Paid to Creditors (3600) (3600) (3600) - - -
Balance - 169400 344000 60000 45000 30000

Cash 74000 - - - - -
Less : Paid to Creditors (34400) (34400) (34400) - - -
Balance 39600 135500 - 60000 45000 30000

Less: Paid to A (15000) (15000) - (15000) - -
Balance 24600 120000 - 45000 45000 30000
Less : Paid to B & C (24600) (24600) - (12300) (12300) -
Aug Balance - 95400 - 32700 32700 30000
Cash realized 49500 - - - - -
Less : Paid to A & B (5400) (5400) - (2700) (2700) -
Sep Balance 44100 90000 - 30000 30000 30000
Less : Paid to all partners (44100) (44100) - (14700) (14700) (14700)
Balance - 45900 - 15300 15300 15000

Cash Realized 11000 - - - - -
Add :- Debtors taken over by B 4500 - - - - -
Balance 15500 - - - - -
Less :- Paid to all in PSR 15500 (15500) - (5166) (5167) (5167)
Loss on Realisation - 30400 - 10134 10133 10133

107

I Balance b/d 60000 45000 30000
II Profit Sharing 1 1 1
Ratio
III Unit Value I ÷ II 60000 45000 30,000
IV Proportionate X II 30000 30000 30000

Capital
V Excess Cap I - IV 30000 15000 -
VI Profit Sharing 1 1 -
Ratio
VII Unit Value V ÷ VI 30000 15000 -
VIII Proportionate X VI 15000 15000 -

Capital
IX Excess Capital V-VIII 15000 - -
Payment Chart
A B C
I Steps : 9 15000 - -
II Steps : 8 15000 15000 -
III Steps : 4 30000 30000 30000
Total 60000 45000 30000
Illustration 4:-
A, B, C were in business sharing profits and losses 3:4:5 they
decided to dissolve their firm 1st July 2013. Following is the
Balance Sheet as on 1st July 2013.
Capital Sundry Assets 36000
A 12000
B 8000
C 4000 24000
A’s Loan 2000
36000 36000
The amt realized were as follows.

15/7 5000
31/7 10000
15/8 5000
31/8 2000
6/9 6000
30/9 5000
Show a detail statement of piecemeal distribution of cash.
108
Date Particulars Cash Total Creditors A’s Loan A B C
1/7 Balance b/d - 36000 10000 2000 12000 8000 4000

15/7 Cash Realised 5000 - - - -
Less : Paid to Creditors (5000) (5000) (5000) - - - -
Balance - 31000 5000 2000 12000 8000 4000

31/7 Cash Realised (10000) - - - - - -
Less : Paid to Creditors (5000) (5000) (5000) - - - -
Balance 5000 26000 - 2000 12000 8000 4000

Less: Paid to A’s Loan (2000) (2000) - (2000) - - -
Balance 3000 24000 - - 12000 8000 4000

Less : Paid to A (3000) (3000) - - (3000) - -
Balance - 21000 - - 9000 8000 4000
15/8 Cash realized 5000 - - - - - -
Less : Paid to A (3000) (3000) - - (3000) - -
Balance 2000 18000 - - 6000 8000 4000
Less : Paid to A & B in (2000) (2000) - - (857) (1143) -
3:4
109
Balance - 16000 5143 6857 4000

31/8 Cash Realized 2000
Less : Paid to A & B (2000) (2000) (857) (1143) -
Balance - 14000 4286 5714 4000
Less : Paid to A & B (4400) (4400) (1886) (2514) -
Balance 1600 9600 2400 3200 4000
Less : Paid to all in PSR (1600) (1600) (400) (533) (667)
Balance - 8000 2000 2667 3333
Less : Paid to all in PSR (5000) (5000) (1250) (1667) (2083)
Balance – Loss on - 3000 750 1000 1250
Realisation
110
Working Notes
1. Step Excess Capital

I Opening bal 12000 8000 4000
Ratio
III Unit Value I ÷ II 4000 2000 800

Capital
V Excess Cap I - IV 9600 4800 -
VI Profit Sharing 3 4 -
Ratio

Capital
Payment Chart
A B C
Steps : 9 6000 - -
8 3600 4800 -
4 2400 3200 4000
Total 12000 8000 4000
Illustration 5:-
A, B & C are partners, profit sharing ratio 1:1:2. Balance sheet as

on 31st March 2014.

Capital Buildings 19750
A 12000 Plant & Machinery 11750
B 9000 Stock 6250
C 6000 27000
A’s Loan 3750
B’s Loan 2500
Creditors 3000
Govt tax 1500
37750 37750
111
It was mutually agreed that the realization of the asset should be

distributed at the end of each month. Month by realization of
assets and expenses were as follows –
Month Asset Expenses

30th April 7360 360
31st May 9100 850
30th June 7800 300
31st July 4780 280
All the assets were fully realized by 31st July 2014.

I Opening bal 12000 9000 6000
Ratio

Capital
V Excess Cap I -IV 9000 6000 -
VI Profit Sharing 1 1
Ratio

Capital
Payment Chart
A B C
Steps : 9 3000 - -
8 6000 6000 -
4 3000 3000 6000
Total 12000 9000 6000

112
Date Particulars Cash Total Govt Credit A’s B’s Capitals

Available Claim ors Loan Loan A B C
1/4 Balance b/d - 37750 1500 3000 3750 2500 12000 9000 6000
30/6 Cash Realised 7360
Less : Exp 360
Cash 7000
Less : Paid to Govt (1500) (1500) (1500) - - - - - -
Balance Creditors 5500 36250 3000 3750 2500 12000 9000 6000
Less: Paid to G (3000) (3000) - (3000) - - - - -
Balance 2500 33250 - - 3750 2500 12000 9000 6000
Less : Paid to A & B (2500) (2500) (1500) (1000) - - -
loan
Balance - 30270 - - 2250 1500 12000 9000 6000
31/5 Cash A/c (9100-300) 8750 - - - - -
Less : Paid to A & B (3750) (3750) - - (2250) (1500) - - -
loan
Balance 5000 27000 - - - - 12000 9000 6000
Less : Paid to A’s (3000) (3000) - - - - (3000) - -
Capital
113
Balance 2000 24000 - - - - 9000 9000 6000

Less : Paid to A & B (2000) (2000) - - - - (1000) (1000) -
Capital
Balance - 22000 - - - - 8000 8000 6000
30/6 Cash A/c (7800-300) 7500 - - - - - - - -
Less : Paid to A & B (7500) (7500) - - (3750) (3750) -
Balance - 14500 - - 4250 4250 -
31/7 Cash 4500 - (1250) (1250)
Less : Paid to A & B (2500) (2500)
Balance 2000 12000 3000 3000 6000
Less : Paid to all in (2000) (2000) (500) (500) (1000)
PSR
Loss on Realisation - 10000 2500 2500 5000
114
Illustration 6:-
Ajay, Vijay & Vishal were in partnership in profit sharing ration5:3:2.
Balance sheet as on 31st March 2014.
Capital Cash 500
Ajay 40000 Debtors 44000
Vijay NIL 40000 Stock 49500
Ajay’s Loan 14000 Vishal Capital 10000
Sunil’s Loan 16000
Bank Loan 4000
Creditors 30000
104000 104000
Realizations were –
15/04/2014 19500
31/05/2014 10000
31/07/2014 20000
31/08/2014 6000
30/09/2014 8000
Vishal brought necessary cash at the time of last realization. Show
Piecemeal Distribution of Cash.
115
Date Particulars Cash Total Creditors Bank Loan Sunil Ajay Ajay Vijay Vishal
Claims
1/4 Balance b/d 500 94000 30000 4000 16000 14000 40000 - (10000)
15/4 Cash Realised 19500
Cash 20000 - - - -
Less : Paid to (20000) (20000) (12000) (1600) (6400) - - - -
Creditors, Bank Loan,
Sunil
Balance - 74000 18000 2400 9600 14000 4000 - (10000)
Less: Paid to (10000) (10000) (6000) (800) (3200) - - - -
Sunil
Balance - 64000 12000 1600 6400 14000 4000 - (10000)
Less: Paid to (20000) (20000) (12000) (1600) (6400) - - - -
Sunil
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Balance 10000 44000 - - - 14000 40000 - (10000)
Less : Paid to Ajay (10000) (10000) - - - (10000) - - -
Loan Balance - 34000 - - - 4000 40000 - (10000)
116
Cash Realised 20000 (4000) - - -

31/7 Less : Paid to Ajay (4000) - - - (4000) - - -
Loan
Balance 16000 30000 - - - - 40000 - (10000)
Less : Paid to Ajay (16000) (16000) - - - - (16000) - -
Cap
Balance - 14000 - - - - 24000 - (10000)
31/8 Cash Realised 6000 - - - -
Less : Paid to Ajay (6000) (6000) - - (6000) - -
Balance - 8000 - - - - 18000 - (10000)
30/9 Cash Realised 8000 - - - - - -
Add : Cash Received 10000 10000 - - - - - - 10000
from Vishal
Balance 18000 18000 - - - - 18000 - -
Less : Paid to Ajay (18000) (18000) - - - - (18000) - -
- - - - - - - - -
Note - Since only Ajay has Credit Balance in Capital Statement of excess Capital can not be prorated.
117
Illustration 7:-
Following is the Balance Sheet of A, B & C who share P&L in the
ratio 4:3:1 on 31st March 2013 on which date they dissolve their
partnership. Balance Sheet as on 31st March 2013.
Sundry Creditors 26250 Bldg 50000
Bank O/D 8750 Machinery 55000
Capital A/c Stock 20000
A 70000 Debtors 60000
B 30000
C 50000 150000
185000 185000
1. Bank O/D is secured against stock.

2. The assets realized following amounts which were
immediately distributed.
May 31 – Debtors Rs.20000/-
July 31 – Stock Rs.15000/-
Sep 30 – Debtors Rs.25000/-
Oct 31 – Machinery Rs.40000/-
Dec 31 – Bldg Rs.65000/-
No further sums could be realized. Show Piecemeal
Distribution.
I Opening bal 70000 30000 50000
Ratio
III Unit Value I ÷ II 17500 10,000 50000

Capital
V Excess Cap I - IV 30000 - 40000
VI Profit Sharing 4 - 1
Ratio
VII Unit Value V ÷ VI 7,500 - 40000
VIII Proportionate X VI 30000 - 7500

Capital
IX Excess Capital V-VIII - - 32500
Payment Chart
A B C
Steps : 9 - - 32500
8 30000 - 7500
4 40000 30000 10000
Total 70000 30000 50000
118
Date Particulars Cash Total Creditors Bank O/D A B C

1/04/13 Balance b/d - 185000 26250 8750 70000 30000 50000
31 July Cash Realised 20000
Less : Paid to Creditors & Bank O/D (20000) (20000) (15000) (5000) - - -
Balance - 165000 11250 3750 70000 30000 50000
31 July Cash Realised 15000
Less : Paid to Bank O/D (3750) (3750) - (3750) - - -
Balance 11250 161250 11250 NIL 70000 30000 50000

Less: Paid to Creditors (11250) (11250) (11250) - - - -
Balance - 150000 - - 70000 30000 50000

30 Sep Cash Realized 25000 - -
Less: Paid to Creditors (25000) (25000) - - - - (25000)
Balance - 125000 - - 70000 30000 25000
31 Oct Cash Realised 40000 - - - -
Less : Paid to Creditors (7500) (7500) (7500)
Balance 32500 117500 - - 70000 30000 17500
Less : Paid to A & C (32500) (32500) - - (26000) - (6500)
- -
Balance - 85000 - - 44000 30000 11000
31 Dec Cash Realised 65000 - -
Less : Paid to A & C (5000) (5000) (4000) - (1000)
Balance 60000 80000 - - 40000 30000 10000
Less : Paid to all in PSR (60000) - - (30000) (22500) (7500)
(60000) - -
Loss - 20000 - - 10000 7500 2500
- -
119
Illustration 8:-
A, B & C are partners sharing profits and losses equally. Their
Balance Sheet as on date of dissolution was follows.
Sundry Creditors 11000 Cash 140
General Reserves 18000 Investment 30000
Due to Bank 33000 Stationary 128300
Capital A/c Sundry debtors 45400
A 80000 Bank 32600
B 160000 Furniture 4120
C 130000 370000 Land & Building 191440
432000 432000
All the sundry creditors have to be paid away. A sum of Rs.2400/-

has to be provided for expenses of realization and subject to this all
cash received should be immediately distributed among partners
the amount realized were :-
1 32260
2 36000
3 212000
4 92600
Expenses of realization Rs.3000/-.

Prepare statement showing Piecemeal Distribution of Cash.
I Balance b/d 86000 166000 136000
II Profit Sharing Ratio 1 1 1
Capital
V Excess Cap I - IV - 80000 50000
VI Profit Sharing Ratio - 1 1
VII Unit Value V ÷ VI - 80000 50000
VIII Proportionate X VI - 50000 50000

Capital
IX Excess Capital V-VIII - 30000 -
Payment Chart
A B C
Steps : 9 - 30000 -
8 - 50000 50000
4 86000 86000 86000
Total 86000 166000 136000
120

Date Particulars Cash Total Creditors Bank O/D A B C
1 Balance b/d 140 432000 11000 33000 86000 166000 136000
Add : Cash 32260
Less : Distribution Exp (2400)
Less : Paid to Creditors & Bank (1:3) (30000) (30000) (7500) (22500) - - -
Balance - 402000 3500 10500 86000 166000 136000
2 Cash Realised 36000
Less : Paid to Creditors & Bank O/D (14000) (14000) (3500) (10500)
Balance 22000 388000 NIL NIL 86000 166000 136000
Less: Paid to Bank (22000) (22000) - - - (22000) -
Balance - 366000 - - 86000 144000 136000

3 Cash Realised 212000 - -
Less: Paid to Bank (8000) (8000) - - - (8000) -
Balance 204000 358000 - - 86000 136000 136000
Less: Paid to Bank & Creditors (100000) (100000) - - - (50000) (50000)
Balance 104000 258000 - - 86000 86000 86000
Less : Paid to all (104000) (104000) - - (34666) (34667) (34667)
Balance - 154000 - - 51334 51333 51333
4 Cash Realised 92600 - -
Less : Exp (600)
Balance 92000 154000 - - 51334 51333 51333
Less : Paid to all (92000) (92000) - - (30667) (30667) (30666)
Loss on realization - 62000 - - 20666 20666 20667

121
Illustration 9:-
P, Q & R were in Partnership sharing Profits & Losses in the ratio of
4:5:1. Their Balance Sheet as on 31st December 2013 is as under:-
Capital A/c Cash in hand 15000
P 75000 Other Assets 280000
Q 60000
R 15000
Loans
P 30000
Q 15000
Reserves 50000
295000 295000
The Partnership is dissolved and the assets were realized as
under:-
1st Realisation: Rs.50000/-
2nd Realisation: Rs.100000/-
3rd Realisation: Rs.85000/-
On the date of the dissolution there was a contingent liability of
Rs.5000/- against the firm which was settled at Rs.3500/- at the
time of 2nd realization. Realisation expenses were estimated at
Rs.10000/- but those actually amounted to Rs.7500/-. R took over
stock worth Rs.2500/- at the time of 3rd realization. The firm was
forced to pay Rs.3000 to sales tax authorities as fine out of the 3 rd
realization for which no provision was made prepare a statement
showing distribution under Excess Capital Method.

Particulars P Q R
Capitals (as given) 75,000 60,000 15,000
Add Reserves 20,000 25,000 5,000
Actual Capitals 95,000 85,000 20,000
PSR 4 5 1
Capitals per unit of PSR 23,750 17,000 20,000
Capitals in PSR 68,000 85,000 17,000
Excess Capital 27,000 NIL 3,000
PSR 4 1
Excess Capital p.u. of PSR 6,750 3,000
Excess Capital in PSR 12,000 3,000
Extra Excess Capital 15,000 NIL
First pay Extra Excess Capital to P Rs. 15,000

Next pay Excess Capital to P and R Rs. 15,000 in the ratio 4:1
Next pay P, Q and R in PSR 4:5:1
122
Date Particulars Cash Rs. Creditors Loan P Loan Q Capital P Capital Q Capital R
Rs. Rs. Rs. Rs. Rs.
1 Opening Balances 15,000 50,000 30,000 15,000 95,000 85,000 20,000
Add : First Realisation 50,000
65,000
Less: Cash Kept aside for contingent 15,000
Liab. Rs. 5,000 estimated realization
exp. Rs. 10,000
50,000
Less: Paid to creditors 50,000 50,000
NIL NIL
Second Realisation 1,00,000
Add: Surplus available from amount
Kept aside for contingent liab.
(5000-3500) 1,500
10,1500
Less: Paid to P & Q loan 45,000 30,000 15,000
56,500 NIL NIL
Less: Extra Excess Cap. Paid to P 15,000 15,000
41,500 80,000
123
Less: Excess Cap. To P & Q in the

Ratio 4:1 15,000 12,000 3,000
26,500 68,000 17,000
Less: Paid to P,Q & R in PSR 4:5:1 26,500 10,600 13,250 2,650
NIL 57,400 71,750 14,350
Third Realisation 85,000
Add: Surplus available from amount
kept aside for estimated realization
Expenses (10,000 -7,500) 2,500
87,500
Less: Sales Tax fine paid 3,000
84,500
Less: Stock taken Over by R 2,500
11,850
Less: Padi to P & Q for stock taken
over by R 22,500 10,000 12,500 -
62,000 47,400 59,250 11,850
Less: paid to P, Q & R in PSR 4:5:1 62,000 24,800 31,000 6,200
Loss on Realisation - 22,600 28,250 5,650
124
Note: 1) Keep aside cash for estimated realization expenses and

contingent liability at the beginning.
2) Excess amount of RS. 1500 kept aside for contingent
liability has been added to the 2nd realization.
3) Excess amount of Rs. 2500 kept a side for realization
expenses has been added to the third realization.
4) Sales tax fine of Rs. 3000 has to be paid first from the
third realization being preferential creditor.
5) Stock taken over by R Rs. 2500 has been deducted from
his capital balance Rs. 10,000 has been paid to P & Rs.
12,500 to Q for stock taken over by R.
PSR P Q R
Cash paid 4 5 1
250
(Proportionately in PSR)
Illustration 10:-
The partners X,Y & Z have called upon you to assist them in
winding up the affairs of their partnership on 30th June 2013. Their
Balance Sheet as on that date is given below:

Sundry Creditors 34,000 Cash at Bank 12,000
Capital Accounts Sundry Debtors 44,000
X 1,34,000 Stock in trade 28,000
Y 90,000 Plant & Equipment 1,98,000
Z 63,000 Loan – X 24,000
Loan – Y 15,000
3,21,000 3,21,000
1. The partners share profit and losses in the ratio of 5:3:2

2. Cash is distributed to the partners at the end of each month
3. A summary of liquidation transactions are as follows:
July 2013
Rs. 33,000 – Collected from Debtors balance is uncollectible
Rs. 20,000 – Received from sale of entire Stock.
Rs. 2,000 – Liquidation expenses paid
Rs. 16,000 – Cash retained in the business at the end of month
August 2013
Rs. 3000 – Liquidation expenses paid as part payment of his
capital, Z accepted a piece of equipment for Rs. 20,000 (book
value Rs. 8,000)
125
Rs. 5,000 – Cash retained in the business at the end of the

month
September – 2013
Rs. 1,50,000 – received on sale of remaining plant & equipment
Rs. 2,000 – liquidation expenses paid. No cash retained in the
business.
Prepare a statement showing distribution of cash by applying
proportionate capital method.
Solution: – Statement of Excess Capital
X Y Z
Rs. Rs. Rs.
Balance 1,34,000 90,000 63,000
Less: Loans 24,000 15,000 -
1,10,000 75,000 63,000
Profit sharing Ratio 5 3 2
Taking X’s capital as the (22,000) (25,000) (31,500)
Basis (1=22,000) 1,10,000 66,000 44,000
9,000 19,000
Profit sharing Ration 3 2
Unit value (3000) (9500)
Taking Y’s Capital as the 9,000 6,000
basis (1= 3000)
- 13,000
Calculation of proportionate Capital after take over of equipment
X Y Z
Rs. Rs. Rs.
Balance on 1.9.2013 1,10,000 67,000 30,000
Profit Sharing Ratio 5 3 2
Unit value (22,000) (22,334) (15,000)
Taking Z’s capital as the
basis 1 = 15,000 75,000 45,000 30,000
35,000 22,000 -
Note: If the share of partner in that realisation less than the value of
asset the asset is given to the partner concerned but it disturbs the
earlier calculation of surplus capital. Hence Surplus capital of
partners is decided again.
126
Statement showing Distribution of Cash
Date Particulars Cash Rs. Total Creditors X Y Z

Rs. Rs. Rs. Rs. Rs.
Balances 34,000 1,34,000 90,000 63,000
Less : Loans taken 24,000 15,000
2,82,000 34,000 1,10,000 75,000 63,000
June 2013
Cash Balance 12,000
Paid to Creditors 12,000 12,000 12,000
2,70,000 22,000
July 2013
1st Realisation 53,000
Less: Expenses 2,000
51,000
Less: Cash Retained 16,000
35,000
Paid to creditors 22,000 22,000 22,000
13,000 2,48,000 -
Paid to Z 13,000 13,000 13,000
Balance due - 2,35,000 - 1,10,000 75,000 50,000
127
Aug 2013
Second Realisation
July Balance retained 16,000
13,000
Less: Cash retained 5,000
8,000
Paid to Y 8,000 8,000 - 8,000
Equipment given to Z - 20,000 - 20,000
- 2,07,000 1,10,000 67,000 30,000
Sep 2013
Final Realisation
August Balance retained 5,000
Sale of plant 1,50,000
1,55,000
1,53,000
Less: Paid to X & Y 57,000 57,000 35,000 22,000
96,000 1,50,000 75,000 45,000 30,000
Paid to X, Y & Z
In 5 : 3: 2 96,000 96,000 48,000 28800 19200
54,000 27,000 16,200 10,800

128
Illustration No. 11
Partnership of L, M & N was dissolved on 31 st October 2013

on which date their Balance Sheet stood as under:

Capital A/cs: Goodwill 80,000
L 1,20,000 Buildings 52,500
M 1,30,000 Furniture 10,000
N 90,000 3,40,000 Stocks 1,52,000
Reserve 60,000 Debtors 1,35,500
Creditors 40,000 Cash 10,000
4,40,000 4,40,000
The partners were sharing profits & loss in the ratio of 3:2:1
respectively. They decided to distribute the cash as and when it
was received L agreed to work as receiver on a remuneration of
Rs. 5,000 and to bear all expenses of realization when it was
completed be found that he had spent Rs. 1050 towards the
expenses. Following details of realization were available:
December 2013 Rs. 45,000

January 2014 Rs. 1,20,000
February 2014 Rs. 1,14,000
There was some stock of the book value of Rs. 9,000 lying unsold
and it was taken over by N at an agreed value of Rs. 5,000.
You are required to prepare the following (using excess capital
method)
1. Statement of Surplus Capital

2. Statement showing monthly distribution of cash available.
129
Solution:
Statement showing surplus capital:
Step Particulars Formula L M N

No. Rs. Rs. Rs.
Capital Balances 1,20,000 1,30,000 90,000
Add: Reserve 30,000 20,000 10,000
I Adjusted Capitals 1,50,000 1,50,000 1,00,000
II Profit sharing Ratio 3 2 1
III Unit values 50,000 75,000 1,00,000
IV Proportionate 1,50,000 1,00,000 50,000

Capital (Base L)
V Surplus Capital - 50,000 50,000
VI Profit sharing ratio 2 1
VII Unit values 25,000 50,000
VIII Proportionate 50,000 25,000

Capital (Base M)
IX Absolute surplus - 25,000
Payment chart (IX, VIII, IV)
I - - 25,000
II - 50,000 25,000
III 1,50,000 1,00,000 50,000
1,50,000 1,50,000 1,00,000
130
Date Particulars Cash Total Creditors Capital Accounts (Adjusted)

Claims
L M N
1/11/13 Balance due 4,40,000 40,000 1,50,000 1,50,000 1,00,000
Cash Balance 10,000
Less: Remuneration to L (5,000)
5,000
Less: Paid to creditors (5,000) (5,000) (5,000)
- 4,35,000 35,000
Dec 13 Realisation in Dec 2013 45,000
Less: Paid to creditors (35,000) (35,000) (35,000)
10,000 4,00,000 -
Less: Paid to M (10,000) (10,000) (10,000)
- 3,90,000 1,50,000 1,50,000 90,000
Jan 14 Realisation in Jan 2014 1,20,000
Less: Paid to M & N to clear
Surplus capital 90,000 (90,000) (50,000) (40,000)
30,000 3,00,000 1,50,000 1,00,000 50,000
131
Less: Paid to all partners in 30,000 (30,000) (15,000) (10,000) (5,000)

PSR
- 2,70,000 1,35,000 90,000 45,000
Feb 14 Cash Realised 11,400
Less: Paid to all in PSR 11,400 1,14,000 57,000 38,000 19,000
- 1,56,000 78,000 52,000 26,000
Feb 14 Cash 6,000
Less: Paid to All in PSR (6,000) (6,000) 3,000 2,000 1,000
Loss on Realisation 75,000 50,000 25,000
132
Illustration 12 :
Avani, Binal and Cindy are partners sharing profits and

losses in the ratio of 4:2:1. They decided to dissolve the partnership
as on 31st March 2013 when their Balance Sheet was as follows :

Creditors 16,820 Cash in hand 500
General Reserve 9,780 Investment 16,000
Capital : Avani 16,000 Machinery 38,740
Binal 32,000 Debtors 6,520
Cindy 26,000 Building 980
Furniture 37,860
1,00,600 1,00,600
All creditors have to be paid off. Rs. 300 has to be provided

for realization expenses.
Thereafter all cash received should be distributed among the

partners.
The amounts were realized in installments as follows :
Rs.
1st 20,000
2nd 3,500
3rd 46,000
th
4 24,000
The actual realization expenses were Rs. 500. Prepare a

statement showing piecemeal distribution of cash as per Excess
Capital Method.
133
Solution :
Statement of Excess Capital :
Sr. Particulars Avani Banal Cindy

Balance B/f 16,000 32,000 26,000
Add : General Reserve 5,600 2,800 1,400
Total 21,600 34,800 27,400
Unit Value 5,400 17,400 27,400
Proportionate capital taking A 21,600 10,800 5,400
as base
Excess Capital -- 24,000 22,000
Profit Sharing Ratio 2 1
Unit Value 12,000 22,000
Proportionate capital taking B 24,000 12,000
as base
Ultimate Surplus 10,000
Sr. Particulars Cash Total Creditors Avani Binal Cindy

No. Available claims
Balance B/f 500 1,00,600 16,800 21,600 34,800 27,400
Less : reserve 300

for Expenses
Balance 200
Less : paid to 200 200 200

Creditors
Balance 0 1,00,400 16,600 21,600 34,800 27,400
Add 1st 20,000

Realisation
Less : paid to 16,600 16,600 16,600

Creditors
Balance 3,400 83,800 0 21,600 34,800 27,400
Less : Paid to 3,400 3,400 3,400

Cindy
Balance 0 80,400 21,600 34,800 24,000
2nd realization 3,500
Less : Paid to 3,500 3,500 3,500

134
Cindy
Balance 0 76,900 21,600 34,800 20,500
3rd realization 46,000
Less : paid to 3,100 3,100 3,100

Cindy
Balance 42,900 73,800 21,600 34,800 17,400
Less paid to 36,000 36,000 24,000 12,000

Binal & Cindy
Balance 6,900 37,800 21,600 10,800 5,400
Less paid to 6,900 6,900 3,943 1,971 986

all in PSR
Balance 0 30,900 17,657 8,829 4,414
4th Realisation 24,000
Less : 200
realization
expenses
Balance 23,800
Less : paid to 23,800 23,800 13,600 6,800 3,400

all in PSR
Loss on 7,100 4,057 2,029 1,014

Realisation
Illustration 13 :
Jam, Bread and Butter are partners sharing profits and

losses in the ratio of 2 : 2 : 1. They decided to dissolve the
partnership as on 31st March 2013 when their Balance Sheet was
as follows :
Balance Sheet as on 31st December, 2013

Creditors 15,000 Cash in hand 9,000
Income tax Payable 4,000 Investment 7,500
Bank loan (secured on 30,000 Machinery 17,800
stock)
Jams loan 11,000 Debtors 66,400
Capital Jam 40,000 Building 60,000
Bread 40,000 Furniture 9,300
Butter 30,000
1,70,000 1,70,000
135
Bank took over Stock and could realize Rs. 25,000 only. Rs. 3,000
were paid for repairing furniture to get better price.
Thereafter all cash received was distributed among all other

liabilities and the partners.
The amounts realized and expenses incurred were in

installments as follows.
Month Cash realized Rs. Expenses Rs.

January 2014 13,400 1,400
February 2014 17,200 2,200
March 2014 11,500 1,500
April 2014 32,750 2,750
May 2014 36,640 1,640
Solution :
Sr. Particulars Jam Bread Butter

Balance B/f 40,000 40,000 30,000
Unit Value 20,000 40,000 30,000
Proportionate capital taking 40,000 20,000 20,000
Jam as base
Excess Capital 20,000 10,000
Unit Value 20,000 10,000
Proportionate capital taking 10,000 10,000
Butter as base
136
Statement Showing Piecemeal distribution of Cash
Sr. Particulars Cash Total I.T. *Bank Creditors Jams Jam Bread Butter
No. Available claims payable loan loan
Balance B/f 9,000 1,45,000 4,000 5,000 15,000 11,000 40,000 40,000 30,000
Less : 3,000
Furniture
Expenses
Balance 6,000 4,000 5,000 15,000 11,000 40,000 40,000 30,000
Less : paid 4,000 4,000 4,000
to I.T.
Balance 2,000 1,41,000 -- 5,000 15,000 11,000 40,000 40,000 30,000
Less : paid 2,000 2,000 500 1,500
to bank &
creditors
Balance -- 1,39,000 -- 4,500 13,500 11,000 40,000 40,000 30,000
Jan Add 1st 12,000
Realisation
Less : Paid 12,000 12,000 3,000 9,000
to Bank &
Creditors
Balance -- 1,27,000 -- 1,500 4,500 11,000 40,000 40,000 30,000
137
Feb 2nd 15,000

realization
Less : Paid 6,000 6,000 -- 1,500 4,500

to Bank &
Creditors
Balance 9,000 1,21,000 -- -- -- 11,000 40,000 40,000 30,000
Less : paid 9,000 9,000 9,000

to Jam loan
Balance -- 1,12,000 -- -- -- 2,000 40,000 40,000 30,000
Mar 3rd 10,000

realization
Less : paid 2,000 2,000 2,000

to Jam loan
Balance 8,000 1,10,000 -- -- -- -- 40,000 40,000 30,000
Less paid to 8,000 8,000 8,000

bread
Balance -- 1,02,000 -- -- -- -- 40,000 32,000 30,000

138
Apr 4th 30,000

Realisation
Less : paid 2,000 2,000 2,000

to bread
Balance 28,000 1,00,000 -- -- -- -- 40,000 30,000 30,000
Less : paid 20,000 20,000 10,000 10,000

to bread &
butter
Balance 8,000 80,000 -- -- -- -- 40,000 20,000 20,000
Less : paid 8,000 8,000 4,000 2,000 2,000

to all in per
Balance -- 72,000 -- -- -- -- 36,000 18,000 18,000
May 5th 35,000

Realization
Paid to all in 35,000 35,000 17,500 8,750 8,750

PSR
Loss on -- 37,000 18,500 9,250 9,250

Realisation
*after payment of Rs. 25,000 recovered from Stock

139
Illustration 14 :
Sonam, Nidhi and Pooja are partners sharing profits and

losses in the ratio of 4:2:1. They decided to dissolve the partnership
as on 31st March 2013 when their Balance Sheet was as follows :

Capital : Sonam 1,00,000 Land & Building 50,000
Nidhi 60,000 Machinery 1,50,000
Pooja 20,000 Debtors 45,000
10% Bank Loan 40,000 Stock 34,500
(unsecured)
Bills Payable 30,000 Cash and Bank 500
Creditors 30,000
2,80,000 2,80,000
Rs. 800 has to be provided for realization expenses.
Thereafter all cash received should be distributed among the

partners.
The amounts were realized in installments as follows :
Rs.
1st 60,300
2nd 50,000
3rd 79,000
th
4 27,700
The actual realization expenses were Rs. 500. Prepare a

statement showing piecemeal distribution of cash as per Excess
Capital Method.
140
Solution :
Sr. Particulars Sonam Nidhi Pooja

Balance B/f 1,00,000 60,000 20,000
Unit Value 25,000 30,000 20,000
Proportionate capital taking 80,000 40,000 20,000
Pooja as base
Excess Capital 20,000 20,000 --
Unit Value 5,000 10,000
Proportionate capital taking 20,000 10,000
Sonam as base
141
Particulars Cash Total BK B.P. Creditors Sonam Nidhi Pooja

Available claims Loan
Balance B/f 500 2,80,000 40,000 30,000 30,000 1,00,000 60,000 20,000
Add : Cash real 60,300
Less : reserve for 800
Expenses
Balance 60,000
Less : paid to 60,000 60,000 24,000 18,000 18,000
Creditors
Balance -- 2,20,000 16,000 12,000 12,000 1,00,000 60,000 20,000
Add 2nd Realisation 50,000
Less : paid to 40,000 40,000 16,000 12,000 12,000
Credit, loan, bs
Balance 10,000 1,80,000 -- -- -- 1,00,000 60,000 20,000
Less : Paid to 10,000 10,000 10,000
Nidhi
Balance -- 1,70,000 1,00,000 50,000 20,000
3rd realization 79,000
Less : Paid to 30,000 30,000 20,000 10,000
Sonam, Nidhi
Balance 49,000 1,40,000 80,000 40,000 20,000
Balance -- 91,000 52,000 26,000 13,000
4th Realisation 27,700
Add : Excess Re 300
28,000
Less : paid to all in 28,000 28,000 16,000 8,000 4,000
PSR
Loss on -- 63,000 36,000 18,000 9,000
Realisation
142
4.6 EXERCISE
Pr.1 A, B, and C carrying on business is partnership decided to
dissolve it on and from 30th Sept. 2013. The following was their
Balance sheet on that date:
Capital Accounts: Sundry Assets 8,000
A 2,800 Cash & Bank 1,000
B 200 Advertisement 900
Suspense A/c
C 1,000 4,000
Profit & Loss 3,900
Loan from A 2,000
9,900 9,900
As per the arrangements with the bank, the partners were

allowed to withdraw an amount of Rs.500 only at present and the
balance amount of Rs.500 could be withdrawn only after 1st
December,2009
It was decided that after keeping aside an amount of
Rs. 2,000 for estimated realization expenses the available cash
should be distributed between the partners immediately.
The following were the realisation.
Fixed Assets Current Assets
Rs. Rs.
31st October, 2013 1,000 1,900
25th November, 2013 2,600 2,000
20th December, 2013 (Final) 1,000 900
Actual realisation expenses amounted to Rs. 1,100 only. Prepare
the statement showing the distribution of cash between the
partners. under excess capital method.
Pr. 2 On 31st December, 2013 the Balance Sheet of the partners X,
Y and Z (sharing Profit and Losses in the ratio of 2:4:6
(respectively) is as follows:
Capital Accounts: Sundry Assets 16,000
A 3,600 Cash 2,000
B 2,400 Advertisement 1,800
Suspense A/c
C 2,000 8,000
Profit & Loss 7,800
Loan from A 4,000
19,800 19,800
143
On Jan 1, 2014 the partners decide to dissolve the firm and

distribute the proceeds as and when realised.
Prepare a statement showing the distribution according to

excess capital Method. The realisations are as below:
Gross Realisation
Realisation Expenses
Rs. Rs.
March 1, 2014 4,450 150
April 15, 2014 6,850 250
April 30, 2014 2,250 250
Pr. 3 Lamb, Deer and Peacock were in partnership, their respective

shares being 1:2:2. The following was their Balance Sheet on 31 st
December, 2013. On which date they decided to dissolve the firm.

Income-Tax payable 8,000 Stock 80,000
Loan from bank 60,000 Debtors 1,20,000
(Secured by pledge
of stock
Deer’s Loan 22,000 Furniture 72,000
Partner’s Capital: Motor car 50,000
Lamb 80,000
Deer 80,000
Peacock 60,000 2,20,000
3,40,000 3,40,000
1. The bank could realize only Rs. 50,000 on disposal of stock

2. A sum of Rs. 6,000 was spent for furniture on getting a better
price.
3. Other assets were realised as follows
In January, 2014 Rs. 24,000
In February, 2014 Rs. 30,000
In March, 2014 Rs. 20,000
In April, 2014 Rs. 60,000
In May, 2014 Rs. 70,000
The partners distributed the cash at and when available. Show

the distribution of cash on the basis of ‘Highest relative capital’.
144
Pr. 4 Gunen, Dinen, and Biren who were partners sharing profit and
losses in the ratio of 3:2:1 decided to dissolve their firm as on 1st
January, 2014 on the basis of the following balance sheet:

Creditors 50,000 Cash at Bank 10,000
Capital A/cs Debtors 1,10,000
Gunen 40,000 Stock 30,000
Dinen 35,000
Biren 25,000 1,00,000
1,50,000 1,50,000
It was agreed that Dinen will be in charge of realisation at

commission of 5% on Realisations and after meeting expenses and
his commission the net amount would be distributed piecemeal as
and when realised. The following schedule of realisation is
available.
Month Realisation Expenses

(2014) Rs. Rs.
January 30,000 1,000
February 20,250 1,100
March 35,100 900
April 25,000 1,250
May (Final) 30,250 750
1,40,600 5,000
Prepare a statement to show how the amount will be

distributed amongst the partners.
Pr.5 Partnership of Urmila, Manisha, and Karishma was dissolved

on 31st October, 2013 on which date their Balance Sheet stood as
under:

Capital A/cs Goodwill 80,000
Urmila 1,20,000 Building 53,000
Manisha 1,30,000 Furniture 10,000
Karishma 90,000 3,40,000 Stock 1,52,000
Reserve 60,000 Debtors 1,35,000
4,40,000 4,40,000
The partnership were sharing profits and losses in the ratio

of 3:2:1 respectively. They decide to distribute the cash as and
145
when it was received. Urmila agreed to work as receiver on a

remuneration of Rs. 20,000/- and to bear all expenses of
realisation. When it was completed, he found that he had spent Rs.
4,200/- towards the expenses. Following details of realisation were
available:
December 2013 Rs. 32,000
January 2014 Rs. 2,42,000
February 2014 Rs. 1,40,000
There was some stock of the book value of R. 36,000 lying
unsold and it was taken over by Karishma an agreed value of Rs.
20,000.
You are required to prepare the following (Using Excess
Capital Method)
(a) Statement of surplus capital
(b) Statement showing monthly distribution of cash available.
146
5
AMALMAGATION OF FIRMS I
UNIT STRUCTURE
5.0 Objectives
5.1 Introduction
5.2 Meaning and Objectives of Amalgamation
5.3 Accounting procedures for closing books of old firm
(amalgamating firm):
5.4 Accounting Entries in the Books of the New Firm
[Amalgamated Firm]:
5.0 OBJECTIVES
After studying the unit the students will be able to:

• Define the term Amalgamation.
• Calculate the amount of Purchase Consideration
• Understand the accounting procedure for amalgamation.
5.1 INTRODUCTION
Business firms grow and expand through business

combinations. Such combinations also help firms to secure
operating efficiencies, avoid competition among them and
economies of scale.
Amalgamation means merger or combination of two or more

existing firms. Two or more existing business entities merged
themselves into one entity, is known as amalgamation. After
amalgamation of firms, amalgamating firms [existing/old firms] get
dissolved, lose their existences and new firm is formed which is
called as amalgamated firm.
147
5.2 MEANING AND OBJECTIVES OF

AMALGAMATION
Meaning
A partnership firm is formed with two or more persons. But it
can also be formed in any of the following ways.
A) When two or more sole proprietors form new partnership firm,

B) When one existing partnership firm absorbs a sole
proprietorship.
C) When one existing partnership firm absorbs another partnership
firm.
D) When two or more existing partnership firm from new
partnership firm.
The ICAI has issued Accounting Standard A.S. 14. Accounting

for amalgamation. It is mandatory in nature. The standard classifies
the amalgamation into two categories, namely.
a) Amalgamation in nature of merger.
b) Amalgamation in nature of purchase.
According to Accounting Standard A.S14, the term

amalgamation includes absorptions. [Acquisitions]
There are two methods of accounting for Amalgamations, as

per A.S.14.
1. Pooling of interest method [confined to amalgamation of
companies only]
2. Purchase method.
Objectives of Amalgamation
1. To enlarge the size of the firm.

2. To reduce overhead or expenses.
3. To avoid cut throat competition among the firms carrying on
similar / complementary business
4. To achieve both external and internal economies of large scale
i.e. purchasing bulk quantities, saving in transportation
expenses etc.
5. To increase productivity and profitably of the firm.
6. To expand the business operations by having more resources
like broader capital base, more man power.
148
Consequences
Primarily the following consequences take place upon
amalgamation.
1. Dissolution of existing amalgamating firms.
2. Formation of a new firm [called amalgamated firm] to take over

business of existing / old firms.
There are given the following points in the practical problem:
1. Balance sheet of two existing firms / sole Proprietary concerns

on date of amalgamation, which enables to close books of old
firms, transferee capitals balances to new firm.
2. Terms and conditions of amalgamations i.e. revaluation of

various asset and liabilities of both the firms, valuation of
Goodwill, disposal of assets or liabilities not taken over by new
firm, certain more transaction before or after amalgamation.
The students are required to :
1. Ascertain purchase consideration.

2. Close books of old firms.
3. Accounting entries in books of new firm.
a. For recording Purchase Consideration.
b. Goodwill treatment.
c. Capital adjustment upon amalgamation.
d. Elimination of inter firm Owings, (if any)
4. Preparation of Balance Sheet of the New Firm.
Purchase Consideration:
Purchase consideration is the agreed amount to be paid by

the purchasing firm to old firm. It can be calculated as follows:
A) Net asset method - Under this method, purchase consideration

is equal to net asset taken over by the New firm at agreed values.
Net asset means all assets taken over at agreed values / other wise
at book values less liabilities taken over by the purchasing firm.
149
The purchase consideration is calculated as under:
` `
A. Agreed values of assets taken over
Goodwill X
Land & Building X
Stock X
Sundry Debtors X
Cash & Bank X XX
Less: B. Agreed values of liabilities
assumed
Sundry Creditors X
Bill Payable X
Bank Loan X
Outstanding Expenses X [XX]
Purchase consideration [A-B] XXXX
You are required to take care about the following terms :
i) Business is taken over, implies all assets & Liabilities are taken
over at agreed value unless mentioned that particular asset or
liability is not taken.
ii) Cash / Bank balance should be included in Purchase

Consideration, only to the extent taken over by the new firm
& that much balance should be transferred to Realisation a/c.
iii) If it is mentioned that only trade liabilities are taken over, then
creditors and bills payable are taken over by the by new firm,
not any other liabilities.
B) Lump sum method - under this method amount of purchase

consideration is given in lump sum. There is no need to calculate
purchase consideration as it is directly given in the sum i.e. in the
problem.
However, difference in Purchase consideration and net

assets taken over, may be Goodwill or Capital Reserve.
Goodwill = Purchase consideration less Net Assets taken over

Capital Reserve = Net Assets less Purchase consideration.
150
5.3 ACCOUNTING PROCEDURES FOR CLOSING

BOOKS OF OLD FIRM (AMALGAMATING FIRM):
Accounting entries in the books of existing firm / sole

proprietor :
Open following ledger accounts:

1. Realisation account.
2. Partner’s Capital Account (columnar)
3. New firm account.
4. Cash / Bank account.
Journal Entries in the books of old firm [Amalgamating firm]
STEP I
A] for transferring Balance Sheet items at book value:
1. For transferring sundry assets:

Realization a/c Dr.
To Sundry Assets [individually]
Notes : All the assets should be transferred at book values.
Cash/Bank bal. should be transferred to the extent it is taken

over.
Debtors should be transferred at gross amount; R.D.D should
be credited to Realization a/c.
Provision for depreciation should be credited to Realization a/c.
Fictitious assets and accumulated losses should not be
transferred to Realisation a/c.
All the assets should be transferred whether taken over or not
by the new firm.
2. For transferring accumulated losses:

Partner Capital a/c Dr.
To Profit & Losses a/c
[In old profit sharing Ratio]
3. For transferring Liabilities:

Sundry Liabilities a/c Dr.
To Realization a/c
4. For transferring Reserves :

Reserves a/c Dr.
To Partners’ Capital a/c [old ratio]
151
STEP II
1. For recording Purchase consideration:

New Firm a/c Dr.
To Realization a/c
2. For Assets taken over by partner:

Partners Capital a/c Dr.
To Realisation a/c
3. For sale of Asset:
Cash/Bank a/c Dr.
To Realisation a/c
4. For liabilities taken over by partner:

Realisation a/c Dr.
To. Partner Capital a/c
5. For payment of liabilities not taken over:

Realisation a/c Dr.
To Cash / Bank a/c
6. For realization expenses:

Realisation a/c Dr.
To Cash a/c, or,
To Partners Capital a/c [if, paid by
the partner]
7. For asset taken over by creditor in settlement of liabilities:

No entry, as both accountants are already transferred to
Realisation a/c. & their accounts are already closed.
8. For transferring profit on Realisation:

Realization a/c Dr.
To Partners Capital a/c [old p.s.r.]
9. For transferring loss on Realisation:

Partners Capital a/c [old p.s.r.] Dr.
To Realisation a/c
10. For transferring Partners Capital Bal:

Partners Capital A/c [individually] Dr.
To New Firm a/c
152
11. For final settlement:

Partners Capital a/c Dr.
To Cash a/c
After passing above entries new firms a/c is automatically

closed and books of old. firm [amalgamating firm[ are closed.
5.4 ACCOUNTING ENTRIES IN THE BOOKS OF THE

NEW FIRM [AMALGAMATED FIRM]:
• For recording various Assets & liabilities taken over,
A. If net acquired assets is equal to purchase consideration.

[If it is calculated by the Net Asset method]
Sundry Assets a/c

Dr.
To Liabilities a/c
To A Capital a/c
To B Capital a/c
To R.D.D.A/C [if any]
B. If net acquired assets is more than purchase consideration:
Sundry Assets a/c Dr.

To Liabilities a/c
To A Capital a/c
To B Capital a/c.
To R.D.D.A/C [if any]
To Capital Reserve a/c
C. If net acquired assets is less than the amount of purchase

consideration: [P.C]
Sundry Assets a/c Dr.
Goodwill a/c Dr.*
To Liabilities a/c
To A Capital a/c
To B Capital a/c
To R.D.D. A/C [if any]
Note :
In case p.c. is taken by lump sum method, GOODWILL OR
CAPITAL RESERVE may be bal. fig.
Partner’s capital accounts shall be credited by the amounts
transferred from old firm.
Similar entry should be passed for recording various Assets &
liabilities taken over from other firm.
153
• Goodwill treatment
For writing off Goodwill in new profit sharing ratio.
All Partners Capital A/c Dr.

(In New Profit Sharing Ratio)
To Goodwill a/c
(Total Goodwill)
• For elimination inter firm debts:
Before amalgamation one firm might have sold goods to another

firm, which may have remained unpaid, e.g. A sold goods worth `
25,000 on credit to B..IF A & B are amalgamated as AB & CO.,
sundry Debtors of A includes B ` 25,000 & sundry creditors of B
includes A ` 25,000, after merger, AB & co. have to cancel / reduce
/ eliminate S. Debtors as well as S. Creditors by ` 25,000.
Sundry Creditors a/c/Loan a /c[taken] Dr.

To Sundry Debtors a/c/Loan a/c [given]
Capital Balance transferred from old firm may not be in their new
P.S.R., Total Capital of the new firm may fixed & to be maintained
for individual capital contribution of the partners working should be
as under:
• For Capital adjustment in new P.S.R.

Partner A B C D
Capital bal. transferred from old firm x x x x
Less: Goodwill written off [x] [x] [x] [x]
Balance left x x x x
Fixed Capital in new P.S.R ……………… [x] [x] [x] [x]
Surplus or [shortage] in capital to be x x x [x]
adjusted
Entry:for Partner’s capital a/c Dr

transferring excess
capital:
To Partner’s Current a/c / Cash a/c, or
To Partner’s Loan a/c
Entry for adjusting Partner’s Current a/c / Cash a/c / Dr.
shortage in capital: Partners Loan a/c
To Partner’s Capital a/c
154
• Preparation of Balance Sheet of the New Firm:
Add up all individual assets of both firms taken over by the

new firm at agreed value, show on the Asset side of the Balance
Sheet, R.D.D should be deducted from S. Debtors on assets side of
the Balance Sheet.
Add up all individual liabilities of both firms taken over by the

new firm at assumed value, show on the liability side of the Balance
Sheet.
All the above figures should be taken from purchase

consideration, after considering additional entries passed in the
books of new firm.
155
6
AMALGAMATION OF FIRM II
Unit Structure
6.0 Objectives
6.1 Solved Problems
6.2 Exercises
6.0 OBJECTIVES
After studying the unit the students will be able to solve the
practical problems on amalgamation.
6.1 SOLVED PROBLEMS
Illustrations : 1
A and B carrying on independent business and their position
on 31.03.2013 is reflected in the Balance Sheet given below:
A B A B
Liabilities ` ` Assets ` `
Sundry 2,20,000 94,000 Stock-in- 3,40,000 1,96,000
Creditors trade
Outstanding 1,500 4,000 Sundry 1,78,000 74,000
Expenses Debtors
Bills Payable 25,000 --- Cash 2,000 400
Capital 3,06,000 1,91,000 Bank 26,000 15.000
Furniture 5,500 3.600
Investments 1,000 ---
5,52,500 2,89,000 5,52,500 2,89,000
Both of them to form a partnership firm from 1.04.2013 in the

style of AB & CO. on the following terms:
a] The capital of the partnership firm would be ` 4,80,000 and to
be contributed by them in the ratio of 2:1.
b] The assets of individual business to be revalued as under:
Assets of A : Stock to be written - down by 15% doubtful

debtors estimated ` 16,526 furniture to be
revaluated at `4,000, market value of
investments at `2,000.
156
Assets of B : Stock to be written - up by 10%, provision for

doubtful debt required at ` 7,100, rest the
assets are the be taken over at book-value.
c] The firm takes over only trade liabilities.
You are required to pass necessary Journal Entries in the

books of A and B. also prepare the opening Balance Sheet of the
firm as on 1.04.2013.
Solution:
In the books of A
Date Particulars L.F. ` Dr. ` Cr.
1.04.13 Realisation a/c Dr. 5,51,000
To Stock a/c 3,40,000
To Sundry Debtors a/c 1,78,000
To Cash a/c 500
To Bank a/c 26,000
To Furniture a/c 5,500
To investment a/c 1,000
[being transfer of assets at book
value]
Creditors Dr. 2,20,000
Outstanding Expenses a/c Dr. 1,500
Bills Payable a/c Dr. 25,000
Realisation a/c 2,46,500
[being transfer of liabilities at
book value]
Realisation a/c Dr. 1,500
To Cash 1,500
[being outstanding expenses
paid]
AB & Co. a/c Dr. 2,37,974
To Realisation a/c 2,37,974
[being Purchase consideration
due]
A’s capital a/c Dr. 68,026
To Realisation a/c 68,026
[being realization loss
transferred to Capital a/c]
A’s capital a/c Dr. 2,37,974
To AB & Co. a/c 2,37,974
[being balance in capital a/c
transferred to close the books
on account]
157
In the books of B
Date Particulars L.F. Amount Amount

1.04.13 Realisation a/c Dr. 2,85,000
To Stock a/c 1,96,000
To Sundry Debtors a/c 74,000
To Cash a/c 400
To Bank a/c 11,000
To Furniture a/c 3,600
[being transfer of assets at book
value]
Realisation a/c Dr. 4,000
To Bank a/c
[being outstanding expenses 4,000
paid]
Creditors Dr. 94,000
Outstanding Expenses a/c Dr. 4,000
[being transfer of liabilities at
book value]
AB & Co. a/c Dr. 2,03,500
[being Purchase consideration
due]
B’s capital a/c Dr. 12,500 12,500
To Realisation a/c
[being realization loss
transferred to Capital a/c]
A’s capital a/c Dr. 2,03,500
To AB & Co. a/c 2,03,500
[being balance in capital a/c
transferred to close the books of
account]
158
Balance Sheet of AB & Co. as on April, 1st 2013.
Liabilitie ` ` Assets ` `
s
Partners Furniture 7,600
Capital
A 3,20,000 Investment 2,000
B 1,60,000 4,80,000 Stock 5,04,600
Sundry 3,14,000 Sundry 2,52,000
Creditors Debtors
Bills 25,000 RDD (23,626) 2,28,374
Payable
Bank 37,000
Cash 90
brought in 82,026
by A
82,926
Less: Paid (43,500) 39,426
to B
8,19,000 8,19,000
Calculation of purchase consideration :
Particulars A` B` Total `
A) Assets taken over.
Furniture 4,000 3,600 7,600
Investments 2,000 - 2,000
Stock 2,89,000 2,15,600 5,04,600
Sundry debtors 1,78,000 74,000 2,52,000
Bank 26,000 11,000 37,000
Cash 500 400 900
A 4,99,500 3,04,600 8,04,100
B Less: Liabilities assumed
Sundry Creditors 2,20,000 94,000 3,14,000
Bills Payable 25,000 - 25,000
R.D.D 16,526 7,100 23,626
B 2,61,526 1,01,100 3,62,626
Net Assets taken over by the AB 2,37,974 2,03,500 4,41,474
& Co Purchase consideration
(A-B)
159
A B
Fixed Capital as per agreement ` 3,20,000 1,60,000
Less : Capital balance transferred ` (2,37,974) (2,03,500)
Cash to be introduced + / withdrawn [-] 82,026 (43,500)
Illustration 2
Two partnership firm, carrying on business under the style of
Anand & Co. [partners N & C] and Ashok & Co. [partners K & P]
respectively, decided to amalgamate into 2 A & Co. with effect from
01st April 2014. the respective Balance Sheet of the both the firms
as on 31st March 2014 are a below:
Liabilities Anand & Ashok & Assets Anand & Ashok &
Co ` Co ` Co ` Co `
Capital : C 1,90,000 Goodwill 50,000
K 1,00,000 Land & 1,00,000 -
Building
P 20,000 Stock 2,00,000 50,000
Bank Loan 1,50,000 Sundry 1,00,000 1,00,000
Debtors
Creditors 1,00,000 95,000 Cash in - 15,000
hand
Capital N 40,000
Total ` 4,40,000 2,15,000 Total ` 4,40,000 2,15,000
Profit sharing ratio are N & C = 1 :2, K & P = 1 : 1. Agreed terms

are :
A) Land & Building to be devalued by 20%.

B) All stocks are to be appreciated by 50%.
C) Anand & Co owes `50,000 to AK & Co. as on 31st March 2014.
This is settled at ` 20,000.
D) Goodwill to ignored for the purpose of amalgamation.
E) The fixed capitals in the new firm 2A & co. are to be N ` 20,000,
C ` 30,000, K `10,000 & P ` 40,000.
F) C take over the Bank loan of Anand & Co., & gifted to N the
amount of money to be brought in by N to make up his capital
contribution.
G) K is paid off in cash from AK & Co. P bring in sufficient cash to
make up his required capital contribution. Pass necessary
Journal entries to close the books of both firms.
Give Balance Sheet of 2A & Co, as on 01st April, 2014.
160
Solution:
In the book of Anand & Co.
Date Particulars L.F. Dr. ` Cr. `

31.03.14 Realisation a/c 4,00,000
To land & Building a/c 1,00,000
To stock a/c 2,00,000
To Sundry Debtors 1,00,000
a/c
[being various assets
transferred at book
value]
Sundry Creditors a/c 1,00,000
Bank Loan a/c 1,50,000
[being various liabilities
transferred at book
value]
2A & co. a/c 4,10,000
[being purchase
consideration due]
Realisation a/c Dr. 1,50,000
To C’s Capital a/c 1,50,000
[being Bank loan taken
over by C]
Realisation a/c Dr. 1,10,000
To N’s capital a/c 36,667
To C’s Capital a/c 73,333
[profit on realization
transferred to partner’s
capital]
C’s capital a/c. Dr. 23,333
To N’s capital a/c 23,333
[being Deficit in N’s
capital gifted by C]
N’s capital a/c Dr. 20,000
C’s capital a/c 3,90,000
To 2A & co. 4,10,000
[balanced in capital
accounts of the partners
transferred to 2A & Co.]
161
In the Books of Ashok & Co.
Date Particulars L.F. Dr. Cr.

31.03.14 Realisation a/c 2,00,000
To Goodwill a/c 50,000
To stock a/c 50,000
To Sundry Debtors a/c 1,00,000
[being various assets
transferred at book value]
Sundry Creditors a/c 95,000
[being creditors transferred
at book value]
2A & co. a/c 50,000
[being purchase
consideration due]
K’s capital a/c 27,500
P’s capital a/c 27,500
[being loss on realization
transferred to partners
equally]
Bank a/c 47,500
To P’s capital a/c 47,500
[being necessary amount
brought in by P to make up
his required capital
contribution]
K’s capital a/c. 62,500
To Bank a/c 62,500
[Being excess capital
refunded]
K’s capital a/c 10,000
P’s capital a/c 40,000
To 2A & co. 50,000
[balance in capital accounts
of the partners transferred
to 2A & Co.]
162
Calculation of Purchase Consideration
Assets Taken Over Anand & Co. ` AK & Co. ` Total `,

Land & Building 80,000 --- 80,000
Stock 3,00,000 75,000 3,75,000
Sundry Debtors 1,00,000 70,000 1,70,000
(A) 4,80,000 1,45,000 6,25,000
Liabilities taken over
Sundry Creditors (B) 70,000 95,000 1,65,000
Purchase 4,10,000 50,000 4,60,000
Consideration [A-B]
Balance Sheet of 2A & Co. 1 April 2014
Liabilities ` Assets `
Partner’s Capital : Land & 80,000
Building
N 20,000 Stock 3,75,000
C 30,000 Sundry
Debtors
K 10,000 [1,70,000- 1,50,000
20,000]
P 40,000
1,00,000
Sundry Creditors 1,65,000
Less : Inter-co.
Owing 20,000 1,45,000
C’s Loan 3,60,000
Total ` 6,05,000 Total ` 6,05,000
After adjustment of reduction in inter company owing by

`30,000.
C’s capital balance transferred 3,90,000 however bal.

required was 30,000. Hence excess capital transferred to c’s loan
a/c [3,90,000 30,000].
Sundry creditors A/c Dr. 20,000

To Sundry Debtors A/c 20,000
Inter firm owing eliminated in the books to firm Z A & Co., as

both firms are magead into one.
163
Illustrations : 3
A and B and C and D are Partner’s in A & Co and C & Co.

respectively. A & B are sharing in the ratio 3,2 and C & D are
sharing in equal proportion. Their balance sheets as on 31st
December 2014 were as under.
Balance Sheet of A & Co as on 31st December, 2014.
Capital Accounts Machinery 60,000
A 75,000 Furniture 5,000
B 50,000 Stock 50,000
Reserves 40,000 Debtors 75,000
Loan from UTI 20,000 Bank 7,000
Bank
Total ` 2,00,000 Total ` 2,00,000
Balance Sheet of C.D & Co. on 31st December 2014
Capital Accounts Goodwill 25,000
C 60,000 Furniture 5,000
D 55,000 Stock 70,000
Reserves 25,000 Debtors 45,000
Loan from IDBI 10,000 Bank 3,000
Cash 2,000
Total ` 1,50,000 Total ` 1,50,000
They decided to amalgamate and form a new firm ABCD &

Co. on 1st January 2015.
Terms of amalgamation :
1) The new firm shall take over all the assets and liabilities of both
the firms.
2) Provision for doubtful debts shall be made at 5% on debtors.
3) Goodwill is to be valued at 2 years purchase of the last 4 years
average profits.
164
4. The profits of the firms are.
Year A & Co. ` C & Co. `

2011 30,000 20,000
2012 45,000 30,000
2013 35,000 40,000
2014 54,000 30,000
5. Machinery of A & Co. is undervalued by ` 15,000. This value

is now to be adjusted property.
You are required to give :
1) Ledger Accounts in the books of both the firms.
2) Balance Sheet of ABCD & Co.
Solution :
In the books of A & Co.
Realisation A/c
Dr. Cr.
Particulars ` ` Particulars ` `
To Machinery 60,000 By Creditors 15,000
To Furniture 5,000 By UTI Loan 20,000
To Stock 50,000 By ABCD & Co 2,58,250
To Debtors 75,000
To Bank 7,000
To Cash 3,000
To Profit on
Realisation
Transferred to
A 55,950
B 37,300 93,250
Total ` 2,93,250 Total ` 2,93,250

Dr. Cr.
Particulars A B Particulars A B
To ABCD & 1,54,950 1,03,300 By Balance 75,000 50,000
Co. b/d
By Reserve 24,000 16,000
By 55,950 37,300
Realisation
Profit
1,54,950 1,03,300 1,54,950 1,03,300
165
ABCD & Co. A/c

Dr. Cr.
Particulars ` Particulars `
To Realisation A/c 2,58,250 By Partner’s Capital 1,54,950
A/c A
B 1,03,300
2,58,250 2,58,250
In the Books of C & Co.

Realisation A/c.
Dr. Cr.
To Goodwill 25,000 By IDBI Loan 10,000
To Furniture 5,000 By ABCD & 1,72,750
Co.
To Stock 70,000
To Debtors 45,000
To Bank 3,000
To Cash 2,000
To Profit on
Realisation
transferred to
C 16,375
D 16,375 32,750
Total ` 1,82,750 Total ` 1,82,750
Partner’s Capital A/c.

Dr. Cr.
To ABCD & Co. 88,875 83,875 By Balance b/d 60,000 55,000
By Reserves 12,500 12,500
By Realisation 16,375 16,375
88,875 83,875 88,875 83,875
ABCD & Co. A/c.

Dr. Cr.
To Realisation A/c 1,72,750 By Partner’s Capital 88,875
C
D 83,875
1,72,750 1,72,750
166
Balance Sheet of ABCD & Co. as on 1st Jan. 2015
Particulars ` ` Assets ` `
Capital A/c’s Goodwill 1,42,000
A 1,54,950 Furniture 10,000
B 1,03,300 Machinery 75,000
C 88,875 Stock 1,20,000
d 83,875 4,31,000 Debtors 75,000
Creditors 15,000 45,000
Uti Bank Loan 20,000 1,20,000
IDBI Loan 10,000 Less : 6,000 1,14,000
RDD
Bank 10,000
Cash 5,000
Total ` 4,76,000 Total ` 4,76,000
Working Notes :
a) Goodwill Valuation Average Profit Method.
Year A & Co C & Co

2010 30,000 20,000
2011 45,000 30,000
2012 35,000 40,000
2013 54,000 30,000
1,64,000 1,20,000
∴ Average Profit = 1.64,000 / 4 1,20,000 / 4

= 41,000 = 30,000
Goodwill = 2 year purchase of Average profit

= 41,000 x 2 = 30,000 x 2
= 82,000 = 60,000
167
Working Note Number : 2
Purchase Consideration :
Particulars A & Co. ` C & Co. ` Total `,

Assets taken over at agreed
values
Goodwill 82,000 60,000 1,42,000
Machinery 75,000 - 75,000
Furniture 5,000 5,000 10,000
Stock 50,000 70,000 1,20,000
Debtors 75,000 45,000 1,20,000
Bank 7,000 3,000 10,000
Cash 3,000 2,000 5,000
A 2,97,000 1,85,000 4,82,000
Less : Liabilities taken over
at agreed values
UTI Bank Loan 20,000 - 20,000
IDBI Bank Loan - 10,000 10,000
Creditors 15,000 - 15,000
RDD 5% 3,750 2,250 6,000
B 38,750 12,250 51,000
Purchase Consideration (A- 2,58,250 1,72,750 4,31,000
B) `
Total columns is useful for preparing Balance Sheet of the new

firm.
Illustration : 4.
Two independent firms of Partner’s ship carrying on

business under the name and style of XY and sons and AB
Associates agreed to amalgamate their business in to one firm from
31st December, 2013 XY & Sons had two Partner’s X and Y
whereas AB & Associates has two Partner’s A and B The partner’s
shared the profits and losses in ratio of their capitals. Their balance
sheets as on 31st December, 2013 were as under.
168
XY & Sons
X 56,000 Building 56,000
Y 28,000 Stock 28,560
Creditors 20,000 Debtors 21,000
Bills Payable 8,000 Bank 7,840
Mortgage Loan 7,000
Total ` 1,19,000 Total ` 1,19,000
AB & Associates
A 33,600 Stock 25,620
B 22,400 Debtors 28,000
Creditors 28,000 Investmen 21,000
ts
Bills Payable 7,000 Bank 9,380
Total ` 91,000 Total ` 91,000
Terms of amalgamations were as under:-
a) The new firm shall carry on business under the name and style
AXBY & Associates
b) Mortgage Loan of XY and Sons and investments of AB &
Associates shall not be taken over by the new firm.
c) Goodwill of XY & Sons was valued at ` 10,200/- and that of AB
& Associates at ` 12,000/-.
d) Building of XY and sons was taken as undervalued by `
14,000/-.
e) Stock of XY and Sons to be depreciated by ` 5,600/- and that of
AB and Associates to be appreciated of ` 2,800/-.
f) 5% may be provided as Bad Debts Reserve of both the firms.
g) The capital of the new firm shall be ` 1,12,000/- which will be
contributed by each partner in the profit sharing ratio i.e. x-3, Y-
2, A-3, B-2 to be adjusted through current accounts.
You are required to close the books of both the firms by

means of journal entries and also give necessary journal entries in
the books of new firm. Also prepare the balance sheet of the new
firm after the amalgamation.
169
Solution
Journal entries in the books of XY & Sons.
Sr. Particulars Dr. ` Cr. `

1. Relisation A/c. Dr. 1,11,560
To Furniture 5,600
To Building 56,000
To Stock 28,560
To Debtors
(Being Sundry Assets 21.000
transferred at Book Value)
2. Creditors A/c. Dr. 20,000
Bills Payable A/c. Dr. 8,000
To Realisation A/c 28,000
(Being sundry liabilities
transferred at Book Value)
3. Mortgage Loan A/c. Dr. 7,000
To Bank A/c. 7,000
(Being Mortgage Loan repaid)
4. Realisation A/c. Dr. 840
To Bank A/c 840
(Being remaining bank balance
transferred to Realisation)
5. New Firm A/c. Dr. 1,01,550
To Realisation A/c. 1,01,550
(Being sale of business
recorded)
6. Realisation A/c. Dr. 17,550
To X’s Capital A/c 11,700
To Y’s Capital A/c 5,850
(Being profit on Realisation
transferred to Partner’s capital
in profit sharing ratio.)
7. X’s Capital A/c. Dr. 67,700
Y’s Capital A/c. Dr. 33,850
To New Firm A/c 1,01,550
(Being Capital Accounts of both
the Partner’s transferred to new
firm account)
170
Dr. Realisation A/c. Cr.
To Furniture 5,600 By Creditors 20,000
To Building 56,000 By Bills 8,000
Payable
To Stock 28,560 By AX By A/c 1,01,550
To Debtors 21,000
To Bank 840
To Profit
Transferred to
porter’s capital
X : 11,700
Y : 5,850 17,550
Total ` 1,29,550 Total ` 1,29,550
Dr. AXBY A/c. Cr.
To Realisation 1,01,550 By X Capital 67,700
By Y Capital 33,850
1,01,550 1,01,550
Dr. Partner’s Capital A.c. Cr.
Particulars X Y Particulars X Y
To AXB y.s A/c 67,700 33,850 By Balance 56,000 28,000
B/d
By 11,700 5,850
Realisation
A/c
67,700 33,850 67,700 33,850
171
Journal Entries in the books of AB & Associates.
Sr. Particulars Dr. ` Cr. `

1. Realisation A/c. Dr. 91,000
To Furniture 7,000
To Stock 25,620
To Debtors 28,000
To Investment 21,000
To Bank 9,380
(Being Sundry assets
2. Creditors A/c. Dr. 28,000
Bills Payable A/c. Dr. 7,000
(Being sundry liabilities
3. New Firm A/c. Dr. 48,400
(Being sale of business
recorded)
4. A’s Capital A/c Dr. 12,600
B’s Capital A/c Dr. 8,400
(Being investments distributed
amongst Partner’s
5. Realisation A/c Dr. 13,400
To A’s Capital 8,040
To B’s Capital 5,360
(Being profit on Realisation
transferred to Partner’s capital.)
B’s Capital A/c Dr. 19,360
To New Firm A/c 48,400
(Being A & B’s Capital
transferred to new firm)
172
Dr. Realisation A/c Cr.
To Furniture 7,000 By Creditors 28,000
To Stock 25,620 By Bills Payable 7,000
To Debtors 28,000 By New Firm 48,400
To Investments 21,000 By Partner’s Capital 21,000
To Bank 9,380
To Profit transferred
To Capital A/c
A 8,040
B 5,360 13,400
Total ` 1,04,400 Total ` 1,04,400
Dr. Partner’s Capital A/c Cr.
To Realisation 12,600 8,400 By Balance b/d 33,600 22,400
To New Firm 29,040 19,360 By Realisation 8,040 5,360
41,640 27,760 41,640 27,760
Dr. A X B Y is A/c Cr.
To Realisation 48,400 By Partner’s Capital
A 29,040
B 19,360
Total ` 48,400 Total ` 48,400
In the books of AXBY (New Firm)
Journal Entries :
Sr. Particulars Debit. ` Credit. `

1. Furniture A/c Dr. 5,600
Building A/c Dr. 70,000
Stock A/c. Dr. 22,960
Debtors A/c Dr. 21,000
Bank A/c. Dr. 840
Goodwill A/c Dr. 10,200
To Creditors A/c 20000
173
To Bills Payable A/c 8,000

To RDD A/c 1,050
To X’s Capital A/c 67,700
To Y’s Capital A/c 33,850
(Being assets and liabilities of
XY & Sons taken over)
2. Furniture A/c. Dr. 7,000
Stock A/c. Dr. 28,420
Debtors A/c. Dr. 28,000
Bank A/c. Dr. 9,380
Goodwill A/c. Dr. 12,000
To Creditors A/c 28,000
To Bills Payable A/c 7,000
To RDD A/c 1,400
To A’s capital A/c 29,040
To B’s capital A/c 19,360
(Being assets and liabilities of
AB & Associates taken over)
3. X Capital A/c. Dr. 6,660
Y Capital A/c. Dr. 4,440
A Capital A/c. Dr. 6,660
B Capital A/c. Dr. 4,440
To Goodwill A/c. 22,200
(Being Goodwill written of in
new P.S.R.)
4. X Capital A/c. Dr. 27,440
Y Capital A/c. Dr. 7,010
To X Current A/c 27,440
To Y Current A/c 7,010
(Being excess in capital account
of X & Y transferred to current
account)
5. A’s Current A/c. Dr. 11,220
B’s Current A/c. Dr. 7,480
To A’s Capital A/c 11,220
To B’s Capital A/c 7,480
(Being deficit of capital account
adjusted through current
account.)
174
Particular X Y A B Particulars X Y A B
s
To 6,660 4,440 6,660 4,440 By Old Firm 67,700 33,850 29,040 19,360
Goodwill
To Current 27,440 7,010 - - By Current - - 11,220 7,480
A/c A/c
To 33,600 22,400 33,600 22,400
Balance
C/d
Total 67,700 33,850 40,260 26,840 67,700 33,850 40,260 26,840
Balance Sheet of AXBY & Co as on 1st January, 2014
X 33,600 Building 70,000
Y 22,400 Stock 51,380
A 33,600 Debtors 49,000
B 22,400 1,12,000 Less:Rdd (2,450) 46,550
Creditors 48,000 Bank 10,220
Bills Payable 15,000 Current A/c’s
Current A/c
X 27,440 A 11,220
Y 7,010 34,450 B 7,480 18,700
Total ` 2,09,450 Total ` 2,09,450
Working Notes
Purchase Consideration:
Particulars XY & Sons AB & Associates

Assets taken over at agreed values
Building 70,000 -
Stock 22,960 28,420
Debtors 21,000 28,000
Bank 840 9,380
Goodwill 10,200 12,000
Total A 1,30,600 84,800
Less: Liabilities taken over at
agreed values
Creditors 20,000 28,000
Bills Payable 8,000 7,000
RDD 1,050 1,400
B 29,050 36,400
Purchase Consideration: (A - B) 1,01,550 48,400
175
Illustration : 5
R & Y were partners in O & Co. decided to amalgamate with I
& Co, where D & K, partner : New firm called as AK & Co.
As on 31st December 2013 the balance sheets of the firms

were as follows.
O & Co.
Capital A/c’s Freehold Property 74,000
R 1,53,000 Furniture & Fixtures 18,000
Y 1,10,000 Motor Vehicles 30,000
Creditors 52,000 Stocks 83,000
Investments 8,000
Debtors 68,000
Bank Balance 34,000
Total 3,15,000 Total 3,15,000
I & Co.
Capital A/c’s Property 1,00,000
D 1,13,000 Furniture & Fixture 14,000
K 74,000 Vehicles 18,000
Creditors 60,000 Stock 66,000
Bank Overdraft 9,000 Debtors 58,000
Total 2,56,000 Total 2,56,000
The terms and conditions of amalgamation were as follows.

A. Provision for doubtful debts @ 5% to be made in respect of
debtors and a provision for discount receivable @ 2.5 % to be
made in respect of creditors.
B. A. K. & Co. to take over the old Partner ship assets @

following values.
O & Co. ` Id Co. `

Stock 84,500 63,900
Motor Vehicles 28,000 13,000
Furniture & fixtures 16,000 -
Property 1,00,000 -
Goodwill 63,000 45,000
176
C. The property and fixtures of I & Co. not to be taken over by AK

& Co. (these assets were sold for ` 1,35,000 cash on 1st
January, 2013)
D. Y to take over her firm’s investments at a valuation of ` 7,600.
E. The capital of AK & Co. to be ` 5,40,000 and to be contributed

by the Partner’s in profit sharing rations 6:5 : 4:3 any
adjustment to be made in cash.
F. R. Y were sharing in 4:3, D K were sharing in 3:2 ratio.
You are required to give ledger accounts closing the books of old
Partner ship firms and also prepare the balance sheet of AK & Co.
Solution:
In the books of O & Co.
To Property 74,000 By Creditors 52,000

To Fixtures 18,000 By New Co 3,05,400
To Vehicles 30,000 By Capital 7,600
To Stock 83,000
To Investments 8,000
To Debtors 68,000
To Profit transferred
to
R Capital A/c 48,000
Y Capital A/c 36,000 84,000
3,65,000 3,65,000
Particulars R Y Particulars R Y
To Realisation 7,600 By balance 1,53,000 1,10,000
A/c B/d
To Cash A/c 19,430 14,570 By 48,000 36,000
Realisation
A/c
To A.K. & Co 1,81,570 1,23,830
2,01,000 1,46,000 2,01,000 1,46,000
177
Dr. A.K & Co. A/c Cr.
To Realisation A/c 3,05,400 By Partner’s Capital

R 1,81,570
Y 1,23,830
3,05,400 3,05,400
In the books of I & Co.
To Property A/c 1,00,000 By Creditors A/c 60,000

To Fixtures A/c 14,000 By AK & Co. 1,18,500
To Vehicles 18,000 By Cash 1,35,000
To Stocks 66,000
To Debtors 58,000
To Profit transferred to
D 34,500
K 23,000 57,500
3,13,500 3,13,500
Particulars D K Particulars D K
To Cash 75,600 50,400 By balance 1,13,000 74,000
B/d
To AK & Co. 71,900 46,600 By 34,500 23,000
Realisation
1,47,500 97,000 1,47,500 97,000
Dr. AK & Co. Cr.
To Realisation A/c 1,18,500 By Partner’s Capital

D 71,900
K 46,600
1,18,500 1,18,500
178
Dr. Cash A/c Cr.
To Realisation A/c 1,35,000 By Balance B/d 9,000

By D Capital A/c 75,600
By K Capital A/c 50,400
1,35,000 1,35,000
In the books of AK & Co.
Dr. Cash A/c Cr.
To Y Capital A/c 26,170 By R Capital A/c 1,570

To D Capital A/c 48,100 By Balance C/d 1,16,100
To K Capital A/c 43,400
1,17,670 1,17,670
Dr. Partner’ Capital A/c Cr.
Partic R Y D K Parti R Y D K
ulars cular
s
To 1,570 - - - By 1,81,570 1,23,830 71,900 46,600
Cash Old
Firm
To 1,80,000 1,50,000 1,20,000 90,000 By 26,170 48,100 43,400
Balan Cash
ce
C/d
Total 1,81,570 1,50,000 1,20,000 90,000 1,81,570 1,50,000 1,20,000 90,000
Balance Sheet of AK & Co.
As On 1st January 2014
Capital Stock 1,48,400
A/c’s
R 1,80,000 Vehicles 41,000
Y 1,50,000 Fixtures 16,000
D 1,20,000 Property 1,00,000
K 90,000 5,40,000 Goodwill 1,08,000
Creditors 1,12,000 Debtors 1,26,000
Less:Prov 2,800 1,09,200 Less:R.D. (6,300) 1,19,700
D
Cash 1,16,100
Total ` 6,49,200 Total ` 6,49,200
179
Working Notes
1. Purchase Consideration
Particulars O & Co. I & Co Total

Assets taken over at agreed values 84,500 63,900 1,48,400
Stock
Vehicles 28,000 13,000 41,000
Fixtures 16,000 - 16,000
Property 1,00,000 - 1,00,000
Goodwill 63,000 45,000 1,08,000
Debtors 68,000 58,000 1,26,000
Prov. For discount on creditors 1,300 1,500 2,800
3,60,800 1,81,400 5,42,200
Less: Liabilities taken over at agreed
values
Creditors 52,000 60,000 1,12,000
Reserve for Doubtful Debts 3,400 2,900 6,300
Purchase Consideration 3,05,400 1,18,500 4,23,400
Illustration : 6
Amin & Naman were in business on their own account as

business. They decided to amalgamate as on 31st December 2013,
the new business to be known as Navamin and associates. Them
balance sheets as on that date were as follows:
Amin & Co.
Amin’s Capital 22,000 Freehold Premises 37,000
Sundry Creditors 10,000 Plant 4,000
Bank overdraft 11,000 Stock 1,000
Debtors 1,000
Total 43,000 Total 43,000
Naman & Co.
Naman’s Capital 12,000 Leasehold Premises 15,000
Debtors 4,000
Bank 2,500
Trade Creditors 15,000 Plant 5,000
Stock 500
Total 27,000 Total 27,000
180
The terms and conditions of a amalgamation were as follows:

A) Profits and losses to be shared in the ratio 2:3.
B) Goodwill to be valued at one years purchase of average profits
of previous three years profits.
C) Goodwill to be written off immediately.
D) Freehold property of Amin is not taken over by the firm, which
is sold by him for ` 32,000 on 1.01.2014 and the proceeds ere
deposited in the firm’s bank account.
E) Certain assets to be revalued as follows.
Amin & Co ` Naman & Co `

Leasehold premises - 20,000
Debtors - 3,000
Plant 5,000 -
The profits & losses of the two businesses for the past three years
were as following.
Year Amin & Co Naman & Co

2011 Loss (2,000) 10,000
2012 21,000 15,000
2013 14,600 17,000
You are required to prepare:

1. Ledger accounts to close the books of both Amin & Co and
Naman & Co.
2. Balance Sheet of the new firin as on 31st December 2013.
Solution
In The Books of Amin & Co.
Dr. Realisation Account Cr.
To Freehold premises 37,000 By Creditors 10,000
To Plant 4,000 By Bank overdraft 11,000
To Stock 1,000 By Navamin of Ass. 29,200
To Debtors 1,000 By Bank (Sale of 32,000
freehold premises)
To bank 32,000
To Profit transferred 7,200
To Amins cap. a/c
82,200 82,200
181
Dr. Amin’s Capital A/c. Cr.
To New Firm A/c. 29,200 By Balance b/d 22,000

By Realisation A/c 7,200
29,200 29,200
Dr. Bank A/c. Cr.
To Realisation 32,000 By Realisation 32,000

32,000 32,000
Dr. Navamin & Associates Cr.
To Realisation 29,200 By Amin’s Capital A/c 29,200

29,200 29,200
In the Books of Naman & Co.
To Leasehold premises 15,000 By Creditors 15,000

To Plant 5,000 By Navamin & 30,000
Associates A/c
To Stock 500
To Debtors 4,000
To Bank 2,500
To Profit transferred to 18,000
Naman’s Capital A/c
45,000 45,000
Dr. Naman’s Capital A/c Cr.
To New firm A/c 30,000 By Balance B/d 12,000

30,000 30,000
Dr. Navamin & Associates A/c Cr.
To Realisation A/c 30,000 By Naman’s Capital 30,000

A/c
30,000 30,000
182
Balance Sheet of Navamin & Associates A/c as on 01st January

2014
Capital A/c’s Leasehold Premises 20,000
Amin 29,200 Plant 10,000
Less Goodwill (10,080) Stock 1,500
19,120 Debtors 4,000
Naman 30,000 Bank 34,500
Less Goodwill (15,120)
14,880
Creditors 25,000
Bank overdraft 11,000
Total ` 70,000 Total ` 70,000
Working notes:
I. Goodwill valuation
YEAR AMIN & CO. ` NAMAN & CO `

2011 (2,000) 10,000
2012 21,000 15,000
2013 14,600 17,000
Total Profit 33,600 42,000
Average Profit = 33,600 / 3 42,000 / 3
= 11,200 = 14,000
II. Purchase consideration
Assets taken over at AMIN & CO. ` NAMAN & CO ` Total

agreed values
Goodwill 11,200 14,000 25,200
Leashold premises - 20,000 20,000
Plant 5,000 5,000 10,000
Stock 1,000 500 1,500
Debtors 1,000 3,000 4,000
Bank 32,000 2,500 34,500
A 50,200 45,000 95,200
Liabilities Taken over
at agreed values
Creditors 10,000 15,000 25,000
Bank overdraft 11,000 - 11,000
B 21,000 15,000 36,000
Purchase 29,200 30,000 59,200
Consideration (A - B)
183
Illustration : 7
Mr. Bill and Mr. Will are partners in BW & Co. In a similar type of
business Mr. Mill & Mr. Gill are partners in MG & Co. It was agreed
that on 1st April, 2013 the old firms be amalgamated into one new
firm BMW Group.
The respective Balance Sheets of the Old firms as on 31st March,

2013 were as follows:
Liabilities BW & MG & Assets BW & MG &

CO. ` CO. ` CO. ` CO. `
Capitals Land and 29,600 40,000
Building
- Bill 61,200 - Furniture 7,200 5,600
- Will 44,000 - Vehicles 12,000 7,200
- Mill - 45,200 Stock 33,200 26,400
- Gill - 29,600 Investments 3,200 -
Creditors 20,800 24,000 Debtors 27,200 23,200
Bank - 3,600 Bank 13,600 -
Overdraft
1,26,000 1,02,400 1,26,000 1,02,400
Profit Sharing Ratio :
Bill Will Mill Gill

Old Firms 4 3 3 2
New Firm 6 5 4 3
Terms and Conditions of amalgamation:

1) Provision for doubtful debts @ 5% to be made on Debtors.
2) Rebate on the liabilities of creditors to be provided @ 2%.
3) New Firm to take over the assets of old firms as under:
Assets BW & CO. ` MG & CO. `

Stock ………… 33,800 25,560
Vehicles ………… 11,200 5,200
Furniture ………… 6,400 -
Land & Building ………… 40,000 -
Goodwill ………… 25,200 18,000
4) Furniture and Land & Building not taken over by New Firm
were sold for ` 54,000 on 1st April, 2013 by MG & Co.
5) Mr. Bill to take over investments for ` 3,040.
6) The Capitals of the Partners in the New Firm were to be `
2,16,000 to be contributed in profit sharing ratio; any
adjustment to be made in cash.
184
You are required to close the books of the Old Firms and prepare
the Opening Balance Sheet of the New Firm. (IDE, Oct. 2003,
adapted)
Solution:
Particulars BW & CO. MG & CO. Total `

` `
Assets taken
over:
Land & ………… 40,000 - 40,000
Building
Furniture ………… 6,400 - 6,400
Vehicles ………… 11,200 5,200 16,400
Stock ………… 33,800 25,560 59.360
Goodwill ………… 25,200 18,000 43,200
Debtors ………… 27,200 23,200 50,400
Bank ………… 13,600 - 13,600
Rebate on ………… 416 480 896
Creditors
(A) 1,57,816 72,440
Less : ………… 20,800 24,000 44,000
Liabilities
taken over
Creditors
Bank ………… - 3,600 3,600
Overdraft
R.D.D. 1,360 1,160 2,520
(B) 22,160 28,760
Purchases (A) - (B) 1,35,656 43,680
Consideratio
n (=Capitals
tfd.)
185
IN THE BOOKS OF BW & CO.

To Land & Building 29,600 By Creditors 20,800
To Furniture 7,200 By BMW Group A/c 1,35,656
(P.C)
To Vehicles 12,000 By Bill’s Capital 3,040
(Investments)
To Stock 33,200
To Investments 3,200
To Debtors 27,200
To Bank 13,600
To Partners Capital
Bill (4/7) 19,141
Will (3/7) 14,355 33,496
1,59,496 1,59,496
Dr. Partners’ Capital Accounts Cr.
Particulars Bill ` Will ` Particulars Bill ` Will `

To Realisation 3,040 - By Balance 61,200 44,000
A/c b/d
To BMW Group 77,301 58,355 By 19,141 14,355
Realisation
A/c (Profit)
80,341 58,355 80,341 58,355
Dr. BMW Group Account Cr.
To Realisation A/c 1,35,656 By Bill’s Capital A/c 77,301
By Will’s Capital A/c 58,355
1,35,656 1,35,656
186
IN THE BOOKS OF MG & CO.
To Land & Building 40,000 By Creditors 24,000
To Furniture 5,600 By Bank Overdraft 3,600
To Vehicles 7,200 By Bank A/c (Land & 54,000
Building)
To Stock 26,400 By BMW Group A/c 43,680
(P.C.)
To Debtors 23,200
To Partners Capital
Mill (3/5) 13,728
Gill (2/5) 9,152 22,880
1,25,280 1,25,280
Dr. Partners’ Capital Accounts Cr.
Particulars Mill ` Gill ` Particulars Mill ` Gill `

To Bank A/c 32,400 21,600 By Balance 45,200 29,600
b/d
To BMW 26,528 17,152 By 13,728 9,152
Group Realisation
A/c (Profit)
58,928 38,752 58,928 38,752
Dr. BMW Group Account Cr.
To Realisation A/c 43,680 By Mill’s Capital A/c 26,528
(P.C.)
By Gill’s Capital A/c 17,152
43,680 43,680
Dr. Bank Account Cr.
To Realisation A/c 54,000 By Mill’s Capital A/c 32,400
(Land & Building) (3/5)
By Gill’s Capital A/c 21,600
54,000 54,000
187
BALANCE SHEET OF BMW GROUP ON 1-4-2013
Particulars ` Assets `
Partners Capital Goodwill 43,200
- Bill 72,000 Land & 40,000
Building
- Will 60,000 Furniture 6,400
- Mill 48,000 Vehicles 16,400
- Gill 36,000 2,16,000 Stock 59,360
Creditors 44,800 Debtors 50,400
Less : Rebate on 896 43,904 Less : Prove. 2,520 47,880
Creditors for D. Debts
Bank Overdraft 3,600 Bank 13,600
Add : Received
from
Will 1,645
Mill 21,472
Gill 18,848
55,565
Less : Paid to 5,301 50,264
Bill
2,63,504 2,63,504
Working Notes:
1) Calculation of Excess / Shortage of Capital
In the books of BMW Group

Particulars Bill Will Mill Gill
` ` ` `
Capitals 77,301 58,355 26,528 17,152
Required Capital (` 2,16,000 72,000 60,000 48,000 36,000
in 6 : 5 : 4 : 3)
Excess/(Shortage) of Capital 5,301 (1,645) (21,472) (18,848)
2) Cash received on Sale of assets not taken over by new firm is

distributed amongst partners in P. S. R.
Illustration : 8
A and B were partners sharing profits and losses in the ratio of 3 : 1

and C and D were partners sharing equally.
Following were their Balance Sheet as on 31st March 2014.
188
Capital Accounts: Goodwill 4,000 -
A 30,000 - Plant and 20,000 27,000
Machinery
B 30,000 - Furniture 8,000 9,000
C - 25,000 Stock 20,000 24,000
D - 32,000 Debtors 19,000 17,000
Creditors 10,000 15,000 Fixtures 1,600 1,200
Bills Payable 4,000 8,000 Cash 3,400 3,300
Qutstanding Rent 2,000 1,500
76,000 81,500 76,000 81,500
The firms are amalgamated on the following terms :

1. Outstanding rent was paid in full by the respective firms.
2. Creditors of both the firms were taken by the new firm at a
discount of 5%.
3. Plant and Machinery is subject to 5% depreciation of both the
firms.
4. Furniture of ‘C’ and ‘D’ was sold in the market for ` 8,000 and
furniture ‘A’ and ‘B’ was not taken over by the new firm.
5. Fixtures were not taken over by the new firm.
6. Stock of ‘A’ and ‘B’ was valued at ` 22,100 and that of ‘C’ and
‘D’ was valued at ` 21,000.
7. Goodwill of M/s A and B is valued at ` 6,000 and that of M/s C
and D at ` 8,000. Goodwill account is not be retained in the
books of the new firm.
8. Capital of each partner in the new firm is to be maintained at `
25,000 by bringing cash or paying cash, as the case may be.
1. Realisation A/c.
2. Partner’s Capital A/c in the books of both the firms and
3. Amalgamated Balance Sheet of the new firm.
(IDE, Apr. 2011, adapted)

189
Solution:
Calculation of Purchase Consideration (PC)
Particulars A&B C&D Total

` ` `
Assets taken over:
Goodwill ………… 6,000 8,000 14,000
Plant and Machinery ………… 19,000 25,650 44,650
Stock ………… 22,100 21,000 43,100
Debtors ………… 19,000 17,000 36,000
Cash ………… 1,400 9,800 11,200
(AB: 3,400 - 2,000, …………
CD: 3,300 + 8,000 -
1,500)
(A) 67,500 81,450
Less : Liabilities
taken over
Creditors ………… 9,500 14,250 23,750
Bills Payable ………… 4,000 8,000 12,000
(B) 13,500 22,250
Purchase (A) - (B) 54,000 59,200
Consideration
In the Books of AB Enterprises
To Goodwill 4,000 By Sundry Liabilities:
To Plant and Machinery 20,000 - Sundry Creditors 10,000
To Furniture 8,000 - Bills Payable 4,000
To Stock 20,000 - Partner’s Capital 9,600
(8,000 + 1,600)
To Debtors 19,000 - ABCD from A/c (PC) 54,000
To Fixtures 1,600
To Cash (3,400-2,000) 1,400
To Profit tfd. to
A’s Capital 2,700
B’s Capital 900 3,600
77,600 77,600
190
Capital A/c
` ` ` `
To Realisation 7,200 2,400 By Balance 30,000 30,000
A/c b/d
To New Firm A/c 25,500 28,500 By 2,700 900
Realisation
A/c
32,700 30,900 32,700 30,900
New Firm A/c
To Realisation A/c 54,000 By Capital A/c
A 25,500
B 28,500 54,000
54,000 54,000
In the Books of CD Enterprises

To Sundry Assets By Sundry Liabilities
- Plant and Machinery 27,000 - Creditors 15,000
- Furniture 9,000 - Bills Payable 8,000 23,000
- Stock 24,000 By Cash (Furniture) 8,000
- Debtors 17,000 By C’s Capital A/c 600
(Fixtures)
- Fixtures 1,200 By D’s Capital A/c 600
(Fixtures)
- Cash 9,800 88,000 By New Firm (PC) 59,200
(3,300 + 8,800 - 1, 500)
To Capital A/c
C 1,700
D 1,700 3,400
91,400 91,400
Capital A/c
Particulars C D Particulars C D
` ` ` `
To Realisation 600 600 By Balance 25,000 32,000
A/c b/d
To New Firm A/c 26,100 33,100 By 1,700 1,700
Realisation
A/c
26,700 33,700 26,700 33,700
191
New Firm A/c
To Realisation A/c 59,200 By Capital A/c
C 26,100
D 33,100 59,200
59,200 59,200
Capital A/cs Goodwill 14,000
A 25,000 Plant and 44,650
Machinery
B 25,000 Stock 43,100
C 25,000 Debtors 36,000
D 25,000 1,00,000
Creditors 23,750
Bank O/D 2,000
(13,200 - 11,200)
1,37,750 1,37,750
Capital A/c
Particulars A B C D
` ` ` `
B/f from Old Firm ………… 25,500 28,500 26,100 33,100
Less : Closing ………… 25,000 25,000 25,000 25,000
Capital
Balance ………… 500 3,500 1,100 8,100
Cash to be paid back = 13,200.
Illustration 9 :
X and Y are two sole traders. Their Balance Sheets as on 1st

January, 2014 are given below:
192
A’s Balance Sheet as at 1st January, 2014
Sundry Creditors 10,000 Plant & Machinery 7,500
Das Bank Ltd. 5,000 Stock in Trade 10,000
Capital Account 15,000 Sundry Debtors 12,500
30,000 30,000
B’s Balance Sheet as at 1st January, 2014
Sundry Creditors 8,500 Plant & Machinery 10,500
Capital Account 20,000 Stock in Trade 5,000
Cash at Bank 2,000
28,500 28,500
They agree to amargamate their business as on 1 st January,

2014. The following revaluations were to be made :
1) Plant and Machinery were to be reduced by 10%.

2) Stock in Trade was to be reduced in case of A by 20% and in
case of B by 10%.
3) A reserve of 2 1 2 % is to be raised against Sundry Debtors.
4) Each partner is to be credited with Goodwill of ` 5,000.
5) The bank overdraft of A is to be paid off by him.
You are required to give the journal entries for recording the above
transactions in the books of A and B give also the amalgamated
balance sheet of the New Firm as on 1st January, 2014.
(IDE, April 2000, adapted)

193
Solution:
IN THE BOOKS OF A
Journal
No Particulars Debit. ` Credit. `

To Plant & Machinery 7,500
To Stock in Trade 10,000
To Sundry Debtors 12,500
(Being Assets transferred to
Realisation Account)
2. Sundry Creditors Dr. 10,000
(Being Liabilities transferred to
3. M/s A & B A/c Dr. 21,937
(Being Purchase Consideration
Due)
To A’s Capital A/c 1,937
(Being Profit on realization)
5. Das Bank Ltd. Dr. 5,000
(Being Bank Overdraft taken
over by X personally)
To M/s A & B A/c 21,937
(Being Capital account settled)
194
IN THE BOOKS OF B
No Particulars Debit. ` Credit. `

To Plant & Machinery 10,500
To Stock in Trade 5,000
To Sundry Debtors 11,000
To Cash at Bank 2,000
(Being Assets transferred to
2. Sundry Creditors Dr. 8,500
(Being Liabilities transferred to
3. M/s A & B A/c Dr. 23,175
(Being Purchase Consideration
Due)
(Being Profit on realization)
5. B’s Capital A/c Dr. 23,175
To M/s A & B A/c 23,175
(Being Capital Account Settled)
M/s A B & Co.
Balance Sheet As At 1-1-2014
Capital Goodwill 10,000
Accounts:
-A 21,937 Plant and 16,200
Machinery
-B 23,175 45,112 Stock 12,500
Sundry 18,500 Debtors 23,500
Creditors
Less : Prov. for 588 22,912
Bad Debts
Cash at bank 2,000
63,612 63,612
195
Working Note :
Calculation of Purchase A B A&B

Consideration: ` ` `
Cash at Bank ………… - 2,000 2,000
Plant & Machinery (90% of ………… 6,750 9,450 16,200
book value)
Stock in Trade (Agreed ………… 8,000 4,500 12,500
value)
Debtors (book value) ………… 12,500 11,000 23,500
Goodwill (agreed value) ………… 5,000 5,000 10,000
………… 32,250 31,950
Less:
………… (313) (275) 588
RDD ( 2 1 2 % of debtors)
Creditors (book value) ………… (10,000) (8,500) 18,500
Purchase Consideration ………… 21,937 23,175
(= Capitals tfd.)
Illustration : 10
Vijay and Sanjay were carrying on business of supply of

hardware as sole traders. Their balance sheets as on 31st March,
2014 are given below:
Liabilities Vijay Sanjay Assets Vijay ` Sanjay

` ` `
Bills Payable 50,000 40,000 Fixed Assets 40,000 50,000
Bank Overdraft 25,000 - Stock 50,000 25,000
Capital A/c 75,000 1,00,000 Book Debts 60,000 55,000
Cash Balance - 10,000
1,50,000 1,40,000 1,50,000 1,40,000
Both the parties decided to amalgamate their business and

form a new partnership firm under the name of M/s Jay on 1 st April,
2014. The terms of amalgamation were as follows:
1) Fixed assets were to be reduced by 10%.

2) Stock of Mr. Vijay to be reduced by 20% and that of Sanjay
increased by 10%.
3) A reserve for 2.5% to be created against book debts.
4) Both the parties to be credited with goodwill of ` 25,000 each.
5) The bank overdraft of Mr.Vijay is to be paid by him.
You are required to prepare necessary Ledger Accounts in

the books of Vijay and Sanjay.
(IDE, Oct.2004, adapted)

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Solution:
Particulars Vijay Sanjay

` `
Assets taken over :
Fixed Assets (90%) …………… 36,000 45,000
Stock (80%) (110%) …………… 40,000 27,500
Book Debts …………… 60,000 55,000
Cash …………… - 10,000
Goodwill …………… 25,000 25,000
[A] 1,61,000 1,62,500
Less: Liabilities taken
Bills Payable …………… 50,000 40,000
RDD (2.5% of Debtors) …………… 1,500 1,375
[B] 51,500 41,375
Purchase Consideration [A] - [B] 1,09,500 1,21,125
(=Capitals tfd.)
IN THE BOOKS OF VIJAY

To Fixed Assets 40,000 By Bills Payable 50,000
To Stock 50,000 By Bank Overdraft 25,000
To debtors 60,000 By M/s Jay P.C.) 1,09,500
To Vijay Capital 25,000
(Overdraft)
To Vijay’s Capital 9,500
(Profit)
1,84,500 1,84,500
Dr. Vijay’s Capital Account Cr.
To M/s Jay )P.C.) 1,09,500 By Balance b/d 75,000
(Overdraft)
(Profit)
1,09,500 1,09,500
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Dr. M/s Jay Account Cr.
To Realisation A/c 1,09,500 By Vijay’s Capital 1,09,500
(P.C.) A/c
1,09,500 1,09,500
IN THE BOOKS OF SANJAY
To Fixed Assets 50,000 By Bills Payable 40,000
To Stock 25,000 By M/s Jay (P.C.) 1,21,125
To Debtors 55,000
To Cash 10,000
To Sanjay’s Capital 21,125,
(Profit)
1,61,125 1,61,125
Dr. Sanjay’s Capital Account Cr.
To M/s Jay (P.C.) 1,21,125 By Balance b/d 1,00,000
(Profit)
1,21,125 1,21,125
M/s Jay Account
To Realisation A/c 1,21,125 By Sanjay Capital 1,21,125
C.P.C A/c
1,21,125 1,21,125
6.2 EXERCISES
A. Fill in the blanks:
1. The new firm formed after amalgamation is called as ----

Firm.
2. The existing firms getting merged together to from new entity
are called as -------.
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3. For calculating Purchase consideration, it is necessary to get

Assets ------.
4. If, one of the firm continues in future with taking the other
firm’s business is called ------.
5. Excess of Assets taken over liabilities is --------.
6. Economies of large-scale combined operations will ------
Fixed cost per unit.
7. Excess of Net Assets over Purchase Consideration is
transferred to --------.
8. Purchase Consideration less Net Assets == ------
9. For transferring R.D.D. in the books of old firm ------ a/c is
credited.
10. On amalgamation, Reserve Fund of vendor firm are
transferred to ------- Accounts.
11. -------- is the amount payable by the purchasing firm to the
vendor firm for taking over it’s business.
12. On amalgamation, assets and liabilities of vendor firm
transferred to -------- a/c at book values.
Ans. 1. Amalgamated Firm 2. Amalgamating firm
3. Revalued 4. Absoration
5. Net assets / or Purchase Consideration,
6. Reduce 7. Capital Reserve
8. Goodwill 9. Realisation a/c
10. Partner’s Capital A/c 11. Purchase Consideration
12. Realisation a/c.
B. Chosse the appropriate word [Multiple Choice]

1. The New firm formed after amalgamation is called as -
a] partnership firm, b] amalgamated firm
c] amalgamating firm d] old firm
2. ----- A/c is opened to find profit / loss on closing of the old firm.
a] profit & loss a/c
b] Realisation a/c
c] profit & loss supense a/c
d] profit & loss adjustment a/c
3. The firms which decide to merge together to from ------ entity
are called as Amalgamating Firms.
a] old firm, b] New
c] dormant firm d] non of the above.
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4. Provision for depreciation on fixed assets appearing in the

Balance Sheet of vendor firm is credited to ------ a/c.
a] new firm a/c b] partner’s capital a/c
c] Realisation a/c d] profit & loss a/c
5. On amalgamation of firms, unrecorded assets taken over by
partner is debited ------- to a/c.
a] Assets a/c b] partner’s capital a/c
c] Realisation a/c d] new firm a/c
6. On amalgamation of firm, accumulated losses of old firm
are transferred to.
a] credited to old partner’ in old PSR
b] debited to old partner’s in new PSR
c] debited to old partner’s in old PSR
d] none of the above.
7. On amalgamation of firm unrecorded liabilities taken over by
the partner is credited to
a] new firm a/c b] partner’s capital a/c
c] Realisation a/c d] profit & loss a/c
8. Debit balance in Realisation a/c indicates -
a] loss on realisation, b] profit on realization
c] net assets, d] all of the above
9. On amalgamation, expenses on dissolution of vendor firm paid
by partner is to be credited to ------ a/c.
a] new firm a/c, b] partner’s capital a/c,
c] Realisation a/c, d] profit & loss a/c
10. Good will of amalgamated firm written off:
a] credited to old partners in old is PSR,
b] Debited to all new partners in new ratio
c] Goodwill a/c.
11. In case of amalgamation.
a] Goodwill of both firms valued,
b] valued goodwill is included in Purchase Consideration
c] both of the above,
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12. On amalgamation of firms, assets shown in the Balance Sheet

of vendor firm transferred to Realisation a/c at.
a] market value b] Agreed value,
c] Book Value, d] none of the above.
Ans. 1-b, 2-b, 3-b, 4-c, 5-b, 6-c, 7-b, 8-a, 9-b, 10-b, 11-b, 12-c,
C. Match the following columns:

(I)
COLUMN A COLUMA B
A. Liabilities of vendor firm 1. No entry.
paid firm, on Amalgamation
B. Assets of vendor firm taken 2. Credit to realization a/c.
over by creditors of vendor
firm
C. Reserve fund appearing in 3. Credit to Partner’s capital
balance sheet of vendor a/c
firm.
4. Debit to realization a/c
(II)
COLUMN A COLUMA B
A. Deferred Revenue exp. 1. Debit to Goodwill a/c in the
appearing on as on date books of purchasing firm.
of amalgamation
B. Realisation exp. of vendor 2. Credit to New firm’s a/c
firm paid by purchasing
firm a/c
C. Liabilities of vendor firm 3. No entry
taken over by new firm
4. Debit to its partners
5. Debit to old partners in old
PSR
(III)
COLUMN A COLUMA B
A. Profit on realization on 1. Credit to old partner’s capital
amalgamation a/c
B. Debit balance on 2. Debit to all to partner’s capital
Realisation a/c a/c in new PSR
C. Goodwill written off by 3. Net Assets
new firm.
D. Purchase Consideration 4. Loss due dissolution of old
firm.
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(IV)
COLUMN A COLUMA B
A. Purchase Consideration 1. Amalgamating firm
B. The firms decided to 2. Amalgamated firm
merge
C. Repayment of partner’s 3. Debit new firm a/c
loan
D. Amalgamation of firm 4. Credit to cash a/c
5. Eliminates competition
Ans. I: a-4, b-1, c-3, II: a-5, b-1, c-4, III:a-1, b-4, c-2, d-3, IV: a-3, b-1, c-4, d-5
D. Substitute the following in a single WORD / Term / Phrase.

1. The new firm formed after amalgamation.
2. The account opened by old firm to find profit or loss due to
dissolution.
3. Excess of net assets over purchase consideration.
4. Combination of two or more firm coming together to secure
economies of large scale production.
5. The amount payable by purchasing firm to the vendor firm for
taking over its business.
Ans. 1-amalgamated firm, 2-Realisation a/c, 3-Capital Reserve, 4-

Amalgamation of firm, 5-Purchase Consideration.
E. State whether True of False, giving reasons in brief.

1. If creditors took over stock in full settlement of liabilities on
amalgamation, Realisation a/c is credited.
2. On amalgamation of firms, unrecorded assets taken over by
new firm, new firm a/c is debited.
3. On amalgamation of firms, fictitious assets are transferred to
the partner’s capital a/c in their old ratio.
4. On amalgamation of firms, sundry debtors transferred to
Realisation a/c at net amount [after deducting R.D.D]
5. On amalgamation of firms, Profit & Loss a/c is opened to find
out profit or loss due to dissolution of firm.
6. On amalgamation of firms, Goodwill of amalgamated firm is
written off in new profit sharing ratio.
7. The new firm records assets & liabilities taken over at book
value, which were appearing in the books of old firms.
8. On amalgamation of firms, old firms may continue their old
business.
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9. On amalgamation of firms, old partners continue to share

profits or losses in their old ratio.
10. On amalgamation of firms, unrecorded liabilities taken over by
partner, partner’s capital a/c is credited.
11. On amalgamation of firms, Realisation a/c is opened in the
books of Amalgamated firm.
12. On amalgamation of firms, Assets realized credited to
realization a/c.
Ans: True : 3, 6, 10, and 12.

False: 1, 2, 4, 5, 7, 8, 9, 11.
F. Theoretical
1. What is amalgamation of firms?
2. What do you understand by the word Purchase
Consideration?
3. What are the basic objectives of amalgamation of firm?
4. What are the consequences of amalgamation of the firm?
5. Explain the term ‘Net Asset’
6. How you account for Goodwill in the books of the new firm?
7. What do you mean by the term ‘Trade Liabilities’?
G. Practical Problems:
1. Following are Balance Sheet of two firms M/s AB & CO. and CD
& Co. as on 31st March, 2014.
Liabilities AB & CO CD & CO Assets AB & CO CD & CO

` ` ` `
Capital : A 100,000 Building 80,000 -
B 100,000 Plant & 100,000 70,000
Machinery
C 54,000 Fixtures and 20,000 14,000
Patterns
D 54,000 Furniture 12,000 20,000
Creditors 1,20,000 60,000 Debtors 60,000 50,000
Bills 42,000 36,000 Stock in 88,000 42,000
Payable trade
Cash on 2,000 8,000
Hand
3,62,000 2,04,000 3,62,000 2,04,000
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A & B sharing profits & losses equally and C, D were sharing

in the ratio of 3:2. The two firm were amalgamated on that date,
AB, C & D decided to shares in the ratio of 3:2:3:2 and assets and
liabilities were revalued as follows :
1. Building was appreciated by 20% but Plant and Machinery of

both the firms were to be depreciated by 12.5%.
2. 5% R.D.D should be provided on debtors of both the firms.
3. Fixtures and patterns of AB & CO. were revalued at ` 20,000
that of CD & CO. ` 18,000.
4. Reserve 2% for discount on creditors of both firms.
5. Furniture of both the firms taken at 120% of book value.
6. Other assets and liabilities were taken over at Book Value.
7. Goodwill of AB & CO. valued at ` 25,000 that of CD & CO. at `
50,000.
Pass necessary Journal Entries in the books of AB & CO.,

Ledger Accounts in the books of CD & CO. and prepare the
Balance Sheet of the amalgamated firm.
2. A & CO and C & CO. decided to amalgamate on the following

terms and conditions on 1st January, 2014, when their Balance
Sheets were as follows:
Liabilities A & CO C & CO Assets A & CO ` C & CO

` ` `
A’s capital 1,20,000 - Building 2,00,000 -
B’s capital 60,000 - Furniture 12,000 20,000
C’s capital -- 66,000 Investments 60,000 40,000
D’s capital 44,000 Stocks 40,000 50,000
Creditors 20,000 30,000 Debtors 28,000 50,000
Bills 40,000 50,000 Cash at bank -- 30,000
Payable
Bank Loan 100,000 --
Total ` 3,40,000 1,90,000 Total ` 3,40,000 1,90,000
Terms of amalgamation:
A. In case of A & Co.
1. Goodwill was valued at ` 25,000.
2. A & Co. should pay its bank loan.
3. Building was taken to be worth ` 2,50,000
4. Stock to be valued at ` 55,000.
5. Provision for doubtful debts to be created at 4% on debtors.
204
B. In case of C & CO.

1. Goodwill was valued at ` 30,000.
2. Investments were not taken over by the firm.
3. Stock was valued at ` 45,000.
4. Provision for doubtful debts to be created at 5% on
debtors.
C. It was further decided that the total capital of the new firms
shall be ` 2,00,000 and the capital of each shall be in profit
sharing partner shall be in profit sharing ratio i.e. ` 3:2:3:2. the
difference to be transferred to the current accounts.
3. P & K were in partnership as PK & CO., S and T were in

partnership as ST & CO. They decided to amalgamate on 1st
April, 2014 into the firm, PK & CO. The profit sharing ratio was
as under:
P : K C S : T
Old Firm 4 : 1 : 3 : 2
New Firm 6 : 5 : 4 : 3
Liabilities PK & CO ST & CO Assets PK & CO ST & CO

` ` ` `
Capital : P 30,000 - Property 15,000 20,000
K 22,000 - Fixtures 3,500 2,500
S 25,000 Vehicles 16,500 4,000
T 15,200 Investment 2,000 15,000
Sundry Creditors 11,000 12,000 Debtors 12,000
Bank Overdraft 2,000 Bank bal. 7,200 12,700
Profit & loss 6,800
a/c
63,000 54,200 63,000 54,200
Terms of amalgamation were :

A] Provision for doubtful debts at 5% to be made on debtors and
provision for discount on creditors @ 2% on creditors is to made.
B] New firm to take over assets of old firms at the following values :
Assets PK & CO ` ST & CO `

Stock 17,000 12,000
Vehicles 20,000 2,500
Fixtures 1,000 ---
Property 20,000 ---
Goodwill 30,000 12,000
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C] Property and fixtures of PK & CO. not to taken over by PK &

CO. These assets were sold for ` 35,000 cash on 1st April 2014.
D] Kis to take over his firm’s investment at ` 2,500/-
E] The capital of PK & CO. to be ` 100,000 and to be contributed

by the partners in profit sharing Ratio, any adjustment to be
made in cash.
Close the books of old firms, and prepare Balance Sheet of the
New Firm.
4. The Balance Sheet of the two firms as on 31st December, 2013

were as follows:
Liabilities P&Q R&S Assets P&Q R&S

` ` ` `
Creditors 10,000 5,000 Cash 2,700 1,500
Outstanding 1,000 500 Investments 3,300 -
Expenses
Loan - 10,000 Debtors 8,000 6,000
Reserve 4,000 2,000 Stock 30,000 24,000
Capital A/c Furniture 6,000 4,000
P 30,000 - Machinery 20,000 22,000
Q 25,000 -
R - 24,000
S - 16,000
70,000 57,500 70,000 57,500
Partner’s in both the firms share profits and losses equally.
The two firms decided to amalgamate as from 1st January

2014 on the following terms and conditions.
a) Goodwill of P & Q was valued at ` 20,000 and that of R & S `
10,000.
b) The new firm would not take over the Investment of P & Q &
the Loan of R & S.
c) A provision for doubtful debts at 5% on Debtors of both the
firms and also a provision for discount at 2% on Creditors of
both the firms be made.
d) An unrecorded Typewriter with R & S. valued at ` 1,000 was
not taken over by the new firm.
206
e) Other assets valued as under:

Particulars P&Q` R&S`
Stock 36,000 29,000
Machinery 17,000 20,000
Your are required to.

i. Accounts to close the books of the old firms; and
ii. Opening Balance Sheet of the new firm. Hints:
Hints :
i. Investment not taken over by the new firm should be
transferred to Capital A/c’s in P.S.R
ii. Loan and R & S not taken over by the new firm should be
taken over by the Partner’s as the cash is not sufficient to play
it.
iii. Typewriter worth ` 1,000 not taken by the new firm. It may be
assumed that it is sold by the old firm.
5. The following were the balance sheets of the two firms as on

31st December, 2013.
Liabilities K&L M&N Assets K&L M&N

` ` ` `
Creditors 25,000 15,000 Bank Balance 21,000 5,000

Bills Payable 5,000 4,000 Investments 10,000 -
Bank Loan 4,000 3,000 Debtors 20,000 15,000
Ks Loan 1,000 - Less: 1,000 19,000
Prov.
Outstanding 2,000 1,000 Due from M & 4,000
N
Salary
Due to K & L 4,000 Stock 29,000 34,000
Employees 5,000 - Furniture 8,000 5,000
Provident
Fund
Investment 3,000 Machinery 20,000 18,000
Fluctuation
Fund
Capital A/c’s Patent Rights 6,000
207
K 50,000 Advertisement
L 30,000 Suspense 5,000

M 30,000 Goodwill 9,000
N 20,000
Current
Accounts
K 5,000
L 1,000
1,31,000 77,000 1,31,000 77,000
Partner’s in both firms share profits and losses equally.
The two firms decided to amalgamate as from 1st Jan 2014 on

the following terms
a) The new firm shall not take over the furniture of both the firms.
b) The new firm shall take over only the trade liabilities of both
the firms.
c) Goodwill of each firm was valued at two years purchase of the
average profits of the last three years. The profits were:
2011 2012 2013

K&L 7,000 8,000 9,000
M&N 2,000 4,000 6,000
d) Advertising Suspense to be written off by the concerned firm.

e) Current account to be eliminated.
f) Mutual dues between the two firms to be treated as book
adjustments.
g) Assets to be revealed as follows:
K&L M&N
` `
Debtors 18,000 13,000
Investments 9,000 -
Stock 40,000 40,000
Machinery 18,000 16,000
Patent Rights 4,000 -
h) The cash required for working of the new firm was estimated
at ` 60,000 to be provided by the Partner’s in their new profit-
sharing proportions which was : K 310 , L 310 , M 2 10 , N 2 10
208
Pass:
i. Closing Entries in the books of old firms; and
ii. Opening entries and Balance Sheet of the new firm.
Hints:
i. Goodwill = Av. Profit x 2
ii. Employee’s PF is a liability.
iii. Investment Fluctuation Fund is a provision against loss on
investment. After adjustment of loss, it should be shared by
the Partner’s.
iv. Trade Liabilities are creditors & B.P only.
209
7
ACCOUNTING WITH THE USE OF
ACCOUNTING SOFTWARE
Unit Structure
7.0 Objectives
7.1 Inventory Accounting and Control Using Tally Erp9
7.2 Procedure Of Using Tally Erp9
7.3 Standard Vouchers Created in Tally Erp9 for Accounting of The
Inventory
7.4 Batch Wise Management In Tallyerp9
7.5 Summary
7.6 Exercise
7.0 OBJECTIVES
After studying the unit the students will be able to know the
importance of Accounting Software in making the accounting
procedure easy.
7.1 INVENTORY ACCOUNTING AND CONTROL

USING TALLY ERP9
Inventory is the total amount of goods TallyERP9-and/ or

materials contained in a store or factory at any given time. It is
possible to manage, track and optimise inventory using Tally ERP9.
Tally ERP9 Software enables businesses to efficiently manage and
track inventory. .Inventory accounting includes recording of stock
details like the purchase of stock, sale of stock, stock movement
between locations or godowns and providing information on stock
availability. Tally ERP9 makes it possible to integrate the inventory
and accounting systems so that the financial statements reflect the
closing stock value from the inventory system. Tally ERP9 is a
complete business software for accounting, finance, inventory,
sales, purchase, point of sales, manufacturing, costing, job costing,
210
payroll and branch management. Tally ERP9 has accounting with

inventory module for inventory management.
Some of the important features available in the inventory module

are-
 Multi-location stock control-To keep track of stock at single or

multiple locations
 Comprehensive recording of stock movements-All stock

movements are fully recorded.
 Management reports-Movement analysis report gives the

party-wise details of goods bought and sold and helps identify
good and bad business partners. Stock query is a single sheet
report that gives information on stocks at different locations as
well as total stock in hand.
 Aging stock analysis-The report helps identify the old stock

and take appropriate decision regarding its disposal.
 Batch-wise or lot-wise inventory with expiry- It is possible to

maintain batch-wise details and keep a track on the date of
manufacturing and the date of expiry
 Reorder levels- It is possible to specify the reorder levels and

minimum reorder quantity based on past consumption. This will
ensure better inventory management.
 Stock categories- Stock categories can be created and altered.
 Create multiple godowns – Creating multiple godowns help to

monitor the location-wise movement of stock.
 Multiple units of measure- Tally offers different units of

measure like no( number) kg( kilogram),m(metre), dozen to
record the quantity of stock
 Multiple stock valuation methods -Tally. ERP 9 shows the

effects of different stock valuation methods on the closing stock
value. A columnar display of different stock valuations can also
be viewed, and each stock item can be set up to have a
different stock valuation method. In some instances, a particular
method of valuation may be required, for example to assess the
replacement value or saleable value of stock. Tally. ERP 9
displays stocks in any or all the valuation methods dynamically
211
and simultaneously, without any complicated procedure. Some

of the stock valuation methods available in Tally are-At Zero
cost, Average cost, First-in-first-out, Last purchase cost, Last-in-
first-out annual, Last –in- first-out perpetual, Standard cost,
Monthly average cost, Market valuation method.
 Movement analysis-Movement analysis shows the analysis of

only those inventory transactions which are integrated with the
accounts, i.e. inventories which are also recorded in the books
of accounts. This is used for comparative studies and to give an
insight into the flow characteristics of stock in an organisation.
 Price lists-Price lists are useful for orders and invoices. Price
lists are available only for inventory items and hence the feature
is available only if inventory and invoicing are activated for the
company. Tally ERP9 also helps to have more than one price
list for different groups of customers.
 Sales and purchase order processing-The delivery of the

goods to customer can be tracked either in the delivery note or
in the sales invoice. Similarly, receipt of goods from supplier is
tracked for the order details from the receipt note or purchase
invoice.
 Bill of Materials: A Bill of Materials is a list of constituent items

along with quantity details that can be allotted for the
manufacture of a certain product, by-product or equivalent. This
facilitates the automatic reduction in stock of the item. This
process of listing the items that make up another item is made
possible in Tally by enabling the Bill of Materials facility. Bill of
Materials (BOM) is created only for those items that are
assembled in-house. Therefore, it needs to be specified at the
time of creating a Stock Item or when altering its master.
7.2 PROCEDURE OF USING TALLY ERP9
Using Tally-Tally ERP9 is user- friendly software. Create a

company selecting accounts with inventory option. Select the
inventory info. Inventory info menu comprises of four types of
Masters-
 Stock group
 Stock items
 Units of Measure
 Voucher Types.
212
To enable cost centre and cost category for a company

Go to Gateway of Tally------ F11 Features------ F1
Accounting features-----Maintain Cost centre? Set Yes--------
More than one payroll or cost category? Set Yes
A cost centre is any unit of an organisation to which
transactions can be allocated. When only costs or expenses are
allocated to these units, they are referred to as cost centres.
 Create cost centre
Gateway of Tally------accounts info------cost centre------single------

create
Cost categories allows allocation of a transaction to several sets

of cost centres across the organisation
 Create cost category
Gateway of Tally----accounts info-----cost category-------single---

--The cost category or cost centre can be displayed, altered and
deleted. The cost category or cost centre can be created in
multiple mode and altered.
 Create stock groups
Gateway of Tally----Inventory info-----stock categories-----

single----create
 Create stock categories
Gateway of Tally----Inventory info-----stock categories -----

single-----create
 Create stock item
Gateway of Tally-----Inventory info----stock categories-----single-

----create
 Create Godown
Gateway of Tally-----Inventory info----Godown-----single----

create
 Creating unit of Measure
Gateway of Tally-----Inventory info----units of measure---- create

213
The unit of measure once created can be altered.
Accounting vouchers will update only accounts but inventory

vouchers will update both accounts and inventory. Inventory
vouchers record the receipt and issue of goods / stock (movement
of goods) and the transfer of stock between locations and physical
stock adjustments.
7.3 STANDARD VOUCHERS CREATED IN TALLY

ERP9 FOR ACCOUNTINF OF THE INVENTORY
Tally ERP9 is preprogrammed with a variety of inventory vouchers,

each designed to perform a different job.
Types of inventory vouchers-
1. Receipt note voucher-(F9 Rcpt Note): Receipt note voucher is

used to record receipts of new stock in case the bill is not
received.
2. Rejections in voucher-(F6 Rej In): Rejections in voucher is

used to keep a record of the goods returned by a customer
3. Delivery note voucher-( F8 Dely Note): Delivery note voucher

is used to record the delivery of goods to customers
4. Rejections out voucher-(F6 Rej Out): Rejections out voucher

is used to record return of rejected goods to supplier.
5. Stock journal voucher- (F7 Stk Jrnl): Stock journal voucher is

used to record the transfer of stock from one location to another
without affecting the books of accounts
6. Physical stock voucher-(F10 Phys Stk): Physical stock

voucher records the physical stock or stock in hand.
7. Manufacturing journal voucher – If a company is involved in

manufacturing process, in which raw materials are consumed
and finished goods are produced then manufacturing journal
voucher is to be created.
8. Purchase orders- For placing order to the vendor for purchase

of materials.
9. Sales order-for accepting orders from customers for sales

214
7.4 BATCH WISE MANAGEMENT IN TALLYERP9
It is necessary to maintain batch wise details and to keep a

track of the date of manufacture and the expiry dates. This is
necessary in case of perishables, food items and medicines.
To activate batchwise details in TallyERP9-
1. Enabling maintain batchwise details and set expiry date for
batches in F11 inventory features
2. Enable the following options related to batches in the stock
item master to Yes
 Maintain in batches
 Track date of manufacture
 Use Expiry date.
Batch vouchers and Batch summary reports-
It is a list of all vouchers for a particular stock item of the

same batch for the given period. The report comprises of both
inward and outward transactions along with quantity, rate and
closing value details for the selected batches.
The configuration in batch vouchers report is as follows:
 Show narration also- By default this option will be set to No

 Select vouchers to show- By default all vouchers will be
displayed for the batches selected
 Show quantities- By default this option will be set to Yes
 Show rates- By default this option will be set to No
 Show values- By default this option will be set to Yes
 Show goods inwards- By default this option will be set to Yes
and will show details like quantity, rate and value of inwards
 Show goods outwards- By default this option will be set to
Yes and will show details like quantity, rate and value of
outwards
 Show closing balance- By default this option will be set to
Yes and will show details like quantity, rate and value of
closing stock.
 Show using alternate units-By default this option will be set
to No
215
 Show tail units of compound units- By default this option

will be set to No.
 Use default valuation for closing values- By default this
option will be set to Yes.
 Show consumption and gross profit for outwards- By
default this option will be set to No.
 Sorting method- This will help the user sort the report
alphabetical wise.
7.5 SUMMARY
Tally ERP9 is a complete solution for problem of inventory

management. The software is user friendly and has a host of
features which makes inventory accounting simple, flexible and
accurate.
7.6 EXERCISE
A. Fill in the blanks

1. Stock group, Stock items, Units of Measure and Voucher Types
these four types of Masters arre comprised in -----------------------.
2. to record receipts of new stock in case the bill is not received----
voucher is used.
3. Delivery note voucher is used to record the --------------------------.
4. ----------------- voucher is used to record return of rejected goods
to supplier.
5. To record the transfer of stock from one location to another
without affecting the books of accounts -----------------------
voucher is used.
6. ------------- Voucher records the physical stock or stock in hand.
7. If a company is involved in manufacturing process then -----------
---------- voucher is to be created.
8. For placing order to the vendor for purchase of materials----------
----------voucher is used.
9. Sales order voucher is used for------------------------.

216
8
FIRE INSURANCE CLAIMS
Unit Structure
8.0 Objectives
8.1 Introduction
8.2 A Claim for loss of stock
8.3 Important points related to Memorandum Trading Account
8.4 Illustrations
8.5 Exercise
8.0 OBJECTIVE:
After studying the unit the students will be able:
• To introduce the topic
• To know about the term fire insurance claim
• To understand the meaning of Average Clause
• To make ready for calculating the claim amount
• To illustrate the practical problems
8.1 INTRODUCTION:
A business concern has always to face a danger of heavy
loss due to fire It is so great that if it occurs it destroys partly or
wholly the business assets as well as paralyses its day-to-day
actives. Besides it becomes very difficult for the business to replace
the lost assets due to the limited working capital. Therefore as a
safety measure a prudent businessman covers his risks by insuring
his business against loss by fire.
Losses due to fire are of two types:
• Loss of assets and
• Loss of profit
Loss of assets affects so badly on business activities which
ultimately affects profits of the business. Therefore the business
concerns take a fire insurance policy in respect of,
• Loss of stock only,
• Loss of profit only, OR
• A comprehensive or Package Policy which covers loss of all
the items i.e. stock, other assets, profit, expenses etc.
217
8.2 A CLAIM FOR LOSS OF STOCK :
For making the claim for loss of sock it is necessary to

calculate the value of stock on the date of fire. In case if there is
perpetual inventory system it is possible to get record of stock
during the year and it becomes possible to decide the value of
stock lost if fire occurs during the year as under.
Opening Stock of the year ***

Add : Purchases made up to the date of fire ***
Total stock on the date of fire
Less : Cost of goods sold up to the date of fire ***
Stock on the date of fire
Less : Stock Salvaged
Loss of stock due to fire ***
Instead of making the statement one can prepare the

Trading Account up to the date of fire.
But generally yearly stock taking system has been adopted

by various concerns. At the end of the year the stock on hand of
various items is actually counted, valued and recorded therefore it
is impossible to know about the real value of stock during the year if
fire occurs during the year. Therefore, the value of stock on the
date of fire is required to be estimate.
For calculating the estimated value of stock it is presumed

that the percentage of gross profit on sales generally remains
constant every year, unless there are some special reasons to
disturb this percentage. In this case the calculate the amount of
claim as under:
• Calculate the Gross Profit for the last year: If the Gross
Profit for the last year has not been given prepare the Trading
Account for the last year to calculate the G/P. If the information
is available for number of past years prepare the Trading
Account in the columnar form for all the years.
• Percentage of Gross Profit: Calculate the percentage of G/P

to Sales. If the Gross Profit for number of past years is
available then calculate the percentage of G/P to Sale for each
year and then calculate the average percentage. If there is
continuous fall in the percentage then instead of taking the
average percentage, it is the general practice to take the
estimated reduced percentage for the year of fire. However it is
not hard and fast rule, in such cases also, average percentage
can be taken. This percentage is the base for determining the
Gross Profit for the year in which the fire occurs. The formula is
as under:
218
Percentage of G/P = Gross Profit X 100

Sales
• Memorandum Trading Account : This account is prepared

from the opening date of the financial year to the date of fire to
trace out the value of stock on the date of fire. Here the Gross
Profit is calculated taking the above calculated percentage as
base for e.g. suppose the percentage of G/P to Sale is 25%
(calculated as above) and Sales up to the date of fire are Rs.
25,000 then it is assumed that the G/P for the year of fire will
be 25% of Rs. 25000 i.e. Rs. 6,250. The proforma of
Memorandum Trading Accounting is as under :
Memorandum Trading Account

Dr.. Up to the date of fire Cr.
To Stock By Sales
To Purchases By Stock on the date
To Gross Profit (on of fire(Balancing figure)
the basis of the
Gross Profit Ratio)
8.3 IMPORTANT POINTS RELATED TO

MEMORANDUM TRADING ACCOUNT :
• The Gross Profit figure is estimated on the basis of the Gross

Profit Ratio which is already calculated or if given in the
problem.
Gross Profit Ratio = G.P/ Sales * 100 . It is always calculated on
sales. If the rate of profit on cost is given in the problem then it is
necessary to convert the rate of profit on cost into the rate of profit
on sales. For e.g. suppose it is stated that Gross Profit is 25% on
cost it
• Means Gross Profit on sales is 20% ( cost +profit =sales. If cost
is Rs. 100 and profits are Rs. 25 i.e sales are Rs 125. Therefore
ratio of Gross Profit to Sales is 100 * 25 / 125 = 20% )
• Normal rate of Gross Profit : To ascertain the normal rate of

Gross Profit it is necessary to ignore the abnormal items in the
last years Trading Account. Generally the items are as follow:
1) Valuation of stock : If the stock figures given in the

problem are not at cost price if they are below or above the
cost , it is necessary to convert them to cost price before
ascertaining the percentage of Gross Profit. For e.g. It is the
practice of the company to value stocks at 10% above cost.
219
The value of opening stock is Rs. 30,800 and of closing

stock is Rs. 44,000 here the cost price of stock is calculated
as under :
Value of opening stock-

It means the stock of Rs 100 is valued at Rs. 110 as per the
practice (as the valuation is 10% above cost). Therefore
The value of Opening stock = 30,800 * 100 /110 = 28000
The value of Closing stock = 44,000 * 100 /110 = 40,000
2) Goods of irregular line, or slow moving or abnormal items:

These are the items generally disposed of at a loss and
there is wide fluctuation in the rate of loss or profit of these
items. If these goods are included in the stocks, purchases
and sales the percentage of Gross Profit affects
considerably. Hence the value of such goods included in
various items must be deducted from the respective items to
get the value of regular line. The Trading Account should be
prepared having two amount columns on each side on e for
normal items and another for abnormal items.
• Loss of stock due to fire : If there is no ‘Average Clause’ in the
policy then it is calculated as under :
Stock on the date of fire ***
Less: Stock Salvaged ***
Loss of stock due to fire ***
• Stock Salvaged: It means stock saved from fire. It is to be

deducted from stock on the date of fire.
• Average Clause: There is a tendency in some businessmen to

under-insurance of stock in order to save some amount of
premium. Under-insurance means taking insurance for a lesser
value than actual. This policy is resorted to because the insured
knows from the experience that there will not be total loss when
fire occurs therefore even there is under-insurance the
businessman can recover his loss.
For example suppose stock of Rs.2, 00,000 may be insured say
for Rs. 1, 50,000. So if fire occurs and the actual loss is
Rs. 1, 30,000 the insured can recover the amount of loss if there
is no ‘average clause’ in the policy.
To discourage such tendency of under-insurance and prevent
the misuse of insurance there is an ‘Average Clause’ included in
the policy.
The effect of this clause is that the insured does not
get the full amount of loss, even though the policy amount is
more than the loss. The insured gets only proportionate amount
of loss. The base of this principle is that in case of under-
220
insurance the owner of the property himself acts as an insurer to

the extent the property has not been insured with the insurance
company. In the above example insured is self responsible for
the amount of the stock
Rs. 50,000(Rs. 2, 00,000 – Rs. 1, 50,000) as he has under-
insured the stock. The formula for calculating the amount of
claim if there is Average Clause:
Amount of claim = Sum Insured (amount of claim) X Actual loss

CHECK YOUR PROGRESS :
1) The cost of the stock on the date of fire is Rs.35,000. Goods

Rs. 1,000 had been purchased but had remained unrecorded.
The value of goods salvaged from the premises was Rs.
3,000.Compute the mount of loss.
2) The stock on the date of fire is Rs. 18,000. The stock salvaged
is worth Rs. 1,200. The sum insured is Rs. 15,000. There is the
average clause in the policy. Calculate the amount of claim.
3) It is the practice of the company that the stocks are away

valued at 90% of the cost. Suppose the value of the opening is
Rs 30,600 and the value of closing stock is 27,000 determine
the cost of the stocks
221
8.4 ILLUSTRATIONS :
A fire occurred in the business premises of M/S Black on 15th

October ,2008. From the following particulars ascertain the loss of
stock and prepare a claim for insurance.
Particulars Rs.
Stock on 1-1-2007 30,600
Purchases from 1-1-2007 to 31-12-2007 1,22,000
Sales from 1-1-2007 to 31-12-2007 1,80,000
Stock on 31-12-2007 27,000
Sales from 1-1-2008 to 14-10-08 1,50,000
The stocks were always valued at 90% of cost. The stock

saved was worth Rs. 18,000. The amount of the policy was Rs.
63,000. There was an average clause in the policy.
Solution:
Trading Account
Dr. For the year ending 31-12-07 Cr.
To Stock( W.N.1) 34,000 By Sales 1,80,000
To Purchases 1,22,000 By Stock (W.N. 2) 30,000
To Gross Profit 54,000
2,10,000 2,10,000
Ratio of Gross Profit to Sales = Gross Profit /Sales *100

= 54,000 /1, 80,000 *100
= 30%

Dr. Up to 15-10-08 Cr.
To Stock 30,000 By Sales 1,50,000
To Purchases 1,47,000 By Stock on the date of 72,000
To Gross Profit (on 45,000 fire(Balancing figure)
the basis of the Gross
Profit Ratio)
2,22,000 2,22,000
222
Calculation of Loss of Stock:
Stock on the date of fire 72,000

Less: Stock Salvaged 18,000
Loss of stock due to fire 54,000
As there is an Average Clause in the policy :

= 63,000 X 54,000
72,000
= Rs. 47,250
Working Notes:
As the stocks are valued at 90% of the cost it means:

1. The cost of Opening Stock is
30,600 * 100 /90 = Rs. 34,000
2. The cost of Closing Stock is

27,000 * 100 / 90 = Rs.30,000
Illustration 2
A fire occurred in the business premises of Bonfire
Enterprises on 30th September, 2002. They close their books on
30th June every year. Following information could be gathered from
their books:
Particulars Rs.
Stock on 30th June 2002 3,60,000

Sales from 1-7-2002 to 30-9-2002 10,00,000
Wages 1-7-2002 to 30-9-2002 2,30,000
Carriage inward for the above period 10,000
Carriage outward for the above period 15,000
Average percentage of G.P. to cost is 33 1/3. Stock of the value of

Rs. 75,000 could be salvaged. Policy was for Rs.2, 50,000. Claim
was subject to average clause.
Following further information is available:

1. Stock in the beginning was calculated at 10% less than cost.
2. Purchases include purchase of furniture Rs. 25,000.
223
3. Amount spent for bringing and setting up the furniture in the

office was Rs. 5,000 which was include in Carriage inward.
You are required to calculate the amount of claim.
(Adapted I.D.E.)
Solution :
Dr. Up to 30th September 2002. Cr.
To Stock (W.N.1) 4,00,000 By Sales 10,00,000
To Purchases 5,75,000 By Stock on the date 4,60,000
(W.N.2) 2,30,000 of fire(Balancing
To Wages 5,000 figure)
To Carriage inward
(W.N.3) 2,50,000
To Gross Profit
(33 1/3 on cost it
means 1/4 on Sales
i.e.1/4 on
10,00,000.) 14,60,000 14,60,000
Calculation of Loss of Stock :

Stock on the date of fire 4,60,000
Loss of stock due to fire 3,85,000
As there is an Average Clause in the policy :

= 2, 50,000 X 3, 85,000
4, 60,000
= Rs. 2, 09,239
Working Notes:
1. The cost of Opening Stock is
360,000 * 100 /90 = Rs. 4,00,000.
2. Purchase of furniture was included in Purchases therefore
Purchases = 6, 00,000 – 25,000 (purchases of furniture)
= 5, 75,000
3. Amount of carriage inward have included the amount for
bringing and setting up the furniture therefore
Carriage Inward = 10,000 – 5,000 =5,000
224
4. Carriage Outward is not to be recorded in the Trading

Account. It is debited to the Profit and Loss Account.
Illustration 3
A fire occurs in the godown of M/s. Blackday Enterprises on
th
20 July, 2008. Goods saved were Rs. 32,000. The proprietor
informs you that the Stock Insurance Policy is in force for
Rs. 1, 00,000.There is an Average Clause in the policy. Most of the
books of accounts were destroyed in the fire. He wants your help in
computing the claim for Loss of Stock due to fire. He informs that
Gross Profit ratio is evenly maintained and submits the following
information:
Particulars Rs. On 01-01-2007 Rs. On 01-01-2008 Rs. On 20-07-2008

Debtors 68,000 74,500 81,500
Creditors 81,500 78,500 92,000
Stock 84,000 98,000 ?
Transaction during the period 01/01/2007 to 01/01/2008 to

31/12/2007 20/07/2008
Amount Received from Debtors 1,41,000 1,13,000
Discount allowed to Debtors 540 450
Amount paid to Creditors 1,16,500 81,500
Discount Received from Suppliers 1,150 650
Cash Sales 1,960 1,050
Cash Purchases 1,600 800
Wages 17,500 9,500
Manufacturing Expenses 15,250 12,000
In the books of M/s. Black day Enterprises

Trading Account A/c
Dr. For the year ending 31-12-07 Cr.
To Stock 84,000 By Sales
To Purchases Cash 1,960
Cash 1,600 Credit(W.N.1) 1,48,040
Credit(W.N.2) 1,14,650 By Stock 98,000
To Wages 17,500
To Manufacturing Exp. 15,250
To Gross Profit 15,000
2,48,000 2,48,000
Ratio of Gross Profit to Sales = Gross Profit /Sales *100

= 15,000/ 1, 50,000*100
= 10%
225

Dr. Up to 20-07-08 Cr.
To Stock 98,000 By Sales
To Purchases Cash 1,050
Cash 800 Credit(W.N.3) 1,20,450
Credit(W.N.4) 95,650 By Stock on the date of
To Wages 9,500 fire(Balancing figure) 1,06,600
To Manufacturing Exp. 12,000
To Gross Profit (on 12,150
the basis of the Gross
Profit Ratio10%on
Total Sales)
2,28,100 2,28,100
Working Notes:
1) Dr. Sundry Debtors A/c (2007) Cr.

To Balance b/d 68,000 By Cash/Bank 1,41,000
To Credit Sales 1,48,040 By Discount Allowed 540
(Balancing Figure) By Balance c/d 74,500
2,16,040 2,16,040
2) Dr. Sundry Creditors A/c(2007) Cr.

To Cash/Bank 1,16,500 By Balance b/d 81,500
To Discount Received 1,150 By Credit Purchases 1,14,650
To Balance c/d 78,500 (Balancing figure)
2,48,000 2,48,000
3) Dr. Sundry Debtors A/c (2008) Cr.

To Balance b/d 74,500 By Cash/Bank 1,13,000
To Credit Sales 1,20,450 By Discount Allowed 450
(Balancing Figure) By Balance c/d 81,500
1,94,950 1,94,950
4) Dr. Sundry Creditors A/c(2008) Cr.

To Cash/Bank 81,500 By Balance b/d 78,500
To Discount Received 650 By Credit Purchases 95,650
To Balance c/d 92,000 (Balancing figure)
1,74,150 1,74,150
226
Calculation of Loss of Stock:

Stock on the date of fire 1,06,600
Loss of stock due to fire 74,600
There is an Average Clause in the policy. Stock on the date of fire

was Rs. 1, 06,600 and Insurance Policy is of Rs. 1, 00,000:
Amount of Insurance Claim = Sum Insured (amount of claim) X Actual loss

=1,00,000/1,06,600*74,600
=Rs.69,981
Illustration 4
On 15th September, 2006 the premises of Lecmic Ltd. were

destroyed by fire and stock of Rs.1,500 was Salvaged and retained
by the insured. The business books and records were saved from
which the following information was obtained.
Particulars Rs.
Stock on 1st Jan. 2005 12,500
Stock on 31st Dec 2005 17,500
Purchases for the year ended 31-12-05 1, 18,500
Sales for the year ended 31-12-05 1, 50,000
Purchases from 1st Jan. 2006 to 15th Sept. 2006 37,500
Sales for the above period 51,250
In valuing the stock as on 31st Dec. 2005 Rs.1,000 had been written
off, certain stock having cost of Rs.2,250.
Half of these goods were sold in July, 2006 for Rs.1,250. The
balance is estimated to be worth the original cost. Subject to the
above exception, gross profit had remained at the uniform rate.
On 14th Sept. 2006, goods worth Rs.1,000 had been received by
the godown keeper but had not been entered in Purchase A/c.
Show the amount of claim. (P.U. April, 1995)
Solution:
Trading Account
For the year ended 31st Dec., 2005
Dr. Cr.
To Stock 12,500 By Sales 1,50,000
To Purchases 1,18,500 By Stock 17,500
To G.P. (@25% on 37,500 Add : Amount
Sales) Written off 1,000 18,500
1,68,500 1,68,500
227
Estimated Trading Account

For 1-1-2006 to 15-9-2006
Dr. Cr.
To Stock 17,500 By Sales 51,250
To Purchases 37,500 Less :Sale of
To G.P. (@25% on Goods of
Sales) 12,500 Irregular Line 1,250 50,000
By Stock 17,500
67,500 67,500
Claim for Loss of Stock

Estimated Stock of Regular Line = 17,500
Stock of Goods of Irregular Line = 1,125
18,625
Add: Goods Purchased but not Recorded 1,000
Claim for Loss of Stock 19,625
8.5 EXERCISE:
Illustration 1 :
On 1st April, 2007 there was a fire in the godown of ABC

Manufacturing Ltd., which completely destroyed the stock and also
other books and records. However, they are able to obtain the
following information from their Income-Tax and Sales Tax
Consultants:
Rs.
Sales : For the year to 31-12-2006 8,00,000
For January and February 2007 80,000
Purchases : For the year to 31-12-2006 3,65,000
For January and February 2007 24,000
Stocks (At cost)
As at 01-01-2006 1,00,000
As at 31-12-2006 45,000
Wages for the year ending to 31-12-2006 1,08,000
Other direct expenses for the year to 31-12-2003 72,000
Further Information :
1) The Sales and Purchases for March 2007 may be assumed
as having been made at the same rate as in past two
months.
228
2) In January 2007 a theft had taken place as a result of which

goods of the value of Rs.6, 000 were lost.
3) Wages and other direct expenses may be taken after 31-12-

2006 at the same rate as in the year 2006.
4) Insurance policy was taken for Rs.22, 500. There was an

average clause in the policy.
You are required to prepare a statement showing the claim to

be lodged with the Insurance Company, taking the value of
Salvage at Rs.5, 000. All workings should form part of your
answer.
[Ans: Insurance Claim – Rs.18,929]
Illustration 2 :
A fire occurred in the godown of Maruti Ltd. on 31st March,

1998 destroying the major portion of the stock. The following
particulars were, however, available.
Particulars Rs.
Stock on 1st Jan. 1997 31,400
Stock on 31st Dec. 1997 35,600
Sales for the year 1997 1, 00,500
st st
Sales from 1 Jan 1998 to 31 March 1998 40,250
Purchases for the year 1997 80,000
Purchases from 1st Jan 1998 to 31st March 1998 12,600
Included in the Stock of 31st Dec. 1996 were some shop-

soiled goods which originally cost Rs.2,000 but were valued at
Rs.1,400. Half of this Stock was sold for Rs.500 in the year 1997
and the remaining stock was valued at Rs.600 on 31st Dec. 1997.
Half of this was sold for Rs.250 in March, 1998. The unsold portion
was considered to be worth 80% of its original cost. Subject to this
the rate of gross profit was uniform.
The sum insured was Rs.15,000 and there was an average

clause in the policy. The stock salvaged was worth Rs.1,200.
Find out the amount of claim to be lodged with the Insurance

Company, for loss of stock. (S. U. Oct., 2000)
(Ans.: G/P Rs.25,000, Stock on the date of Fire Rs.17,600, Amount of Claim
Rs.14,000)
229
Illustration 3 :
A fire occurred in the premises of Bhaskar on 31st August

2008 and stock of the value of Rs.1,01,000 was salvaged.
However, books and records were saved. The following information
was available.
Rs.
Purchases for the year ended 31-3-2008 6, 80,000
Sales for the year ended 31-03-2008 11, 00,000
Purchases from 01-04-2008 to 31-08-2008 2, 50,000
Sales from 01-04-2008 to 31-08-2008 3, 60,000
Stock on 31-3-2008 3, 00,000
Stock on 31-3-2008 3, 40,000
Further Information is given
1) The Stock on 31-03-2008 was overvalued by Rs.20,000.

2) The Sales and Purchases for the year ended 31-03-2008
were spread evenly during the year.
3) From April, 2008, selling price was lowered by 10%.
4) The stock was insured for Rs.3, 00,000 and there was
Average Clause in the policy.
Calculate the amount of the claim.
[Ans : Insurance Claim – Rs.2,08,182]
Illustration 4:
A Fire broke out in the premises of Megha Company on 1st July,

1995 and stock of the value of Rs.1,57,500 was salvaged and the
books and records were saved.
The Following information was obtained :

Rs.
Stock on 31st March, 1994 4,20,000
Stock on 31st March, 1995 4,20,000
Sales from 1st April to 30th June 1995 5,10,000
Purchases from 1st April to 30th June 1995 3,15,000
Sales for the year ended 31st March, 1995 15,00,000
Purchases for the year ended 31st March, 1995 9,00,000
Calculate the amount of claim to be submitted to the Insurance

Company in respect of Loss of stock. (P.U. April, 1997)
(Ans.: G/P Rs.6,00,000, Stock on the date of fire Rs.4,29,000,Claim Amount

Rs.2,71,500.)
230
Illustration 5:
A fire Occurred in the factory of M/s Badmanners on 1 st
November 2007 and destroyed the stock of goods in their godown.
The following figures are available.
Rs.
Opening Stock on 01-01-2006 31,570
Sales during the year of 2006 3,50,000
Purchase during the year of 2006 1,83,200
Sales from 1-1-2007 to 01-11-2003 2,69,350
Closing Stock on 31-12-2006 40,590
Other details are as follows:
a) A theft took place in September 2007 and goods of sale
value of Rs.19,040 were stolen and lost but were not
recorded in the books.
b) Goods costing Rs.5,205 were given away as free samples
but no entries were passed.
c) The goods saved from fire were subsequently sold by the
firm of Rs.17, 600 at a loss of Rs.1, 200.
d) The gross profit remained constant throughout.
e) The stock of goods was insured by the firm for Rs.38, 100
and there was an average clause in the policy.
f) The firm, as a practice, valued the stock of goods at 10%
above cost.
Calculate the amount of claim.
[Ans : Insurance Claim – Rs.24,900]
Illustration 6 :
The premises of M/s. Thin and Company were destroyed by

fire on 1st September 2004 and some stock was found badly
damaged. The accounts of the firm are closed on 31st December
each year. On 31st December 2003, stock was valued at cost
Rs.26,544 against Rs.19,228 as at 31st December 2002.
Purchases and sales were as follow:
Particulars Rs.
Purchases for the year 2003 90,516
Sales for the year 2003 1, 04,000
Purchases from 01/01/2004 to 01/09/2004 69,654
Sales from 01/01/2004 to 01/09/2004 98,340
231
In addition to the above following additional information is collected:

i) Sometime in May 2004 goods costing Rs.10,000 were
distributed as part of advertisement campaign in support
whereof no entry appears to have been passed in the books.
ii) During 2004, cash sales of Rs.1,190 were misappropriated and
these were not recorded in the books.
Ascertain the estimated value of Stock on the date of the
assuming that the rate of gross profit has been constant.
[Ans : Amount of Claim Rs.6,574]
Illustration 7 :
The premises of M/s Weakend were destroyed by fire on

30-06-2008. Following figures were collected from available
sources. Prepare statement of claim, showing the amount of claim.
The firm closes its books on 31st December every year.
Details 2005 2006 2007 2008

Rs. Rs. Rs. Rs.
30/06/08
Opening Stock 20,000 22,000 11,800 34,020
Sales 2,22,000 2,02,500 1,93,500 28,000
Purchases 1,60,000 1,45,000 1,70,000 35,000
Freight Outward 6,000 7,000 3,000 2,500
Freight Inward 5,000 3,000 5,000 1,000
Return Inward 22,000 4,000 6,000 2,000
Closing Stock 22,000 11,800 34,020 ?
Further Information:
1) In 2005, while valuing closing stock, a slow moving item
costing Rs.5,000 was valued at Rs.4,000 and this was sold
in 2006, for Rs.4,500.
2) In 2006, while valuing closing stock, an item costing
Rs.6,000 was wrongly valued at Rs.7,000 and was sold in
2007 for Rs.5,500.
3) In 2007 while valuing closing stock, goods costing Rs.12,000
were valued at Rs.10,000. 50% of these goods were sold
before 30-06-2008 for Rs.6,000.
4) The goods salvaged were Rs.10, 000.
232
Illustration 8:
On 21st June, 2004 the premises of X Ltd. were destroyed by fire

but sufficient records were saved from which the following
particulars were ascertained.
Rs.
Stock at cost on 1-1-2003 73,500
Stock at cost on 31-12-2003 79,600
Purchases during the year 2003 3,98,000
Sales during the year 2003 4,87,000
Sales from 1-1-2004 to 21-6-2004 2,31,200
In valuing the stock for the Balance Sheet at 31 st December

2003 Rs.2,300 had been written off from certain stock which was a
poor selling line, having cost Rs.6,900. A portion of these goods
was sold in April 2004 at a loss of Rs.250 on the original cost of
Rs.3,450. The remainder of this stock now estimated to be worth
the original cost. Subject to above exception, gross profit had
remained at a uniform rate throughout.
The stock salvaged was Rs.5,800.
Show the amount of claim.
Illustration 9:
A fire occurred in the godown of X Ltd. on 9th March, 2004,

destroying the entire Stock. The books and records were salvaged
from salvaged from which the following particulars were
ascertained :
Rs.
Sales for the year, 2003 10,01,000
Sales for the period 1-1-2004 to 8-3-2004 3,00,000
Purchases for the year, 2003 8,00,000
Purchases for the period 1-1-2004 to 8-3-2004 1,25,000
Stock on 1-1-2003 3,31,100
Stock on 31-12-2003 3,85,000
The company has been following the practice of valuing the

Stock of goods at actual cost plus 10%. Included in the Stock on 1-
1-2003 were some shop-soiled goods which originally cost
Rs.2,000, but were valued at Rs.1,100. These goods were sold
during the year 2003 for Rs.1000. Subject to these, the rate of
Gross Profit on the basis of valuation of Stock was uniform.
You are required to ascertain the value of the Stock destroyed.
[Ans : Rs.2,50,000]
233
Illustration 10:
On 31 st May, 2004, the premises and stock of a firm were

totally destroyed by fire. The books of accounts, however, were
saved. In order to make a claim on their fire policy, they asked your
advice and you are able to obtain the following information. The
stock on hand has always been valued at 5 per cent below cost.
Details 2001 2002 2003 2004

Rs. Rs. Rs. Rs.
Opening Stock as Valued 22,800 30,400 36,100 39,900
Purchases Less Returns 91,000 1,10,000 1,20,000 41,000
Sales Less Returns 1,40,000 1,70,000 1,86,000 75,000
Wages 28,400 31,200 34,200 12,000
Closing Stock 30,400 36,100 39,900 -
Prepare a statement for submission to the Insurance Company in

support of your claim for loss of stock.
(B.U.) (Ans : Claim Rs.35,000)
Illustration 11:
The premises of Mumbai Sports House caught fire on 1st April,

2004 and its stocks was damaged. The firm had made up accounts
to 31st May each year. The following information is available.
1st June, 2002 to 1st June, 2002 to

31st May, 2003 1st April, 2003
Rs. Rs.
Stock at commencement
conventionally valued at
10 per cent above cost 1,05,754 1,45,992
Purchases 4,52,580 3,48,270
Sales 5,20,000 4,91,700
In December, 2003 goods which can cost Rs.10,000 were given

away to Gymkhana Secretaries of various colleges for
advertisement purpose; no entry was made in the books. During
the same month salesman had misappropriated unrecorded cash
sales of Rs.4,000. The rate of gross profit is constant. From the
above, make an estimate of stock on hand on the date of fire.
(B.U.) (Ans : Stock Rs.74,430)

234
Illustration 12 :
There was a fire in the godown of M/s Fire Fighting
Equipments Ltd. on 1st July, 20 04. The entire stock was burnt with
an exception of some goods costing Rs.18,000. The following
information could be gathered from the records saved.
(a) The Company’s average gross profit arrived at in accordance

with its method of valuation of stocks was 25% on sales.
(b) The stock as on 31st December, 2003, valued at 10% above
cost as per the practice of the company, was Rs.55,000.
(c) The purchases and sales from 1st January, 2004 to the date of
fire were Rs.75,000 and Rs.1,70,000 respectively.
(d) The wages for that period amounted to Rs.36,000.
Prepare a Statement of fire Insurance claim.
(Ans : Claim Rs.17,000)
Illustration 13 :
B & Co. suffered loss of stock due to fire on May 16, 1999. From
the following information prepare a statement showing the claim to
be lodged.
Rs.
Stock on 1-1-98 38,400
Purchase during 1998 1,60,000
Sales during 1998 2,02,600
Closing Stock on 31-12-98 31,800
Purchases from 1-1 to 15-5-1999 54,000
Sales from 1-1 to 15-5-1999 61,400
An item of stock purchased in 1997 at a cost of Rs.10,000

was valued at Rs.6,000 on 31-12-97. Half of this stock was sold on
1998 for Rs.2,600, the remaining was valued at Rs.2,400 on 31-12-
97. One fourth of the original stock was sold in March, 1999 for
Rs.1,400 and the remaining stock was considered to be worth 60%
of the original cost. Salvage was Rs.12,000, the amount of the
Policy was Rs.30,000 and there was an Average clause in the
policy.
(S.U.) (Ans : Claim Rs.20,000)
Illustration 14 :
The factory Building of H. Ltd. caught fire on 22nd October,
1998 and the stock was damaged. The Company had made up
Accounts to 31st Dec. each year. On 31st Dec. 97 the stock at cost
was Rs.26,544 as against Rs.19,228 as on 31st Dec. 1996.
235
Purchases from January, 1996 to the date of fire were Rs.69,654

as against Rs.90,516 for the full year 1997 and corresponding
figures of Sales were Rs.98,340 and Rs.1,04,000 respectively. You
are given following further information.
(i) In April, 1996 goods which cost Rs.2, 000 were given away
for advertising purpose, no entries bring made in the books.
(ii) During 1996 a clerk had misappropriated unrecorded cash
sales. It is estimated that the defalcation averaged Rs.20
per week from 1st Jan. 1996 to 21st May, 1996 when the clerk
was dismissed.
(iii) The rate of Gross Profit is constant.
From the foregoing information prepare a statement of claim for

loss of stock on the date of fire.
(S.U.) (P.U.) (Ans : Claim 19,181)
Illustration 15 :
A fire occurred in the godown of Pratap & Co. on 31st Dec.
1990. Godown was situated behind their office premises. A
considerable part of the stock of readymade garments was
destroyed by fire, The salvaged stock realized Rs.1,520. The stock
and premises were fully insured against fire risks. Considering the
following particulars, prepare a statement showing the amount of
claim to be lodged by M/s Pratap & Co. with the New India General
Insurance Co. Ltd. for the loss of stock only.
Rs.
Purchases Less returns for the year ending
31-3-1990 1, 56,940
Sales Less returns for the year ending 31-3-1990 1, 96,000
Stock on 1-4-1990 68,480
Stock on 31-3-1990 58,820
Sales for the period ending 31-12-1990 1, 09,200
Trade creditors on 31-3-1990 24,608
Trade creditors on 31-12-1990 22,121
Amount paid to the creditors during the period ending
31-12-1990 88,016
Goods returned to the creditors during the period
ending 31-12-1990 6,390
(Note : Working shall be treated as part of your answer)
(S.U.) (Ans. : Claim Rs.56,390)
236
9
REDEMPTION OF PREFERENCE SHARES
PART I
Unit Structure
9.0 Objectives
9.1 Introduction
9.2 Legal provision
9.3 Sources of Redemption
9.4 Capital Redemption Reserve (C.R.R.)
9.5 Methods of Redemption
9.6 Accounting Procedure
9.7 Exercise
9.0 OBJECTIVES:
After studying this unit students will be able to:
• Know the Concept of Redemption and purpose of issuing

redeemable Preference Shares.
• Understand various provision of the Companies Act regarding
redemption of Preference Shares.
• Know the sources of redemption including divisible profits and
proceeds of fresh issue of shares
• Understand the concept of Premium on Redemption & Capital
Redemption Reserve.
• Know to prepare Capital Redemption Reserve Account and use.
• Know the Methods of redemption of Preference Shares and
understand the concept of
• Understand the Accounting procedure of redemption of
Preference Shares.
• Prepare the Balance Sheet (Revised Schedule VI) of the
Company after redemption of Preference Shares.
237
9.1 INTRODUCTION:
Any company can issue two types & shares-viz. Equity

Shares and Preference Shares. An Equity Share is defined as a
share which is not a Preference Share. Sec 85 of the Companies
Act, 1956 defines Preference Share Capital as that part of the
Share Capital of a Company, limited by shares, which carries a
preferential rights as to payment of fixed rate of dividend and
repayment of capital before any payment is made to the Equity
shareholders.
To redeem means to repay. Redemption is the process of

repaying an obligation as per predetermined terms and conditions.
All the Preference Shares issued after 15th June 1988 have to be
redeemable Preference Shares. The Preference Shares issued
prior to that date were required to be redeemed within Ten years
from the 15th June 1988.
At present, any Preference Share issued by any company is

required to be redeemable within maximum period of ten years
from date of issue.
The dividend at specified rate is payable only if the company

earn profits as Sec.205 of Companies Act. Thus dividend is not
payable in event of losses suffered by company. This class of
shares provide funds to the company period which it needs funds
and therefore repay the same.
9.2 LEGAL PROVISIONS:
9.2.1 PURPOSE OF ISSUING PREFERENCE SHARES:
A company may raise finance required for the medium term

project or additional capital required, by issue of redeemable
Preference Shares, at the option of the company.
The purpose of issue of Preference Shares is providing

funds in following situation.
(a) There is uncertainly of earning adequate profits for some period.
(b) To funds are required for specific period not more than ten
years.
9.2.2 LEGAL PROVISIONS:
Section 80 of “The companies Act, 1956” lays down the

Provisions relating to issue & redemption of preference shares.
Accordingly, A company limited by shares if so authorized by its
238
articles, may issue Preference Shares. However, the redemption

can be effect only if the following conditions are fulfilled.
1. Only full paid Preference shares can be redeemed.
Thus partly paid up OR partly called up shares cannot be

redeemed. In case shares which are partly called up; final call
should be made. After receiving final call money, the
preference shares are fully paid up, and then only Preference
Shares can be redeemed. If there are shares on which calls are
in arrears either call should be received or these shares must be
forfeited and then only the remaining shares can be redeemed.
2. The Preference shares can redeemed either out of
a) Proceeds of fresh issue of shares.

AND/OR
b) Divisible Profits.
3. In case redemption out of accumulated Divisible Profit, it is

necessary to transfer amount equal to face value of Preference
Share redeemed out of divisible profits to the Capital
Redemption Reserve Account.
4. If the shares are redeemable at a premium then the premium

on redemption must be provided for either out of the profits
of the company or its Securities Premium Account.
5. The redemption may be in full or in parts as per terms of

issue. The redemption may be
1. Payment by cheque
2. Conversion into Equity or Preference Share
3. Conversion into Debentures.
After the amendment of the Companies Act in 1988, a

company can not issue any Preference Share which are
irredeemable or is redeemable after the expiry of a period of Ten
years from the date of its issue.
9.3 SOURCES OF REDEMPTION:
9.3.1 REDEMPTION OUT OF PROCEEDS OF FRESH ISSUE OF

SHARES.
The proceeds of fresh issue of shares (Equity Share and/or
Preference Share) would basically mean the cash realized by way
of issue of these shares on Capital. The fresh issue of shares
may be at par or at premium or at discount.
239
• If fresh issue of shares is at par or premium, only face

value of the fresh issue share is to be taken as the
proceeds of fresh issue.
• If shares are issued at discount, net amount received is

considered as proceeds of fresh issue of shares.
e.g. A share of Rs.100/- (face value) is issued,

i) at par or
ii) at 20% premium or
iii) at 5% discount,
Proceeds of issue of share in respect of

(i) and (ii) above will be equal to Rs.100/- only.
But in iii) it is net amount received on account of issue of share

which is (Rs100-5%) discount = Rs.95/- only.
The time lag between the fresh issue and redemption should
not be more than one month.
However conversion of Preference Share / outstanding

Debentures into new Equity Shares can be considered on proceeds
from fresh issue of share.
Making of a call on partly paid up shares cannot be

considered as proceeds of fresh issue of shares. Debentures may
be issued for raising funds, but the proceeds from issue of
Debentures cannot be considered as part of the proceeds of fresh
issue of shares.
9.3.2 REDEMPTION OUT OF DIVISIBLE PROFITS:
Divisible Profits means and include those profits, which are

available for distribution by way of dividends among the
shareholders.
a) The following are Divisible Profits.

i. Accumulated credit balance in Profit and Loss A/c
ii. Revenue Reserve/General Reserve.
iii. Dividend Equalization Reserve.
iv. Voluntary, Debenture Redemption Fund/Sinking Fund.
v. Investment Fluctuation Reserves.
vi. Workmen's Compensation Fund (only to extent, of Free
Reserve)
240
vii. Development Rebate Reserve or Investment Allowance

Reserve (Not to be utilized in future);
viii. Export Profits Reserve, [no longer required to carry forward
as per income tax provisions.]
Transfer to Capital Redemption Reserve Account is allowed

from these profits. Capital Redemption Reserve A/c can be created,
to the extent redemption out of divisible profits.
b) The following are not divisible profits.
i. Securities Premium Account.

ii. Profits Prior to Incorporation.
iii. Share Forfeited Account.
iv. Capital Reserve.
v. Revaluation Reserve.
vi. Capital Redemption Reserve.(Previous Balance)
vii. Debenture Redemption Reserve.
viii. Investment Allowance Reserve (before the expiry of the
period as required under the Income Tax Act 1961).
Transfer to C.R.R. A/c is not allowed from above profits.
ix. Development Rebate Reserve
9.4 CAPITAL REDEMPTION RESERVE [C.R.R.]
Section 80 of the Companies Act ensures that there is no

reduction in shareholders' funds due to redemption and the interest
of outsiders is not impaired. Redemption of Preference Share
requires that either fresh issue of share is made or distributable
profits are retained and transferred to Capital Redemption Reserve
Account. As capital Redemption Reserve can be used only for
issue of fully paid up Bonus Shares, profits retained in the
business ultimately get converted into Share Capital hence
effectively there is no reduction in the capital of the company.
   
C.R.R. =  Nominal Value of Preference  Less  Proceeds of Fresh 
 Shares Capital   issue of shares 
241
9.5 METHODS OF REDEMPTION:
Redemption of shares
Capital Amount Premium Amount
Proceeds of fresh Divisible profits Security premium A/c Other Reserve

Issue or shares (Divisible profits)
Receive Funds Transfer to Capital

Redemption Reserve
9.5.1 OUT OF PROCEEDS OF FRESH ISSUE OF SHARES.
One of the methods of redemption of Preference Shares is

to use the proceeds of a fresh issue of shares. New shares may be
issued at par or at premium or at discount.
• Find out premium payable on redemption of Preference Share

whether sufficient balance available in Securities Premium A/c
plus premium received on new issue; otherwise new issue
requires to increase to the extent of balance premium required.
• Ascertain the maximum amount of reserve and surplus available
for redemption from given balance sheet before redemption and
the additional information provided in the problem.
Proceeds from Fresh Issue =
a) Nominal value of Preference Shares to be redeemed

Less
b) Maximum amount of reserve and surplus available for
redemption
• Determination of Minimum Amount of Fresh Issue
Sometimes, problem does not specify the minimum number

of shares to be issued for the purpose of redemption of Preference
Share and to ensure compliance of section 80 of the Companies
Act, 1956.
242
• Minimum number of shares

Minimum proceeds to comply with sec. 80
=
Proceeds of one share
Proceeds of one share mean the face value of a share

issued, if it is issued at par or premium. In case of issue of share at
a discount, it refers to the discounted value [Face Value – Discount
on issue].
Minimum number of shares calculated above should not be

in fractions. In case fractional shares should be rounded up to the
next higher figure. Minimum number of shares ascertained above
should be a multiplied by face value of share, i.e. Rs.10/- or Rs.50/-
or Rs.100/- as the case may be
Illustration 1
The Board of Directors of KM Ltd. decide to issue minimum

number of Equity Shares of Rs.10/- each to redeem Rs.6,00,000/-
Preference Shares at 10% premium. It has a General Reserve of
Rs.1,20,000/- and Securities Premium Rs.1,00,000/-. Calculate the
minimum number of Equity Share issued in each of the following
cases:
Case I: If the new Equity Shares are issued at par
II: If the new Equity Shares are issued Rs.20/-
III. If the new Equity Shares are issued at Rs.9.50
Solution:
Redemption of Preference share capital Rs.6,00,000/-
Premium payable on redemption = 6,00,000 × 10% = Rs.60,000/-
can be provided out of Securities Premium balance available.
Minimum proceeds of new issue of Equity shares

Rs.
Nominal value of Preference share to be redeemed 6,00,000
Less: Maximum amount of Reserve available for (1,20,000)
Redemption proceeds of new issue of Equity share 4,80,000
Case I: When new issue Equity shares at par

Minimum proceeds require
Minimum no. of shares =
4,80,000
= 48, 000 Equity shares of Rs.10/- each at par
10
New Issue of Share Capital = 48,000 Equity shares of
Rs.10.
243
Case II: When the new issue of Equity share of Rs.10/- @ Rs.20/-
4,80,000
Minimum No. of shares = = 48, 000 Equity shares
10
of Rs. @ Rs.20/-
New Issue of Share Capital = 48,000 Equity shares of
Rs.10/- @ Rs.10/- premium.
Case III: When the new issue of Equity share of Rs.10/- @ Rs.
9.50
4,80,000
Minimum no. of share = = 50,526.32
9.50
New Issue of Share Capital = 50,527 Equity Share to be
issued of Rs.10/- each @ Rs.0.50 discounts per share.
Illustration 2:
M.R. Ltd. decided to redeem 2,000 Preference Shares of

Rs.100/- each at 10% premium on date of redemption the company
had the General Reserve stood at Rs.50,000/- the Profit and Loss
Account credit balance of Rs.40,000/- and Securities Premium
Rs.10,000/-. Calculate the minimum number of Equity Share of
Rs.50/- each issued in each of the following cases.
Case I If the new Equity Shares are issued Rs.48.00

II If the new Equity Shares are issued at par
III If the new Equity Shares are issued at Rs.55.00
Solution:
In the above problem Securities Premium is less than the

premium payable on redemption of Preference Share. Therefore
remaining premium payable on redemption of Preference Shares
required to be provided out of Divisible Profit as new issue of Equity
Share is at discount.
Rs.
Nominal value of Preference Share to be redeemed 2,00,000
Less maximum amount of reserve available

for redemption balance in General Reserve 50,000
Cr. Balance in Profit & Loss A/c 40,000
90,000
Less premium payable to be provided [20,000-10,000] (10,000)
80,000
Proceeds of new issue of Equity Share 1, 20,000
244
Case I: When new issue of Equity Shares of Rs.50/- each @

Rs.48/-
Minimum porceeds require

Minimum no. of shares issue =
120
, ,000
= = 2, 500 Shares
48
∴ 2500 Equity Shares of Rs.50/- each to be issued @
Rs.48/- per share.
CRR = Nominal value of Preference redeemed

Less Proceeds of new issue
= 200,000 – 120000(2500* 48) = 80000.
Case II: Premium redemption = Sec. Premium + Rs. 10,000 Bal.

from divisible profits.
Proceeds of new issue of Equity Share= 1, 20,000
1, 20, 000
Minimum No. Of shares = = 2, 400
50
∴ 2,400 Equity Shares to be issued at par
Case III : The new Equity Share of Rs.50/- each issued at Rs.55/-
i.e. Rs.5/- premium.
In case III premium payable on redemption can be provided

out of balance in Securities A/c Premium A/c plus provision
received on new issued of shares
Nominal value of Preference share 2, 00,000

Less: Divisible profit available - 90,000
For redemption (P & L A/c + General Reserve

Proceeds of new issue of Equity shares 1,10,000
Minimum No. of share to be issue

Minimum proceeds required
=
1, 10, 000
= = 2, 200 Equity share of Rs.50/- each @ Rs.55/-
50
C.R.R. = 2, 00,000 -1,10,000 = 90,000 (out of divisible profit)
Premium payable on redemption =

10% on Rs.2.00,000 =Rs.20,000
245
Provided out of Securities Premium
BAL B/d Rs. 10,000

Add Received on new issue(2,200 x 5) 11,000
= 21,000
premium payable on redemption = Rs.20,000/- can be
provided out of Rs.21,000/- balance in Securities Premium
A/c
9.5.2 REDEMPTION OUT OF DIVISIBLE PROFIT:
A company may use the distributable profits (profits or

reserves available to company for distribution to shareholders as
dividends or otherwise as per provisions of laws applicable) in
place of issuing new shares. To the extent redemption of
Preference shares out of divisible profit, an amount equal to face
value of shares redeemed is transferred to Capital Redemption
Reserve A/c by debiting the distributable profits.
When Preference shares are redeemed out of divisible profit,

there is no change in the percentage of share holding of the
company and also future earnings are not diluted. However
payment to percentage share holders results in reducing working
capital. This is possible, if company has bank balance available to
repay capital since repayment of redemption needs actual bank
balance.
9.5.3 COMBINATION OF 2.4.1 & 2.4.2
A company may redeem the Preference shares partly from

the new issued and partly out of divisible profits. In such case,
divisible profits transfer to capital redemption reserve A/c to the
extent redemption out of profit.
Generally redemption is carried out in combination

depending upon availability of reserves and bank balances with
company and its respected needs of funds.
9.6 ACCOUNTING PROCEDURE:
Accounting procedure, depends on the transaction effected

by company these steps may be
a) If shares are not fully paid up convert into fully paid up by
receiving required amount or such share to be forfeited.
b) Measures to receive funds by sale of assets/Investments.
c) Receive money on fresh issue of shares
d) Ascertain amount payable to shareholders
e) Pay amount due
246
f) Transfer reserves to capital redemption reserve and security

premium.
g) Issue of Bonus shares to Equity shareholders of so decided.
Following journal entries are passed for redemption of
Preference shares along with other transaction given
a) For making call on partly paid

Preference share.
Share final call A/c Dr. X
To Preference share capital A/c X
b. For receipt of final call due

Bank A/c Dr. X
To Share final call A/c X
a. Forfeiture of shares
Share Capital A/c
[called up amount] Dr. X
To calls in Arrears X
To Forfeited shares A/c X
• For reissue of forfeited shares

Bank A/c (amount received) Dr. X
Forfeited shares A/c[Bal Fig.] Dr. X
To Share Capital A/c X
[Amount credited as paid up]
• For transferring balance in forfeited shares A/c

Forfeited shares A/c Dr. X
To Capital Reserve A/c X
• For sale of Investment

Dr. (Rs.) Cr. (Rs.)
a. At cost
Bank A/c Dr. X
To Investment A/c X
b. At Profit
Bank A/c Dr. X
To Investment A/c X
To Profit & Loss A/c X
c. At Loss
Bank A/c Dr. X
Profit & Loss A/c Dr. X
To Investment A/c X
247
• For issue of share
a. At par
Bank A/c Dr. X
b. At Premium
Bank A/c Dr. X
To share capital A/c X
To Securities Premium X
c. At Discount
Bank A/c Dr. X
Discount on issue of shares A/c Dr. X
• For redemption of Preference shares
a. for transferring the claim of Preference shareholders. [Towards

Capital, premium and dividends unpaid]
Preference Share Capital A/c Dr. X

Premium on Redemption of Preference
Capital A/c Dr. X
Dividend Preference Share A/c (if any) Dr. X
To Preference shareholders A/c X
b. For providing premium on redemption

Securities Premium A/c Dr. X
Capital Reserve A/c Dr. X
Profit and loss A/c Dr. X
To premium on redemption of
Preference share A/c X
Note: It is prudent to use first Securities Premium then Capital

Reserve realized in cash, balance if any required from divisible
profits.
c. For creating capital redemption reserve

Profit and Loss A/c Dr. X
And/or
General Reserve A/c Dr. X
Any other divisible Profit/Reserve A/c Dr. X
To Capital Redemption Reserve A/c X
248
Note:
   
C.R.R. =  Nominal Value of Preference  Less  Proceeds of Fresh 
 Shares redeemed   issue of shares 
d. For payment to Preference shareholder

Preference shareholders A/c Dr. X
To Bank A/c X
Note: In case any amount remains unpaid, the entry should be

passed for the amount actually paid, and unpaid amount should be
shown as current liability as "due to Preference shareholders"
• For making partly paid up Equity shares into fully paid up,
without asking shareholders to pay for call dues.
a. For providing bonus issue

Profit and Loss A/c Dr. X
And/or
Revenue Reserves A/c Dr. X
To Bonus to shareholders A/c X
b. For making call money due

Equity share final call A/c Dr. X
To Equity share capital A/c X
c. For adjusting bonus issue

Bonus to shareholders A/c Dr. X
To Equity share final call X
• For issue for fully paid Bonus shares.

a. For providing bonus
Capital redemption reserve A/c Dr. X
Securities Premium A/c Dr. X
[If required]
To Bonus to shareholders A/c X
b. For issue of bonus shares

Bonus to shareholders A/c Dr. X
To Equity share capital X
Note:
For any other transaction given in examination problem;
usual accounting entry should be passed.
249
9.7 EXERCISE
A. Give the items which are not divisible profits.

B. How to calculate Minimum proceeds from new (fresh) issue of
shares.
C. Give the journal entry for reissue of forfeited shares.
D. Fill in the blanks
1. The Preference shares can redeemed either out of Proceeds
of fresh issue of shares or-------------------------------------------.
2. In case redemption out of accumulated Divisible Profit, it is
necessary to transfer amount equal ------------------to the Capital
Redemption Reserve Account.
3. Section ------------------of the Companies Act ensures that there
is no reduction in shareholders' funds due to redemption and
the interest of outsiders is not impaired.
4. Preference shares redeemable within _____________ years
can be issued.
5. Profit on forfeiture of redeemable preference shares is credited
to_________________
6. ____________paid preference shares cannot be redeemed.
250
10
REDEMPTION OF PREFERENCE SHARES
PART II
Unit Structure
10.0 Objectives
10.1 Illustration (Simple Problem)
10.2 Key Points / Key Terms
10.3 Exercise
10.0 OBJECTIVES
practical problems of redemption of preference shares
10.1 ILLUSTRATIONS (SIMPLE PROBLEM)
Illustration 1
Ketan Ltd. had 6000, 9% redeemable Preference Shares of

Rs.50/- each fully paid. The company decides to redeem the
shares at a premium of 10%. The company makes the following
issues for the purpose of redemption.
a) 25,000 Equity Shares of Rs.10/- each at a premium of 10%.
b) 3,000, 9% Debenture of Rs.100/- each at a premium of Rs.10/-
each.
The company has a General Reserve of Rs.3,75,000/- and

Securities Premium of Rs.50,000/-. Pass journal entries to record
above transactions.
251
Solution:
Ketan Ltd.
Particulars Dr. (Rs.) Cr.(Rs.)

1. Bank A/c Dr. 2,75,000
To Equity Share Capital A/c 2,50,000
To Securities Premium A/c 25,000
[Being 25000 Equity share at Rs.10/-
each, issued at 10% premium]
2. Bank A/c Dr. 3,30,000
To 9% Debentures A/c 3,00,000
[Being 3,000, 9% Debentures of
Rs.100/- each, issued at 10%
premium]
3. 9% Preference Share Capital A/c Dr. 3,00,000
Premium on Redemption of
Preference Share A/c Dr. 30,000
To Preference Shareholders A/c 3,30,000
[Being the claim of transferred
Preference shareholders to their
accounts]
4. Securities Premium A/c Dr. 30,000
To Premium on Redemption of
Preference Shares A/c 30,000
[Being premium on redemption of
Preference share provided]
5. General Reserves A/c Dr. 50,000
To Capital Redemption Reserve
A/c 50,000
[Being capital redemption reserve
created to the extend redemption of
profit]
6. Preference Shareholders A/c 3,30,000
To Bank A/c 3,30,000
[Being claim of Preference share
holders paid]
252
Note:
   
C.R.R. =  Face Value of Preference  Less  Proceeds of New 
 Share to be redeemed   issue of shares 
= 3, 00,000 - 2, 50,000
= 50,000
Illustration 2:
[Calculation of issue minimum number of shares]

N.Ltd. decided to redeem their Preference shares 10 premium as
on 31st March 2012. On that date their position was as under:
Balance sheet as on 31st March 2012

Issued Share Capital Fixed Assets 2,10,000
10,000, 9% redeemable Current Assets 1,45,000
Preference Share of Investment 1,00,000
Rs.10/- each fully paid 1,00,000 Bank Bal. 50,000
20,000 Equity Share of
Rs.10/- each fully paid 2,00,000
Profit & Loss A/c 50,000
Dividend Equalization
Reserve 20,000
10% Debentures 1,00,000
5,05,000 5,05,000
In order to facilitate the redemption of Preference share it

was decided.
a) Part of Investment to be sold at 10% profit for Rs.55,000/-

b) To finance part of the redemption from company funds,
subject to leaving a balance on Profit and Loss A/c of
Rs.40,000/- and
c) To issue sufficient numbers of Equity Share of Rs.10/- each
at a premium of Rs.2.50 per share to raise the balance fund
required.
The Preference shares were redeemed on the due date and

issue of Equity shares was fully subscribed.
You are requiring (i) the necessary journal entries to record

above transactions (including cash) and (ii) The Balance Sheet
after redemption.
253
Solution:
Working Notes: Rs.

(a) Nominal value of Preference
Capital to be redeemed 1, 00,000
Less: Divisible Profit available
Profit and Loss A/c 50,000
Add: Profit on sale of Investment 5,000
Less: Bal. requires to 55,000
P & Loss A/c Balance - 40,000
15,000
Dividend Equalization Fund 20,000 (35,000)
(b) Proceeds of new issue of shares 65,000
(c) Minimum no. of shares to

Minimum proceeds require be issued
=
65,000
= = 6,500 Shares.
10
∴ 6,500 Equity Shares of Rs.10/- each to be issued @
premium of Rs.2.50
Premium on redemption of Preference Shares can be

provided out of premium received on new issue.
N. Ltd.
Journal (31st March 2012)
No. Particulars Dr. (Rs.) Cr.(Rs.)

1. Bank A/c Dr. 5,5000
To Investment A/c 50,000
To Profit & Loss A/c 5,000
(Being part of Investment sold at 10%
profit)
100
cost of Investment sold = 55,000 ×
110
2. Bank A/c Dr. 81,250

To Equity Share Capital A/c 65,000
[Being 6500 Equity shares of Rs.10
each issued @ 2.50 premium]
254

Preference Share Capital A/c Dr. 10,000
(Being the claim of Preference
shareholders transferred to their
accounts)

To Premium on Redemption of 10,000
Preference Shares Capital A/c
5. Profit & Loss A/c Dr. 15,000

Dividend Equalization Reserve A/c Dr.
To Capital Redemption Reserve A/c 20,000
[Being Capital Redemption Reserve
created to the redemption out of
35,000
profit]
6. Preference Shareholders A/c Dr. 1,10,000
[Being claim of Preference share
holders paid]
Bank A/c
Dr. Cr.
To Bal b/fd. 50,000 Bank Preference 1,10,000
Shareholders A/c
Bank Bal c/fd
To Equity Share Capital 65,000 76,250
1,86,250 1,86,250
255
N Ltd.
Balance Sheet as at 31st March 2012
Particulars Note Amount Amount
EQUITYAND LIABILITIES
1. Shareholder’s Funds
a. Share Capital 1 2,65,000
81,250
b. Reserves and Surplus 2 3,46,250
2. Non-Current Liabilities
Long Term Borrowings 3 1,00,000
3. Current Liabilities
a. Trade Payables 4 35,000
Total 4,81,250
ASSETS
1. Non Current Assets
a. Fixed Assets
- Tangible Assets
2,10,000
b. Non Current Investments 50,000
2. Current Assets
76,250
a. Cash and cash
equivalents
b. Other Current Assets. 1,45,000
2,21,250
Total
4,81,250
256
Notes to Accounts
Note Particulars Number Amount Amount

1. Share Capital
Equity share capital
Authorised, shares of
(Rs.10) each
Issued, Subscribed and fully 26500 2,65,00

paid shares (Rs.10) 0
2,65,000
2. Reserves and Surpluses

a. Capital Redemption
Reserve 20,000
Transfer from
Dividend Equalisation 15,000 35,000
Reserve
Transfer from P&L
A/c
b. Securities Premium
Add: on fresh issue 16,250
Less: premium on 10,000 6,250
Redemption
c. Surplus/(Deficit)
Balance in Statement
of P & L 50,00
Add: Profit on sale of 0
Investment
5,000
Less: Transfer to
Capital Redemption 15,000 40,000
Reserve
81,250
Total
Long Term Borrowings 1,00,000

10% Debentures
Trade Payables 35000

a. Sundry creditors
257
Illustration 3: [Computation of C.R.R. and bonus shares]

The Preference Shares of T T Ltd. is to be redeemed on 1st
April 2012, at a premium of Rs.2/- per share. Part of Investment
were sold @ 10% loss for Rs.7,20,000/- and issued 60,000 Equity
Shares of Rs.10/- each at premium of Rs.10/- per share for
redemption. The company redeemed the Preference shares on 1st
April 12 except in case of one shareholder holding 500 Preference
Shares who could not be traced Subsequently the company issued
bonus share in the ratio of one Equity Share for every four Equity
Shares held including the new issued.
The following is the balance sheet of T T Ltd. as at 31 March 2012

Share capital Fixed Assets 6,00,000
90,000,10% Preference Investment 8,50,000
share of Rs.10/- each Current Asset 5,10,000
fully paid 9,00,000
[Including Bank
40,000 Equity Share of Bal. Rs.1,20,000]
Rs.10/- each fully paid 4,00,000
Reserve and surplus
Securities Premium 60,000
Profit & Loss A/c 4,00,000
Current Liabilities
19,60,000 19,60,000
You are required to pass journal entries and prepare balance

sheet after above transactions.
Solution:
Working Notes:
1. Amount due and paid to Preference Shareholder Rs.
Preference Share Capital 9,00,000
Premium payable on redemption (90000 x 2) 1,80,000
Preference shareholder claim 10,80,000
Less : unpaid amount on 500 shares @ Rs.12/- (6,000)
Amount paid to Preference shareholders 10,74,000
2. Redemption out of Divisible Profit Rs.

Nominal value of Preference Share Capital 9,00,000
Redeemed
Less: Proceeds of new issue of Equity Shares (6,00,000)
[60,000 X 10]
Redemption out of profit [C.R.R.] 3,00,000
258
100
3. Cost of Investment sold = 7,20,000 × = 8,00,000
90
Investment costing Rs.8,00,000/- sold for Rs.7,20,000/-
4. Bonus shares to be issued No. Rs.
Old Equity Share Capital 40,000 4,00,000
Add new issue of Equity Shares 60,000 6,00,000
1,00,000 10,00,000
Add Bonus(1:4)
1
= 100,000 × (Out of C.R.R.) = 25,000 2,50,000
4
Total Equity capital 1,25,000 12,50,000
Bank A/c
Dr. Cr.
Rs. Rs.
To Bal. b/fd 1,20,000 By Preference 10,74,000
To Investment A/c 7,20,000 Shareholders A/c
To Equity Share By Bal. c/fd 9,66,000
Capital A/c 6,00,000
To Securities Premium
A/c 6,00,000
20,40,000 20,40,000
T.T.Ltd.
Journal
1. Bank A/c Dr. 7,20,000
Profit & Loss A/c Dr. 80,000
To Investment A/c 8,00,000
[Being Investment sold at loss]
2. Bank A/c Dr. 12,00,000
To Securities Premium A/c 6,00,000
[Being 60,000 Equity shares of Rs.
10 each issued @ Rs.20 per shares]
Premium of Redemption of
Preference Share Capital A/c Dr. 1,80,000
To Preference Shareholder A/c 10,80,000
[Being Preference shareholders
claim transferred]
259
4. Securities Premium A/c Dr. 1,80,000

Preference Share Capital A/c 1,80,000
[Being Premium on Redemption of
Preference Share Capital adjusted]
5. Profit & Loss A/c Dr. 3,00,000
To Capital Redemption Reserve
A/c 300,000
[Being C.R.R. created to extend
redemption out of profit]

To Bank A/c 10,74,000
[Being Preference share holders
claim paid except on 500 shares]
7. Capital Redemption Reserve A/c Dr. 2,50,000
To Bonus to Shareholders A/c 2,50,000
[Being bonus provided in the ratio of
one share for every four Equity
shares]
8. Bonus to Shareholders A/c Dr. 2,50,000
[Being 25000 Equity shares issued
as fully paid Bonus share]
T.T .Ltd.

EQUITYAND LIABILITIES
1.Shareholder’s Funds
b. Reserves and Surplus 2 5,50,000 18,00,000
2.Current Liabilities
a. Trade Payables 2,00,000
b. Preference shareholders 6,000
Total 20,06,000
260
ASSETS 6,00,000
3. Non Current Assets 50,000
a. Fixed Assets
- Tangible Assets
b. Non Current Investments 9,66,000
c. Current Assets 3,90,000
c. Cash and cash 13,56,000
equivalents
d. Other Current Assets. 20,06,000
Total
T.T. Ltd.
Notes to Financial Statements for the year ended 31 March, 2012
As at 31 March 2012
Number Rs
Note "1" : SHARE CAPITAL
Authorised Shares
Equity Shares of `10 each
Issued, Subscribed & Fully Paid up Shares
Equity Shares of `10 each 1,25,000 12, 50,000
[Included 25000 Equity shares of Rs. 10 each
issued on fully paid bonus share by capitaling
C.R.R.]
Total 1,25,000 12,50,000
As at 31
March
Note "2" : RESERVES & SURPLUS 2012
Surplus
Reserves & Surplus
Add: Received on new issue 6,00,000
Less : used for premium on redemption 1,80,000 4,80,000
Capital Redemption Reserve 3,00,000
less: Issue of Bonus shares 2,50,000 50,000
Profit & Loss Account (Surplus/Deficit) 4,00,000
(-)Transferred to capital redemption reserve 3,00,000
(-)Sale of investment at loss 80,000 20,000
5,50,00
Total 0
261
Illustration 4
[Forfeiture and reissue of forfeiture shares]
The following were the balance of Z ltd. as on 31st December, 09
10,000 Equity shares of Rs. 100 each 10, 00,000
100,000, 10% Preference share of Rs. each
Fully called-up 10, 00,000
Less: calls in arrear [on 1500 shares] (6000) 9, 94,000
Securities Premium 1, 20,000
Profit & Loss A/c 6, 40,000
Revenue Reserves 2, 60,000
Bank Balance 5, 60,000
Preference shares were redeemable on 1 July 2010 at a premium

of 10%.
On getting a reminder about payment of calls-in-arrears,
shareholders holding 1000 shares paid their dues on 1 April 09
along with interest Rs. 200 on calls-in-arrears. The shareholding
the remaining share on which calls were due was not tracble
consequently, the directors forfeited those shares and re-issued
them as fully paid on 1 May 2010 on receiving Rs. 9 per share
On 15 June 10, 5000 Equity share of Rs. 100 were issued @
Rs. 120 per share for the purpose of redemption.
Repayments were compiled on 1 July 2010 except in the
case of one shareholder, holding 1000 shares, who was expired.
Your are required to show the journal entries,
Solution:
In the books of Z Ltd.
Date Particulars Dr. Rs. Cr. Rs.
1 April 10 Bank A/c Dr. 4,200

To Calls in Arrears A/c 4,000
To Interest on Calls in Arrear A/c 200
[Being call dues as interest on
arrears received]
1 April 10 10% Preference Share Capital A/c Dr. 5,000

To Calls in Arrear A/c 2,000
To Share Forfeited A/c 3,000
[Being 500 Preference shares of Rs.
10 forfeited for non-payment of call
due]
262
1 May 10 Bank A/c Dr. 4,500

Share Forfeited A/c Dr. 500
To 10% Preference Share Capital 5,000
A/c
[Being 500 forfeited Preference
shares reissued as fully paid at Rs.
9 per shares]
1 May 10 Share Forfeited A/c Dr. 2,500

To Capital Reserve A/c 2,500
[Being balance in Share Forfeited
A/c transferred to Capital Reserve]
15 June 10 Bank A/c Dr. 6,00,000

To Equity Share Capital 5,00,000
[Being 5,000 Equity shares of Rs.
100 issued at premium of Rs. 20 per
shares]
1 July 10 Profit & Loss A/c Dr. 50,000

To Preference Dividend A/c 50,000
[Being Preference dividend @ 10%
on Rs.10,00,000 provided for 6
month]
1 July 10 10% Preference Share Capital A/cDr. 10,00,000

Preference Share Capital A/c Dr. 1,00,000
Preference Dividend A/c Dr. 50,000
To Preference Shareholder's A/c 11,50,000
claim transferred a long as its
Preference dividend due for six
months]
1 July 10 Securities Premium A/c Dr. 1,00,000

Preference Share Capital A/c
1,00,000
[Being Premium Redemption of
Preference Share Capital provided]
263
1 July 10 Profit and Loss A/c Dr. 5,00,000

To capital Redemption Reserve 5,00,000
A/c
[Being C.R.R. created to the extend
as redemption out of profit]
Note: CRR = Face value of
Preference share redeemed -
proceeds of new issue of shares
= 10, 00,000 - 500,000
1 July 10 Preference Shareholders A/c Dr. 11,38,500

To Bank A/c 11,38,500
claim paid except on 1000 shares]
Total Claim 1150,000

Less: Pref. share capital
1000 X 10 (10,000)
Premium on redemption
10,000 X 10% (1000)
Pref. dividend for 6 month
6
10000 X 10% X (500)
12
Amount paid 11,38,500
Illustration 5: [Fully & partly paid Preference shares given]
The balance sheet of K Ltd. on date of redemption of

Preference share is as follows.

10% Preference share capital Fixed Assets 6,40,000
[Rs.50/- each fully paid] 2,00,000 Investments 3,00,000
12% Preference share capital [face value
[Rs.100/- each Rs.75/- paid] 1,50,000 Rs.2,50,000/-]
Equity share capital Rs.10/- each 4,00,000 Other Current
Capital Redemption Reserve 1,00,000 Assets 4,50,000
Securities Premium 75,000 Bank 110,000
Other Liabilities 2,75,000
15,00,000 15,00,000
264
To redeem Preference share following resolution is passed.

a) Preference shares are to be redeemed at a premium of 10%
b) Investment are to be sold at a profit of 10%
c) 5,000 Equity shares of Rs. 10 each are to be issued of 50%
premium, for the purpose of redemption of Preference
shares. Pass journal entries to record the above transactions
and also prepare balance sheet after redemption of
Preference shares.
Solution:
K Ltd.
Journal
Date/ Particulars L/F Dr. Rs. Cr. Rs.
No.
1. Bank A/c Dr. 3,30,000
[Being sale of Investment at profit]
2. Bank A/c Dr. 75,000
[Being 5000 Equity shares of Rs. 10
each issued at 50% premium]
Preference Share Capital A/c Dr. 20,000
[Being claims of Preference
shareholders transferred]
Preference Capital A/c 20,000
Preference shares of written off]
To Capital Redemption Reserve A/c 1,50,000
redemption of Preference share
capital out of profit.
6. Preference Shareholder's A/c Dr. 2,20,000
[Being Preference shareholders claim
paid]
265
Note:
1. Only fully paid Preference shares can be redeemed as per
sec. 80 companies Act.
2. As the call on 12% Preference share capital is not made
some cannot be repaid.
3. C.R.R. = Nominal value of proceeds of new Preference
share less issue of shares capital
= 200,000 - 50,000
= 150,000
K Ltd.
Balance sheet (after redemption)
Notes As on _____
Particulars
I EQUITY AND LIABILITIES

1 Shareholders’ funds
(a) Share capital 1 6,00,000
(b) Reserves and surplus 2 5,10,000
11,10,000
3 Current liabilities
(c) Other current liabilities 2,75,000
TOTAL 13,85,000
II ASSETS
1 Non-current assets
(a) Fixed assets
Tangible assets 6,40,000
2 Current assets
(a) Cash and Bank Balances 2,95,000
(b) Other current assets 4,50,000
13,85,000
TOTAL
266
K Ltd.
Notes to Financial Statements for the year ended ______
As at __________
Number Rs
Authorised Shares
Equity Shares of `10 each -
12% Cum Pref Shares of `100 each
Equity Shares of `10 each 45,000 4,50,000
Issued, Subscribed &Partly Paid up Shares
12% Cum Pref Shares of `100 each(Rs. 75
called) 2,000 1,50,000
Total 47,000 6,00,000
As at ________
Note "2" : RESERVES & SURPLUS
Surplus
Reserves & Surplus
Add:Received on new issue 25,000
Less : used for premium on redemption 20,000 80000
Capital Redemption Reserve 1,00,000
Transfer from Profit & Loss Account 1,50,000 2,50,000
Profit & Loss Account (Surplus/Deficit) 3,00,000
(-)Transferred to captal redemption

reserve 1,50,000
(+)Sale of investment atProfit 30,000 1,80,000
Total 510000
Illustration 6: [Fresh Issue of shares at discount]

The Preference shares of RK Ltd. are due for redemption on 1 April
08 at a premium of Rs. 5 per shares. For the purpose of
redemption, a minimum number of Equity shares of Rs. 10 each at
10% discount are issued by the company part of Investment costing
Rs.1,00,000/- sold for Rs.1,05,000/-.
267
Pass necessary journal entries affecting redemption of

Preference shares.
The Balance Sheet of RK Ltd. as on 31.3.12
3,000 9% Pref. Shares Land and Building 7,00,000
of Rs.100/- each 3,00,000 Plant 3,50,000
(-) Call-in Arrears Investment 1,20,000
@ Rs.20/- (10,000) 2,90,000 Stock 40,000
Equity Share Capital [Rs.10] 6,00,000 Debtors 92,000
Profit and Loss A/c 75,000 Bank 98,000
10% Debentures [Rs.100] 2,00,000
Fixed Deposits 1,75,000
14,00,000 14,00,000
Solution: 1) Calculation of minimum number of shares.
As minimum number of shares is to be issued, total

Preference share capital is taken into consideration: so party paid
share can be redeeming as soon as calls in arrears received.
Nominal Value of Preference share capital 300000

Add: premium on redemption (3000 X 5) + 15000 315000
Less: i) Profit available for redemption
Profit and loss A/c bal. 75000
II) Profit on sale of Investment 5000
III) Minimum proceeds of fresh issue (80000)
235000
Equity share of Rs.10 each to be issued @10% discount.

Therefore proceed of one Equity share = 10-10% = Rs.9 per share
Minimum proceeds of new share

Minimum number of shares =
Proceed of one share
2, 35, 000
=
9
= 26111.11
= 26112 Equity shares of Rs. 10 each
@ 10% discount.
Proceeds of fresh issue = 26112 X 9

= 2, 35,008
Capital redemption Reserve = Nominal value of Preference share

To be redeemed
Less
Proceeds of fresh issue of shares.
= 2, 50,000 - 235008
= Rs. 14992
268
R.K. Ltd.
Journal
Date Particulars LF Dr. Rs. Cr. Rs.

1.4.08 Bank A/c Dr. 1,05,000
1 To Investment A/c 1,00,000
[Being Investment realized at profit]
2 Bank A/c Dr. 2,35,008
Discount on issue of shares A/c Dr. 26,112
[Being 26112 Equity shares of Rs. 10
each issued of 10 discount]
3 9% Preference Share Capital A/c Dr. 2,50,000
Premium on Redemption on Preference
Share Capital A/c Dr. 12,500
[Being 2500 Preference shareholder
transferred at 10% premium.]
4 Profit and loss A/c Dr. 12,500
Preference Share Capital A/c 12,500
[Being premium on Redemption of
Preference Share Capital provided]
5 Profit and Loss A/c Dr. 14,992
[Being C.R.R. created out of Profit and
Loss A/c to the extend redemption out of
profit]
6 Preference Shareholders A/c Dr. 2,62,500
[Being Preference shareholder claim
paid]
Illustration 7: [Redemption by conversion]

The Preference Shares of H. Ltd. are redeemable (5%
premium and Debentures are redeemable @ 10% premium). For
redemption of Preference Shares and the Debentures the company
offered to the redeemable Preference shareholders and the
Debenture holders the options to convert their holdings into Equity
Shares, which are to be treated as worth Rs.12.50 each.
1/3rd of the Preference shareholders and 1/2 of the

debenture holders agreed to do this. The company issued 40,000
Equity Shares of Rs.10/- each Rs.12.50 to the public for cash and
with funds available paid off the bank loan and redeemed the
remaining redeemable Preference Shares and Debentures.
269
The summarized Balance Sheet of H Ltd. as at 31st March 2012

was as follows

Share Capital Fixed Assets
9% Redeemable Preference Goodwill 1,00,000
Share of Rs.100/- 3,00,000 Other Fixed Assets 7,11,000
Equity Shares of Rs.10/- each 4,00,000 Stock 3,50,000
Profit & Loss A/c 3,50,000 Sundry Debtors 2,45,000
7% Debentures. 4,00,000 Bill Receivable 50,000
Bank Loan 50,000 Advance Tax 1,25,000
Creditors 96,000 Discount on issue of
Debentures 15,000
15,96,000 15,96,000
Journalize the above transactions and prepare the Balance Sheet

after redemption.
Solution:
H. Ltd.
Journal
1.4.09
1. Bank A/c Dr. 5,00,000
[Being 40,000 Equity shares of Rs.10/-
each issued @ Rs.2.50 premium per
share]

Share A/c Dr. 15,000
[Being Preference shareholders claim
transferred]

Preference Shares A/c 15,000
[Being premium on redemption provided]

each issued @ Rs.12.50 as per option by
1,000 Preference shareholders]

[Being balance Preference share
redeemed in cash]
270
6. 7% Debentures A/c Dr. 4,00,000

Premium on Redemption of Debentures A/c 40,000
To 7% Debentures holders A/c 4,40,000
[Being debenture holders claim
transferred]

Debentures A/c
To Discount on issue of Debentures A/c 15,000
Debentures and discount on Debentures
written off]
8. Debenture holder's A/c Dr. 2,20,000

To Security Premium A/c 44,000
[Being half of debenture holders claim
discharged by issuing Equity shares of Rs.
10 each @ Rs. 12.50]
9. Debenture holders A/c Dr. 2,20,000

[Being remaining debenture holders claim
settled in cash]
10. Bank Loan A/c Dr. 50,000

To Bank A/c 50,000
[Being bank loan repaid]
Working Notes:
Amount payable
1. No. of shares issued on conversion =
Issue price per share
∴ No. of Equity Shares issued to Preference shareholders
1,05,000
= = 8,400 Equity shares of Rs.10/- each @ Rs.12.50
12.50
2, 20,000
No. of shares issued to debenture = = 17,600 Equity
12.50
shareholders of Rs.10/- each @ Rs.12.50
2. Preference capital - redeemed - 3,00,000

Fresh issue on conversion - 84,000
To debenture holder 1,76,000
For cash consideration 4,00,000
C.R.R. required NIL
271
H Ltd.
Balance sheet as on 1 April 2012
Notes As on _____
Particulars
I EQUITY AND LIABILITIES
1 Shareholders’ funds
10,60,
(a) Share capital 1 000
(b) Reserves and surplus 2 4,45,000
15,05,
Total 000
2 Current liabilities
96,00
(c) Other current liabilities 0
TOTAL 16,01,000
II ASSETS
1 Non-current assets
(a) Fixed assets
7,11,0
Tangible assets 00
Intangible assets 1,00,000
2 Current assets
3,50,0
(a) Inventories 00
(b) Short Term Advances
Advance Tax 1,25,000
(c) Trade Receivables
Debtors 2,45,000
(d) Cash and Cash Equivalents 20,000
TOTAL 16,01,000
H Ltd.
As at ________
Number Rs
Authorised Shares
Equity Shares of `10 each 1,06,000 10,60,000
[In dues 66,000 Equity shares of Rs.10/- each
issued on conversion to Preference
shareholders and debenture holders]
Total 1,06,000 10,60,000
272
As at ____
Surplus
Reserves & Surplus
Securities Premium
Add: Received on new issue 1,00,000
Less : used for premium on redemption 15000
Less : used for premium on redemption 40,000
Add: Received on conversion of deb 44,000
Add: Received on conversion of pref sh 21,000
Less : used for Discount on debentures 15,000
95,000
Total 4,45,000
Illustration 8 [Computation of number of share for redemption]
M Ltd. has an issued share capital of 1000, 7% redeemable

Preference shares of Rs. 100 each and 5000 Equity shares of Rs.
100 each. The Preference share redeemable at a premium of Rs.5
per share was redeemed on 1st April 2012.
Balance sheet of M Ltd. as on 31st March 2012

Particulars Rs. Rs.
Sources of Funds
Share Capital
Issued and paid up
1,000 7% Preference shares of Rs.100/- fully paid 1,00,000
5000 Equity Shares of Rs.100/- each fully paid 5,00,000 6,00,000
Profit and Loss A/c 62,000
Total 8,62,000
Application of funds
Fixed Assets 8,04,000
Investments 40,000
Current assets
Bank balance 60,000
Less: Current Liabilities
Trade Creditors 42,000 18,000
8,62,000
In order to facilitate the redemption of the Preference shares,

the company decided:
a) To sell all the Investment for Rs.45,000/-
b) To finance part of the redemption from company funds,
subject to leave a balance of Rs.27,000/- in the profit and
loss A/c
273
c) To issue sufficient Equity shares of Rs.100/- each at a

premium of Rs.25/- per share to raise the balance funds
required.
The Preference shares were redeemed on the due date and

issue of Equity fully subscribed.
You are required to
i. The necessary journal entries to record above transactions.
ii. Balance Sheet after Redemption of Preference Shares
Solution
M Ltd.
Journal

1. Bank A/c Dr. 45,000
To Profit and Loss A/c 5,000
[Being Investments sold at profit]
2. Bank A/c Dr. 75,000
[Being 600 Equity shares of Rs.100 each
issued at Rs.25 premium per share]
Premium on Redemption of Preference 5,000
Shares A/c Dr.
[Being 1000 Preference share capital and
premium on redemption at 5% transfer]
4. Securities Premium A/c Dr. 5000
Preference shares provided]
[Being CRR created to the extend
[Being Preference shareholders claim paid]
274
Balance sheet of M Ltd. as on 1/4/12

EQUITY AND LIABILITIES
b. Reserves and Surplus 2 77,000 6,37,000
Trade Payables 42,000
Total 8,79,000
ASSETS
1.Non Current Assets
a. Fixed Assets 8,04,000

- Tangible Assets
2. Current Assets 7
a. Cash and cash 5,000
equivalents
8,79,000
Total
M Ltd.
As at __________
Number Rs
Authorised Shares

Total 5,600 5,60,000

275
As at ____
Surplus
Reserves & Surplus
Securities Premium
Add: Received on new issue 15,000
Less : used for premium on redemption 5000 10,000
Capital redemption reserve
Add: Tr. From Profit & Loss A/c 40,000
Profit & Loss A/c
Opg. Bal 62,000
Less: Tr to Capital redemption reserve 40,000
Add : Profit on Investment 5,000 27,000
Total 77,000
Working Note:
1) Minimum no. of shares to be issued Rs. Rs.

Preference shares to be redeemed 1,00,000
(-) Profit available balance 62,000
Profit on sale of Investment 5,000
67,000
(-) Profit to be retained (27,000) (40,000)
Proceed of fresh issue 60,000
600 Equity shares of Rs.100/- each to be issued at premium of
Rs.25/- per share.
2) CRR = Nominal value of Preference shares redeemed - proceed

of new issue of shares.
1,00,000 - 60,000 = 40,000
Illustration 9: [Converting partly Equity shares into fully paid and

issue of fully paid bonus share]. The 10% Preference shares due
for redemption of 1st April 09, @ 10% premium.
276
The balance sheet of ABK Ltd. on 31st March 2012

10% Redeemable Preference I. Fixed Assets
Shares of Rs.10/- each Rs.7.50 Land & Buildings 4,95,000
paid up 1,50,000 Plant & Machinery 1,21,000
Equity Shares of Rs.5/- each Furniture 35,000
Rs.3/- paid up 1,50,000 II. Current Assets
Security Premium 1,00,000 Stock 40,000
General Reserve 2,00,000 Debtors 91,500
Profit and Loss A/c 1,25,000 Cash & Bank 1,71,000
10% Debentures 1,00,000 Bills Receivable 10,500
Creditors 75,000 Prepaid Insurance 1,000
Outstanding Expenses 23,000
9,65,000 9,65,000
At the annual general meeting of the company the following

resolutions were passed.
1. To redeem the 10% Preference shares as per terms and to
issue 20,000 Equity shares of Rs. 5 each at a premium of
Rs. 2 per share.
2. To declare bonus at the rate of Rs.2 per Equity share for the
purpose of making the said shares fully paid.
3. To issue bonus shares to Equity shareholders including new
shares in the ratio of one share for every two shares held.
Pass the necessary journal entries to record the above
transactions and prepare the balance sheet
Solution:
ABK Ltd.
Journal
No. Particulars LF Dr. Rs. Cr. Rs.

1. Bank A/c Dr. 1,40,000
each issued at a premium of Rs.2/- per
share]
2. Preference Share Final Call A/c Dr. 50,000
To 10% Preference Share Capital A/c 50,000
[Being final call on redemption of
Preferences shares made]
3. Bank A/c Dr. 50,000
To Preference Share Final Call A/c 50,000
[Being Preference share final call dues
received]
277
4. 10% Preference Share Capital A/c Dr. 200,000

Share Capital A/c Dr. 20,000
To Preference Shareholders A/c 220,000
[Being amount due to Preference
shareholders transferred]
[Being premium on redemption
transferred]
6. Profit and Loss A/c Dr. 1,00,000
[Being Preference shareholder's dues
on redemption paid]
8. Equity Share Final Call A/c Dr. 1,00,000
[Being final call on 50,000 Equity shares
@ Rs.2/- per share]
9. General Reserve A/c Dr. 1,00,000
To Bonus to Equity Shareholders A/c 1,00,000
[Being bonus @ Rs.2/- per Equity share
on 50, shares]
10. Bonus to Equity Shareholder's A/c Dr. 1,00,000
To Equity Share Final Call A/c 1,00,000
[Being bonus adjusted with final calls
dues]
Securities Premium A/c Dr. 75,000
[Being sanctioned at the rate of one
Equity shares for every two shares of
Rs.5/- paid]
[Being 35000 Equity shares of Rs.5/-
each issued]
278
Balance sheet of ABK Ltd. as on ... (After bonus)

b. Reserves and 2 1,70,000 6,95,000
Surplus
2. Non-Current 1,00,000
Liabilities
3. Current Liabilities 23,000 2,40,000
a. Trade Payables 9,35,000
b. Short term liabilities
Total
ASSETS
1. Non Current Assets 3 6,51,000
Fixed Assets
- Tangible Assets 40,000
2. Current Assets 1,02,000
a. Inventories 1,41,000
b. Trade receivables 1,000 2,84,000
c. Cash and cash 9,35,000
equivalents
d. Other current assets
Total
M Ltd.
As at __________
Number Rs
Authorised Shares

Equity Shares of `5 each 1,05,000 5,25,000
Total 1,05,000 5,25,000

279
As at
Note "2" : RESERVES & SURPLUS ________
Surplus
Reserves & Surplus
Securities Premium
Opening Balance 1,00,000
Less : used for premium on redemption 20,000
Less: used for issue of bonus 75,000 45,000
Add: Tr. From Profit & Loss A/c 1,00,000
Less: used for issue of bonus 1,00,000
General Reserve
Opening Balance 2,00,000
Less: used for issue of bonus 1,00,000 1,00,000
Profit & Loss A/c
Opg. Bal 1,25,000
Less: Tr to Capital redemption reserve 1,00,000 25,000
Total 1,70,000
Note "3" : Fixed As at ________

Assets
Tangible Assets
Plant & Machinery 1,21,000
Furniture 35,000 6,51,000
Working notes: 1
Bank A/c
Particulars Amt. Particulars Amt.

To Balance b/d 1,71,000 By Preference
To Equity Share Capital Shareholders A/c 2,20,000
A/c 1,00,000 By Bal c/fd 1,41,000
A/c 40,000
To Preference Share
Final Call A/c 50,000
3,61,000 3,61,000
280
2. Only fully paid Preference shares can be redeemed. Therefore

final call on Preferences shares is made and received.
3. Issue of partly paid shares (call) is provided out of general
1,50,000
reserves =5,000 shares × 2.50
7.5
4. C.R.R. Rs.
N.V. of Preference share capital redeemed 2, 00,000
Less: proceeds of fresh issued of shares - 1, 00,000
C.R.R. Rs. 1, 00,000
Illustration 10 [Calls in arrears and proposed dividend]
The undernoted balances were extracted from the
Ledger of S Ltd.
No. Particulars Rs.

1. 1,00,000 10% Preference share of Rs.10/- 10,00,000
each
Less calls in arrears @ Rs.4/- per share (2,000)
2. Amount paid up 9,98,000
3. Security Premium 2,00,000
4. Investment Allowance Reserve 7,50,000
5. General Reserve 2,50,000
6. Profit and Loss A/c 5,81,000
Proposed dividend since sanctioned on 99,500
Preference Shares.
The directors redeemed the Preference shares of Rs.10/-

each at Rs.12/- and for the purpose made a fresh issue of Equity
shares of Rs.10/- each at Rs.9.50 for such amount as was
necessary for the purpose after utilizing the available sources to the
maximum extend and satisfying amount of sanction Preferences
share dividend. Rs.4,00,000/- of the Investment allowance reserves
is free for distribution as dividend.
Give journal entries recording above transactions.

281
Solution:
Journal of S Ltd.
No. Particulars Dr. Rs. Cr. Rs.

1. Bank A/c Dr. 2,86,900
Discount on issue of shares A/c Dr. 15,100
[Being 30200 Equity shares of Rs.10/-
each issued @ Rs.9.50 each]
Share A/c Dr. 1,99,000
[Being amount payable to Preference
shareholders on redemption of 99500
Preference shares of Rs.10 each of
premium of Rs. 2 per share]
3. Securities Premium A/c Dr. 1,99,000
Preference Shares A/c 1,99,000
[Being premium payable on redemption
of Preference share written off]
4. Investment Allowance Reserved A/c Dr. 4,00,000
General Reserve A/c Dr. 2,50,000
Profit and Loss A/c Dr. 58,100
[Being amount transferred C.R.R. to the
extent required under law]
5. Preference shareholders A/c Dr. 11,94,000
To Bank A/c 11,94,000
[Being amount paid to Preference
shareholders]
6. Proposed Preference Dividend A/c Dr. 99,500
To Bank A/c 99,500
[Being Preference dividend paid]
Working Note:
1. Only fully paid Preference shares can redeemed

∴ 1,00,000 – 2,000 = 99,500 Preference share can be
4
redeemed.
282
2. Rs. Rs.
Fresh issue of Equity Shares
9, 95,000
N.V. of Preference Share [99,500×10]
Less: Divisible profits

Investment allowance Reserve 4, 00,000
General Reserve 2, 50,000
Profit and Loss bal. 58,100 7, 08,100
Proceeds of fresh issue of Equity share 2, 86,900
∴ No. of Equity share issued

Proceeds of New Issue of Share
=
Proceed of one share
2,86,900
= = 30,200 Equity shares
9.50
Illustration 11 (Determining issue of Equity share by using

algebraic equation)
Balance sheet of MJ Ltd. as

on 31st March 2012

10% Preference Shares of Fixed Assets 6,64,000
Rs.20/- each Rs.15/- paid up 3,75,000 Bank Balance 1,10,000
Equity Shares of Rs.20/- each 6,00,000 Other Current Assets 4,25,000
fully paid up
Investments
Security Premium A/c
5,000 51,000
Profit and Loss A/c
45,000
Current Liabilities
1,25,000
11,50,000 11,50,000
The Board of director has recommended that

i) Investment to be realized for Rs.58,000/-
ii) Preference shares to be redeemed @ 10% premium.
iii) Issue of minimum number of Equity shares of Rs.20/- each
@10% premium.
iv) Assuming that all the formalities required under section 80
Companies Act, were compiled with.
You are required to give the journal entries and prepare the
Balance Sheet.
283
Solution:
MJ Ltd.
Journal
No. Particulars LF Dr. Rs. Cr. Rs.

1. Preference Share Final Call A/c Dr. 1,25,000
To 10% Preference Share Capital 1,25,000
[Being final call of Rs.5/- per share on
25,000 Preference share made]
2. Bank A/c Dr. 1,25,000
To Preference Share Final Call A/c 1,25,000
[Being amount of final call received]
3. Bank A/c Dr. 4,93,020
[Being 22,410 Equity Shares of
Rs.20/- each issued @ 10% premium]
4. Bank A/c Dr. 58,000
[Being Investment sold at profit]
Preference Shares A/c Dr. 50,000
[Being amount payable on redemption
of Preference Share plus premium on
redemption transferred to Preference
shareholders]
Profit and Loss A/c 180
Preference Share A/c
[Being Premium on Redemption as
Preference Shares adjusted]
7. Profit and loss A/c Dr. 51,800
To capital redemption reserve A/c 51,800
[C.R.R. created to the extent
[Being amount due to Preference
shareholder paid]
284
MJ Ltd.

b. Reserves and 2 51,820 11,00,020
Surplus
2. Current Liabilities 1,25,000
a. Other current
liabilities 42,000
Total 12,25,020
ASSETS
6,64,000
a. Fixed Assets
- Tangible Assets 1,36,
b. Current Assets 020
b. Cash and cash 4,25,000
equivalents
c. Other current assets 12,25,020
Total
MJ Ltd.
As at __________
Number Rs
Authorised Shares
-
Equity Shares of `10 each 1,04,820
10,48,200
Total 1,04,820 10,48,200

285
As at _____
Surplus
Reserves & Surplus
Securities Premium
Opening Bal 5,000
Less : used for premium on redemption 49,820 -
Add: Tr. From Profit & Loss A/c 51,800
Profit & Loss A/c
Opg. Bal 45,000
Less: used for premium on redemption 180
Less: Tr to Capital redemption reserve 51,800
Add : Profit on Investment 7,000 20
Total 51,820
Working Note:
Paid Preference shares can be redeemed. Therefore final call

should make and received then only Preference shares can be
redeemed.
3,75,000
1. Final call = = 25,000 Preference Shares × Rs.5/ –
15
= Rs.1,25,000/ –
2. The given balance in Securities Premium and premium received

on new issue of shares is insufficient for providing premium
payable. The number of new issue of share is to be determined
by algebraic equation.
Let N.V. of Equity share to be issued = x

∴ Premium received = 0.10x on new issue
N.V. of Preference share capital = Balance in Securities
Premium + Premium on redemption = Balance in Profit & Loss
A/c + New issue + premium received on new issue
5,00,000 + 50,000 = 5,000 + 52,000 + x + 0.10 x
∴ 5, 50,000 = 57,000 + 1.10x
∴ 5, 50,000 – 57,000 = 1.10x
∴ x = 4,48,182
286
4,48,182
∴ No. of fresh issue of Equity Share = 20
= 22,409.10
= 22,410 Equity shares
i.e. 22,410 Equity shares of Rs.20/- each @ 10% premium
(Rs.2/- per share)
3. Premium on redemption = Rs.50,000/-
Sources of premium payable
Securities Premium [5000 + 44820] 49,820
Balance from Profit & Loss A/c 180
50,000
4. C.R.R. = N.V. of Preference share less proceeds of fresh issue
of shares
= 5,00,000 – 4,48,200
= Rs.51,800
5. Bank A/c
Dr. Cr.
To Balance 10,000 By Preference 5,30,000
To Final Call A/c 1,25,000 Shareholder A/c
To Equity Share A/c 4,48,200 By Balance 1,36,020
To Securities Preference A/c 44,820
6,86,020 6,86,020
Illustration 12 [New issue at discount]

KPM Ltd. decided to redeem their Preference shares on 31st
December 2012 on that date their balance sheet was as under:

Share Capital Fixed Asset 23,55,000
50,000 Equity Shares of (-) Acc.Depn. 6,50,000 17,05,000
Rs.10/- each 5,50,000 Investment 2,00,000
50,000; 9% Redeemable Current Asset 3,50,000
Preference Shares of Rs.10/- Bank Balance 2,20,000
Rs.5/- paid up 2,50,000
75,000; 10% Preference
Shares of Rs.10/- fully paid 7,50,000
Reserves & Surplus
Capital Reserve 25,000
Dividend Equalization
Reserve 2,10,000
Secured Loan
Current Liabilities 1,20,000
24,75,00 24,75,000
0
287
Preference shares are to be redeemed @ 5% premium. For

the purpose of redemption the co. decided to issue, after carrying
out the necessary formalities required under law. Minimum number
of Equity shares of Rs. 10/- each at a discount of 10%. Redemption
is duly carried out. Fixed assets costing Rs.4,50,000/-.
Accumulated depreciation there on was Rs.90,000/- was sold for
Rs.3,85,000/-. Investment was sold for Rs,2,90,000/-. Show
necessary ledger accounts & prepare balance sheet after
redemption.
Solution:
In the books of KPM Ltd
Preference Share Capital A/c
Dr. Cr.
To Preference By Bal b/d 7,50,000
Shareholder A/c 7,50,000
7,50,000 7,50,000
Equity share capital A/c

Dr. Cr.
To Bal c/d 7,00,000 By Bal B/d 5,00,000
By Bank A/c 1,80.000
By Discount on issue of
Equity Shares A/c 20,000
7,00,000 7,00,000
Securities Premium A/c

Dr. Cr.
To Premium on By Bal B/d 75,000
Redemption of
Pref. Shares A/c 37,500
To Bal c/d 37,500
75,000 75,000
Dividend Equalization Reserve A/c

Dr. Cr.
To Capital Redemption 2,10,000 By Bal B/d 2,10,000
Reserve A/c
2,10,000 2,10,000
288
Premium on Redemption of Preference Shares A/c

Dr. Cr.
To Preference 37,500 By Securities Premium 37,500
Shareholders A/c A/c
37,500 37,500
Profit & Loss A/c

Dr. Cr.
To Capital Redemption 3,60,000 By Bal B/d 2,45,000
Reserve A/c By Profit on Sale of
Fixed Assets A/c 25,000
By Profit on Sale of
Investment A/c 90,000
3,60,000 3,60,000
Fixed Asset (at cost)

Dr. Cr.
To Bal b/d 23,55,000 By Accumulated
To Profit & Loss A/c 25,000 Depreciation A/c 90,000
By Bank A/c 3,85,000
By Bal c/d 19,05,000
23,80,000 23,80,000
Accumulated depreciation A/c

Dr. Cr.
To Fixed Asset A/c 90,000 By Bal B/d 6,50,000
To bal c/d 5,60,000
6,50,000 6,50,000
Preference Shareholders A/c

Dr. Cr.
To Bank A/c 7,87,500 By 10% Preference
Share Capital A/c 7,50,000
By Premium on
Redemption of
Preference Share A/c 37,500
7,87,500 7,87,500
289
Investment A/c
Dr. Cr.
To Bal b/d 2,00,000 By Bank A/c 2,90,000
2,90,000 2,90,000
Capital Redemption Reserve A/c

Dr. Cr.
To Bal b/d 5,70,000 By Dividend Equalization
Reserve A/c 2,10,000
By Profit & Loss A/c 3,60,000
5,70,000 5,70,000
Discount on Issue of Shares A/c

Dr. Cr.
To Equity Share Capital 20,000 By Bal B/d 20,000
A/c
20,000 20,000
Balance sheet as on 31st December, 2012

c. Reserves and Surplus 2 6,32,500 15,82,500
Other current Liabilities 1,20,000
Total 20,02,500
ASSETS
a. Fixed Assets
- Tangible Assets 13,45,000
2. Other Non-Current
Assets 3 20,0
a. Discount on issue of 00
shares
a. Other current Asset 2,85,000
b. Cash and cash 6,35,000
equivalents
20,02,500
Total
290
Notes to Accounts
As at 31 March
2009
Number `
Authorised Shares
Redeemable Pref Shares of `5 each
70,000 Equity Shares of `10 each 70,000
7,00,000
50,000 Redeemable Pref Shares of `5 each 5000 2,50,000
Total 75,000 950000
As at _______
Surplus
Reserves & Surplus
Securities Premium
Opening Balance 75,000
Less: used for premium on redemption 37,500 37,500
Add: Tr. From Dividend equalisation 2,10,000
reserve 5,70,000
Profit & Loss A/c
Op. Bal 2,45,000
Add : Profit on Investment 25,000
Add : Profit on Fixed Assets 90,000
Less: Tr to Capital redemption reserve 3,60,000 -
Capital Reserve 25,000
Total 6,32,500
Note "3”: Tangible Assets
Assets Gross Block Provision for Net Block

Depreciation
Opening Additions Closing Opening Additions Closing Opening closing
Tangible 23,55,000 (4,50,000) 19,05,000 6,50,000 (90,000) 5,60,000 17,05,000 13,45,000
Assets
291
Working Notes:
I. Only fully paid Preference Shares can be redeemed. As call
on 9% Preference shares is not made, it is not redeemed
II. Proceeds of new issue:
Nominal value of Preference shares 7,50,000
Less : Profits available for redemption
Dividend equalization reserve 2,10,000
Profit & Loss A/c 3,60,000 5,70,000
Proceeds of new issue 1,80,000
No. of Equity shares of Rs.10/- issued at Rs.9/- each
Proceeds reqired 1,80,000
= = 20,000
proceeds of one share 9
∴ 20,000 Equity Shares of Rs. 10/- issued at Rs.9/-
III. Premium payable on redemption of Preference shares is
provided from Securities Premium.
Illustration 13 [Minimum cash balance and bonus]

The following is the Balance Sheet of Y Ltd. as at 31st March 08

I Share capital I Fixed Assets 9,23,000
Authorized
25,000 12% Redeemable II Investments 2,40,000
Preference Shares of Rs.20/-
each 5,00,000 III Current Assets And
1,00,000 Equity Shares of Loans & Advances
Rs.20/- each 20,00,000 Inventory 50,000
25,00,000 Stores 40,000
Issued, subscribed & paid up Sundry Debtors 1,05,000
25000, 12% Redeemable Bank Balance 1,85,000
Preference Shares of Rs.20/-
each 5,00,000
IV Miscellaneous
25,000 Equity Shares of Expenditure 40,000
Rs.20/- each 5,00,000
(to the extent not written off)
Preliminary EXP.
II Reserves and Surplus
Securities Premium 1,00,000
General Reserve 2,50,000
III Secured Loans NIL
IV Unsecured Loans
Fixed Deposits 50,000
V Current Liabilities
Provisions 1,20,500
15,83,000 15,83,000
292
The following information is available with regards to company's

operations:
a) Y Ltd. redeemed the Preference Shares at a premium of 5%
along with the Preference dividend for the ended 31st March 09.
All payments were made except to the holder of 500 Preference
shares.
b) Investment costing Rs.2, 00,000/- sold for Rs. 3,10, 000/-.
c) Except Bank balances Other Current Assets and Current
Liabilities as on 31st March 09 were the same as on 31.03.08.
d) The company issued Bonus Shares in the ratio of one share of
every two Equity share held on 31.03.09.
e) The company repaid Fixed Deposit, For the year ended 31/3/09,
the company earned a Net Profit of Rs.1,75,000/- after providing
Rs.40,000/- depreciation and writing off the half of Preliminary
Expenditure.
Journalize the transition which took place during year 2008-2009
Solution:
Journal of Y Ltd.
No. Particulars Dr. Rs. Cr. Rs.
1. Bank A/c [Cash profit] Dr. 2,35000

To Profit & Loss A/c 2,35,000
[Being net profit made for the year ended 31.3.09]
2. Bank A/c Dr. 3,10,000

To Profit & Loss A/c 1,10,000
[Being amount realized on sale of Investment]

To Preference Dividend A/c 60,000
[Being Preference Dividend @ 12% on Rs.
500,000 Preference Share Capital]
4. 12% Preference Share capital A/c Dr. 5,00,000

Premium on Redemption A/c Dr. 25,000
Preference dividend A/c Dr. 60,000
To Preference Share holders A/c 5,85,000
[Being the amount payable to Preference
shareholder including dividend transfer]
293

To Premium on Redemption A/c 25,000
[Being Premium on Redemption of Preference
Share Capital provided]

General Reserve A/c Dr. 2,12,500
[Being transfer to C.R.R. A/c on redemption of
Preference Shares]

[Being payments on redemption of 12%
Preference Shares, including Preference dividend
except on 500 shares]

[Being amount adjusted for issuing Bonus Shares
in the ratio of 1:2 on 25000 Equity Shares]

[Being Bonus Shares issued]
10. Fixed Deposit A/c Dr. 50,000

To Bank A/c 50,000
[Being Fixed Deposit repaid]
Working Notes:
1. Profit and loss A/c Bal. as on 31.3.09 Rs.
Balance as on 31.3.08 62,500
Profit for the year 1,75,000
Profit on sale of Investment 1,10,000
Preference dividend paid (60,000)
Balance used for C.R.R. 2,87,500
2. Payments to Preference shareholders Rs.

Total claim including dividend 5,85,000
unpaid on 500 shares
Less : 10,000
Capital 500 × 20
Premium @ 5% 500
Preference dividend @ 12% 1,200 (11,700)
Payments made to Preference shareholder 5,73,300
294
Illustration 14(Shares forfeited and calculation of fresh issue of

shares)
The Balance Sheet of B.R. Ltd. as at 31st March 12

2,000 Equity shares of Fixed Assets 9,90,000
Rs.100/- each fully paid 2,00,000 Sundry Debtors 3,20,000
20,000 10% Redeemable Inventories 2,00,000
Preference Shares of Marketable Securities 4,00,000
Rs.50/- each fully called up 10,00,000
Bank balance 60,000
Less : calls in arrears @
Rs.10/- each (Miscellaneous
(5,000) 9,95,000 Expenditures to the
Security Premium 10,000 extent not written off)
Capital Redemption Discount on Issue of
Reserve 50,000 Debentures 5,000
General Reserve 2,10,000
10% Debenture [Rs.100/-
each] 2,00,000
19,95,000 19,95,000
10% Redeemable Preference Shares were due for

redemption on 1st April 09 at a premium of 10%.
Company sent reminders for the final call on 500, 10%
Preference Shares and could collect money from shareholders
holding 300 shares and forfeited remaining defaulting shares.
Marketable securities sold for Rs.4,20,000/- Company
issued adequate number of new Equity Shares of Rs.100/- each @
25% premium, to the extent available profits were insufficient to
back up the redemption.
10% Debenture also, due for redemption @5% Mr. Kale
holding 200 Preference shares and 100 Debentures could not be
traced and payment due to him on redemption of shares and
Debentures could not be paid to him.
Prepare necessary ledger A/cs and prepare the Balance
Sheet of the company after redemption.
Solution:
In books B.R. Ltd.
Equity Share Capital A/c
Dr. Cr.
To Bal c/fd 8,00,000 By Bal b/fd 2,00,000
By Bank A/c 6,00,000
8,00,000 8,00,000
295
10% Preference Share Capital A/c

Dr. Cr.
To Share Forfeited By Bal b/fd 10,00,000
A/c [200 x 50] 10,000
To Preference
Shareholder A/c 9,90,000
10,00,000 10,00,000
Calls in Arrears A/c

Dr. Cr.
To Bal b/fd 5,000 By Bank A/c 3,000
By Shares Forfeited A/c 2,000
5,000 5,000
Shares forfeited A/c

Dr. Cr.
To Calls in Arrears A/c 2,000 By 10% Preference
To Capital Reserve A/c 8,000 Share Capital A/c 10,000
10,000 10,000
Securities Premium A/c

Dr. Cr.
To Premium on By Balance b/fd 10,000
Redemption of By Bank A/c 1,50,000
Preference Shares
A/c 99,000
To Premium on
Redemption of
Debentures A/c 10,000
To Dis. on Issue
Debentures A/c 5,000
To Balance c/fd 46,000
1,60,000 1,60,000
General Reserve A/c

Dr. Cr.
To Capital Redemption 2,10,000 By Bal b/fd 2,10,000
Reserve A/c
2,10,000 2,10,000
296
10% Debentures A/c

Dr. Cr.
To Debenture holders 2,00,000 By Bal b/fd 2,00,000
A/c
2,00,000 2,00,000
Profit & Loss A/c

Dr. Cr.
To Capital Redemption 1,80,000 By Balance b/fd 1,60,000
Reserve A/c By Marketable
Securities A/c 20,000
1,80,000 1,80,000
Preference Shareholders A/c

Dr. Cr.
To Bank A/c 10,78,000 By 10% Preference
To Balance c/fd 11,000 Share Capital A/c 9,90,000
[dues to Mr. Kale] By Premium on
(200 x 55) Redemption Pref.
Capital A/c 99,000
10,89,000 10,89,000
Debenture holders A/c

Dr. Cr.
To Bank A/c 1,99,500 By 10% Debentures A/c 2,00,000
To Balance c/fd 10,500 By Premium on
[dues to Mr. Kale] Redemption of
(100 x 105) Debentures A/c 10,000
2,10,000 2,10,000
Capital Reserves A/c

Dr. Cr.
To Balance c/fd 8,000 By Share Forfeited A/c 8,000
8,000 8,000
297
Marketable securities A/c

Dr. Cr.
To Balance b/fd 4,00,000 By Bank A/c 4,20,000
To Profit and Loss A/c 20,000
4,20,000 4,20,000
Discount on Issue of Debentures A/c

Dr. Cr.
To Balance b/fd 5,000 By Securities Premium 5,000
A/c
5,000 5,000
Bank A/c
Dr. Cr.
To Balance B/fd 60,000 By Preference
To Calls in Arrears A/c 3,000 Shareholders A/c 10,78,000
To Marketable By Debenture holders
Securities A/c 4,20,000 A/c 1,99,500
To Equity Share
Capital A/c 6,00,000
A/c 1,50,000
To Balance c/fd 44,500
12,77,500 12,77,500
Capital redemption reserve A/c

Dr. Cr.
To Balance c/fd 4,40,000 By Balance b/fd 50,000
By General Reserve A/c 2,10,000
By Profit and Loss A/c 1,80,000
4,40,000 4,40,000
298
B.R. Ltd.
Balance sheet as on 1st April 2012

b. Reserves and 2 4,94,000 12,94,000
Surplus
2. Current Liabilities 1,50,000
a. Trade Payables
b. Short Term Loans 66,000
& Prov. 15,10,000
Total
ASSETS
9,90,000
a. Fixed Assets
- Tangible Assets
a. Trade Receivables 2,00,000
b. Inventories 15,10,000
Total
B.R. Ltd.
As at __________
Number Rs
Authorised Shares

Total 8,000 8,00,000

299
As at
Note "2" : RESERVES & SURPLUS ________
Surplus
Reserves & Surplus
Securities Premium
Less: used for premium on redemption 99,000
Less: used for premium on redemption 10,000
Less : used for Discount on Deb. 5000 46,000

Add: Tr. From Gen Res 2,10,000 4,40,000
Profit & Loss A/c
Opg. Bal 1,60,000
Add : Profit on Investment 20,000
Less: Tr to Capital redemption reserve 1,80,000 -
Capital Reserve 8000
Total 4,94,000
Working Notes: Fresh issue of Equity Shares Rs.

N.V. of Preference Share Capital 9, 90,000
Less: Divisible Profits [C.R.R.]
General Reserve 2, 10,000
Profit & Loss A/c 1, 80,000 (3, 90,000)
Proceeds of fresh issue of Equity Shares 6, 00,000
∴6,000 Equity Shares of Rs.100/- each issued at Rs.25/-
premium per share.
300
10.2 KEY POINTS / KEY TERMS:
Only fully paid Preference Shares can be redeemed

• C.R.R. can be created only of Divisible Profits.
• Premium on redemption of Preference Share Capital should be
provided first out of Securities Premium, Capital Reserve
[realized in Cash], it they are inadequate, then form Divisible
Profit.
• If in balance sheet, partly paid Preference share given, then
make the final call and after call money received only fully paid
Preference shares can be redeemed.
• C.R.R. = Face value of Preference Shares to be redeemed
Less Proceeds of fresh issued of shares.
• Conversion of Preference Shares into Equity Share, new
Preference Shares amounts less fresh issue of shares.
• For converting partly paid Equity Shares into fully paid by cap
lasing Profit, only Free Reserves should be use.
• For issuing fully paid Bonus Shares, C.R.R. should be used first,
then Security Premium then other divisible profit.
• Divisible Profits: Profit available for distribution as divided.
• Party paid Preference share : i) Can not be redeemed, ii) Final
Call may made and after Preference shares fully paid up, then
only Preference shares can be redeemed.
   
• C.R.R. =  N.V. of Pref. Shares  Less  Proceeds of New 
 Redemed   issue of shares 
• Proceeds of Fresh issue: Amount received on a/c of share
capital. i.e.
Rs.100/- issued at par, proceeds = Rs.100/-
Rs.100/- issued @ Rs.140/-, proceeds = Rs.100/- (premium
ignore)
Rs.100/- issued @ Rs.96/-, proceeds = Rs.96/-.
• Unpaid amount of Preference shareholders, show in Balance
sheet as current liabilities.
• Issued of partly paid bonus: utilize only divisible profits.
• Issue of fully paid bonus share: utilized first C.R.R., the
Securities Premium lastly Revenue Reserve and Profit and loss
A/c surplus.
• Revaluation Reserve (Profit cannot be used for Bonus as well
as dividend)
301
• Workmen’s compensation Fund: It is free Reserve to extent

there is no compensation payable
• Workmen’s Profit sharing Fund / Provident Fund: There are
liabilities, hence cannot be used for C.R.R., payment of dividend
and bonus share.
10.3 EXERCISES:
10.3.1 OBJECTIVE QUESTIONS:

• Fill in the blanks.
a) 1,000 Equity shares of Rs.100/- each issued at 20% premium,

proceeds of Equity share capital will be Rs.__________.
b) Profits otherwise available for dividend is called as __________.
c) No company can issue __________ Preference shares.
d) Only __________ Preference shares can be redeemed.
e) Premium on redemption of Preference share can be provided
for either out of the __________ of the company or its
__________ accounts.
f) __________ Preference shares can not be redeemed.
g) Unpaid amount to some Preference shareholders who are non-
traceable, their claim should be shown as __________ in the
Balance sheet.
h) __________ should be use first for issue of fully paid Bonus
Equity Shares.
i) Investment sold @ 10% Loss, for Rs.180, 000/-, Loss on sale
amounts to Rs.__________.
   
j) C.R.R. =  ____________  Less  Proceeds of New 
   issue of shares 
k) Preference share redeemable within __________ years can be

issued.
l) Redeemable Preference shares can be issued only when it is
authorized by its __________.
m) Rs.6,00,000/-, 12% Debentures of Rs.100/- each converted into
10% Preference shares of Rs.10/- each @ Rs.15/-. C.R.R.
=Rs.__________
302
n) Rs.16, 00,000/- Preference shares to be redeem @ par. Free

Reserve available for redemption Rs.4,00,000/-. Ascertain
minimum number of Equity shares to be issue
a) Equity shares of Rs.100/- each at par __________.
b) Equity shares of Rs.10/- each at premium__________.
c) Equity shares of Rs.100/- each at 4% discount__________.
[Answer : a) Rs.1,00,000/-, b) Divisible Profit, c) Irredeemable Preference, d)

Fully paid, e) Profit Security Premium, f) Partly paid up, g) current liabilities,
h) C.R.R., i) Rs.20,000/-, j) N. value of Preference shares redeemed, k) 20, l)
Articles of Association, m) Nil or Not Req., n) [a – 12,000/-, b – 40,000/-, c –
12,500/-]
• Fill in the blanks.
I. For redemption of Preference share, a company can issue

Equity shares or __________ shares.
II. For redemption of Preference share amounting Rs.5, 00,000/-,
new 2,000 Equity shares Rs.100/- issued @ 5% Discount,
C.R.R. required Rs. __________ .
III. For redemption of 12% Preference share capital of Rs.12,
00,000/-.
a) When divisible Profit available Rs.6, 00,000/-, proceeds of
new issue of shares = Rs. __________.
b) When 4,000 Equity Shares of Rs.100/- issued @ Rs.125/-,
CRR = Rs. __________.
c) When 12% Debentures of Rs.10, 00,000/- issued @ 10%
premium, C.R.R. = Rs. __________.
d) When 20,000, 10% Preference shares of Rs.50/- each
issued @ 20% discount, C.R.R. = Rs. __________.
e) C.R.R. created Rs.7, 10,000/- out of Free Reserve, New
Equity Shares of Rs.100/-, issued @ 2% discount for
purpose of redemption of Preference shares.
IV. Rs.8,00,000/- 12% Preference shares are converted into
Equity shares of Rs.100/- @ 25% premium, then C.R.R.
__________ .
V. __________ section of Company Act 1956, relates to
Redemption of Preference shares.
VI. Dividend Equalisation Reserve is __________ Reserve.
VII. Failure to pay call money on shares result into __________ of
shares.
VIII. __________shares can be issued out of Capital Redemption
Reserve.
303
IX. The calls made on shares can not be consider as __________

of fresh issue of shares.
X. Conversion of Preference shares into new Equity shares at
par can be considered on proceeds of __________.
XI. On redemption of Preference share __________ is reduced.
XII. Loss on sale of Investment decreases __________ Reserve.
XIII. The issue of Debentures __________ be treated as proceeds
of fresh issue of shares.
[Answer : I – Preference, II – Rs.3,10,000/-, III – (a – Rs.6,00,000/-, b –

Rs.8,00,000/-, c – Rs.12,00,000/-, d – Rs.2,20,000/-, e – 4,900 shares), IV –
Rs.1,60,000/-, V – Sec.80, VI – Free, VII – Forfeiture, VIII – Proceeds, IX –
Fresh issue, X – Paid up share capital, XI – Free, XII – can not]
• Select the most appropriate answer.
i) For purpose of redemption of Preference share Company can

issue ___________ .
a) Debentures at premium b) Equity shares
c) Bonds d) Fixed Deposits Certificates
ii) Profit on sale of Investment should be debited to ___________ .

a) Profit & Loss A/c b) Capital Reserve A/c
c) Investment A/c d) Sinking Fund A/c
iii) Issue of bonus of make partly paid profits can be used

___________.
a) C.R.R. b) Securities Premium
c) Profits prior to incorporation d) Profit & Loss Account
iv) Capital Redemption Reserve should be created only when

redemption of Preference shares.
a) Some Preference shareholders non-traceable
b) Redemption out of divisible profits
c) Redemption out of issue of Equity shares
d) Redemption out of issue of Preference shares.
v) 50,000 Equity shares of Rs.10/- each, issued at Rs.20/-, for the

purposed of redemption of Preference share capital amounting
Rs.7, 50,000/-. How much amount to be transferred to C.R.R.
a) Rs.5, 00,000/- b) Rs.10, 00,000/-
c) Rs.2, 50,000/- d) Rs.2, 50,000/-
[Answer: (i – b), (ii – c), (iii – d), (iv – e), (v – c)]

304
• Select the most appropriate answer and write again.
i) Dividend paid to Preference shareholders on

a) Face value b) Called up
c) Paid up d) None of above
ii) Capital Redemption Reserve is created

a) Redemption of Debenture
b) Refund of Fixed Deposit
c) Redemption of Preference share capital
d) Redemption of Preference share capital out of Free Reserve
iii) Capital Redemption Reserve is created

a) Voluntarily
b) Redemption not out of proceeds of Debentures
c) Legal Requirements
d) All above the three
iv) A company can issue redeemable Preference shares

a) Only at par b) At premium
c) Out of Free Reserve d) All above the three
v) Preference share can be redeemed

a) Out of profits only
b) Out of proceeds of issue of shares
c) Partly out of issue of shares and balance of out of Free
Reserve
d) All the above
vi) After redemption of Preference share, Bonus share issued to

a) Preference Shareholders b) Old Equity Shareholders
c) New Equity Shareholder d) Both b and c
vii) The terms & redemption is specified at time

a) Redemption of Preference share
b) Payment to Preference shareholder
c) Divided by Board of Directors
d) Issue of shares
[Answer : (i – c), (ii – d), (iii – c), (iv – d), (v – d), (vi – d), (vii – d)]
• State whether the following statements are true or false.

i) Only partly paid Preferences can be redeemed.
ii) No company can issue irredeemable Preference shares.
iii) Preference share can be redeemed only out of Capital Profit.
iv) Only Equity Shares can be issued for purpose of redemption of
Preference shares.
305
v) Conversion of Preference shares into Equity shares are also

amounted to issue of Preference shares.
vi) Premium on redemption of Preference shares can be debited to
Revaluation Reserve.
vii) No company can issue redeemable Preference share after 15th
June 1988.
viii) Balance Security premium can be used for providing
premium on redemption of Preference shares.
[Answer : True – ii, iv, viii, False – i, iii, v, vi, vii]
i) Divisible profit mean available for distribution as divided.

ii) A company can redeemed Preference share out of proceeds of
fresh issue of Debentures.
iii) Company can redeemed Preference share out of proceeds of
fresh issue of Debentures.
iv) Company can not issue irredeemable Preference share.
v) Paid up share capital is reduce due to redemption of Preference
share capital.
vi) Premium or redemption of Preference share can be provided
out of Revaluation Reserve.
vii) Preference divided is payable annual even though the company
makes loss.
[Answer : True – i, iv, v, False – ii, iii, vi, vii]
• Match the columns :

I.
Group A Group B
i) Unclaimed Dividend a) Premium on Redemption of
ii) Security Premium Preference shares
iii)Capital Redemption Reserve b) Share final call made
iv) c) Can not be redeem
Partly paid Preference share d) Current Liabilities
v) Partly called up Preference share e) Capital Reserve
f) Redemption out of Free
Reserve
g) Can be redeem only after final
call money received
[Answer : (1 – d), (2 – a), (3 – f), (4 – c), (5 – g)]

306
II.
Group A Group B
i) Pre-incorporation Profit a) Appropriation of Profit
ii) Capital Redemption b) Proceeds of issue of
Reserve can be used Debentures
iii) Preference Dividend c) Rs.1,50,000/-
iv) Redemption of Preference d) Not Free Reserve
Share Capital e) Fully Paid Bonus share
v) 7,500 Preference Share of f) Free Reserve + proceed of
Rs.100/- redeemable at fresh issue of share
10% premium, issued of g) Rs.2,16,000/-
new 60,000 Preference h) Rs.2,00,000/-
Share at Rs.10/- at 20% i) Rs.1,90,000/-
premium C.R.R. j) Can not be issued by Ltd.
vi) 8,000 Equity share of company
Rs.100/- each, issued at k) Partly paid Bonus share
2% discount for redemption
of Preference share capital
Rs.10,00,000/- C.R.R. =
vii) Irredeemable Preference
Share
[Answer: (i – d), (ii - e), (iii – a), (iv – f), (v – c), (vi - g), (vii – j)]
10.3.2 THEORY QUESTION:

1. Explain the provision of the Companies Act, 1956, regarding
redemption of Preference Shares.
2. Distinguish between Redemption of Preference shares and buy
– back of Equity shares.
3. Write short notes on
a) Capital Redemption Reserve
b) Profit otherwise available for dividend
c) Proceeds of fresh issue of shares
d) Issue of fully paid Bonus Shares
e) Irredeemable Preference shares
f) Various methods of Redemption of Preference Shares
g) Profits not available for redemption of Preference shares
4. Redemption of Preference share of by way of conversion into
Equity shares issued at premium.
5. Redemption of Preference share at premium by a way of
conversion into New Preference Shares issued at discount.
307
10.3.3 PRACTICAL PROBLEMS:
Illustration 1
[For calculation of new issue to raised funds required]
The balance sheet of N J Ltd. as on 31st March 09 was as follows.
Share Capital : Fixed Assets : 6,12,000
1,500, 9% Preference Investments : 90,000
Share of Rs.100/- each Current Assets :
fully paid 1,50,000 Bank Balance 63,000
50,000 Equity of Rs.10/- Other Current Assets 4,27,000
each fully paid. 5,00,000
Reserve surplus :
Secured Loans :
Current Liabilities :
11,92,000 11,92,000
In order to facilitate the redemption of Preference shares and 10%

debenture, both redeemable at 10% premium the company
decided:
a) To sell all Investments for Rs.1,12,000/-.
b) To finance part of redemption from company funds, subject
to leaving a bank balance of Rs.40,000/-.
c) To issue minimum Equity shares of Rs.10/- each at a
premium of Rs. 40 per share to raise the balance of funds
required.
You are required to pass the necessary Journal entries to
record above the transaction and prepare balance sheet as on
completion of the above transactions.
I) Working for issue of shares Rs. Rs.
9% Preference Share Capital 1,50,000
10% Debentures 2,00,000 3,50,000
Premium payable on redemption 10% 35,000
Total amount required 3,85,000
Less: i) Available bank bal. 23,000

[63000-40000 required]
ii) Sale of Investment 1,12,000 1,35,000
Funds from new issue of Equity share 2,50,000
Amount required
Number of Equity Shares =
Proceed of one equity share
2, 50, 000
= = 5, 000
50
∴ 500 Equity share of Rs.10/- each issued @ Rs.40/- premium

308
II) Face value of Preference Share 1,50,000

Less: Proceeds of new issue of share (5000 X 10) 50,000
C.R.R. 1,00,000
(Balance sheet total: 10, 79,000)
2. (Minimum Reduction in Revenue Reserve)

The Balance Sheet of BM Ltd. as at 31st December, 2008 is as
follows :
Share Capital : Fixed Assets 1,85,000
750 redeemable Current Assets :
Preference shares of Stock 60,000
Rs.100/- each fully Debtors 10,000
paid 75,000 Investments 30,000
10,000 Equity Shares Bank 10,000
of Rs.10/- each fully
paid 1,00,000
Reserves and Surplus:
General Reserve 30,000
Current Liabilities 20,000
2,95,000 2,95,000
The company decided to redeem its Preference shares at a

premium of 10 per cent, on 31st January, 2009. A fresh issue of
Equity shares of Rs.10/- each was made at Rs.14/- pre share,
payable in full on 1st January, 2009. These were fully
subscribed and all moneys were duly collected. All the
Investments were sold realizing Rs.42,000/-. The Directors
wish that only a minimum reduction should be made in the
revenue reserves.
You are required to give the journal entries, including those
relating to cash to record the above transactions and draw up
the Balance Sheet as it would appear after redemption of
Preference shares.
3. (Bonus to make fully paid shares, issue of fully paid Bonus
share)
The Bharat Steel Ltd. whose issued share capital on 31st
December, 2008, consisted of 10,000 8% redeemable
Preference shares of Rs.100/- each fully paid and 50,000 Equity
shares of Rs.100/- each Rs.30/- paid up, decided to redeem
Preference shares at a premium of Rs.10/- per share. The
company’s balance sheet as at 31st December, 200 showed a
General Reserve of Rs.18,00,000/- and a Capital Reserve of
Rs.1,70,000/-. The redemption was effected partly out of profits
and partly out of the proceeds of a new issue of 7,000, 10%
cumulative Preference shares of Rs.100/- each at a premium of
309
Rs.40/- per share. The premium payable on redemption was

met out of the premium received on the new issue.
On 1st April, 2009, the company at its General meeting resolved
that all the Capital Reserves be applied in the following manner:
a) The declaration of bonus at the rate of Rs.10/- per share on
Equity shares for the purpose of making the said Equity
shares fully paid and
b) The issue of bonus shares to the Equity shareholders in the
ratio of one share for every shares held by them.
You are required to pass journal entries.
4. (Redemption of Preference shares at premium)

The following is the Balance Sheet of RK Ltd. as on 31st March
2009.
5,000 9% Investment 20,000
Redeemable Pref. Current Assets 86,000
Shares of Rs.10/- Cash at Bank 80,000
each fully paid 50,000
10,000 Equity shares
of Rs.10/- each fully
paid 1,00,000
Securities Premium
A/c 30,000
Profit & Loss Account 1,04,500
3,14,000 3,14,000
The company exercised its option to redeem on 1st April, 2009,

the whole of the Preference share capital at a premium of 10%
per cent.
To assist in financing the redemption, all the Investments were
sold for Rs.24, 000/-. On 1st May, 2009, the company made a
bonus issue of two Equity shares fully paid for every Equity
shares held on that date.
The appropriate resolutions having been passed the above
transactions were duly completed.
You are required to five pass the journal entries to record the
transactions in the books of the company and the balance sheet
after above transaction.
310
5. RK Ltd. has issued 5,000 12% redeemable Preference shares

of Rs.100/- each, Rs.80/- paid. In order to redeem these shares
now being redeemable, the company issued for cash 20,000
Equity shares of redeemed, balance being met out of the
General Reserve which stood at Rs.3,00,000/-. The company
then declared the bonus issue of 10,000/- ordinary shares of
Rs.10/- each to the existing ordinary shareholders out of reserve
created for redemption purpose.
Pass the necessary journal entries giving effect to the above
transactions.
6. On 1st July, 2008 the following balances appeared in the books

of Jai Ltd.
Particulars Rs.
10% Preference share capital 4,00,000
(Shares of Rs.100/- each redeemable on 31-12-2008,
at a premium of Rs.5/- per share)
Security Premium A/c 1,00,000
Profit & Loss A/c (Cr.) 3,00,000
To provide a part of cash necessary for the repayment of

Redeemable Preference Shares (which were redeemed on the
due date), the company made an issue of 14% Preference
Shares of Rs.100/- each at Rs.110/- per share payable in full on
application.
Applications for 1,200 of the new shares were received on 1 st
November, 2008 and expenses of the issue amounting to
Rs.10,000/- were paid on 30th November, 2005.
Show the Journal entries (including cash transactions)

necessary to record the above transactions in the books of the
company.
7. The following is the summarized Balance Sheet of A Ltd. as on
30th September, 2008.
10% Redeemable Current Assets 1,57,000
Preference shares of
Rs.100/- each 60,000
Equity shares of
Rs.100/- each fully
paid up 2,00,000
Security Premium 2,64,000
Creditors 1,60,000
4,57,000 4,57,000
311
The Preference shares were redeemed on 10th October, 2008 at

a premium of 15%. A bonus issue of two Equity share for every
five shares held was made on the same date. No trace could
be found of the holder of 20 Preference Shares.
You are required to give the journal entries in the book of the
company and draw up the resultant Balance Sheet in a
summarized form.
8. DT Ltd. has the following Balance Sheet as on 31-03-2009.
Issued, subscribed and Fixed Assets 19,00,000
fully paid up Current Assets 13,50,000
20,000 Equity shares of (including Bank bal.
Rs.100/- each 20,00,000 Rs.4,50,000/-)
50,000 Preference
Shares of Rs.10/- each 5,00,000
Capital Reserve 2,00,000
Security Premium A/c 1,00,000
32,50,000 32,50,000
The Preference shares are to be redeemed at 10% premium.

Fresh issue of Equity shares is to be made to the extent it is
required under the Companies Act for the purpose of this
redemption.
Show journal entries giving effect to the redemption and draw

up the Balance Sheet of the company as it would appear
immediately after the redemption.
9. On 1st April, 08 a company issued 4,000 12% Debentures of

Rs.100/- each. The interest is payable on 30th and 31st March
every year. The company is allowed to purchase its own
Debentures which may be cancelled or kept or re-issued at the
company’s option. The company made the following purchases
in the open market.
On 31st July 2008 500 Debentures at Rs.96/- ex-interest

On 30th Nov. 2008 200 Debentures at Rs.97/- cum-interest
The Debentures, which were purchased on 31st July 2008 were

cancelled on 31st December, 2008. All payments were made on
due dates.
Give journal entries to record the above transactions and the

relevant items in the Balance Sheet as on 31st March 2009.
312
10. (Forfeiture of Shares and their Reissue)

A company issued 20,000 6% Redeemable Preference Shares
of Rs.100/- each at par. At 30th June, 2009; the shares are to
be redeemed at Rs.110/- a share and for the purpose of
assisting the redemption 1,00,000 Equity Shares of Rs.10/-
each were issued at 40% premium. On the above date, 500 of
the Redeemable Preference Shares had been forfeited for non-
payment of the last call of Rs.20/-, 400 of which had been re-
issued as fully paid for Rs.80/- a share. The balance of Profit &
Loss Account was Rs.15,40,000/- and the General Reserve
Rs.2,00,000/-. On the same day, as the redemption took place,
a bonus was declared of Rs.10, 00,000/- to the Equity
shareholders.
Show the journal of the company to record the above transactions.

313
11
REDEMPTION OF DEBENTURES I
Unit Structure
11.0 Objectives
11.1 Introduction and Meaning
11.2 Definition
11.3 Types of Debentures
11.4 Debenture Interest
11.5 Issue of Debentures
11.6 Accounting Procedure for Issue of Debentures
11.7 Exercise
11.0 OBJECTIVES:
After studying the unit the students will be able to

 Define Debentures
 Explain the types of Debentures
 Know the terms of issue and redemption of Debentures
 Know the Terms of redemption
 Understand the Methods of redemption
 Explain the procedure of Conversion of debentures
 Understand how to create debenture redemption reserve as
per rules
 Journalize the transactions
 Solve the problems
11.1 INTRODUCTION AND MEANING:
A Debenture is a document acknowledging a loan to

company and executed under the common seal of the company,
usually containing provisions as to payment, of interest and the
repayment of principal amount and giving a charge on the assets of
a such a company, which may give security for the payment over
the some or all the assets of the company.
314
Issue of Debentures is one of the most common methods of

raising the funds available to the company. It is an important source
of finance.
11.2 DEFINITION:
Debenture may be defined as a certificate issued by
company under its seal acknowledging a debt due by to its holder.
The essential characteristic of debentures is indebtedness Sec.2
(12) of the Companies Act, 1956. A Debenture includes debenture
stock bonds any other securities of a company whether constituting
a charge on company assets or not. A person who purchases a
debenture is called a debenture holder.
11.3 TYPES OF DEBENTURES:

Different types of debentures can be classified as follows:-
I) ON THE BASIS OF SECURITY:

a) Naked Debentures: These Debentures are not secured
against any assets of the Co. In case of winding of the
company, debentures holders holding unsecured debentures
treated as unsecured creditors.
b) Secured Debentures: These Debentures are secured by a
charge on the assets of the company. These debentures are
secured either on a particular asset called fixed charge or on
the general assets of the company called floating charge.
The debentures holder has a right to recover outstanding
loan & interest out of such charge assets. These debentures
are issued by the company under an agreement which is
called “Mortgage Deed”. Such mortgage is registered with
Register of Companies.
II) ON THE BASIS OF PERFORMANCE:

a) Redeemable Debentures: The debentures are redeemed
by repayment of the amount of debentures after a specified
date, as per terms & conditions issued.
b) Irredeemable Debentures: In this case the issuing

company does not fix any date by which debentures should
be redeemed & the debentures holder cannot demand
repayment of the sum of debenture from the company so
long as it is going concern.
315
III) ON THE BASIS OF PRIORITY:
a) First debentures: As the name implies this type of

debentures are repaid before the repayment of other
debentures.
b) Second debentures: These debentures are paid after

payment of first debentures.
IV) ON THE BASIS OF CONVERTIBILITY:
a) Convertible debentures: Holders of such debentures are given

option to convert the debentures fully or partly into equity shares
or preference shares or new debentures after a specified time.
b) Nonconvertible debentures: The holders of this type of

debentures do not have any right to convert them into equity
shares etc.,
v) On the basis of Records:

a) Bearer debentures: Just like bearer cheques these
debentures can be transferred freely. Payment of interest is
made on productions of coupons attached with debentures.
b) Registered debentures: These are transferred only by

transfer deed. The complete particulars in regard to such
debentures are entered into register & the interest is paid
only to those whose name appears in the register.
11.4 DEBENTURE INTEREST:
Debentures being borrowed capital, they carry a specific rate

of interest payable on specified date Debentures interest is
expenditure & it is payable as an when interest is due whether
there is a profit or loss. It is usually paid half-yearly. The amount of
interest is calculated & paid on nominal value i.e., face value of
Debentures.
The following Journal entries are passed.

a) When debentures interest is due:
Debenture Interest A/c Dr. (Gross amt.)
To Tax Deducted as source (With income tax)
To Debentures holder A/c (Net amt. payable)
b) When net amount due is paid:

Debentures Holder A/c Dr.
To Bank A/c
316
c) At the end of the year balance in debenture interest being

expense transferred to P & L A/c
P & L A/c Dr.
To Debenture Interest A/c
11.5 ISSUE OF DEBENTURES:
11.5.1 Debentures can, be issued in three ways.
a) At par: Debenture is said to have been issued at par when the

amount collected for it is equal to the nominal value of
debentures. e.g. the issue of debentures of Rs. 100/- for Rs.
100/-.
b) At Discount: Debenture is said to have been issued at discount
when the amount collected is less than the nominal value, for
e.g., issue of debentures of Rs. 100/- for Rs. 95/-. The
difference of Rs. 5/- is the discount and is called discount on
issue of Debentures. This discount on issue of debentures is a
capital loss & it is charged to P & L A/c over the period of its
benefit to the company & it is shown under the head
“Miscellaneous Expenditure” on the assets side of the Balance
Sheet.
c) At Premium: When the price charged is more than it’s nominal
value, a debentures is said to be issued at a premium. e.g.,
issue of debentures of Rs. 100 each for Rs. 120, the excess
amount over the nominal value i.e., Rs. 20 is the premium on
issue of debentures. Premium received on issue of debentures
is a capital gain & it is credited to “Securities Premium A/c”.
Premium on issue of debentures cannot be utilised for
distribution of dividend. Premium on debentures is shown under
the head Reserves & Surplus on the liability side of the Balance
Sheet.
11.5.2 ISSUE OF DEBENTURES FOR CASH:
Debentures may be issue for cash at a par, at a discount or
at a premium. When amount is payable in installments entries will
be similar to the issue of shares. Any premium or discount on issue
of debentures is usually adjusted at the time of making allotment.
Premium payable on redemption of debentures is also adjusted at
the time of issue of debentures.
11.5.3 ISSUE OF DEBENTURES FOR NON-CASH

CONSIDERATION
Debentures may be issued for consideration other than cash
such as acquisition of business, or assets. It should be noted that
ouch debentures may be issue at par or at a premium or at a
discount.
317
11.5.4 ISSUE OF DEBENTURES AS A COLLATERAL

SECURITY
Debentures can be issued as collateral security against a

loan or overdraft from bank or other financial institution. Collateral
Security means an additional or parallel security. Debentures
issued as collateral security is a contingent liability. However, it can
become a definite liability only in the invent of default by the
company in repaying the loan. No interest is payable on such
debentures. Normally no entry is passed in the books for issue of
such debentures. Only a note is given under loan concerned that
such loans are secured by way of collateral security by issue of
debentures. Normally no entry is passed in the books for issue of
such debentures. Only a note, however, the following entry may be
passed in the books in the issue of such debentures:
Debentures Suspense A/c Dr.
To Debentures A/c
On repayment & release of debenture, the entry pass is
Debentures A/c Dr.
To Debentures Suspense A/c
11.6 ACCOUNTING PROCEDURE FOR ISSUE OF

DEBENTURES
No. Transaction Accounting Entries

1) Issue for cash (collection in
installments)
a) Receipt of application Bank A/c Dr.
money To Debentures Application A/c
b) Transfer of application Debentures Application A/c Dr.
money to debentures To Debentures A/c
c) Allotment money due Debentures Allotment A/c Dr.
To Debentures A/c
d) For receipt of allotment Bank A/c Dr.
money To Debenture Allotment A/c
e) Call money due Debenture Call A/c Dr.
To Debentures A/c
f) Receipt of call money Bank A/c Dr.
To Debenture Call A/c
Note: Discount or premium on issue of debentures should be adjusted
at the time of making allotment entries for such will be the similar to the
issue of shares.
318
2) Issue for cash (collection in

lump sum)
a) Issue at par redeemable Bank A/c Dr.
at par To Debentures A/c
b) Issue at discount Bank A/c Dr.
redeemable at par. Discount on issue of Debentures
A/c Dr.
To Debentures A/c
c) Issued at premium Bank A/c Dr.
redeemable at par. To Debentures A/c
To Securities Premium A/c
d) Issued at par redeemable Bank A/c Dr
at premium. Loss on issue of debentures A/c
Dr.
To Debentures A/c
To Premium on redemption of
debentures A/c
e) Issued at a discount Bank A/c Dr.
redeemable at premium. Loss on issue of debentures A/c
Dr.
To Debentures A/c
To Premium on redemption of
debentures A/c.
3) Issue of Debentures for Non-

cash consideration
a) On purchase of business Sundry Assets A/c Dr.
*Goodwill A/c Dr.
To Sundry Liabilities A/c
To Vendor A/c
To Capital Reserve A/c
Note: Goodwill=P.C consideration – Net Assets. OR

Capital Reserve = Net Assets – P. C
b) On issue of Debentures to
Vendor
(i) Issue at per redeemable Vendor A/c Dr.
at par To Debentures A/c
(ii) Issued at discount Vendor A/c Dr.
redeemable at par Discount on issue of Debentures
A/c Dr.
To Debentures A/c
(iii) Issued at premium Vendor A/c Dr.

redeemable at par To Debentures A/c
To Securities Premium A/c
319
(iv) Issued at par Vendor A/c Dr.

redeemable at premium. Loss on issue of debenture A/c Dr.
To Debentures A/c
To Premium on redemption
of debentures A/c
(v) Issued at a discount Vendor A/c Dr.
redeemable at premium Loss on issue of debentures A/c Dr
To Debentures A/c
To Premium on redemption
of debentures A/c
4) Issue of Debenture as No Entry
collateral security
11.6.1 Treatment of Discount on Issue of Debentures:
Discount on issue of debentures is a capital loss & such loss

is written off from books of account as early as possible. Following
journal entries passed to write off discount.
P & L A/c Dr.
To Discount on issue of Debentures A/c
Balance on discount is shown in the balance sheet on the
assets side under the head “Miscellaneous Expenditure”.
The amount of discount is written off in the following ways.
a) When debentures are redeemed after certain period.

In this case total discount on debentures is written off equally
each year over the period of debenture tenure.
Total Discount
Discount to be written off 
No.of years after which debentures will be redeemed
11.7 EXERCISE
 State whether true or false
1. Registered debentures are transferred only by transfer deed.
2. Redeemable Debentures are redeemed at any time.
3. Debenture interest is payable only when a company makes
profits.
4. When the price charged is more than its nominal value, a
debenture is said to be issued at a premium.
5. If the debentures are redeemed at discount such discount is a
revenue profit for the company.
320
6. Premium payable on redemption of debentures is a capital loss

for the company.
7. No interest is payable on the debentures issued as a collateral
security.
8. Debentures can be issued at a discount and redeemed at a
premium
9. The maximum rate of discount at which debentures can be
issued is 10%
10. Debentures can be forfeited for non-payment of calls.
11. A Company can buy its own debentures.
12. Debenture holders are the members of the company
 Fill in the blanks

1. When debentures are to be redeemed at their face value they
are to be said as----------------------------.
2. Accumulated balance of premium on redemption is shown
under the head------------ on the assets of the Balance Sheet.
3. If the term on issue of debentures is ‘Issued at par redeemable
at premium’ the journal entry is-----------------------
4. Debentures issued as collateral security is a ---------- liability.
5. The amount of interest is calculated and paid on-------------- of
Debentures.
6. Premium received on issue of debentures is a capital gain and it
is credited to----------------------------.
7. Debentures which are secured by a charge on the assets of the
company are termed as -----------------------
8. A company issues 100 debentures of Rs.1000 each at 97
percent. These are repayable out of profits by equal annual
drawings over 5 years. Discount on issue of debentures will be
written off in the__________ ratio
9. Debenture stock _____ partly paid
10. Raj Ltd. purchased assets of Alpa Ltd. for purchase
consideration of Rs. 60 lacs.It was decided that the purchase
consideration will be discharged by issue of 10% debentures of
Rs.10 each at a premium of 20%.The amount of debentures
issued will be___________
11. Hansa Ltd. purchased assets of Alpa Ltd. for purchase
consideration of Rs. 60 lacs. It was decided that the purchase
consideration will be discharged by issue of 10% debentures of
Rs.10 each at a discount of 20%.The amount of debentures
issued will be___________
321
12. ______________ debentures need not be registered with the

company.
13. The premium collected on issue of debentures is transferred to
_____________
14. Priya Ltd. issued 5000,12% debentures of Rs.100 each at a
premium of 10%,which are redeemable after 10 years at a
premium of 20%.The amount of loss on redemption of
debentures to be written off every year is _____________
15. Zenith Ltd. issued Rs. 1,00,000 Debentures at a discount of 6%
on 1st Jan.,2001 repayable at the end of the 5th year. Discount
written off is _________
16. Discount on issue of debentures is a________________
17. Loss on issue of debentures is treated as_____________

322
12
REDEMPTION OF DEBENTURES II
Unit Structure :
12.0 Objectives
12.1 Solves Problems
12.2 Terms of redemption
12.3 Methods of Redemption of Debentures
12.4 Accounting Procedure for Redemption of Debentures
12.5 Solved Problems
12.6 Key Terms
12.7 Exercise
12.0 OBJECTIVES
practical problems on redemption of debentures.
12.1 SOLVED PROBLEMS
Illustration: 1 A Ltd. issued 5000 debentures of Rs. 100 each at

10% discount redeemable at par after 10 years.
Total discount = 10% of Rs. 5, 00,000= Rs. 50,000
Rs. 50000
Discount returned off each year =
10 years
= Rs. 5.000 each year.
a) When debentures are redeemable in installment by annual

drawings.
In this case, discount written off each year is proportionate to

the debentures outstanding at the beginning of the year. At the end
of the life of debentures the entire discount on issue of debenture is
written off.
323
Illustration: 2 K Ltd., issued Rs. 1000000 15% debentures at 5%

discount and redeemable at 10% premium. Debentures are to be
redeemed in the following manner:
Year end Face value of debentures to be redeemed
Rs.
2 100000
3 200000
4 300000
5 400000
Give loss on issue of debentures account for the 5 Years.

Solution:
Bank A/c 950000
Loss on issue of debentures A/c 150000
To 15% debentures A/c 1000000
To Premium on redemption on debentures A/c 100000
(Being Loss to be written off in each year)
In the books of K Ltd.

Loss on issue of debentures account
Particulars AMT. Particulars AMT.

To 15% debentures A/c 1,50,000 By P & L A/c 37,500
By Bal. C/d 1,12,500
1,50,000 1,50,000
To Bal. B/d 1,12,500 By P & L A/c 37,500
By Bal. C/d 75,000
1,12,500 1,12,500
To Bal. B/d 75,000 By P & L A/c 37,500
By Bal. C/d 75,000
75,000 75,000
To Bal. B/d 41,250 By P & L A/c 26,250
By Bal. C/d
41,250 41,250
To Bal. B/d 15,000 By P & L A/c 15,000
15,000 15,000
Illustration: 3 (When amount of debentures is collected in

installments)
YES Ltd., issued 1000 10% debentures of Rs. 1000 each
payable at Rs. 250 on application & Rs. 750 on allotment.
Application mere received for 1000 debentures. All the applicants
mere allotted debentures. All the money were received. Pass the
journal entries in the books of the Company.
324
Solution:
Journal of YES Ltd
Particulars Dr. Cr.

Bank A/c Dr. 250000
To Debenture Application A/c 250000
(Application money of Rs. 250 per
debenture received on 1000 debenture as
per details in debenture Application Book.)
Debenture Application A/c Dr. 250000
To 10% Debenture A/c 250000
(Application money of Rs. 25 per
debenture transferred to Debenture A/c on
allotment of 1000 Debentures vide Board
Resolution No. .............dated .............&
per particulars in Debenture Application &
Allotment Book)
Debenture Allotment A/c Dr. 750000
(Allotment amount due on 1000
debentures at Rs. 750 per debenture vide
Board Resolution No. ............. dated
..........& particulars in debenture
Application & Allotment Book.)
Bank A/c Dr. 750000
To Debenture Allotment A/c 750000
(Allotment money of Rs. 750 per
debenture received on 1000 debentures
as per details in Allotment Book)
Balance sheet (extract) of YES Ltd.as on ____

a. Long term borrowings 1
10,00,000
Total ____10,00,000
ASSETS
1. Current Assets
a. Cash and cash 2
equivalents(balance 10,00,000
with banks) 10,00,000
Total
325
Notes to Accounts
No Particulars Amount Amount

1. Long term borrowings
a. 1000 10% debentures of Rs.
1000 each
10,00,000
2. Cash and Cash Equivalents
a. Balance with Banks 10,00,000
Illustration: 4 (When different conditions of issues and redemption

are given)
City Enterprises Ltd., Issued 1000 debentures of Rs. 100/-
each. You are asked to give journal entries on issue if.
1. The debentures are issued at par and redeemable at par.
2. Debentures are issued at discount of 5% but redeemable at par.
3. Debentures are issued at a premium of 5% but redeemable at a
par.
4. Debentures are issued at a discount of 5% but redeemable at a
premium of 5%.
5. Debenture issued at par but redeemable at 10% premium.
Solution:
Journal of City Enterprise Ltd.
Particulars Dr. Cr.

Bank A/c Dr. 100000
To Debenture A/c 100000
(Issue of 1000 7% debenture of Rs. 100
each vide Board Resolution No.
..........dated ..........& per details in
Debenture Application & Allotment
Register)
Bank A/c Dr. 95000
Discount on issue of Debentures A/c Dr. 5000
(Issue of 1000 debentures of Rs. 100 each
at a discount of 5% vide Board Resolution
No. ........... dated ............ & per particulars
in Debenture Application & Allotment
Register)
326
Bank A/c Dr. 105000

To Security Premium A/c 5000
(Issue of 1000 debenture of Rs. 100 each
at Rs. 105 vide Board Resolution No.
.........dated .............& particulars in
Debenture Application & Allotment
Register)
Bank A/c Dr. 95000
Loss of issue of Debenture A/c Dr. 10000
To Premium on redemption of 5000
Debentures A/c
(Issue of 1000 debentures of Rs. 100 each
at Rs. 95 but redemeable at Rs. 105 vide
Board Resolution No. ....... dated ............&
particulars in Debenture Application &
Allotment Register)
Bank A/c Dr. 100000
Loss of issue of Debenture A/c Dr. 10000
To Premium on redemption of 10000
Debentures A/c
(issue of 1000 debentures at par
redemeable at Rs. 110 vide Board
Resolution No.......... dated ......... & per
detail in Debenture Application & Allotment
Register)
Illustration: 5 (When amount of debenture is collected in

installments)
N Ltd. issued 1000, 8% Debenture of Rs. 100/- each at a

discount of 10% Payable as Rs. 10/- on application, Rs. 30/- on
allotment and Balance on final call All the money were duly
received.
Pass necessary journal entries in the books of company.

327
Solution:
Journal of N Ltd.
Particulars Dr. Cr.

Bank A/c Dr. 10000
To 8% Debenture Application A/c 10000
(Being application money received)
8% Debenture Application A/c Dr. 10000

(Being application money transferred to
Debenture A/c)
8% Debenture Allotment A/c Dr. 30000

Discount on 8% Debenture A/c Dr. 10000
(Being amount due on allotment)
Bank A/c Dr. 30000

To 8% Debenture Allotment A/c 30000
(Being Allotment money received)
8% Debenture First Call A/c Dr. 40000

(Being first call of Rs. 40 per share due)
Bank A/c Dr. 40000

To 8% Debenture First Call A/c 40000
(Being first call money received)
8% Debenture Final Call A/c Dr. 10000

(Being final call of Rs. 10 per share due)
Bank A/c Dr. 10000

To 8% Debenture Final Call A/c 10000
(Being final call received)
12.2 TERMS OF REDEMPTION
12.2.1 Meaning of redemption :
Redemption means repayment debenture is basically loan

capital and has to be repaid as terms agreed at the time of issue.
328
According to sec. 80A of the companies Act, 1956

debentures issued by a company have to be redeemed within 10
years after issue.
Debentures are normally redeemed after expiry of a

specified period. However, the company may redeem debentures
before expiry of a specified period; if articles of association &
debenture deed permit it. Even companies are allowed to
purchase it own debentures in open market such own debentures
may be kept by company as investment or it may be redeemed
own debentures by cancellation.
Debentures may be redeemed (repaid) a) at a par b) at a

premium or c) at a discount.
a) Redeemable at par: When debentures are to be redeemed at

their face value they are said to be redeemable at par.
b) Redeemable at a premium: When debentures are to be

redeemed at an amount higher than their face value they said to
be redeemable at a premium. For example, a debenture of face
value of Rs.100 may be redeemable at Rs.110 such premium
payable on redemption is a capital loss for the company. Such
premium even though payable on redemption must be provided
as a liability at a time of issue of debentures. Loss on issue of
debentures should be charged to the P & L A/c over the period
of it’s benefits to the company & it is shown under the head
Miscellaneous Expenditure on the assets of the Balance Sheet.
c) Redeemable at a discount: When debentures are to be

redeemed at an amount lower than their face value, they are said to
be redeemable at a discount such discount is a capital profit for the
company. Practically such debentures are not issued by any
company. However the company may purchase its own
debentures in open market when debentures are traded at less
than face value, and redeemed own debentures at discount.
The amount to be paid to debentures holders depends upon

the terms of issue. According to the terms of issue, the debentures
may be redeemable fully in one lump sum at a given time or in
installment or by drawing lots.
12.3 METHODS OF REDEMPTION OF DEBENTURES

1. Redemption In lump-sum, at the end of stipulated period :
Under this method the entire debentures are redeemed at

the stipulated date stated in the prospectus for the issue of
329
debentures. The drawback of this method is that the company has

to arrange a large amount at the time of redemption. Usually
companies prepare well advance for the redemption of debentures.
2. By Draw of Lots :
Under this method the company does not redeem all the
debentures at the same time. Instead it will call back only a portion
of its debentures in the market for redemption each year. The
company select the debentures of a predetermined value, by
drawing lot and they are redeemed that year. This method of
redemption reduces the burden of redemption. Planning is relatively
easy and the impact of redemption on the finance of the company
is limited.
Illustration 6
On 31st December, 2010 XYZ Ltd. had 12% debentures of Rs.4,50,
000, 1/3rd of which were selected by lot to be redeemed. Pass
Journal Entries for the redemption.
Date Particulars Amount Amount

Dr. Cr.
2010 12% Debenture Account Dr. 1,50,000
Dec 31 To Bank 1,50,000
(1/3rd Debentures redeemed by draw
of lots)
2010 Profit and Loss Appropriation a/c Dr 1,50,000
Dec 31 To Debenture Redemption Reserve 1,50,000
(Debenture redemption reserve
`created to substitute redeemed
debentures)*
Note: Debenture redemption reserve should be created even when

the question is silent about it.
12.3.1 REDEMPTION OUT OF CAPITAL :

This is the method of redemption of Debentures. Debentures
may be redeemed out of capital. Payments to debenture-holders
are not plain from date of issue of debenture. On redemption, the
debenture-holders are paid out of cash and bank balance. This
reduces working capital available with the company. As per SEBI
guidelines, redemption of debentures wholly out of capital is not
possible. And a company has to create debenture redemption
reserve equivalent to 50% of the amount of debenture issue,
before debenture redemption commences. Hence it will not be
possible for a company to redeem debentures purely out of capital.
Creation of debenture redemption reserve is not required for
issue of debenture with a maturity period of 18 months or less.
330
12.3.2 REDEMPTION OUT OF PROFIT:
Under this method the company holds a part of divisible

profit, for redeeming the debentures. The amount of profit is
reduced to the extent of debentures to be redeemed and hence not
available for distribution by way of dividend among the
shareholders. The existing liquid resources are not affected by
redemption of debenture.
For redemption of debentures out of profit; adequate amount
is appropriated from profit and loss appropriation A/c and it is
transferred to Debenture Redemption Reserve A/c every year till
debenture redeemed.
The companies' amendment Act 2000 has introduced Sec.
117 C dealing with the liability of a company to create "Debenture
redemption reserve A/c" (DRR). DRR represents the retention out
of profits made for the purpose of redeeming debentures. As it is
created for a specific purpose out of revenue profits, it may be
called as a "Specific Revenue Reserve".
12.3.3 DEBENTURE REDEMPTION RESERVE (D.R.R):
Following guidelines has been issued with regard to redemption of

debentures.
 Every company shall create D.R.R in case of issue of
debentures with maturity period of more than 18 months.
 D.R.R. shall be created for non-convertible debentures and non-
convertible portion of partly convertible debentures.
 A company can create D.R.R. equivalent to at least 50% of the
amount of debentures issue before starting the redemption of
debentures.
 Withdrawal from D.R.R is permissible only after 10% of
debenture liability have been actually redeemed by the
company.
 DRR shall be treated as part of general reserve; for
consideration of bonus issue proposal.
 The company shall create D.R.R. for redemption of debentures.
A company can create D.R.R. by transferring adequate amount
from profit & Loss appropriation A/c until such debenture
redeemed debentures. However, it does not specify the
percentage or amount to be transferred to D.R.R.
There are three options available to the company in regard:

331
12.3.4. DRR AMOUNT NOT INVESTED OUTSIDE BUSINESS :
The amount of divisible profits with held by the company

may be retained in the business itself as a source of internal
finance. I.e. DRR amount not invested outside business to provide
cash for redemption.
In such case following entries are passed.
1) On debentures becoming due for redemption
Debentures A/c Dr. [with face value]
Premium on redemption of
Debentures A/c Dr. [with premium it any]
To Debenture holder A/c Total amount to be paid
2) On redemption
Debenture holder's A/c Dr. with the amount paid
To bank A/c
3) On transfer of profit to D.R.R.
Profit & Loss appropriation A/c Dr.
To Debenture redemption Reserve A/c
Note: Every year adequate amount should be transferred to
D.R.R.
4) On redemption of debenture balance, in D.R.R. can be
transfer to general reserve A/c
Debenture redemption reverses A/c Dr.
To General Reserve A/c
12.3.5 Redemption by Purchasing in the Open Market :
Debentures can be redeemed by purchasing them from the
open market. If a company finds its debentures are available in the
open market at cheap rate it will purchase those debentures and
cancel them. Price paid for the debentures depends on the market
quotation
*If the quotation is Ex-interest it excludes the interest and for

recording purposes interest is calculated and added separately to
the quotation.
*If the quotation is Cum-interest that means it is with interest and

interest deducted from the total price. If nothing is stated then the
quotation is to be considered Ex-Interest. Interest on debentures
is generally paid half-yearly to the holders on certain certified dates.
E.g. 30th September & 31st March every year. If the debentures are
purchased between the specified dates, the quotation may be Cum-
332
Interest or Ex-Interest depending upon whether it includes the

interest in the price paid for the purchase of debentures.
E.g if the purchase price is Rs. 95 per debenture of 9% debenture

Face value Rs. 100 on 31st July, then the price can be cum-interest
or ex-interest.
Case 1 : if cum-interest, then it includes the interest for the period

from 1st April to 31st July (4 Months). This amounts to
100*9/100*4/12=Rs. 3
Hence the purchase price of Debenture is Rs. 95-Rs.3= Rs.92
Case 2: Ex-Interest, then the purchase price is Rs.95 and in
addition Rs. 3 to be paid as interest, so the company pays Rs.95+
Rs.3(Interest) = Rs. 98
*Amount paid towards the price of debentures is capital expenditure

whereas amt paid for interest is revenue expenditure.
*When securities are purchased or sold on a date other than the

date of interest, distinction must be made between the capital and
revenue portion of the price paid for the debentures.
Illustration 7
On 1st January 2003 a limited company purchased its 8%

debentures of Rs.50,000 at 90% from the open market for
cancellation. Pass necessary journal entries.
Journal Entries
Dr. Cr.
2003 8% Debenture Account Dr. 50,000
Jan 01 To Bank 45,000
To Profit on redemption 5,000
(Purchase of Debentures from open market
for cancellation)
2003 Profit on Redemption of Debentures Dr. 5,000
Jan 01 To Capital Reserve 5,000
(Profit on Redemption transferred to capital
reserve)
2003 Profit and Loss Appropriation a/c Dr. 45,000
Jan 01 To Debenture Redemption Reserve 45,000
a/c
(Reserve created for redemption of
debentures)
333
12.3.6 Sinking fund / debenture redemption fund investment

method :
In most cases, the debentures are redeemable in lump sum

on a specified date. Therefore it is necessary to make an
arrangement for the amount required to redeem debentures.
Sinking fund/Debenture redemption fund is created by

setting aside a fixed sum of profit every year. The amount of
annual appropriation should be such amount which required for
payment on redemption, debenture holders. Such accumulate a
fixed amount at the expiry of given period of time and at given rate
of interest. For calculating annual appropriation towards Sinking
fund, Sinking fund table can be used.
Annual Appropriation  Amount payable at the Relevant sinking

time of Re demption of X Fund Table value
Debentures
The same amount is Invested in readily marketable

securities. Income from such Investment (S.F. Investment) is
credited to Sinking fund and along with annual appropriation. It is
invested every year; till debenture, become due for redemption.
When debentures become due for redemption, Sinking fund
investment is realized. Any profit OR loss on sale of S.F.
investment is transferred to Sinking fund A/c again any profit or loss
on redemption of debenture is also transferred to Sinking fund.
After redemption of debenture, balance in Sinking fund is free
reserve, therefore it is transferred to general reserve, in case of
partial redemption of debenture to the extent nominal value of
debentures redeemed should be transferred to general reserve.
The accounting entries in such a case will be as follows:
I First year [At the end]

(1) On transfer of profit to Sinking fund account.
Profit and loss appropriation A/c Dr. with annual
To Sinking Fund A/c Appropriation
(2) On purchase of S.F. investment

Sinking Fund Investment A/c Dr. With amount
To Bank A/c invested.
Note: i) Sinking fund is also called debenture redemption reserve

A/c
ii) Sinking fund balance is shown on the liabilities side of
balance sheet under the head reserve and surplus. Sinking Fund
Investment on the asset side under head investment.
334
II Second and subsequent years over the life of the

debentures excepting the last year.
1. On receipt of interest on Sinking

Fund Investment
Bank A/c Dr. With the amount of
To Interest on Sinking Fund interest received
Investment A/c on S.F. investment
2. On transfer of interest
Interest on Sinking fund investment With the amount of
A/c Dr. interest received
To Sinking Fund A/c
3. On transfer of annual appropriation
Profit & Loss Appropriation A/c Dr. With the amount of
To Sinking Fund A/c interest received
4. On investment purchased
[Annual appropriation + Interest
received on S.F. investment]
Sinking fund investment A/c Dr.
To Bank A/c
III In the last year when the Debentures becomes due for
redemption (at the end of year).
1. On receipt of interest on Sinking fund

investment
Bank A/c Dr.
To Interest on Sinking Fund
Investment
2. On transfer of interest
Interest on Sinking fund investment A/c
Dr.
To Sinking Fund A/c
3. For transferring annual appropriation

Profit & Loss appropriation A/c Dr.
To Sinking Fund A/c
4. On realization of Sinking fund

investments
a) at cost
Bank A/c Dr.
To Sinking Fund Investment
335
b) At profit
Bank A/c Dr. Amount Profit
realized
To Sinking Fund Investment cost of
invest
To Sinking Fund A/c
c) At Loss
Bank A/c Dr.
Amount
Sinking fund A/c Dr. realized
loss on sale
To Sinking Fund Investment cost
5. On debentures are due for payment
a) At par
Debentures A/c Dr. Nominal
value of the
To Debenture holder A/c Debentures
b) i) At premium
Debentures A/c Dr. X
Premium on redemption of
debentures A/c Dr. X X
To Debenture holder's A/c
b) ii) On transferring premium
On redemption of debentures
(if it is not provided at time of issue
of debentures]
Sinking fund A/c Dr.
To premium on redemption of X
debentures A/c X
c) At discount
Debentures A/c Dr. Face value
Amt.to be
To Debenture holder's A/c paid
Dis. on
To Sinking Fund A/c redemption
6. On payment/Redemption
Debenture holder's A/c Dr. X
To Bank A/c X
7. On transfer of Sinking fund balance to

general reserve
Sinking fund A/c Dr.
To General Reserve A/c
Note: In case of partial redemption of debentures, to the extent of

nominal value of debenture redeemed should be transferred to
General Reserve.
336
Note: 3
i. No investment should be made in last year
ii. This method assures the availability of profit and sufficient
cash for purchasing investment.
iii. Where only part of the debentures redeemed it must be
ensured that the balance in Sinking fund is equal to 50% of
the amount of debentures issue on the date of redemptions
is obligatory. However, a company may create more reserve
if it so desires.
12.3.7 Redemption of debentures by conversion into new class

of shares or debentures :
Conversion of debentures into shares is another method of

redemption. When debentures are converted to shares, the
company does not pay money to debenture holders. Instead the
company issues share certificates in place of debentures. It may
look good for the company because there is no need of cash
payment. But the company is selling its shares. Selling shares is
actually selling part of the ownership. Debenture holders become
shareholders as company agree to give some shares to make the
issue of debentures more attractive to buyers.
When the company converts debentures into shares it may

issue shares at par premium of discount. If the company converts
debentures of Rs.5,000 in shares issued at par means the
company cancels debentures of Rs.5,000 and issues share of the
same value. Debentures become share capital of equal value.
When the company issues shares at a premium, the debenture

holders get less in the form of shares than what they were holding
as debentures. It is opposite in case of a issue at a discount.
Illustration 8
On 31st December 2013, a limited company redeemed its 6%

debentures of the total value of Rs.100,000 by converting
debentures of Rs.63,000 into equity shares of Rs.100 each and
paying cash for the balance.
Pass Journal Entries assuming that:
a. Equity shares have been issued at a premium of 25%
b. Equity shares have been issued at a discount of 10%
a. Equity shares issued at premium:

No of equity shares issued = 63,000 / 125 =504
337
Journal Entries

Dr. Cr.
2013 6% Debenture Account a/c Dr. 100,000
Dec 31 To Debenture holders a/c 100,000
(Debentures transferred for redemption)
2013 6% Debenture holders a/c Dr. 37,000
Dec 31 To Bank a/c 37,000
(Debentures redemption by payment)
Dec 31 To Share capital 50,400
To Securities Premium 12,600
(Debentures redemption by conversion))
2013 Profit and Loss Appropriation a/c Dr 37,000
Dec.31 To Debenture Redemption Reserve 37,000
(Reserve created for the redemption by cash
payment)
b. Equity shares issued at Discount
No of equity shares issued = Rs.63,000 / 90 = 700

Dr. Cr.
2013 6% Debenture Account a/c Dr. 100,000
Dec 31 To Bank a/c 37,000
(Debentures redemption by payment)
Dec 31 Discount on issue of Shares Dr 7,000
To Share capital 70,000
(Debentures redemption by conversion)
2013 Profit and Loss Appropriation a/c Dr 37,000
Dec.31 To Debenture Redemption Reserve 37,000
(Reserve created for the redemption by cash
payment)
338
12.4 ACCOUNTING PROCEDURE FOR REDEMPTION

OF DEBENTURES
Accounting Entries:
Date Particulars L Dr. Rs. Cr. Rs.
Sr. No. F
1. On debentures becoming due
for payment
a) Redemption at par
Debentures A/c Dr. (F.V.) X
To debenture holders A/c X
b) Redemption at a premium
Debentures A/c Dr. F.V.
Premium on redemption of With
debentures A/c premium
To Debenture holders A/c With amount
payable
c) Redemption at discount
Debenture A/c Dr. F.V. with amount
To debenture holders A/c payable dis.
To profit on redemption of on redemption
debenture A/c Discount
earned
2. On redemption
Debenture holders A/c Dr. X
To Bank A/c X
3. On transfer of premium on
redemption
Securities premium A/c Dr. X
OR
Profit & Loss A/c Dr. X
To premium on redemption X
of debentures A/c
Note: [Only it it is not provided
at the time of issue of
debentures]
4. On transfer of profit to D.R.F.
Profit & Loss Appropriation A/c X
Dr.
To Debenture Redemption X
Reserve A/c
5. On transferring the balance on
debenture redemption reserve
Debenture redemption reserve X
A/c Dr.
To General Reserve A/c X
Illustration no.9 [Issue of debenture and redemption under

various alternatives]
Give necessary journal entries both at time of issue and
redemption of debentures in each of the following alternative cases.
I. K Ltd. Issued 5000, 9% debentures of Rs.100 each at par

and redeemable at par at the end of five years.
339
II. K.P.M. Ltd. issued 5000, 9% debentures of Rs.100 each at

2.5% discount, redeemable at par at the end of five years.
III. O.K. Ltd. issued 5000, 9% debentures of Rs.100 each at a
premium of 10% to be redeemed at par at the end of five
years.
IV. Mama Ltd. issued 5000, 9% debentures of Rs.100 each at
par, redeemable at 5% premium at the end of five years.
V. Yes Ltd. issued 5000, 9% debentures of Rs.100 each at a
discount of 3%, redeemable at a premium of 7% at the end
of five years.
VI. OM Ltd. issued 5000, 9% debentures of Rs.100 each at a
discount of5% redeemable at a discount of 5% at the end of
five years.
Solution:
All above companies issued debenture on 1st January 2001
debenture interest paid annually on 31st December every year.
[Narration not required]
Solution:
Important Note: Even though redemption is out of capital,
debenture redemption reserve is created as per 4/5 117C
requirement of the companies amendment Act 2000
Solution:
Case I
Journal of K Ltd.
Date/ Particulars L Dr. Rs. Cr. Rs.
Year F
1 Jan 01 1. On issue of 5000 debenture of
Rs.100 each at par
Bank A/c Dr. 500,000
To 9% Debentures A/c 500,000
31 Dec 01 2. For debenture interest paid
Debenture interest A/c Dr. 45,000
To Bank A/c 45,000
31 Dec 01 3. For transferring debenture interest
Profit and Loss A/c Dr. 45,000
To debenture interest A/c 45,000
31 Dec 01 4. On transferring profit to D.R.R.
Profit and Loss Appropriation A/c Dr. 100,000
To Debentures redemption reserve 100,000
31.12.02 A/c
31.12.03 Entry no.2, 3, 04 will
31.12.04 be repeated every year
31.12.05 with same amount.
340
31.12.05 5. On debentures are due for

payment at par
9% Debentures A/c Dr. 500,000
To Debenture holders A/c 500,000
31.12.05 6. On redemption
Debenture holder's A/c Dr. 500,000
To Bank A/c 500,000
31.12.05 7. On transfer of D.R.R.
Debenture redemption reserve A/c 500,000
Dr.
To General Reserve A/c 500,000
Case II
Journal of K.P.M. Ltd.
F
1 Jan 01 1. On issue
Discount on issue of debentures A/c 12,500
Dr. 500,000
To 9% Debentures A/c
31 Dec 2. On payment debenture interest
01 Debenture interest A/c Dr. 45,000
To Bank A/c 45,000
31 Dec 3. On transferring debenture interest
01 Profit and Loss of discount of issue of 47,500
debentures.
Profit & Loss A/c Dr.
To Debenture interest 45,000
To Discount on issue of debenture 2500
A/c
31 Dec 4. On transferring profit to D.R.R.
01 Profit and Loss Appropriation A/c Dr. 100,000
A/c
31.12.02 5. Entry no.2, 3, 04 will be repeated
31.12.03 every year
31.12.04
31.12.05

payment at par
9% debentures A/c Dr. 500,000
To Bank A/c 500,000
Dr.
341
Case III
Journal of O.K. Ltd.

F
To securities premium A/c 50,000
31 Dec 2. On payment debenture interest
01 Debenture interest A/c Dr. 45,000
To Bank A/c 45,000
31 Dec 3. On transferring debenture interest
01 Profit & Loss A/c Dr. 45,000
To Debenture interest 45,000
31 Dec 4. On transferring profit to D.R.R.
01 Profit and Loss Appropriation A/c Dr. 100,000
To Debentures Redemption 100,000
Reserve A/c
31.12.03 every year
31.12.04
31.12.05
payment at par
To Bank A/c 500,000
Dr.
Case IV
Journal of Mama Ltd.
F
Loss on issue of debentures A/c Dr. 25,000
To Premium on redemption of 25,000
debenture
31 Dec 01 2. On payment of debenture interest
To Bank A/c 45,000
31 Dec 01 3. On transferring debenture interest
and w/off 1/5 of loss on issue of
debenture
To Debenture interest A/c 45,000
To Loss on redemption of 5,000
debenture
342
31 Dec 01 4. On transferring profit to D.R.R.

A/c
31.12.03 every year
31.12.04
31.12.05
payment at 5% premium
9% debentures A/c Dr. 500,000
Premium on redemption of 25,000
debentures A/c
To Bank A/c 525,000
Debenture redemption reserve A/c Dr. 500,000
Case V
Journal of Yes Ltd.
F
01.01.01 1. On issue
Loss on issue of debentures A/c Dr. 50,000
To Premium on redemption of 35,000
debenture
31.12.01 2. On payment of debenture interest
To Bank A/c 45,000
31.12.01 3. On transferring debenture interest
and w/off 1/5 of loss on issue of
debenture
To Loss on redemption of 10,000
debenture
31.12.01 4. For transferring profit to D.R.R.
A/c
31.12.03 every year
31.12.04
31.12.05
343

payment at 5% premium
Premium on redemption of 35,000
debentures A/c
To Bank A/c 535,000
Debenture redemption reserve A/c Dr. 500,000
Case VI
Journal of OM Ltd.
F
01.01.01 1. On issue
Discount on issue of debentures A/c 25,000
Dr.
31.12.01 2. On payment of debenture interest
To Bank A/c 45,000
31.12.01 3. On transferring debenture interest
and w/off 1/5 of Discount on issue of
debenture
To Loss on issue of debenture A/c 5,000
31.12.01 4. For transferring profit to D.R.R.
To Debentures Redemption 100,000
Reserve A/c
31.12.03 every year
31.12.04
31.12.05
31.12.05 6. On debentures due for payment at

discount
To Discount on redemption A/c 25,000
To Bank A/c 475,000
Dr.
Note: According to prudence and realization concepts, discount on

redemption of debenture being gain, should be recorded at the time
344
of redemption of debenture and not at the time of issue or allotment

of debentures.
12.5 SOLVED PROBLEMS:
Illustration No. 10 [Sinking fund created for redemption of

debentures at the end of the specified period.]
On 1st January 06 S Ltd. issued 2000, 10% debentures of

Rs.100 each @ 5% premiums, redeemable at par. The company
decided to set aside every year a sum of Rs.63440 to be invested
in 5% Govt. securities. The investments were sold at Rs.130200 at
the end of third year and debentures were redeemed.
Give journal entries in the books of S Ltd.
Solution
Journal of S Ltd.

F
01.01.06 Bank A/c Dr. 210,000
To Securities premium A/c 10,000
[Being 2000, 10% debentures of
Rs.100 each issued @ 5% premium]
31.12.06 Profit and appropriation A/c Dr. 63,440
To Sinking Fund A/c 63,440
[Being amount set aside from profit for
redemption of debentures]
31.12.06 Sinking fund investment A/c Dr. 63,440
To Bank A/c 63,440
[Being 5% Govt. securities purchased
out of Sinking fund]
31.12.07 Bank A/c Dr. 3172
To Interest on Sinking Fund 3172
Investment
[Being into @ 5% received on Sinking
fund investment]
31.12.07 Interest on Sinking fund investment 3172
A/c Dr.
To Sinking Fund A/c 3172
[Being interest received on Sinking
fund investment transferred to Sinking
fund]
31.12.07 Profit and Loss appropriation A/c Dr. 63,440
redemption of debentures]
345
31.12.07 Sinking fund investment A/c Dr. 66,612

To Bank A/c 66,612
[Being 5% Govt. securities purchased
out of Sinking fund 63440 + 3172]
31.12.08 Bank A/c Dr. 6503
To Interest on Sinking Fund 6503
Investment A/c
[Being interest received on Sinking
fund investment 130052 x 5%]
31.12.08 Interest on Sinking fund investment 6503
A/c Dr.
To Sinking Fund A/c 6503
[Being interest on Sinking fund
investment transferred to Sinking fund]
31.12.08 Profit & Loss appropriation A/c Dr. 63,440
redemption of debenture A/c]
31.12.08 Bank A/c Dr. 130,200
To Sinking fund investment A/c 130,052
To Sinking fund A/c 148
[Being amount received on sale of
Sinking fund investment of profit]
31.12.08 10% Debenture A/c Dr. 200,000
To Debenture holder's A/c 200,000
[Being 10% debenture due for
redemption]
31.12.08 Debenture holder's A/c Dr. 200,000
To Bank A/c 200,000
[Being amount paid to debenture
holders]
31.12.08 Sinking fund A/c Dr. 200,143
[Being balance in Sinking fund
transferred on redemption of
debentures]
Working Notes:
1. In year 2007, annual appropriation plus int. on Sinking fund
investment received is invested.
2. Profit on sale Sinking fund investment is credited to Sinking
fund.
3. On 31.12.08, no Sinking fund investment made as
debentures are due for redemption on that date.
Illustration No. 11 [Debenture are issued at discount, Sinking fund

created]
346
On 01/04/2004 P Ltd. issued 4,000, 12% debentures of

Rs.100/- each @ 5% discount. The debentures as redeemable @
4% premium in lump sum on 31/03/2007. The interest is payable on
30th September, and 31st March. The company closes the
accounts on 31st March every year. It has been stipulated to
annually appropriate Rs. 124,000 towards debenture redemption
fund & invest the same in 10% IDBI bonds together with interest
received. Interest is received on 31st March every year &
investment is also made on the same day. On 31/03/2007, the
investment is sold for Rs.2, 62,000 including bonus & the debenture
are redeemed. Show relevant ledger accounts in the books of P
Ltd.
In the books of P Ltd.

12% Debenture
Date Particulars Rs. Date Particulars Rs.
31/03/05 To balance 4,00,000 01/04/04 By Bank A/c 380,000
c/d By Disc. on
issue of 20,000
Debenture
4,00,000 4,00,000
31/03/06 To bal c/d 4,00,000 01/04/05 By bal b/d 4,00,000
4,00,000 4,00,000
31/03/07 To 4,00,000 01/04/06 By bal b/d 4,00,000

debenture
holders A/c
4,00,000 4,00,000
Loss on issue of Debenture

01/04/04 To discount 31/03/05 By Profit &
on issue of Loss A/c
debenture 20,000 [36000 x 1/3] 12,000
To premium
on
redemption 16,000 By Bal. c/d 24,000
of debenture
36,000 36,000
01/04/05 To bal c/d 24,000 31/03/06 By P & L A/c 12,000

31/03/06 By bal c/d 12,000
24,000 24,000
31/03/07 To bal. c/d 12,000 31/03/07 By P & L A/c 12,000
12,000 12,000
347
Debenture Interest A/c

30/09/04 To bank A/c 24,000 31/03/05 By P & L a/c 48,000
31/03/05 To bank A/c 24,000
48,000 48,000
30/09/05 To Bank A/c 24,000 31/03/06 By P & L A/c 48,000

31/03/06 To Bank A/c 24,000
48,000 48,000
30/09/06 To Bank 24,000 31/03/07 By P & L A/c 48,000

31/01/07 To Bank 24,000
48,000 48,000
Premium on redemption of Debenture A/c

31/03/05 To balance c/d 16,000 01/04/04 By loss on 16,000

issued
debenture
16,000 16,000
31/03/06 To bal c/d 16,000 01/04/05 By bal b/d 16,000
16,000 16,000
31/03/07 To Debenture 16,000 01/04/06 By bal b/d 16,000

holders A/c
16,000 16,000
Debenture Redemption fund invest A/c

Dr. Cr.
31/03/05 To Bank A/c 1,24,000 31/03/05 By Bal. c/d 1,24,000
1,24,000 1,24,000
01/04/05 To bal b/d 1,24,000 31/03/06 By bal c/d 2,60,400

31/03/06 To Bank A/c 1,36,400
2,60,400 2,60,400
01/04/06 To Bal. b/d 2,60,400 31/03/07 By Bank 2,62,000

31/03/07 To debenture 1,600 A/c
redemption
reserve profit
2,62,000 2,62,000
348
Debenture Redemption fund A/c

31/03/05 To balance 1,24,000 31/03/05 By profit & 1,24,000
c/d Loss
appropriation
1,24,000 1,24,000
31/03/06 To bal c/d 2,60,400 01/04/05 By bal b/d 1,24,000

31/03/06 By Bank A/c 12,400
(Int.)
31/03/06 By Profit & 1,24,000
Loss
appropriation
2,60,400 2,60,400
To general 4,12,040 31/03/06 By bal b/d 2,60,400

reserve A/c By Bank A/c 26,040
(Bal. By profit &
transferred) Loss
appropriation 1,24,000
A/c
By
debenture
redemption 1,600
reserve A/c
4,12,040 4,12,040
9% Debenture holder A/c

31/03/07 To Bank A/c 4,16,000 31/03/07 By 9% 4,00,000
Debenture
A/c
31/03/07 By premium 16,000
on
redemption
of debenture
4,16,000 4,16,000
Illustration 12
JJ ltd. had debentures of Rs.3,000. In redemption of these

debentures the company offered:
a. cash or
b. equity shares issued at a premium of 50%.
Half the debenture holders opted for cash and remaining half
opted for shares. Pass journal entries.
349

Dr. Cr.
Xxx 1. X% Debenture Account a/c Dr. 3,000
To Debenture holders a/c 3,000
(Debentures transferred for conversion))
Xxx 2. Debenture Holders a/c Dr. 1,500
To Bank a/c 1,500
(Debentures redeemed by cash payment)
Xxx 3 P&L Appropriation a/c 1,500
DRR 1,500
(Appropriation of profit for the debentures
redeemed)
Xxx 3. Debenture Holders a/c Dr. 1,500
To Share capital 1,000
To Securities premium 500
(Debentures redeemed by conversion)
Illustration 13
On 1st January, 2000 a company issued 5000, 15%

debentures of Rs.100 each at Rs.98. Holders of these debentures
had an option to convert their debentures into 10% preference
shares of Rs.100 each at a premium of Rs,20 per share at any time
within 2 years. On 31st December, 2000 a holder of 1200
debentures notified his intention to exercise his option. Pass
necessary Journal entries.

Dr. Cr.
2000 Bank a/c Dr. 490,000
Jan 1 Discount a/c Dr. 10,000
To 15% Debenture a/c 500,000
(Issue of debentures at discount)
2000 15% Debenture a/c Dr. 120,000
Dec 31 To 10% Preference share capital Dr 100,000
To Securities Premium 20,000
(Debentures redemption by conversion)
12.6 KEY TERMS
 Redemption of Debentures: Repayment of Debentures.

 Sinking Fund: It is a fund created out of Profit for the
purpose of redemption of Debentures.
 Sinking Fund Investments: Annual Profit appropriated, along
with Interest received, is invested in outside securities. Such
investment is known as Sinking Fund Investment.
350
 Own Debentures: These are companies own Debenture,

purchased in open market, for investment or for immediate
cancellation.
 Premium on Redemption of Debentures: It is additional
amount to Debenture holders at time of redemption. It is a
Capital Loss to the company. Normally it is provided at the
time of Issue of Debentures.
 Cum Interest: means interest is also included in the price of
debenture upto the date of purchase of debenture.
 Ex Interest: means interest is not included in the price of
debenture while purchasing.
 Annuity method: When Company plans to redeem the
debentures after a specified time period with the help of its
investment, which is created through investing a certain fixed
sum after a specific time period to acquire a desired sum at
the time of requisition of sum, accordingly Company also,
earns interest on its principal amount.
Key Points:
 Debenture may be issued at par, or at discount or at
premium. Similarly, Debentures may be redeemed at par, at
discount or at a premium.
 Discount / Loss on issue of Debentures, is Capital Loss can
be transferred to Securities Premium A/c or Profit & Loss
A/c. Normally it is written off over the period of outstanding
Debentures. Till the Loss / Discount not written off, it
appears in the Balance sheet of the company on the asset
side, under heading Miscellaneous Expenditure” (to extent
not written off)
 Any Profit or Loss on sale of Sinking Fund investment should
be transfer to Sinking Fund A/c.
 Redemption of Debentures, balance Sinking Fund A/c
should be transferred to General Reserve A/c.
 Debenture may be redeemed by conversion into shares on
new Debenture issued.
Amt. payable to debentureholders

No. of Shares/Debenture issued =
Issue price of Shares/Debentures
351
12.7 EXERCISE:
12.7.1 OBJECTIVE QUESTIONS:
1. Fill in the blanks with suitable words:

A) After redemption of Debentures for transferring balance in
Sinking Fund ___________ A/c is debited.
B) Interest accured on Debenture Redemption Fund Investment
credited to ___________ A/c.
C) When Debentures are due for conversion ___________ A/c is
debited.
D) New shares on Debenture issued on conversion amount
payable to Debenture holders ___________ .
E) 40,000 9% Debentures of Rs.100/- are to be redeemed @
12.50% premium on conversion into Equity Shares of Rs.10/-
each issued at Rs.20/-. Equity shares issued = ___________ .
F) 40,000 9% Debentures of Rs.100/- each redeemable @ 12.50%
premium are to be converted at to 96
No. of Debentures issued = ___________ .
G) Companies Act allows company to purchase ___________
Debentures from market as S.F. Investment.
H) Interest received on Own Debentures purchased as S.F.
Investment is transferred to ___________ Account.
I) Profit or loss on cancellation of own Debenture held as S.F.
Investment is transferred to ___________ Account.
J) Interest on Own Debentures can be transferred to ___________
Account.
K) Interest accrued on Debentures Redemption Fund Investment
___________ Account.
L) X Ltd. issued Rs.5,00,000/- Debentures at 5% Discount
redeemable in 5 years equally. Discount on issue of
Debentures will be written off in the ratio of _____________ .
M) Z Ltd. issued Rs.5,00,000/- Debentures @ 5% Discount
redeemable at the end of 5th year Annual Discount to be written
off = Rs. _____________ .
N) Debentures may redeemed at _____________ or at
_____________.
O) _____________ is a special fund established out of Profit for
redemption of Debentures.
352
P) Company may purchased Own Debentures for _____________

or for _____________.
Q) Redemption of Debentures means _____________ .
R) Debentures can be redeemed by _____________ then in
shares / New Debentures.
S) Premium or redemption of Debentures is normally provided at
the _____________.
T) Discount on issue of debenture is shown in Balance sheet under
heading _____________.
U) Sinking Fund for redemption of Debenture is also known as
_____________.
V) Annual Appropriation for Sinking Fund = Amt. payable at the
time of Redemption  _____________.
W) Amount of S.F. Investment purchased = Annual Appropriation +
_____________.
X) Any Profit on Loss on Sale of S.F. Investment is transferred to
_____________ account.
Y) After redemption of Debentures, balance in Sinking Fund is
transferred to _____________.
Z) On partial Redemption Debentures, balance in S.F. Account is
transferred to General Reserve to the extent _____________ .
[Answer: A) Sinking Fund, B) Debenture Redemption Fund Account, C)

Debenture holder’s Account, D) Issue price of one share, E) 2,25,000 Equity
Shares, F) 46,875 New Debentures, G) Own, H) Sinking Fund, I) Sinking
Fund, J) Profit and Loss Account, K) Debenture Redemption Fund, L)
5:4:3:2:1, M) 5,000, N) Par, Premium or Discount, O) Sinking Fund / D.R.F.,
P) Investment, immediate cancellation, Q) Discharge of Debentures
Liability, R) Converting, S) Issue of Debentures, T) Miscellaneous
Expenditure, U) Debenture Redemption Fund, V) Relevant Annuity Table
Value, W) Interest received on S.F. Investment, X) Sinking Fund Account, Y)
General Reserve Account, Z) Nominal value of Debentures Redeemed.
2. STATE WHETHER TRUE OR FALSE

1) Debentures can be redeemed only at par.
2) Annual Appropriation to Sinking is debited to Bank A/c.
3) After redemption of all Debenture, balance in Sinking Fund A/c
is transferred to General Reserve.
4) Debentureholders are not entitled to invest if company is making
Loss.
5) A company can purchased its own debentures from market.
6) Company may held its own Debentures as investment.
353
7) Debentures are always secured.

8) Security Premium can be used to write off Discount on issue of
Debentures.
9) Capital Reserve can used to pay Debenture interest.
10) Loss on sale of Sinking Fund Investment is debited to Profit &
Loss A/c.
11) Interest received on Sinking Fund Investment, is debited to
Sinking Fund A/c.
12) Capital Redemption Reserve is created when Debentures are
redeemed in cash.
13) A company cannot issue unsecured Debentures.
14) Accrued Debenture Interest is added to Debentures.
15) Debentures hold get their money only on liquidation of
company.
[Answer: True: 3, 5, 6, 8, False: 1, 2, 4, 7, 9, 10, 11, 12, 13, 14,

15.]
3. MULTIPLE CHOICE QUESTIONS :
1) The balance of Sinking Fund A/c is transferred to

_____________ .
a) Capital Reserve A/c b) Balance sheet
c) General Reserve A/c d) None of the above
2) Profit on sale of Sinking Fund Investment with be debited to

_____________ .
a) Profit & Loss A/c b) Sinking Fund Investment A/c
c) Sinking Fund A/c d) Revaluation A/c
3) Interest received on debenture redemption fund investment will

be _____________ .
a) Debited to Bank A/c b) Debited to Sinking Fund A/c
c) Profit & Loss A/c d) Sinking Fund A/c
4) On Redemption of Debentures, account paid to Debenture

holders A/c credited to _____________.
a) Debenture holders A/c b) Bank A/c
c) Debentures A/c d) Sinking Fund A/c
5) On payment of debenture interest amount paid is debited to

_____________ .
a) Sinking Fund A/c b) Debenture Interest A/c
c) Bank A/c d) Investment A/c
354
6) Balance in Discount on issue of Debentures is shown in

Balance sheet.
a) On Liabilities side b) Current Assets
c) On Assets side d) None of the above
7) Premium on redemption of debenture not provided at the time of

issue, transferred to _____________.
a) Profit & Loss A/c b) Trading A/c
c) Sinking Fund A/c d) Debenture A/c
[Answer: (1 – c), (2 – b), (3 – a), (4 – b), (5 – b), (6 – c), (7 – c)]
4. Match the following Columns.
1)
Group “A” Group “B”
a) Sinking Fund i) Carries Fixed Rate Interest
b) Price including accrued ii) Specified at the time of
interest issue
c) Debentures iii) Credited to S.F. A/c
d) Terms of Redemption iv) Credited to Trading A/c
e) Interest received on S.F. v) P&L Appropriation debit
Investment
vi) Cum – interest price
vii) Ex – interest price
[Answer: (a – v), (b – vi), (c – i), (d – ii), (e – iii)]
2)
Group “A” Group “B”
a) Sinking Fund i) Balance Sheet Assets side
b) Sinking Fund Investment ii) Annual appropriation
c) Amount to be invested Interest received on S.F.
Investment
d) Redemption of Debentures
iii) Profit & Loss A/c
e) Debenture interest
iv) Unsecured Loans
v) Optional
vi) Reduction in owed fund
vii) Own Debenture
viii)Reduction is own fund
[Answer: (a – v), (b – i), (c – ii), (d – vi), (e – iii)]

355
12.7.2 Theory Questions:
1. What do you mean by Redemption of debentures?

2. Distinguish between redemption of Preference shares and
redemption of Debentures.
3. Discuss various methods of redemption of debentures.
4. Distinguish between redemption of Debentures out of Profit &
out of capital.
5. Explain Own Debentures.
12.7.3 PRACTICAL PROBLEMS:

1) The following balances appeared in the books of a company as
on 31.12.2008. 10% Mortgage Debentures Rs.6,00,000/-;
Sinking Fund Rs.5,81,000/-; Sinking Fund Investment, 4%
Government Loan purchased at par Rs.2,80,000/- and 5%
Government paper purchased for Rs.3,01,000/- - F.V.
3,20,000/-.
On 31st March 2009; the Investments were sold at Rs.105/- and
Rs.98/- respectively and the Debentures were paid off at
Rs.104/- together with accrued interest. The interest on
Debentures had been paid up to 31st December, 2008.
Write up the ledger accounts concerned.
2) On 30th June, 2008 the following balances stood in the books of

Kumari Ltd.
Particulars Rs.
10% First mortgage Debentures 7,50,000
Debenture redemption Reserve Fund 7,25,000
The above Fund was invested the following
securities :
Rs.3,60,000/-, 5% Government Loan
3,52,000
Rs.3,80,000/-, 4% Government Loan
3,73,000
To redeem the Debentures on 30th June, 2008 the above

investments were sold on the same day under:
5% Government loan, at par, 4% Government Loan, at Rs.98/-
Draw up the necessary accounts; bring down their balances, if

any, after the redemption of Debentures, and state how they will
be disclosed in the balance sheet of the company.
356
3) Ext. Co. Ltd. has 4,000, 6% Debentures of Rs.100/- each

outstanding on 1st January, 2009. There was a Sinking Fund
amounting to Rs.3,50,000/- represented by 5% Mumbai
Municipal Corporation Debentures of face value of
Rs.3,60,000/-. Interest on these is payable on 30th June and
31st December every year and these were also the dates for the
payment of interest as Debentures of the company. Half yearly
interest of Rs.9,000/- was received up to 30th June, 2009.
On 31st December, 2009; further Rs.50,000/- was appropriated
towards the Sinking Fund and corresponding investment in
Mumbai Municipal Corporation Debentures were acquired with
this amount and interests received on existing investments
which amounted to Rs.9,000/-. The face value of investments
made was Rs.60,000/-. Show ledger account in books of Ext.
Ltd., relating to following :
a) Sinking Fund Account
b) Sinking Fund Investment Account; and
c) 6% Debenture Account.
4) The Balance Sheet of a Company as at 31st March, 2008 as

follows :
Equity Share Capital 20,00,000 Sinking Fund

Securities Premium 3,00,000 Investment (Face 10,00,000
value Rs.10,00,000/-)
Debenture
Redemption Reserve 10,00,000 Other Assets 41,00,000
General Reserve Discount on issue of 40,000

4,00,000
Debentures
(Rs.100/- each)
Premium on
Redemption of
1,00,000
Debentures
51,40,000 51,40,000
On 1st April, 2008, the Board of Directors decided to and gave

following options to remaining debenture holders :
a) to accept cash payment at 10% premium, or
b) to accept three shares of Rs.100/- each for four Debentures
held in the company.
357
Debenture holders holding Rs.5,00,000/- Debentures opted for

cash payment and balance of debenture holders opted for the
conversion of their Debentures into shares. Journalise.
5) On 1st April, 2005, Apana Sapan Ltd. issued 1,000 10%
Debentures of Rs.500/- each at par, payable @ Rs.525/-. As
per terms of issue, the Board of Directors decided to provide
Sinking Fund for redemption of Debentures and took an
Insurance Policy to provide the necessary cash. The annual
premium being Rs.1,65,000/-. On which the return is 3% p.a.
compound interest, Insurance Premium paid on 1st April, 2005,
2006, 2007.
On 31st March 2008, Insurance Policy was surrendered and
Debentures were redeemed as per terms surrendered and
debentures were redeemed as per terms.
You are required to prepare necessary ledger accounts for the
three year ended on 31st March 2006, 2007 & 2008.
6) The following balances appearent in the books on 1st January
2008.
Particulars Rs.
12% Debentures A/c 15,00,000
Sinking Fund A/c 12,00,000
Sinking Fund Investments :
6% Maha. Govt. Loan A/c 6,00,000
4% Sadar Bonds [F.V. Rs.6,50,000/-] 6,00,000
Following transaction took place during year.

a) Half yearly Debenture Interest paid on 30th June 08 and 31st
Dec. 08.
b) On 31st December 08, Debentures redeemed @ 5%
premium.
c) 6% Maha. Govt. Loan realized for Rs.6,20,000/- and 4%
Sadar Bonds Rs.5,95,000/-.
d) Interest on Sinking Fund Investment received.
e) Annual contribution to Sinking Fund transferred Rs.50,000/-.
7) On 1st April, 2008 Z Ltd. issued 1,200 6% Debentures of
Rs.500/- each at Rs.525/- each. Debenture holders had an
option to convert their holding into 9% Preference shares of
Rs.100/- each at a premium of Rs.20/- per share. On 31st
March 09, one year’s interest had accrued on these Debentures
which was paid. All the Debenture holders notified intention to
convert their holdings into 9% Preference shares. Journalise the
above transactions on March 09.
358
8) On January 1, 2008 Tatal Ltd. gave notice of its intention to

redeem its Rs.20,00,000/- 10% Debentures on 31st March, 2008
at 110 per cent offered the debentureholders the following
options :
a) To apply the redemption money in subscribing :
i) 11% Cumulative Preference shares of Rs.100/- each at
Rs.125/- (opted by the holders of 9,800 Debentures) or
ii) 8% Debentures at Rs.98/- per cent (opted by the holders
of 8,800 Debentures)
b) To get their holding redeemed for cash if neither of the
options under (a) was accepted.
Show as on 31st March, 2008 the journal entries to record the

redemption.
9) On 01-04-2003 Z Ltd. issued 5,000 Debentures of Rs.100/-

each at a discount of 5%. These Debentures were repayable at
par on 31-03-2008 and a Sinking Fund was to be created out of
profits by setting aside an equal amount of Rs.40,000/- on 31st
December every year to be invested in 6% securities.
You are requested to show the Sinking Fund Account and the
investment Account in the books for four years.
10) The following balances appeared in books of R. Chiski Ltd. as

on 01-04-05.
Rs.
8% First Mortgage Debentures 18,00,000
Income received on Sinking Fund Investments 1,45,000
Discount on issue of Debentures 45,000
Sinking Fund Account 15,00,000
Sinking Fund Investment :
a) 7% RBI Bonds 9,00,000
b) 9% Central Govt. Securities 6,00,000
On the same day the investments were sold as follows :

a) RBI Bonds at 10% Profit
b) 9% Central Govt. Securities at 5% Loss
On 1st April 2006 Debentures of Rs.12,00,000/- were redeemed

at a premium of 6%. On the same day Gujarat Road
Development Corporation Bonds of Rs.2,00,000/- were
purchased at 5% premium. Annual contribution for Sinking
Fund was Rs.1,50,000/-.
359
You are required to prepare for the year ended 31-03-06.

1) Debentures A/c
2) Sinking Fund A/c
3) Sinking Fund Investment A/c
4) General Reserve A/c
11) J. Ltd. Took over the assets of Rs. 150000 & liabilities of A
Ltd. For an agreed purchase consideration of Rs. 108000 is to be
satisfied by the issue of 10% debentures of Rs. 100 each. Show
journal entries in the books of J Ltd. Under the following
circumstances:
a) When Debentures are issued at par
b) When Debentures are issued at 20% premium &
c) When Debentures are issued at 10% discount.
Working Note:
a) Number of Debentures to be issued = Purchase consideration
 Issued price
b) Debenture issued at 20% premium

Debenture = 108000  120= 900 Debentures of Rs. 100 each
at 20% premium
c) Debenture issued at 10% discount

Debentures= 108000  90=1200 Debentures of Rs. 100 each at
10% discount.
12) P.T. Ltd., took a loan of Rs. 100000 from a bank & deposited
1000, 8% Debentures of Rs. 100 each as Collateral security,
Company again took a loan of Rs. 100000 after 3 months from a
bank & deposited 1000, 8% Debentures of Rs. 100 each as a
collateral securities. With this amount company purchased plant
& machineries for Rs. 150000 pass necessary Journal entries in
the books of the company & prepare balance sheet.

360
13
ACCOUNTING WITH THE USE OF
ACCOUNTING SOFTWARE
Unit Structure :
13.0 Objectives
13.1 Purchase order and Sales order
13.2 Budgeting and Controls
13.3 Product Invoice and Service Invoice
13.4 Short - cut keys or keyboard shortcuts available in tally
ERP9
13.5 Key combination used for navigation
13.6 Management information system
13.7 Exercise
13.0 OBJECTIVES
After studying the unit students will be able to know the use
of accounting software for advance accounting and shortcut keys
for operating the software.
13.1 PURCHASE ORDER AND SALES ORDER
Purchase order:
It is a commercial document issued by a buyer to a seller
indicating details of quantity and agreed prices for products /
services the seller will provide to the buyer.
Purchase orders are generally pre - printed numbered

documents generated by the retailers’ financial management
system which shows that purchase details have been recorded and
payment will be made.
361
Details in purchase order

 Party a/c name
 Order number
 Name of the item
 Delivery date
 Location where goods are to be delivered
 Quantity, rate and amount
To create a purchase order:
Gateway of Tally ------ Inventory vouchers ----- F4 (Alt F4)
purchase order on button panel
For purchase order processing or sales order processing - Go to
inventory features -------- order processing and type ‘Yes’.
The purchase order can be altered or deleted.
Sales order:
It can be created once the quote is accepted by prospective
customer. Sales order contains the following details:
 Sales order number

 Date
 Product quantity
 Product price
 Billing address
 Terms and conditions
To create a Sales order:

Gateway of Tally ----- Inventory vouchers ------ F5 (Alt F5) sales
order on side button panel
Reorder - It is the level at which new order for supply of materials is
to be placed.
The two factors that determine the appropriate order point
are the delivery time stock which is the inventory needed during the
lead time (difference between the order date and the receipt of the
inventory ordered) and the safety stock which is the minimum level
of inventory that is held as protection against shortages due to
fluctuations in demand Gateway of Tally ------- Display Menu ---------
Statements of Inventory ---------- Reorder Status.
362
Delivery Notes:
It is a document accompanying a shipment of goods that lists the
description, grade and quantity of the goods delivered. Delivery
note voucher is used to record the delivery of goods to customers.
To create Delivery note voucher:

Use F8 (Alt and F8 simultaneously) or F8 on the right hand side
button panel.
13.2 BUDGETING AND CONTROLS
An estimation of the revenue and expenses over a specified

future period of time is a budget. A Budget serves as an action
plan for achieving quantified objectives -
Budget is a standard for measuring performance and a device
for coping with foreseeable adverse situations.
Budget creation -
Budget Menu has three options -
Create -------- Alter ---------- Delete
Gateway of Tally ------ Account Info ------ Budgets ------- Create
Gateway of Tally ------ Account Info ------ Budgets ------- Alter
Gateway of Tally ------ Account Info ------ Budgets ------- Delete
13.3 PRODUCT INVOICE AND SERVICE INVOICE
An Invoice is a non-negotiable instrument issued by a seller to a

buyer which may be for sale of goods or service
Gateway of Tally ------ F11 ------ Accounts Features ------- Allow
invoicing ------- Type ‘Yes’
13.4 SHORT - CUT KEYS OR KEYBOARD

SHORTCUTS AVAILABLE IN TALLY ERP9
Tally ERP 9 offers a range of keyboard shortcuts to make it

very user friendly.
The shortcut keys appear in button names in the button bar
(right side of the Tally screen). You can either click the button from
the button bar or press the relevant function key or character
underlined / double - underlined.
363
The buttons have a function key before the button names

(Eg. F1 : Select Company) which means you need to press F1 key
(Function Key) to select the ‘Select Company’ screen.
The buttons have an underlined character (Eg : F3 : Cmp

Info), which means you need to press ALT + F3 to select the
‘Company Info’ screen.
Some buttons have a double- underlined character (Eg : As

Voucher) which means you need to press CTRL+V to select the
‘Voucher’ in voucher mode.
The shortcut keys available in Tally ERP 9 are listed in the table
below :
Windows Functionality Availability
F1 To select a company At all masters menu screen

To select Accounts Button All the Accounting / Inventory
and inventory Buttons vouchers creation and
alteration screen
F2 To change the menu To change the menu period

period
F3 To select the company To change the menu period
F4 To select the Contra At Accounting / Inventory

voucher Voucher creation and
alteration screen
F5 To select the Payment At Accounting / Inventory

alteration screen
F6 To select the Receipt At Accounting / Inventory

alteration screen
F7 To select the Journal At Accounting / Inventory

alteration screen
F8 To select the Sales At Accounting / Inventory

alteration screen
364
F8 To select the Credit note At Accounting / Inventory

(CTRL+F8) voucher Voucher creation and
alteration screen
F9 To select the Purchase At Accounting / Inventory

alteration screen
F9 To select the Debit Note At Accounting / Inventory

(CTRL+F9) Voucher creation and
alteration screen
F10 To select the Reversing At Accounting / Inventory

Journal voucher Voucher creation and
alteration screen
F10 To select the At Accounting / Inventory

Memorandum voucher Voucher creation and
alteration screen
F11 To select the Functions At almost all screens in

and Features screen TALLY
F12 To select the Configure At almost all screens in

screen TALLY
ALT+2 To Duplicate a voucher At list of Vouchers - creates

a voucher similar to the one
where you positioned the
cursor and used this key
combination
ALT+A To Add a voucher At List of Vouchers - adds a

voucher after the one where
you positioned the cursor
and used this key
combination
ALT+C To create a master at a At voucher entry and

voucher screen (if it has alteration screens, at a field
not been already assigned where you have to select a
a different function, as in master from a list. If the
reports like Balance necessary account has not
Sheet, where it adds a been created already, use
new column to the report) this key combination to
create the master without
quitting from the voucher
screen
365
ALT+D To delete a voucher
To delete a master At Voucher and Master

(Single) alteration screens.
Masters can be deleted
(if it has not been already subject to conditions, as
assigned a different explained in the manual.
function, as explained
above)
ALT+C To create a master at a At voucher entry and

voucher screen (if it has alteration screens, at a field
not been already assigned where you have to select a
a different function, as in master from a list. If the
reports like Balance necessary account has not
Sheet, where it adds a been created already, use
new column to the report) this key combination to
create the master without
quitting from the voucher
screen.
ALT+D To delete a voucher At Voucher and Master

To delete a master (Single) alteration screens.
Masters can be deleted
(if it has not been already subject to conditions, as
assigned a different explained in the manual.
function, as explained
above)
ALT+E To export the report in At all reports screens in

ASCII, SDF, HTML OR TALLYY
XML format
ALT+I To insert a voucher At list of Vouchers - inserts a

voucher before the one
where you positioned the
cursor and used this key
combination.
ALT+R To remove a line in a At all reports screens in

report TALLY
ALT+S To bring back a line you At all reports screens in

removed using ALT+R TALLY
ALT+X To cancel a voucher in At all voucher screens in

Day Book / List of TALLY
Vouchers
366
CTRL+A To accept a form - At most all screens in

wherever you use this key TALLY, except where a
combination, that screen specific detail has to be
or report gets accepted as given before accepting
it is
13.5 KEY COMBINATION USED FOR NAVIGATION
Windows Functionality Availability
PgUp Display previous voucher At voucher entry and

during voucher entry / alter alteration screens
PgDn Display next voucher At voucher entry and

during voucher entry / alter alteration screens
ENTER To accept anything you You have to use this key at

type into a field. most areas in TALLY
To accept a voucher or At the receivables report -
master press enter at a pending bill
To get a report with further to get transactions relating to
details of an item in a this bill (e.g., original sale bill,
report receipts and payments
against this bill, etc)
ESC To remove what you typed At most all screens in TALLY

into a field
To come out of a screen
To indicate you do not
want to accept a voucher
or master
SHIFT + Collapse next level details At Voucher Register screen

ENTER and Trial Balance Sheet.
SHIFT + To explode a line into its In almost all Reports :

ENTER details At a Group / Stock Group /
Cost
Category / Godown / Stock
Category - displays Sub
Groups and Ledgers / Stock
Items / Cost
Centres / Secondary
367
Godowns / Secondary Stock

Categories
At a Voucher - displays its
entries and narration
At a Stock Item - displays its
godowns and batch details
At Voucher Register screen -
displays the next level details
At Trial Balance report -
displays the next level details
CTRL + To alter a master while At voucher entry and

ENTER making an entry or viewing alteration screens
a report At all reports
13.6 MANAGEMENT INFORMATION SYSTEM
Management Information Systems (MIS) Reports are required by

the management to asses the performance of the organization and
allow for faster decision - making
Types of MIS Reports in Tally.ERP9
 Accounting Reports : To obtain information on the financial

position, operational performance and economic activities of the
business.
 Financial Reports : To determine the financial condition of an
organization as required by shareholders, creditors and
government units.
 Inventory Reports : To manage the Inventory effectively since

the actual status of stock items is obtained.
 Management Control Reports : To utilize budgets, cost centre

reports, scenario reports etc. for controlling activities.
Few of the financial MIS reports are listed below :
1. Receivables
2. Payables
3. Cost Centre Reports
4. Ratio Analysis
5. Cash Flow
6. Funds Flow
7. Exceptional Reports
368
Tally automatically generates a number of reports. The

following reports are readily available.
 Trial Balance
 Balance Sheet
 Profit and Loss A/c
 Stock summary
 Ratio Analysis
 Display Menu
 Day Book
 Bank Reconciliation Statement
Gateway of Tally ------- Display ------- Trial Balance
Gateway of Tally ------- Balance Sheet
Gateway of Tally ------- P & L A/c
Gateway of Tally ------- Stock summary
Gateway of Tally ------- Ratio Analysis
Display Menu –
The following options can be verified

 Trial Balance
 Day Book
 Accounts Book
 Statement of Accounts
 Inventory Books
 Statements of Inventory
 Cash Flow and Fund Flow
 List of Accounts
 Exceptional Reports
Tally 9 is the most powerful business accounting software with

basic MIS.
 Best for simple, instant as well as advanced financial MIS

 Best Inventory and Statutory MIS
 Simple input capabilities
 Easy to use interface
Tally 9 designed exclusively to meet the needs of small
business is a fully integrated, affordable, and highly reliable
software.
369
13.7 EXERCISE
A. Write the proper key used for the following function:

1. To alter a master while making an entry.
2. To collapse next level details.
3. To come out of a screen
4. To accept anything you type into a field.
5. To display next voucher during voucher entry.
6. To cancel a voucher in Day Book / List of Vouchers.
7. To insert a voucher.
8. To select the Functions and Features screen.
9. To delete a voucher or master.
10. To duplicate a voucher.
11. To add a voucher.
12. To select the company.
13. To select the Payment voucher.
14. To select the Sales voucher.
15. To select the Credit note voucher.


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13

ACCOUNTANCY AND FINANCIAL

(Revised Syllabus w.e.f Academic Year 2014-15)

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1. Final Accounts of Partnership Firms I 01

2 Piecemeal Distribution of Cash

Sr. Title of the Authors Publisher

PATTERN OF QUESTION PAPER FOR 100 MARKS

MAXIMUM MARKS – 100 DURATION – 3 HRS

1. In all there will be 4 questions.

1. In all there will be 4 questions.

1.0 OBJECTIVE OF THE UNIT

After studying the unit the student will be able to :

A Partnership is defined by section 4 of the Indian

1.1.1 There are three important characteristics of Partnership

1) There should be AGREEMENT between two or more persons.

1.2 PARTNERSHIP DEED

We have seen above that Partnership is created by an

1.2.1 Partnership deed specific:-

1.2.2 Partnership deed is silent (or absence of Partnership

1.3 PARTNERSHIP FINAL ACCOUNTS

Each partner should know the financial performance of the

The final accounts of partnership firm includes:-

3) Profit and Loss Appropriation Account to disclose the

1.4 PROFIT AND LOSS APPROPRIATION A/C

This is a special Account prepared in case of only

Note: In case of Partnership firm any remuneration paid or payable

Thus this A/c will be debited by:

This A/c will be credited by

The difference in this account will show the Final Net

If the Credit side is heavier-profit to be distributed

1.4.1 INTEREST ON CAPITAL OR SALARY ETC

Interest or Salary is payable only out of the Profit (i.e. on

However, the partner may decide to waive such intimation

1.4.2 INTEREST ON DRAWINGS

The partner may be charged Interest on the Drawing. So as

Withdrawals Interest on total Drawings

1.5 GUARANTEE OF PROFITS TO/OR BY A PARTNER

According to the partnership deed, one or few partners are

The different types of guarantee arrangements are as follows:-

1) A Partner is given an undertaking that his share in profits

the concerned Partner’s share of profit exceeds the minimum limits

2) A partner guarantees that the profit of the firm would above a

3) A partner guarantees that, if particular partner’s share of profit

1.6 JOINT LIFE POLICY

The object of taking life policy on the lives of the partner is to

Accounting treatment may be one of the following three ways:-

1.6.1 Premium paid is treated as expense of the firm and

1.6.2 When premium paid is treated as assets: - In this case

1.6.3 When premium paid treated as asset and Joint life

Policy is shown on Assets side of the Balance Sheet. Joint Life

On the maturity of the policy or when policy is surrendered

When Joint Life Policy premium paid

b) For transferring to Profit & Loss A/c (equal to premium paid)

c) For bring balance in Joint life policy to surrender value

Above entries are repeated every year, if joint life policy

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, & $ 4 5 6 7 8 9 5 9 : ; 8 < = > > 7 = ? @ 9 5 6 7 A 9

= = = = ; A | | 5 } 5 A E ; A < < 5 9 6 5 ~ 6 A B A < @ 6 > =

! " " # $ " % $ & ' $ " $ ( ) $ $ * + $ , - -