Corporate Accounting I I Final

UNIT- I
Unit I details Accounting for Mergers and Amalgamation – Absorption and External Reconstruction (Both Internal and
External Reconstructions)
AMALGAMATION
When two or more existing companies combine together to form a new company, it is amalgamation. All the combining
companies are liquidated. A new company is floated to take over their businesses. For example, C Ltd. Is formed to take over the
business of A Ltd. and B Ltd. Here both A Ltd. and B Ltd. will be liquidated and a new company C Ltd. will be formed.
These concepts have been modified by the Accounting Standard 14 (AS-14) – “Accounting for amalgamation”, issued by the
Institute of Chartered Accountants of India.
• Transferor Company means the company which is amalgamated into another company.
• Transferee Company means the company into which a transferor company is amalgamated.
PURPOSE OF AMALGAMATION
➢ To acquire cash resources

➢ Eliminate competition
➢ Tax savings
➢ Economies of large scale operations
➢ Increase shareholders value
➢ To reduce the degree of risk by diversification
➢ Managerial effectiveness
➢ To achieve growth and gain financially
PROCEDURE FOR AMALGAMATION
❖ The terms of amalgamation are finalized by the board of directors of the amalgamating companies.
❖ A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
❖ Approval of the shareholders’ of the constituent companies is obtained followed by approval of SEBI.
❖ A new company is formed and shares are issued to the shareholders’ of the transferor company.
❖ The transferor company is then liquidated and all the assets and liabilities are taken over by the transferee company.
TYPES OF AMALGAMATION
➢ In the Nature of Merger

➢ In the Nature of Purchase
Corporate Accounting - II Page 1

METHODS OF ACCOUNTING:
AMALGAMATION IN NATURE OF MERGER AMALGAMATION IN NATURE OF PURCHASE

• Balance sheet of both companies would be • Here the assets & liabilities are valued at their
combined at book value without revaluing assets or book value or on basis of fair value.
creation of goodwill and liabilities. • Total Assets-Liabilities = Net Asset Value
• Balances of P/L a/c of both companies would (NAV)
be added or else would be transferred to General • If Consideration Paid = NAV = Effect same as
Reserve A/C Pooling of Interest Method
• If consideration Paid = NAV = Assets recorded
• Any difference between consideration paid to at increased price in consolidated B/S, Excess Amount =
the transferor company and amount recorded as nominal Goodwill
value of share capital to the transferor company is • Goodwill written off over a period of five years
adjusted in general reserves. • If Consideration Paid < NAV = Assets recorded
at written down value in consolidated B/S, Less amount
= Adjusted as Capital Reserve
DIFFERENCE BETWEEN AMALGAMATION AND MERGER

Points of
Amalgamation Merger
difference
Meaning A new company is formed to take over the A merger is called absorption of weaker
existing business of all the amalgamating units by a strong unit.
companies. After the amalgamation, all
combining units are automatically liquidated.
Formation Under amalgamation, a new organization is Under merger an existing co. absorbs one or
formed to effect fusion of the two or more more existing companies. The absorbing
existing companies. company survives
Initiation Amalgamation takes place on the initiative of an In the merger, the surviving or acq1uirgin
outside promoter since the business rivalry of company takes initiative and tries its level
several units normally acts as a bar to their best to effect the merger.
coming together on their own initiative.
Effect on Amalgamation affects all shareholders. In a merger, the shareholders of absorbed
Shareholders companies are affecting.
ABSORPTION:
When one existing company takes over the business of one or more existing companies, it is absorption. The companies whose
business is taken over are liquidated. No new company is formed.
In absorption, one company is taken over by another and hence it loses its own core identity. The identity of absorbing company
only sustains. Here, it's not pooling of interest. It is the dominance of absorbing company. Here, it is the taking of a small
company by a comparatively bigger business company.
Example: Takeover of Myntra by Flipkart.

RECONSTRUCTION
It includes
1. Internal reconstruction
2. External reconstruction.
Internal Reconstruction
Internal reconstruction is carried when the company faces consistent financial pressure and is incurring loss since long. Here, there
might be some alterations in share capital and waiver of some debts. The company is neither liquidated nor any new company is
formed. “And reduced” words are to be added in balance sheet . This procedure includes involvement of court and is bit tedious
and lengthy.
External Reconstruction
External reconstruction refers to forming of a new company to take over the assets and liabilities of old company. Here, the new
company if formed with the deliberate purpose of taking over the old company. And hence here old company is liquidated and
new company is formed. It doesn't require court’s permission and takes less time as compared to internal reconstruction.
PURCHASE CONSIDERATION
In case of amalgamation, purchase consideration is the agreed amount which transferee company (Purchasing company) pays
to the transferor company (Vendor company) in exchange of the ownership of the transferor company. It may be in form of cash,
shares or any other assets as agreed between both the companies.
The calculation of purchase consideration is very important and may be calculated in the following ways:
1. Lump Sum Method

Under this method purchase consideration willbe paid in lump sum as per the valuation of purchasing companies valuation.
For example, if X Ltd. purchases the business of Y Ltd. and agrees to pay Rs.25,00,000 in all, it is an example of lump sum
payment.
2. Net Worth or Net Assets Method

Under this method, purchase consideration is calculated by adding up the values of various assets taken over by
the purchasing company and then deducting there from the values of various liabilities taken over by the purchasing company.
Example of Net Worth or Net Assets Method
BALANCE SHEET OF A CO. LTD

Liabilities Rs. Assets Rs.
Share Capital 6,000 Equity shares of Rs.10 each 60,000 Goodwill 28,000
5% Debentures 10,000 Land and Building 16,000
Sundry Creditors 6,000 Plant and Machinery 28,000
General Reserve 4,000 Stock 16,000
Profit and Loss Account 20,000 Debtors 8,000
Cash 2,000
Preliminary Expenses 2,000
1,00,000 1,00,000

Suppose
(i) Company B takes over the business of company A;
(ii) The value agreed for various assets is: Goodwill Rs. 22,000, Land and Building Rs. 25,000, Plant and Machinery Rs. 24,000,
Stock Rs. 13,000 and Debtors Rs. 8,000;
(iii) B company does not take over cash but agrees to assume the liability of Sundry Creditors
at Rs. 5,000
Solution:
The Calculation of Purchase Consideration will be as follows:
Value of assets taken over by B Company Rs.
Goodwill 22,000
Land and Buildings 25,000
Plant and Machinery 24,000
Stock 13,000
Debtors 8,000
92,000
Less: Sundry Creditors taken over by B Company 5,000
Purchase Consideration 87,000
1. Net Payment Method

In this case purchase consideration is calculated by adding all the payments made by the transferee company to the shareholders of
the transferor company.
Example of Net Payment Method
B Co. Ltd. agree to give for every 10 shares in A Ltd. 15 shares of Rs. 10 each, Rs. 8 paid up; B Co. Ltd. also agrees to pay Rs.
15,000 cash to discharge the creditors.
Solution:
The purchase consideration will be calculated as under:
Shareholders of A Co. Ltd. will get: Rs.
6000 x 15/10 = 9,000 shares of Rs. 10 each, Rs. 8 paid up 72,000
Cash paid to discharge creditors 15,000
Purchase Consideration 87,000
2. Shares Exchange Method

Purchase consideration is calculated by dividing the net asset value of transferor company by price of one share of transferee
company. The result figure then divided by number of existing shares of transferor company to find out the ratio.
Example of Shares Exchange Method
Suppose X Ltd. and Y Ltd. are two companies carrying on business in the same line of activity. Their capital is Rs. 6,00,000 and
Rs. 2,00,000 (value of each share, Rs. 10). The two companies decided to amalgamate in XY Ltd. if each share of X Ltd. and Y
Ltd. is valued at Rs. 15 and Rs. 25 respectively for the purpose of amalgamation, then purchase consideration will be as under:

X Ltd. Y Ltd.
Rs. Rs.
60,000 Shares @ Rs. 15 each 9,00,000 -
20,000 Shares @ Rs. 25 each - 5,00,000
Note: while issuing shares to individual shareholders of the selling company, these may be infractions. A company
cannot issue shares in fractions but it can issue fractional certificates or coupons or pay cash for the fractions.
COMPUTATION OF PURCHASE CONSIDERATION

PROBLEM NO: 1
A Ltd. is absorbed by B Ltd. the consideration being the takeover of liabilities, the payment of cost of absorption as part of
purchase consideration not exceeding Rs. 10,000; the payment of the debentures of Rs. 15 per share in cash and allotment of one
10% preference share of Rs. 10 each and five equity shares of Rs. 10 each fully paid for every four shares in A Ltd. The numbers
of shares of A Ltd. are 2 lakhs of Rs. 10 each fully paid. Compute the amount of consideration.
Net Payments Method

PROBLEM NO: 2
A Ltd. agrees to take over the business of B Ltd. on the following terms:
1. The shareholders of B Ltd. are to be paid Rs. 25 in cash and the offer of four shares of Rs. 10 each in A Ltd. for every
share of B Ltd. B Ltd. has 50,000 equity shares outstanding.
2. The debenture holders holding 5,000 debentures of Rs. 100 each are to be redeemed at a premium of 10%
3. Cost of liquidation amounting to Rs. 25,000 are to be borne by A Ltd.
Compute the purchase consideration.
Net Asset Method

PROBLEM NO: 3
Balance sheet of Anand Sai Ltd. as on March 31, 2002:
10,000 Equity Shares of Rs. 10 each 1,00,000 Fixed Assets 4,00,000
fully paid
General Reserve 3.00.000 Investments 1,00,000
Profit and Loss Account 1,00,000 Current Assets 2,50,000
Trade Creditors 1,50,000 Preliminary Expenses 60,000
Provision for Taxation 1,20,000 Share Issue Expenses 40,000
Proposed Dividends 80,000
850,000 8,50,000
On the date of balance sheet the company was taken over by Harsha Ltd. on the following terms:
1. Fixed assets are revalued at Rs. 5,60,000
2. Investments have only a market value of Rs. 80,000
3. Current assets are agreed at Rs. 3,00,000 for the purpose of absorption
4. Harsha Ltd. agrees to pay the tax liability which is estimated at Rs. 1,30,000
5. Dividends are to be paid before absorption by Anand Sai Ltd. Compute the Purchase Consideration.

Share Exchange Method
PROBLEM NO: 4
Strong Ltd. takes over Weak Ltd. in pursuance of a scheme of amalgamation and it was agreed that the shareholders of Weak Ltd.
must be issued shares in Strong Ltd. and the exchange is to be determined on the basis of the intrinsic values of the shares of the
two companies concerned. The capital of Weak Ltd. comprises 1, 00,000 equity shares of Rs. 10 each. The intrinsic values were,
Strong Ltd. Rs. 40 and Weak Ltd. Rs. 25. In allotment fractional shares are aggregate to 500. The market value of the share of
Strong Ltd. was Rs. 60. Compute the purchase consideration payable to Weak Ltd.
Accounting in the Books of Transferor Company

Account to be
Transactions
Debited Credited
Closing of assets accounts Realisation Asset
Closing of Liabilities Liability Realisation
Purchase consideration payable by the transferee

Transferee Realisation Company
company
Realization of assets not taken over by transferee

Bank Realisation
company
Payment liabilities not taken over by transferee Realisation Bank
Realization expenses borne by transferor company Realisation Bank Pref. Shareholders

A/c
Premium on redemption of preference shares Realisation Equity Shareholders
Profit on realisation Realisation Realisation
Loss on realisation Equity Shareholders Equity Shareholders A/c
Transfer of capital, Reserves, etc. to Equity Equity Share Capital

Preference
Shareholders A/c General Reserve

Profit & Loss (Cr.)
Transfer of Preference Share Capital to Preference Profit & Loss (Dr.)

Preference Share Capital
Shareholders A/c Fictitious Asset
Transfer of accumulated losses and fictitious assets to

Equity Shareholder a/c Transferee Company A/c
Equity Shareholders A/c
Receipt of purchase consideration Shares/Debentures/Bank Shares/Debentures/Bank
Payment of Preference Shareholders Preference Shareholders Bank
Payment of Equity Shareholders Equity Shareholders Shares/Debentures/Bank
Make Journal Entries in the Book of Transferor Company

PROBLEM NO: 5
The Balance Sheet of A Ltd. and B Ltd. as on 31 st March 2002 were as follows:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Rs. Rs. Rs. Rs.
Share Capita: 50,000 Pref. Shares of 5000 - Goodwill - 700
Rs. 100 each
Patents 2,000 -
15,00,000 Equity Share of Rs. 10 each 15,000 4,000
4,00,000 Equity Share of Rs. 10 each 20,000 4,000 Land and Buildings 6,000 -
General Reserve 8,000 - Plant and Machinery 15,500 -
Profit and Loss Account 900 320 Motor Vehicles - 400
Creditors 500 210 Furniture - 250
Investments 1,150 -
Stocks 3,500 2,390
Debtors 800 620
Cash at bank 450 170

29,400 4,530 29,400 4,530

A new company C Ltd. was formed to acquire the assets and liabilities of A Ltd. and B Ltd. the terms of acquisition of business
were as under:
1. C Ltd. to have an authorized capital of Rs. 3,50,00,000, divided into 50,000 13% preference shares of Rs. 100 each and
30,00,000 Equity shares of Rs. 10 each.
2. Business of A Ltd. valued at Rs. 3,00,00,000; settlement being Rs. 60,00,000 cash and balance by issue of fully paid
equity shares of Rs. 12 each.
3. Business of B Ltd. valued at Rs. 48,00,000 to be settled by issue of fully paid equity shares of Rs.12 each.
4. Preference Shareholders of A Ltd. and B Ltd. were redeemed.
Make Journal entries of A Ltd. and B Ltd. to close their books of account.
Accounting in the Books of Transferee Company

Account to be
Transactions
Debited Credited
On amalgamation of the business, the entry would be Business Purchase Liquidator of transferor company
for the amount of purchase consideration
On the acquisition of assets, liabilities and reserves Sundry assets (with individual Sundry liabilities
amounts) Profit & Loss A/c Reserves
Business Purchase
On the payment of purchase consideration in the form Liquidator of Transferor Share Capital Debentures
of shares, debentures and cash Company Bank
Formation expenses of the new company (if formed) Preliminary Expenses Bank
Pooling of Interest Method
This method of accounting is to account for amalgamation as if the separate business of the amalgamating companies were
intended to be continued by the transferee company.
PROBLEM NO: 6
Alpha Ltd. and Beta Ltd. were amalgamated on and from 1 st April 2001. A new company Gamma Ltd. was formed to take over
the business of the existing companies. The Balance Sheets of Alpha Ltd. and Beta Ltd. as on 31 March, 2001 are given below;

Balance Sheet of Alpha and Beta Ltd. as on 31 st March 2001
Liabilities Alpha Ltd. Beta Ltd. Assets Alpha Beta Ltd.
Rs. Rs. Ltd. Rs.
Rs.
Share Capital Equity Shares of Rs. 100 Fixed Assets 1,200 1,000
each 1,000 800
Current Assets, Loan and
15% Preferecne Shares of Rs. 100 Advances 880 565
each 400 300
Reserve & Surplus

Revaluation Reserve 100 80
General Reserve 200 150
P&L Account 80 60
Secured Loan
12% Debentures of Rs.100 each 96 80
Current Liabilities & Provisions 204 95
2,080 1,565 2,080 1,565
1. 12% Debenture holders of Alpha Ltd. and Beta Ltd. are discharged by Gamma Ltd. by issuing adequate number of 16%
Debentures of Rs. 100 each to ensure that they continue to receive the same amount of interest.
2. Preference Shareholders of Alpha Ltd. and Beta Ltd. have received same number of 15% Preference shares of Rs. 100
each of Gamma Ltd.
3. Gamma Ltd. has issued 1.5 equity shares for each equity share of Alpha Ltd. and 1 equity share for each equity share of
Beta Ltd. The face value of shares issued by Gamma Ltd. in Rs. 100 each.
Prepare the Balance Sheet of Gamma Ltd. as on 1 st April 2001 after the amalgamation has been carried out using the
pooling of interest method.

Amalgamation in the Nature of Merger
PROBLEM NO: 8
Clip Ltd. and Punch Ltd. were amalgamated on and from 1 st April 2002. A new company Stapler Ltd. was formed to take over the
business of existing companies. The balance sheet of Clip Ltd. and Punch Ltd. as on 31 st March 2002 are given below.
Balance Sheet of Clip and Punch Ltd.
Liabilities Clip Ltd. Punch Ltd. Assets Clip Ltd. Punch
Rs. Rs. Rs. Ltd.
Rs.
Equity shares of Rs. 10 each 600 400 Fixed Assets 1,200 800
Less: Depreciation 200 150
12% Preference shares of Rs. 100 each 300 200 1,000 650
Investments 400 150
Reserve and Surplus Current Assets:

Capital Reserve 200 150 Stock 300 150
General Reserve 300 150 Debtors 400 200
Profit & Loss A/c 100 50 Cash and Bank Balance 300 150
Secured Loans 400 200
Trade Creditors 300 100
Tax Provision 200 50
2,400 1,300 2,400 1,300
1. Preference Shareholders of the two companies are issued equivalent number of 15% preference shares of Stapler Ltd.
2. Stapler Ltd. will issue one equity share of Rs.10 each for every share of Clip Ltd. and Punch Ltd.
Prepare the balance sheet of Stapler Ltd. on the assumption that the amalgamation is in the nature of merger.

Amalgamation in the Nature of Purchase
PROBLEM NO: 9
A Ltd. and B Ltd. were amalgamated on and from 1 st April 2002. A new company C Ltd. was formed to take over the business of
the existing companies. The Balance Sheets of A Ltd. and B Ltd. as on 31 st March 2002 are given below
Balance Sheet of A Ltd. and B Ltd. as on 31st March 2002

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Rs. Rs. Rs. Rs.
Share Capital Fixed Assets

Equity Shares of Rs. 100 each 800 750 Land & Building 550 400
12% Preference Shares of Plant & Machinery 350 250
Rs. 100 each 300 200 Investments 150 50
Reserve and Surplus
Revaluation Reserve 150 100 Current Assets, Loans and
General Reserve 170 150 advances
Investment Allowance Stock 350 250
Reserve 50 50 Sundry Debtors 250 300
P&L Account 50 30 Bills Receivable 50 50
Secured Loans Cash and Bank 300 200
10% Debentures (Rs.100 each) 60 30
Current Liabilities and Provisions
Sundry Creditors 270 120
Bills Payable 150 70
2,000 1,500 2,080 1,565
1. 10% Debenture holders of A Ltd. and B Ltd. are discharged by C Ltd. issuing such number of its 15% Debentures of Rs. 100
each so as to maintain the same amount of interest
2. Preference shareholders of the two companies are issued equivalent number of 15% preference shares of C Ltd. at a price of
Rs.150 per share (face value Rs.100)
3. C Ltd. will issue 5 equity shares for each equity share of A Ltd. and 4 equity shares for each equity share of B Ltd. The shares
are to be issued @ Rs. 30 each, having a face value of Rs. 10 per share.
4. Investment allowance reserve is to be maintained for 4 more years
Prepare the Balance Sheet of C Ltd. as on 1 st April, 2002 after the amalgamation has been carried out on the basis of
amalgamation in the nature of purchase.

Nature of Merger and Purchase Method
PROBLEM NO: 10
The following are the abridged balance sheet of P Ltd. as on 31 st March 1999.
Balance Sheet
Liabilities P Ltd. S Ltd. Assets P Ltd. S Ltd.
Rs. Rs. Rs. Rs.
Equity share capital (Rs.10 each) 8,000 3,000 Fixed Assets 11,000 4,730
10% Preference share capital ( Rs. 100 - 1,000
each) Current Assets 4,000 1,970
General Reserve 4,610 980
Statutory Reserves 390 125
Profit and Loss Account 563 355
12% Debentures - 250
Current Liabilities 1,437 990
15,000 6,700 15,000 6,700
On 1st April, 1999, P Ltd. takes over S Ltd. on the following terms:
1. P Ltd. will issue 3,50,000 equity shares of Rs. 10 each at par to the equity share holders of S Ltd.
2. P Ltd. will issue 11,000 10% preference shares of Rs. 100 each at par to the preference shareholders of S Ltd.
3. The debentures of S Ltd. will be converted into an equal number of 12.5% debentures of the same denomination.
Here the statutory reserves of S Ltd. are to be maintained for two more years. Here required to show the balance sheet of P Ltd.
immediately after the above.
a) The amalgamation is in the nature of merger; and
b) The amalgamation is in the nature of purchase
Pooling Interest Method
PROBLEM NO: 11
Exe Limited is absorbed by Wye Limited. Given below are the balance sheets of two companies as on 31st March 2002.
Balance Sheet
Liabilities Exe Ltd. Wye Ltd. Assets Exe Ltd. Wye Ltd.
Rs. Rs. Rs. Rs.
Authorised share capital Assets

9,000 Equity shares of Rs. 150 each 13,50,000
Sundry Assets 16,85,000 43,57,500
60,000 Equity Share of Rs. 75 each
paid-up share capital 45,00,000 Cash in hand 3,500 27,500
9,000 Equity Shares – Rs.135 paid up

12,15,000

40,000 Equity shares – Rs.75 paid-up
General Reserve
30,00,000
Profit and Loss Account
4,03,500 12,85,000
Sundry Creditors
15,000 35,000
55,000 65,000
16,88,500 43,85,000 16,88,500 43,85,000
The holders of every three shares in Exe Ltd. was to receive five shares in Wye Ltd. Pass the necessary journal entries in the
books of both the companies and the balance sheet of Wye Ltd. after absorption. The amalgamation is by merger.
PROBLEM NO: 12
On 31st March, 1999, Thin Ltd. was absorbed by Thick Ltd., the later taking over all the assets and liabilities of the former at book
values. The consideration for the business was fixed at Rs. 4,00,000 to be discharged by the transferee company in the form of its
fully paid equity shares of Rs. 10 each, to be distributed among the shareholders of the transferor company, each shareholder
getting two shares for every share held in the transferor company. The balance sheet of the two companies as on 31 st March, 1999
stood as under:
Balance Sheet as on 31st March, 1999
Liabilities Thick Ltd. Thin Ltd. Assets Thick Ltd. Thin Ltd.
Rs. Rs. Rs. Rs.
Liabilities Goodwill 2,00,000 60,000
Share Capital:
Authorised 15,00,000 5,00,000 Plant and Machinery 4,12,000 1,00,000
Issued and Subscribed: Furniture 80,000 30,000

Equity shares of Rs. 10 each,
fully paid 9,00,000 2,00,000 Stock – in – trade 2,65,500 60,000
General Reserve 1,80,000 50,000 Sundry Debtors 2,21,200 46,000
Profit and Loss account 20,502 12,900 Pre – Paid Insurance - 700
Workmen’s compensation fund 12,000 9,000
Sundry creditors 58,567 30,456 Income – Tax refund claim - 6,000
Staff Provident fund 10,200 4,000
Provision for taxation 12,300 5,000 Cash in hand 869 356
Cash at bank 14,000 8,300

16,88,500 43,85,000 16,88,500 43,85,000

Amalgamation expenses amounting to Rs. 1,000 were paid by Thick Ltd.
1. Prepare realisation account and equity shareholders account in the books of Thin Ltd.
2. Pass the necessary journal entries in the books of Thick Ltd.
3. Prepare the balance sheet of Thick Ltd. after the amalgamation in the nature of merger.
Purchase Method
PROBLEM NO: 13
A new company, C Ltd., was formed to acquire the assets and liabilities of A Ltd. and B Ltd. The terms of acquisition of business
were as under:
Balance Sheet
Liabilities Thick Ltd. Thin Ltd. Assets Thick Ltd. Thin Ltd.
Rs. Rs. Rs. Rs.
Share Capital: Goodwill - 700
50,000 Pref. Shares of Rs. 100 each Patents 2,000 -
15,00,000 equity shares of Rs. 10 5,000 - Land and Building 6,000 -
each Plant and Machinery 15,500 -
4,00,000 equity shares of Rs. 10 15,000 Motor Vehicles - 400
each Furniture - 250
- 4,000 Investments 1,150 -
General Reserve 20,000 4,000 Stock 3,500 2,390
Profit and Loss a/c 8,000 - Debtors 800 620
Investment allowance 320 Cash at bank 450 170
Reserve
Creditors 580 320
500 210
29,400 4,530 29,400 4,530
1. C Ltd. to have an authorized capital of Rs. 3,50,000, divided into 50,000 13% preference shares of Rs. 100 each and
30,00,000 equity shares of Rs. 10 each.
2. Business of A Ltd. valued at Rs. 3, 00, 00,000; settlement being Rs. 60,00,000 in cash and balance by issue of fully-paid
equity shares at Rs. 12.
3. Business of B Ltd. valued at Rs. 48,00,000, to be satisfied by issue of fully-paid equity shares at Rs. 12.
4. Preference shares of A Ltd. were redeemed.
5. C Ltd. made public issue of 30,000 preference shares at par an 3,00,000 equity shares at Rs. 12. The issue was
underwritten at the commission allowed by law and was fully subscribed. All obligations were met.
6. D, who mooted the scheme, was allotted 40,000 equity shares (fully-paid) at Rs.12 in consideration of his services.
Make journal entries in the books of C Ltd. and prepare the Balance Sheet of C Ltd. after absorption.

External Reconstruction
PROBLEM NO: 14
On 1st July, 2002 the Balance Sheet of Amrit Limited was as under:
Authorised and issued capital: Goodwill 1,00,000
3,000 6% cumulative preference Sundry Assets 2,50,000

shares of Rs. 25 each fully paid 75,000
Cash 10,000
8,000 Equity Shares of Rs. 50 each
fully paid 4,00,000 Profit and Loss account 1,90,000
6% Debentures
50,000
Creditors
25,000
5,50,000 5,50,000
Preference dividends were in arrears for two years. A scheme of reconstruction agreed upon was as under;
1. A new company to be formed, called M/s Amrit (2002) Limited, with an authorized capital of Rs. 5,00,000 all in equity shares
of Rs. 100 each.
2. One equity share of Rs. 100 each fully paid in the new company to be issued in exchange of 3 preference shares in the old
company.
3. One equity share of Rs. 100 each fully paid in the new company to be issued in exchange of 3 equity shares in the old company.
4. Arrears of preference dividend to be cancelled.
5. Debenture holders to receive 50 equity shares in the new company as fully paid
6. Creditors to be taken over by the new company and immediately paid off
7. The new company to issue remaining equity shares for public subscription
8. The new company take over old company’s assets, subject to revaluation of sundry assets at
Rs. 2,65,000
Prepare the necessary ledger accounts in the books of Amrit Ltd. and open the books of the new company by means of journal
entries, assuming that the public subscription was fully responded.

PROBLEM NO: 15
The balance sheet of D Ltd. is as follows:
Balance Sheet as on December 31, 2001
2,500 6.5% preference shares of Rs. Patents 24,500
20 each fully paid 50,000
Buildings 60,000
3,000 equity shares of Rs. 20 each
fully paid 60,000 Cash 500
5% Debentures 10,000 Debtors 12,000

Add: Interest 2,000 12,000
Stock 18,000
Creditors 8,000 Profit and Loss a/c 15,000
1,30,000 1,30,000
The following scheme was passed and sanctioned:

1. X Ltd. to be formed to take over the business
2. One share of Rs. 10 fully paid in the new company to be issued for every three equity shares in the old company;
3. Three shares of Rs. 10 fully paid in the new company to be issued for every five preference shares in the old company
4. Debenture holders to be paid in full by X Ltd.
5. The creditors to receive 80 per cent of the sums due to them in fully paid shares of Rs. 10 in the new company in full settlement
6. Patents and profit and loss account to be written off
7. Arrears of preference dividend t be cleared by issuing one Rs. 10 fully paid equity share in X Ltd. for every twenty held; and
8. Any balance available by the scheme to be used in writing down buildings.
Prepare opening journal entries and prepare the initial balance sheet of X Ltd.
PROBLEM NO: 16
The Balance Sheet of Z Ltd. and A ltd. as on September 30, 2006 is given below:

A Ltd. propose to take over Z Ltd. on the following terms:
(1) A Ltd. will issue a sufficient number of its shares @ Rs. II each and pay Re. 0.50 cash per share held by members of Z Ltd.
(2) 9% debentures of Z Ltd. are to be paid at 8% premium by issue of a sufficient number of 10% debentures of A Ltd. @ Rs. 90.
Assuming that the take-over has been complete, show Journal entries and ledger accounts in the books of the Companies and draft
the Balance Sheet in the books of A Ltd.
PROBLEM: 17
The following are the summarized Balance Sheet of X Ltd. and Y Ltd. as on 31st March, 2006:
X Ltd.
Share capital 40,000 Sundry Assets 50,000
Profit and Loss Account 5,000 Share in Y Ltd. (1500 20,000
15% Debentures 10,000 Shares)
Creditors 15,000
70,000 70,000
Y Ltd.
Share capital of Rs. 10 20000 Sundry Assets 34000
each
Creditors 14000
34000 34000
A new company, XY Ltd., is formed to a acquire the entire business of X Ltd. and Y Ltd. For this purpose, sundry assets of X Ltd.
were valued at Rs. 30,000 and sundry assets of Y Ltd. at Rs. 20,000. The consideration is to be discharged in shares of the new
company. Close the books of X Ltd. and Y Ltd. Also give journal entries in the books of XY Ltd. for the purchase of business.
PROBLEM NO: 18 (Calculation of intrinsic values):

The following are the balance sheets of Pratiksha Ltd. and Nidhi Ltd. as on 1st March, 2006:
Balance Sheet of Pratiksha Ltd.

As on 31st March 2006
Share capital: Fixed assets 3,50,000
20000 shares of Rs.10 each 200000 Investments 2,50,000
General reserve 250000 Current assets 3,00,000
Profit and Loss A/c 150000
Debentures 175000
Current Liabilities 125000
900000 900000
Pratiksha Ltd. agrees to take over Nidhi Ltd. Find out the ratio of exchange of shares on the basis of book values.

PROBLEM NO: 19 (Reconstruction):
Moon Company Ltd. decided to reconstruct and consequently went into voluntary liquidation.
Balance Sheet of company on 31st March 2006 was as follows:

Share capital: Buildings 31800
4000 7% Preference Shares of Rs.10 40000 Plant 16500
each Furniture 1620
60000 Equity Shares of Rs. 1 each 60000 Stock 7350
Capital Reserve 1210 Debtors 13400
Bank Loan 1440 Less: Reserve 300 13100
Creditors 8610 Cash 40
Bills payable 420 Profit and Loss A/c 41270
111680 111680
A new company called New Moon Co. Ltd. was formed to acquire the following assets of Moon Co. at the values stated:
Buildings Rs. 20,000, Plant Rs. 12,000, Furniture Rs. 2,000 and Stock Rs. 6,000.
The purchase consideration was to be satisfied by the allotment of 20,000 10% preference shares of Rs. 15 each, credited with Rs.
10 paid-up.
The preference shareholders in the old company accepted the preference shares in the new company in full satisfaction of the
amount due to them.
The book debts realized Rs. 12275 and creditors were discharged by the payment of Rs. 8134. Bank loan and bills payable were
paid in full cost of winding up came to Rs. 1071
Show the ledger accounts in the books of the old company and journal entries in the books of the new company. Also give the
balance sheet of the new company assuming that a call of Rs.5 per share was made on equity shares and paid in full and
preliminary expenses amounted to Rs. 1000

PROBLEM NO: 20
Amalgamation and External Reconstruction:
The following are the summarised balance sheets of V Ltd and P Ltd as at 31st March, 2012:
P Ltd. acquires the entire business of V Ltd. for Rs 14,00,000 to be satisfied by allotment of equity shares at par. All the
acceptances of P Ltd. are in the favour of V Ltd. and which are included in the figure of Rs 40,000 in V Ltd.’s balance sheet.
Trade Receivables appearing in the balance sheet of V Ltd. include Rs, 10,000 due from P Ltd.
Prepare Realisation Account and Equity Shareholders Account in the books of V Ltd.
Pass journal entries in the books of P Ltd. and redraft P Ltd.’s balance sheet immediately after amalgamation assuming (i) it is an
amalgamation in the nature of purchase and (ii) it is an amalgamation in the nature of merger.

UNIT- II
Holding Company Accounts - Consolidation of Balance Sheets with treatment of Mutual Owings, Contingent Liability,
Unrealized Profit, Revaluation of Assets, Bonus issue and payment of dividend (Inter Company Holdings excluded).
HOLDING COMPANY
A holding company is one which controls one or more other companies by means of:
1. Holding majority shares or
2. Controlling the composition of Board of directors or
3. Controlling a holding company with subsidiaries
DEFINITION
The Indian Companies Act does not define a holding company directly. Sec. 4(4) of the Companies Act says “ A Company shall
be deemed to be the holding company of another, if, but only if, that other is its subsidiary”.
ROLE OF HOLDING COMPANY

A holding company is a registered and legally recognized entity. It exists for the sole purpose of owning the controlling interest
in other companies. The holding company does not usually want to own the entire business. Rather, it buys enough stock in other
corporations to take control of them.
REVALUATION OF ASSETS
At the time of acquiring shares in a subsidiary company, it is usual for the holding company to revalue the assets and liabilities of
the former in order to arrive at a fair price to be paid for its share. Any profit or loss on such revaluation is a capital profit or
loss.
CONSOLIDATED BALANCE SHEET

Balance Sheet is a statement that balances between assets and liabilities. On the other hand, a consolidated balance sheet is an
extension of balance sheet. In the consolidated balance sheet, the assets and liabilities of subsidiary companies are also included in
the assets and liabilities of parent company.
PREPARATION OF CONSOLIDATED BALANCESHEET

Consolidated balance sheets must be prepared according to the same rules and accounting methods used across the parent
company and its subsidiaries. ... Make a list of all the asset accounts and all the liability accounts including their values. Then, add
together all the company's assets and all its liabilities.
The following are the various points to be considered and followed for the preparation of consolidated Balance Sheet of a holding
company and its subsidiaries.
1. Basic philosophy of consolidation – Elimination of investment account
2. Minority Interest
3. Cost of control or goodwill
4. Revenue profits or post acquisition profits
5. Revenue losses or post acquisition losses
6. Capital Profits and Losses or Pre acquisition Profits & Losses.

7. Revaluation of assets and liabilities
8. Bonus Shares issued by subsidiary company
9. Dividends from subsidiary company
10. Preference shares in subsidiary company
11. Debentures in subsidiary company
12. Elimination of common transactions or mutual obligation or mutual indebtedness
13. Contingent liabilities
14. Provision for unrealized profits in stocks
15. Abnormal Losses
PROBLEM NO: 1 (B.com., 2009)

GOODWILL GIVEN IN BALANCE SHEET
The Balance Sheets of C Ltd. and D Ltd. as 31 st Dect 1986 are as follows:
Liabilities C Ltd. D Ltd Assets C Ltd. D Ltd
Rs. Rs. Rs. Rs.
Share capital (in shares of Sundry assets 132500 138200
Rs.10 each) 200000 100000 Goodwill - 20000
General reserve 18000 20000 Shares in D Ltd. at cost 140000 -
Profit & Loss A/c 24500 23000
Creditors 30000 15200
272500 158200 272500 158200
In the case of D Ltd., profit for the year ended 31 st Dec 1986 is Rs. 12000 and transfer to reserve is Rs. 5000. The holding of C
Ltd. in DLtd. Is 90% acquired on 30 th June 1986.
Draft a consolidated Balance sheet of C Ltd., and its subsidiary.
PROBLEM NO: 2
UNREALISED PROFIT IN STOCK
On 31st March 1996 the balance sheets of H Ltd. and its subsidiary S Ltd. stood as follows:
Liabilities H Ltd. SLtd Assets H Ltd. SLtd
Rs. Rs. Rs. Rs.
Equity share capital 800000 200000 Fixed assets 550000 100000
General reserve 150000 70000 75% share in S Ltd. (at
Profit & loss A/c 90000 55000 cost) 280000
Creditors 120000 80000 Stock 105000 177000
Other current assets 225000 128000
1160000 405000 1160000 405000
Draw a consolidated Balance sheet as at 31st March 1996 after taking into consideration the following information:
1. H Ltd acquired the shares on 31st July 1995
2. S Ltd. earned profit of Rs. 45000 for the year ended 31 st March 1996
3. In January 1996 S Ltd. sold to H Ltd. goods costing Rs. 15000 for Rs. 20000 On 31st March, 1996 half of these goods were
lying as unsold in the godown of H Ltd.

PROBLEM NO: 3 (B.COM 2005)
Mutual Obligation in bills
From the following Balance sheet relating to H Ltd. and S Ltd. prepare a consolidated Balance Sheet.
Rs. Rs. Rs. Rs.
Share capital (shares of Sundry fixed assets 800000 120000
Rs.10 each) 1000000 200000 Stock 610000 240000
Profit & Loss A/c 400000 120000 Debtors 130000 170000
Reserves 100000 60000 Bills receivable 10000 -
Creditors 200000 120000 Shares in S Ltd. at cost
Bills Payable - 30000 (15000 shares) 150000
1700000 530000 1700000 530000
1. All profits of S Ltd. have been earned after the shares were acquired by H Ltd. But there was already a reserve of Rs. 60000 on
that date.
2. All the bills payable of S Ltd. were accepted in favour of H Ltd.
3. The Stock of H Ltd. includes Rs. 50,000 purchased from S Ltd. the profit added was 25% on cost.
PROBLEM NO: 4
CAPITAL EXPENSES GIVEN IN BALANCE SHEET
The following are the Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31.3.1995
Rs. Rs. Rs. Rs.
Share capital: Machinery 300000 100000
Rs. 10 each fully paid 600000 200000 Furniture 70000 45000
General Reserve 150000 70000 70% shares in S Ltd. at
Profit & Loss A/c 70000 50000 cost 260000 -
Creditors 90000 60000 Stock 175000 189000
Debtors 55000 30000
Cash at bank 50000 10000
Preliminary expenses - 6000
910000 380000 910000 380000

H Ltd acquired the shares of S Ltd. on 30 June 1994. On 1 April 94 S Ltd’s general reserve and P&L A/c stood at Rs. 60000
th st
and 20,000 respectively. No part of the preliminary expenses was written off in the year ended 31.3.95.
Prepare consolidate Balance Sheet of H Ltd. and it’s subsidiary S Ltd. as on 31.3.95 giving all your working notes separately.

PROBLE NO: 5
CASH IN TRANSIT – MUTUAL OBLIGATION IN DEBTORS AND CREDITORS
You are required to consolidated the following Balance
BALANCE SHEET OF R LTD.
20000 Shares of Rs.10 200000 Buildings 80000
each fully paid 100000 Machinery 60000
12% debentures 40000 Fixtures 40000
Trade creditors 60000 Investments in S Ltd.
Profit & Loss A/c 50000 10000 shares at cost 140000
Stock in trade 30000
S Ltd 30000
Others 60000 90000
Balance ate Bank 10000
450000 450000
BALANCE SHEET OF S LTD.
12000 Shares of Rs.10 120000 Buildings 50000
each Vehicles 40000
Profit & Loss A/c 90000 Stock 30000
Sundry Creditors: Sundry Debtors 90000
R Ltd. 25000 Bills receivable 50000
Others 55000 80000 Balance at bank 30000
290000 290000
The holding of R Ltd. in S Ltd was acquired some years earlier at a premium of 40% the balance at credit of the P&L A/c of S
Ltd. being Rs. 30000.
Transaction between R Ltd. and S Ltd. include the purchase of goods by S Ltd. at cost plus 25%. The stocks of S Ltd. on the
Balance sheet date consists of:
Goods from R Ltd. Rs. 15000
Goods from others Rs. 15000
30000
Cash amounting to Rs. 5000 was in transit from S Ltd. to R Ltd. on the date of the Balance Sheet.
PROBLEM NO: 6
CASH – IN- TRANSIT – MUTUAL OBLIGATIONS
X Ltd purchased 750 share in Y Ltd. on 1.7.94. the following were their Balance Sheet on 31.12.94
Liabilities X Ltd. YLtd Assets X Ltd. Y Ltd
Rs. Rs. Rs. Rs.
Share capital: shares of Rs. Buildings 205000 125000
100 each 300000 100000 Stock 100000 80000
Gen. reserve on 1.1.94 100000 70000 Debtors 100000 40000

Profit & Loss A/c 100000 60000 Investments in Y Ltd. 100000 -
Creditors 80000 40000 Bills receivable 40000 45000
Bills Payable 50000 20000 Cash at bank 60000 20000
Current Account: Current Account:
X Ltd. - 20000 Y Ltd. 25000 -
630000 310000 630000 310000
Additional Information:
1. Bills receivable of X Ltd. include Rs. 10000 accepted by Y Ltd.
2. Debtors of X Ltd. include Rs. 20000 payable by Y Ltd.
3. A cheque of rs. 5000 sent by Y Ltd. on 28 th Dec was not yet received by X Ltd. on 31st Dec 1994.
4. P&L A/c of Y Ltd. shoed a Balance of Rs. 20000 on 1.1.94.
Prepare a consolidated Balance sheet of X Ltd and Y Ltd as on 31.12.1994.
PROBLEM NO: 7 (B.COM 2004)

ASSET TO BE WRITTEN OFF FROM REVENUE PROFITS
The following are the balance sheet of A Ltd. and B Ltd. as at Dec 1993.
Liabilities A Ltd. B Ltd Assets A Ltd. B Ltd
Rs. Rs. Rs. Rs.
Equity share capital Rs. 10 Sundry assets 66250 69100
each 100000 50000 Shares in B Ltd. at cost 70000 -
Revenue reserves 9000 10000 Good will - 10000
P&L A/c on 1.1.73 8500 8000
Profit for the year less
transfer to reserves 3750 3500
creditors 15000 7600
136250 79100 136250 79100
Profit for the year of B Ltd. was Rs. 6000 out of which Rs.2500 was transferred t reserves.
The holding of A Ltd in B Ltd. is 90% acquired a year ago on 31.12.92
Write off from sundry assets of A Ltd. Rs. 9000. Also write off Rs.3100 from the sundry assets of B Ltd. out of the current years’
profits.
Draft a consolidated Balance Sheet of A Ltd. and it’s subsidiary.
PROBLEM NO: 8
BONUS SHARES – REVALUATION OF ASSETS
A Ltd. acquired 1600 ordinary shares of Rs. 100 each in B Ltd. on 31 st Dec 1989. Their summarized Balance sheet as on that date
were as under:
Rs. Rs. Rs. Rs.
Capital: Land & Building 150000 180000
5000 ordinary shares of Rs. Plant & Machinery 240000 109400
100 each 500000 Investments in B Ltd. at
2000 ordinary shares of Rs. cost 340000 -

100 each 200000 Stocks 120000 36000
Capital reserve 120000 Debtors 44000 40000
General reserve 240000 - Bills receivable (including
P&L A/c 57200 36000 Rs. 3000 from B Ltd) 15800 -
Bank overdraft 80000 - Cash at bank 14500 8000
Bills payable (including
Rs. 4000 to A Ltd.) - 8400
924300 373400 924300 373400
1. B Ltd had made a bonus issue on 31 Dec 1989 of one ordinary shares for every two shares held by it’s share holders. Effect
st
has yet to be given in the accounts for the issue.

2. The directors are advised that Land & Buildings of B Ltd. are undervalued by Rs. 20000 and Plant & Machinery of B Ltd. over
valued by Rs. 10000. These assets have to be adjusted accordingly.
3. Sundry creditors of A Ltd include Rs. 12000 due to B Ltd.
Prepare a Balance Sheet as on 31st Dec 1989.
PROBLEM NO: 9
CAPITAL LOSS – DEBENTURES IN SUBSIDIARY
The following Balance sheet are presented
Balance Sheet as at 31.12.89
Rs. Rs. Rs. Rs.
Share Capital: Shares of Fixed assets 175000 75000
Rs. 50 each 250000 100000 Stock in trade 45000 20000
General reserve 50000 - Debtors 30000 15000
Profit & Loss A/c 40000 - 6% debentures in B Ltd.
6% debentures - 50000 acquired at par 30000 -
Trade Creditors 37500 22500 Shares in B Ltd. 1500 at
Rs. 40 60000 -
Cash at Bank 37500 12500
Profit & Loss A/c - 50000
377500 172500 377500 172500
A Ltd. acquired the shares on 1.4.89. the profit & loss A/c of B Ltd. showed a debit balance of Rs.75000 on 1.1.89. trade creditors
of B Ltd. include Rs.10000 for goods supplied by A Ltd. on which A Ltd., made a profit of Rs. 1000. Half of the goods were still
in stock on 31.12.89
Prepare a consolidated Balance Sheet.

PROBLEM NO :10
DIVIDNT PAID OUT OF CAPITAL PROFITS
The balance sheet of X Ltd and its subsidiary Y Ltd as on 31 st March 1996 are given below.
Liabilities X Ltd. Y Ltd Assets X Ltd. Y Ltd
Rs. Rs. Rs. Rs.
Equity share of Rs. 100 Buildings 412000 120000
each 600000 200000 Machinery 100000 96000
General reserve 380000 8000 Furniture 20000 12400
Profit & loss A/c 320000 144000 Stock 136000 80800
Sundry creditors 60000 64400 Investments 448000 -
Debtors 112000 63200
cash 132000 44000
1360000 416400 1360000 416400
st
Prepare a consolidated Balance sheet of X Ltd and its subsidiary Y Ltd. as on 31 March 1996 together with the working notes
after giving effect to the following relevant information.
1. X Ltd. acquired 80% equity shares in Y Ltd. on 1 st july 1995 at a cost price of Rs. 448000
2. In the Profit & Loss A/c of X Ltd interim dividend declared by Y Ltd. on 1st July 1995 at the rate of 10% p.a is included.
3. Creditors of X Ltd include an amount of Rs. 24000 in respect of purchase from Y Ltd and stock of X Ltd also includes stock at
cost price of Rs. 12000 purchased from Y Ltd. which sells the goods by adding 25% profit on the cost price.
On 1st April 1995 in the books of Y Ltd., P&L A/c credit balance was Rs. 112000 from which the company declared 10% interim
dividend.
During the year 1995-96 profit of the company was constant.
PROBLEM NO: 11
PROPOSED DIVIDEND
L.G. Ltd. acquired 90% of the equity shares in D .R Ltd. on June 30 1985 at a cost of Rs. 600000. No Balance sheet was prepared
at the date of acquisition.
Balance sheet of D.R Ltd as at Dec 31 1984 and 1985 were as follows:
Liabilities 1984. 1985 Assets 1984. 1985
Rs. Rs. Rs. Rs.
Share capital: Sundry assets 600000 756000
20000equity shares of Good will 100000 100000
Rs.10 each 200000 200000
Revenue reserve 400000 440000
Profit & Loss A/c 100000 174000
Proposed divident - 42000
700000 856000 700000 856000

Balance sheet of L.G Ltd as at Dec 31 st 1985 were as follows:
Liabilities 1985 Assets 1985
Rs. Rs.
200000 equity shares of 2000000 Net assets 3000000
Rs. 10 each Investment:
Capital reserve 200000 18000 equity shares of Rs.
General reserve 1000000 10 each in D.R.Ltd. 600000
Profit & Loss A/c 400000
3600000 3600000
L.G. Ltd has not passed entries for the dividend proposed by D.R. Ltd. Prepare consolidate Balance Sheet of L.G. Ltd and its
subsidiary D.R. Ltd as on 31st Dec 1985.
Balance sheet of D.R Ltd as at Dec 31 1984 and 1985 were as follows:
PROMBLE NO: 12
BONUS SHARES ISSUED OUT OF REVENUE PROFITS
The summarized Balance Sheets of H Ltd. and S Ltd. as on 31 st Dec 1992 are given below
Rs. Rs. Rs. Rs.
Share capital: Sundry assets 500000 170000
Shares of Rs. 10 each 500000 100000 8000 shares in S Ltd. 140000 -
Reserves 80000 30000
Profit & Loss A/c 60000 40000
640000 170000 640000 170000
S Ltd had the reserve of Rs. 30000 when H Ltd acquired the shares in S Ltd but the profit & loss a/c balance of S Ltd was fully
earned after the purchase of shares.
S Ltd. decided to issue bonus shares out of the post acquistion profit in the ration of 2 shares for every 5 shares held.
Calculate the cost of control before the issue of bonus shares and after the issue of bonus shares.
PROBLEM NO: 13
DIVIDEND PAID OUT OF CAPITAL PROFIT – BONUS SHARES ISSUED OUT OF CAPITAL PROFITS
The following are the Balance Sheet of H Ltd. and S Ltd. as on 31 st March 1989
Rs. Rs. Rs. Rs.
Share capital: Fixed assets 250000 200000
Shares of Rs. 100 each 500000 400000 Investment in S Ltd. 250000 -
General Reserves 100000 100000 Current assets 400000 550000

Profit & Loss A/c 200000 150000
Current Liabilities 100000 100000
900000 750000 900000 750000
1. H Ltd acquired 2000 shares in S Ltd on 1.4.88 when the latter’s general reserve and Profit & Loss account were Rs. 2,50000
and Rs. 100000 respectively.
2. On 30.6.88 S Ltd. declared 20% dividend out of pre acquisition profits and H Ltd credited the amount received to its;s P&L
A/c.
3. On 31.10.88 S Ltd. issued bonus shares in the ration of 3 shares for 5 shares held out of the general reserve. H Ltd. made no
entry in its books for the bonus shares received.
4. S Ltd. owed H Ltd. Rs. 50000 on 31.3.89 on account of goods supplied on credit. However all of those goods were already
disposed off by S Ltd.
Prepare a consolidated Balance sheet as at 31st March 1989.
PROBLEM NO: 14
PREFERENCE SHARES IN SUBSIDARY - REVALUATION OF FIXED ASSETS – DEPRECIATION ON
REVALUED ASSETS
The Balance sheet of H Ltd., and S Ltd., on 31st Dec 1990 were as follows:
Rs. Rs. Rs. Rs.
Share capital: Land & Buildings 310000 160000
10% Pref. shares of Rs. Machinery Less
100 each - 100000 10% depreciation 270000 135000
Equity shares of Rs. 100
each 1000000 400000 3000 shares in S Ltd. 450000 -
General reserve 100000 50000 Stock at cost 220000 150000
P & L A/c balance on Debtors 155000 90000
1.1.90 40000 30000 Cash and Bank Balance 85000 195000
Profit on 1990 200000 80000
14,90,000 7,30,000 14,90,000 7,30,000
H Ltd acquired 3000 equity shares in S Ltd on 1 st July 1990. As on the date of acquisition. H Ltd., found that the value of Land
and Building and Machinery of S Ltd., should be Rs. 150000 and Rs. 192500 respectively.
Prepare the consolidated Balance Sheet of H Ltd., and its subsidiary S Ltd showing the assets at their proper values.
PROBLEM NO: 15
The following Balance sheet are presented
Balance Sheet as at 31.12.99
Rs. Rs. Rs. Rs.
Share Capital: Shares of Fixed assets 125000 70000

Rs. 50 each 200000 90000 Stock in trade 40000 15000
General reserve 25000 - Debtors 35000 10000
Profit & Loss A/c 30000 - 6% debentures in B Ltd.
6% debentures - 40000 acquired at par 25000 -
Trade Creditors 37500 22500 Shares in B Ltd. 1500 at
Rs. 40 60000 -
Cash at Bank 37500 12500
Profit & Loss A/c - 50000
377500 172500 377500 172500
A Ltd. acquired the shares on 1.4.99. the profit & loss A/c of B Ltd. showed a debit balance of Rs.50000 on 1.1.89.Ttrade
creditors of B Ltd. include Rs.15000 for goods supplied by A Ltd. on which A Ltd., made a profit of Rs. 2000. Half of the goods
were still in stock on 31.12.99
Prepare a consolidated Balance Sheet.
PROBLEM NO: 16
From the following Balance sheet relating to H Ltd. and S Ltd. prepare a consolidated Balance Sheet.
Rs. Rs. Rs. Rs.
Share capital (shares of Sundry fixed assets 800000 120000
Rs.10 each) 1000000 200000 Stock 610000 240000
Profit & Loss A/c 500000 150000 Debtors 130000 170000
Reserves 200000 50000 Bills receivable 10000 -
Creditors 100000 100000 Shares in S Ltd. at cost
Bills Payable - 20000 (15000 shares) 150000
1800000 520000 1800000 520000
1. All profits of S Ltd. have been earned after the shares were acquired by H Ltd. But there was already a reserve of Rs. 60000 on
that date.
2. All the bills payable of S Ltd. were accepted in favour of H Ltd.
3. The Stock of H Ltd. includes Rs. 50,000 purchased from S Ltd. the profit added was 25% on cost.
PROBLEM NO: 17
CONSOLIDATED PROFIT & LOSS ACCOUNT
H Ltd acquired 80% of the shares in S Ltd on 1.1.96 on which date S Ltd has Rs 20,000 credit balance in its P& L account.
The following position was revealed on 31.12.1997
H Ltd. SLtd
Rs. Rs.
Profit for the year 1997 200000 80000
P&L Balance on 31.12.96 120000 70000
S Ltd had not paid any dividend during the years 1996 and 1997. Prepare a consolidated P&L account for the year ended 31.12.97.

PROBLEM NO: 18
H Ltd purchased 60% of the shares in S Ltd on 1.1.96. The following is the summarized P&L account of the companies after
ascertaining net profit.
Profit & Loss Account of H Ltd. and S Ltd. for the year ended 31.12.96
Particulars H Ltd. SLtd Particulars H Ltd. SLtd
Rs. Rs. Rs. Rs.
To proposed dividend - 100000 By Net Profit b/d 400000 180000
To balance c/d 460000 80000 By Dividend receivable
from S Ltd. 60000 -
460000 180000 460000 180000
Prepare a consolidated P&L account of the two companies.
PROBLEM NO: 19
A Ltd purchased 55% of the shares in S Ltd on 1.1.99. The following is the summarized P&L account of the companies after
ascertaining net profit.
Profit & Loss Account of A Ltd. and B Ltd. for the year ended 31.12.96
Particulars A Ltd. B Ltd Particulars A Ltd. B Ltd
Rs. Rs. Rs. Rs.
To proposed dividend - 200000 By Net Profit b/d 400000 280000
To balance c/d 500000 80000 By Dividend receivable
from S Ltd. 100000 -
500000 280000 500000 280000
Prepare a consolidated P&L account of the two companies.
PROBLE NO: 20
A Ltd acquired 80% of the shares in B Ltd on 1.1.96 on which date B Ltd has Rs 20,000 credit balance in its P& L account.
The following position was revealed on 31.12.1999
A Ltd. B Ltd
Rs. Rs.
Profit for the year 1999 300000 50000
P&L Balance on 31.12.98 100000 40000
S Ltd had not paid any dividend during the years 1996 and 1997. Prepare a consolidated P&L account for the year ended 31.12.97.

Unit – III
Unit III explores about Banking Company Accounts - Preparation of Profit and Loss Account and Balance Sheet (New format
only) - Rebate on Bills Discounted - Classification of Advances - Classification of Investments.
BANKING COMPANY ACCOUNTS

➢ The important provisions of Banking Regulation Act, 1949 specially having a bearing on the preparation of bank
accounts.
➢ The special system of book-keeping followed by banks.
➢ The guidelines issued by RBI regarding capital adequacy norms, income recognition, classification of advances,
requirements of provisioning based on such classification and valuation of investments and provisioning for changes in
the value of investments.
➢ The preparation of final accounts of banking companies in the format prescribed by RBI and in accordance with the
instructions given in the third schedule to the Act.
➢ Special adjustment relating to unexpired discount on bills called ‘rebate on bills discounted’ including its computation
and treatment of special items like ‘ bills for collection, acceptances, endorsements and other obligations’ and other
contingent liabilities.
WHAT IS BANKING COMPANY

Sec 5 of the Banking Regulation Act, 1949 defines a banking company as any company which transacts the business of banking in
India. It further says that the word ‘banking’ used with reference to the above definition of banking company “means the
accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise’. Therefore any company which is engaged in the manufacture of goods or
carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as
manufacturer or trader is not considered as a banking company.
SPECIMEN FOR OF ACCOUNTING POLICIES

Principal Accounting Policies
1. General
The accompanying financial statements have been prepared on the historical cost basis and conform to statutory provisions and
practices prevailing in the country.
2. Transactions Involving Foreign exchange
3. Investments
4. Advances
5. Fixed Assets
6. Staff Benefits
7. Net Profit
I BOOK SECTION
1. Cash Book
a. Rough Cash Book
b. Fair Cash Book

2. Cash Balance Book
3. Cash Reserve Book
4. Day Book
II LEDGER SECTION
As is done in any business house, in the banks also the transactions are first recorded in the books and then posted to ledger. There
are various types of ledgers for meeting out different purposes.
1. Current Accounts Ledger
2. Savings Bank Ledger
3. Fixed Deposit Ledger
4. Overdue Fixed Deposit Ledger
5. Fixed Deposit Interest Ledger
6. Loan Ledger
7. Investment Ledger
8. General Ledger
III REGISTERS SECTION

For the working of bank it is necessary that certain books and ledgers must be kept. This enables the maintenance of records on
double entry system. These have been discussed in the preceding two sections. Besides, it is necessary for a bank to maintain
certain registers which do not for of double entry system.
1. Bills for Collection Register
2. Securities Register
3. Jewellery Register
4. Document Register
5. Standing order Register
6. Cheques Dishonoured Register
7. Drafts payable Register
8. Drafts Issue Register
9. D.D. Register
10. Foreign Letters of Credit Register
IV SLIP SYSTEM OF LEDGER POSTING

Slip system of ledger posting is a method of rapid posting of books of account kept on double entry system. Slips are nothing but
loose leaves of journals or cash book on which transactions are recorded as they occur. These slips are passed on to the ledger –
keeper concerned for immediate posting to the debit or credit of accounts mentioned thereon.
PREPARATION OF PROFIT AND LOSS ACCOUNT

Banking is a special type of business and the preparation of financial statements call for specialized knowledge. In the preparation
of income statement, two important things to be noted are: income recognition and provisioning for assets for the likely loss in the
value of assets.
Banks are required to prepare final accounts for each financial year. i.e., their books are closed each year on 31st Mach. But for
internal purpose, banks usually close their books on 30 th September called half yearly closing. The Profit & Loss Account of a
banking company has to be prepared in Form ‘B’ of Schedule III attached to the Banking Regulation Act 1949.

Form ‘B’
Form of Profit and Loss Account
Profit and Loss Account for the year ended 31 st March
Schedule Year ended on 31.3…. Year ended on
No. (current year) 31.3(previous year
Rs. Rs.
I. Income
Interest earned 13 xxxx
Other Income 14 xxxx
II. Expenditure
Interest expended 15 xxxx
Operation expense 16 xxxx
Provisions and Contingencies
III. Profit/Loss
Net Profit/Loss (-) for the year xxxx
Profit/Loss (-) brought forward xxxx
IV. Appropriations:
Transfer to statutory reserves xxxx
Transfer to other serves xxxx
Transfer to Govt./proposed dividend xxxx
Balance Carried over to Balance Sheet xxxx
Total
SCHEDULE TO BE ANNEDED WITH PROFIT AND LOSS ACCOUNT
SCHEDULE 13: INTEREST EARNED

Year ended on Year ended on
31.3…. (current year) 31.3(previous year
Rs. Rs.
I. Interest / Discount on Advance/Bills xxxx
II. Income on investments xxxx
III. Interest on balances with RBI and other inter-bank funds xxxx
IV. Others xxxx

SCHEDULE 14: OTHER INCOME

Rs. Rs.
I. Commission, Exchange and Brokerage xxxx
II. Profit on sale of investments xxxx
Less: Loss on sale of investments xxxx xxxx
III. Profit on revaluation of investments xxxx
Less: Loss on revaluation of investments xxxx xxxx
IV. Profit on sale of Land/Building and other assets xxxx
Less: Loss on sale of Land, Building and other assets xxxx xxxx
V. Profit on Exchange transactions xxxx
Less: Loss on Exchange transactions xxxx xxxx
VI. Income earned by way of dividends etc.
From subsidiaries/companies and or Joint
Ventures abroad/in India xxxx
VII. Miscellaneous Income xxxx
Total
Note: Under items II to V, loss figure may be shown in brackets
SCHEDULE 15: INTEREST EXPENDED

Rs. Rs.
I. Interest on Deposit xxxx
II. Interest on RBI/Inter-Bank Borrowings xxxx
III. Others xxxx
SCHEDULE 16: OPERATING EXPENSES

Rs. Rs.
I. Payments to and Provisions for employees xxxx xxxx
II. Rent, taxes and lighting xxxx xxxx
III. Printing and Stationery xxxx xxxx
IV. Advertisement and Pubicity xxxx xxxx
V. Depreciation on Bank’s property xxxx xxxx
VI. Directors’ fees, allowances and expenses xxxx xxxx
VII. Auditor’s fees, allowances and expenses xxxx xxxx

VIII. Law charges xxxx xxxx
IX. Postage, telegrams, telephones, etc. xxxx xxxx
X. Repairs & Maintenance xxxx xxxx
XI. Insurance xxxx xxxx
XII. Other Expenditure xxxx xxxx
Total
PROBLEMS
NON-PERFORMING ASSET (N.P.A) – PROVISION FOR DOUBTFUL DEBTS
PROBLEM NO.1 (B.COM., APRIL 2007)
On 31st March 1998, Bharat Commercial Bank Ltd., finds its advances classified as follows:
Standard Assets Rs. 14,91,300

Sub- standard Assets Rs.92,800
Doubtful Assets (secured)
: doubtful for one year Rs. 25,660
: doubtful for one year to 3 years Rs. 15,640
: doubtful for more than 3 years Rs. 6,580
Loss assets Rs. 10,350
Calculate the amount of provision to be made by the bank against the above mentioned advances.
INTEREST ON DOUBTFUL DEBTS

PROBLEM NO.2 (B.COM APRIL 2008)
While closing the books of a bank on 31 st Dec. 1989, you find in the loan ledger as unsecured balance of Rs. 2 lakhs in the
account of a merchant whose financial condition is reported to you as bad. Interest on the same account amounted to Rs.20,000
during the year. During the year 1990, the bank accepted 75 paise in the rupee on account of the debt upto 31 st Dec, 1989. Give
journal and ledger to record these transactions under alternative accounting policies.
REBATE ON BILLS DISCOUNTED

PROBLE NO.3 (B.COM., NOV 2005)
On 31st March, 1998 a bank held the following bills, discounted by it earlier:
Date of Bill 1998 Term of bill Discounted Amount of bill
(months) @ % p.a Rs.
i. January, 17 4 17 7,30,000
ii. February, 7 3 18 14,60,000
iii. March, 9 3 17.5 3,64,000
Calculate the rebate on bills discounted. Also show the necessary journal entry for the rebate.

PROBLEM NO.4 (B.COM NOV. 2006)
The trial balance of the Nedungadi Bank Ltd., as on 30 th June 1994 shows the following balances.
Rs.
Interest and discount 45,40,600
Rebate on bills discounted (1.7.93) 4,750
Bills discounted and purchased 3,37,400
The unexpired discount as on 30.6.94 is estimated to be Rs. 5,560. Draft necessary adjusting entries and calculate the amount of
interest and discount to be credited to profit and loss account.
PROBLEM NO. 5 (B.COM NOV 2008)

As on 31st December 1995, the books of the Hercules bank, include among others, the following balances.
Rs.
Rebate on bills discounted (1.1.1985) 3,20,000
Discount Received 46,00,000
Bills discounted and purchased 3,15,47,000
Throughout 1995, the bank’s rate for discounting has been 18%
On investigation and analysis, the average due date for the bills discounted and purchased is calculated as 14 th February, 1986.
Show the calculation of the amount to be credited to the banks Profit and Loss A/c under discount earned for the year 1985. Show
also the journal entries required to adjust the above mentioned accounts.
PROBLEM NO. 6
On 1.1.90, the rebate on bills discounted account of a bank showed a credit balance of Rs.1,00,000. On 31.12.90, the discount
account showed a credit balance of Rs. 15,00,000 before adjusting unexpired discount. The bills discounted outstanding on
31.12.90 were Rs. 2 crores with average maturity date of January 31, 1991and they were all discounted at 12% p.a.
Write adjustment entries and relevant ledger accounts to record these items and also show how these items will appear in the final
accounts of the bank.
PROBLEM NO.7(B.COM 2005)

From the following particulars, prepare a P&L A/c of New bank Ltd., for the year ended 31.12.1996.
Rs. Rs.
Interest on Loans 260 Interest on cash credits 225
Interest on fixed deposits 280 Rent and taxes 20
Rebate on bills discounted 50 Interest on overdrafts 56
Commission charged to customers 9 Directors and Auditor’s fees 4
Establishment expenses 56 Interest on savings bank accounts 70
Discount on bills discounted 200 Postage and telegrams 2
Interest on current accounts 45 Sundry charges 2
Printing and advertisements 3

PROBLEM NO .8 (B.COM NOV 2009)
From the following information relating to Lakshmi Bank Ltd., Prepare the P&L A/c for the year ended 31 st December, 1987
Rs. Rs.
Rent Received 72,000 Salaries and allowances 2,18,800
Exchange and commission 32,800 Postage 5,600
Interest on fixed deposit 11,00,000 Sundry charges 4,000
Interest on savings bank A/xs 2,72,000 Director’s & Auditor’s fees 16,800
Interest on overdrafts 2,16,000 Printing 8,000
Discount on bills discounted 7,80,000 Law Charges 3,600
Interest on current accounts 1,68,000 Locker rent 1,400
Interest on cash credits 8,92,000 Transfer fees 2,800
Depreciation on bank property 20,000 Interest on loans 10,36,000
PROBLEM NO. 9
The following figures are extracted from the books of Bheema Bank Ltd. as on 31.12.987
Rs.
Interest and discount received 36,95,738
Commission, exchange and brokerage 2,00,000
Director’s fees and allowances 55,000
Postage and telegrams 62,313
Stationery 17,625
Preliminary expenses 15,000
Interest paid on deposit 20,32,542
Rent received 55.000
Salaries and allowances 1,75,000
Rent and taxes paid 87,973
Profit on sale of investments 2,00,000
Depreciation on building 27,375
Audit fees 5,000
1. A customer to whom a sum of Rs. 10,00,000 has been advanced has become insolvent. It is expected that only 50% can be
recovered from his private estate.
2. For the remaining debts, a provision of Rs. 1,50,000 was necessary.
3. Rebate on bills discounted as on 31.12.86 Rs. 12,000 and on 31.12.1987 Rs. 16,000
4. Provide Rs. 6,50,000 for taxation
5. Write off all preliminary expenses.
Prepare P&L A/c in accordance with the Law.

PROBLEM NO. 10
From the following information, prepare Profit and Loss account of Swadesh Bank Ltd., for the year ended 31 st December 1987.
Rs.
Interest on fixed deposits 430
Interest on loans 650
Discount on bills discounted 415
Interest on over drafts 210
Interest on cash credits 410
Interest on savings bank deposits 125
Salaries and allowances 140
Rent, taxes, insurance and lighting 40
Locker rent 5
Repairs to bank property 2
Commission, exchange and brokerage 24
Director’s fees and allowances 25
Transfer Fees 2
Provident fund contribution 12
Local committee fees and allowances 10
Audit fees 12
Printing and stationery 4
Loss on sale of government securities 5
Loss on sale of furniture 2
Postage and telegrams 2
Depreciation 10
Advertisement 4
Legal charges 3
Additional Information
1. Rebate on bills discounted on 31st Dec, 1986 Rs. 19,000
2. Rebate on bills discounted on 31st Dec 1987, Rs. 26,000
3. Bad debts to be written off Rs. 40,000
4. Provide for taxation Rs. 50,000
PROBLEM NO.11
From the following information prepare the P&L a/c of ABC Bank Ltd. for the year ended on 31 st March1992 in the prescribed
form.
Rs.
Interest on loan 2,59,000
Interest on fixed deposits 2,75,000
Rebate on bills discounted required 49,000
Commission 8,200
Establishment 54,000

Discount on bills discounted 1,95,000
Interest on cash credit 2,23,000
Interest on current account 42,000
Rent and taxes 18,000
Interest on overdraft 1,54,000
Director’s fees 3,000
Auditor’s fees 1,200
Interest on savings bank deposits 68,000
Printing and stationary 2,900
Sundry charges 1,700
Bad debts to be written off amounted t o Rs. 40,000. Provision for taxation may be made @ 55%
Balance of Profit from last year was Rs.1,20,000. The directors have recommended a dividend of Rs.20,000 for the shareholders.
PROBLEM NO. 12
Some of the items in the Trial balance of Modern Bank Ltd as on December 1992 were as follows:
Rs. Rs.
Loans and advances 71,50,000 Printing and stationary 4,500
Current accounts (including Int. on savings bank deposits 75,000
overdraft of Rs.15,00,000) 66,00,000 Auditor’s fees 5,000
Bills discounted and purchased 19,20,000 Director’s fees 2,500
Interest on fixed deposits 1,55,000 Interest on overdrafts 95,000
Interest on loans 2,25,000 Provision for bad debts, Jan1, 1992 42,000
Discount (subject to unexpired Bad debts 21,000
discounts Rs.30,000) 2,01,000 Provision for income tax, Jan 1, 1992 66,000
Interest on cash credits 1,05,000 Income tax paid for 1982 54,000
Commission earned 46,500
Loss on sale of investments 34,000
Salaries and allowances 82,000
Prepare the profit and loss a/c of the bank maintaining the provision for income tax at Rs. 84,000 and provision for bad debts at
Rs. 52,000 for the year ended Dec 31st 1992.
PROBLEM NO.13
From the following details, prepare the P&L A/c of the Bharat Bank Ltd., for the year ended December 31, 1990.
Rs.
Interest paid on deposits and borrowings 2,40,000
Interest and discount 7,48,000
Rent received 36,000
Net profit on sale of investments 2,700
Salaries, allowances, bonus and brokerage 2,10,000

Legal charges 12,000
Audit fees 5,000
Director’s and local committee members fees 2,400
Printing and stationary 6,400
Miscellaneous expenditure 12,000
Telephone, postage and telegrams 44,000
Advertising 9,000
Insurance and lighting 7,400
Bad debts 34,500
Rent paid 48,000
Opening balances on unexpired discount and reserve for bad and doubtful debts were Rs. 48,000 and Rs. 24,000 respectively.
Closing balances required on these amounts are Rs. 54,000 and Rs. 36,000 respectively. Provide 60% taxation on current profits.
The chairman and managing director has been paid a salary of Rs. 2400p.m and has been provided free quarters and a motor car
perquisites valued at Rs. 6,000p.a.
PROBLEM NO: 14
From the books of accounts of new Bharat Bank Ltd. as on 31 st March 1996 the following particulars regarding loans and
advances given by the Bank in India are available.
Rs.
1. Loan to corporate sector fully secured (excluding banks but
including companies in which directors are interested) 10,00,000
2. Loan to Vijaya Bank Ltd., fully secured 3,00,000
3. Debts due by officers (excluding directors, fully secured) 2,00,000
4. loans to non-corporate sector-fully secured 9,00,000
5. loans to Nagarik Bank Ltd., fully secured 4,00,000
6. Debts due by Manoj, director of the bank- fully secured 1,00,000
7. Debts considered good which are unsecured 5,00,000
8. Debts due by companies in which the directors are interested, fully 6,00,000
secured
9. Maximum amount of debts at any time during the year 15,00,000
10. Doubtful debts 50,000
11. Provision for bad and doubtful debts 75,000
12. Maximum amount of debts due by officers and directors at any
time during the year 5,00,000
Show the items are statutorily required to be entered in the balance sheet of the bank.

PREPARATION OF BALANCE SHEET
PROBLE NO: 15
On 31st Dec 1996. The following balances stood in the books of Asian Bank Ltd. after preparation of its profit and loss A/c.
Rs.
Share Capital
Issue and subscribed 4000
Reserve fund (under section 17) 6200
Fixed deposits 42600
Savings bank deposits 19000
Current accounts 23200
Money at call and short notice 1800
Investments 25000
st
Profit and Loss A/c (cr) 1 Jan 1996 1350
Dividend for 1995 400
Premises 2950
Cash in hand 380
Cash with RBI 10000
Cash with other banks 6000
Bills discounted and purchased 3800
Loans, cash credits and over drafts 51000
Bills payable 70
Unclaimed dividend 60
Rebate on bills discounted 50
Short loans (borrowing from other banks) 4750
Furniture 1164
Other assets 336
Net profit for 1996 1550
Prepare a balance sheet of the bank as on 31st Dec 1996.
PROBLEM NO: 16
From the following particulars of XY Bank Ltd., having its own premises, prepare the balance sheet in the prescribed form as on
31st Dec 1995.
Rs.(in
thousands)
Authorised Capital 4000
Subscribed capital 4,00,000 shares of Rs. 10 each
Rs. 5 paid 2000
Investments 7000
Bills discounted (in India) 15000
Profit and Loss (cr) 850
Endorsement on bills for collection 100
Liability of customers for acceptances 5000

Money at call and short notice 9000
Cash in hand 2000
Cash with RBI 4000
Reserve 3000
Cash with state bank 4000
Letters of credit issued 500
Telegraphic transfers payable 800
Bank drafts payable 1200
Short loans 40
Rebate on bills discounted 10
Acceptances for customers 5000
Loans and Advances 10000
Cash credits 10000
Overdrafts 1000
Bills purchased (payable outside India) 1000
Current and deposit accounts 56000
Investment fluctuation fund 100
Bills for collection 100
Prepare a trial balance and determine the balancing figure which constitutes the value of premises.
PREPARATION OF PROFIT AND LOSS ACCOUNT AND BALANCE SHEET

PROBLEM NO: 17
The following is the Trial Balance extracted from the books of Town Bank Ltd.
Debit Balances Rs. Credit Balances Rs.
Balances with Banks 46350 Share Capital 300000
Investment in Government bonds 194370 Security deposit for employees 15000
SB Accounts 7420
Other investments 155630 Current accounts 97000
Gold Bullion 15130 Fixed deposits 113050
Interest accrued on investments 24620 Reserve fund 140000
Silver 2000 Borrowings from banks 77230
Constituent’s liability for Profit and Loss a/c 6500
acceptance, etc. 56500 Bills for collection 43500
Building 65000 Acceptances and endorsements 56500
Furniture 5000 Interest 72000
Commission 25300
Money at call 26000 Discounts 43000
Loans 200000 Rent 600
Bills discounted 12500 Profit on bullion 1200
Interest 7950 Miscellaneous income 2700
Bills for collection 43500 Accumulated depreciation on building 20000

Audit fees 5000
Loss on sale of furniture 1000
Director’s fees 1200
Salaries 21200
Postage 50
Managing director’s remuneration 12000
Loss on sale of investments 30000
Cash in hand 25000
Cash with RBI 50000
Branch adjustment A/c 20000
Prepare the profit and loss a/c and balance sheet after taking into consideration the following:
1. Bad debts Rs. 500
2. Rebate on bills 1000
3. Current year’s depreciation on building Rs. 2000
4. Some current accounts are over drawn to the extent of Rs. 25,000 and total of credit balances is Rs. 1,22,000
PROBLEM NO :18
From the following, to prepare the P&L A/c and Balance sheet of Madras Bank Ltd., as 31 st Dec 1990 according to Banking
Regulation Act 1949.
Rs. Rs.
Issued capital:
20,000 shares of Rs. 100 each 2000
Money at call and short notice 800 -
Reserve fund - 700
aCash in hand 650 -
Deposits - 2500
Cash at bank 950 -
Borrowings from SBI - 500
Investments in Government Securities 900 -
Secured loans 1500 -
Cash credits 500 -
Premises less depreciation 580 -
Furniture less depreciation 120 -
Rent 5 60
Interest and discount - 800
Commission and brokerage - 70
Interest paid on deposits 300 -

Salary and allowances paid to staff 150 -
Interest paid on borrowings 50
Audit fees 10
Directors’ fees 8
Non-banking assets 80
Depreciation on bank’s property 13
Printing 3
Advertisement 1
Stationary 5
Postage and telegrams 2
Other expenses 3
Adjustments:
1. Provide Rs. 20000 for doubtful debts
2. Provide Rs.10000 on bills discounted but not matured on 31.2.1990
3. Acceptances and endorsements on behalf of customers amounting to Rs. 4,00,000
4. Provide Rs. 60,000 for taxes.
PROBLEM NO. 19
The following figures are extracted from the books of Bheema Bank Ltd. as on 31.12.987
Rs.
Interest and discount received 3000000
Director’s fees and allowances 40,000
Stationery 15,625
Preliminary expenses 12,000
Interest paid on deposit 20,00,000
Rent received 45.000
Salaries and allowances 1,25,000
Rent and taxes paid 80000
Profit on sale of investments 2,00,000
Depreciation on building 27,375
Audit fees 5,000
1. A customer to whom a sum of Rs. 15,00,000 has been advanced has become insolvent. It is expected that only 50% can be
recovered from his private estate.
2. For the remaining debts, a provision of Rs. 1,00,000 was necessary.
3. Rebate on bills discounted as on 31.12.86 Rs. 10,000 and on 31.12.1987 Rs. 15,000
4. Provide Rs. 5,50,000 for taxation
Prepare P&L A/c in accordance with the Law.

PROBLEM NO: 20
From the books of accounts of new Vijaya Bank Ltd. as on 31 st March 1999 the following particulars regarding loans and
advances given by the Bank in India are available.
Rs.
1. Loan to corporate sector fully secured (excluding banks but
including companies in which directors are interested) 15,00,000
2. Loan to Vijaya Bank Ltd., fully secured 2,00,000
3. Debts due by officers (excluding directors, fully secured) 1,00,000
4. loans to non-corporate sector-fully secured 5,00,000
5. loans to Nagarik Bank Ltd., fully secured 3,00,000
6. Debts due by Manoj, director of the bank- fully secured 2,00,000
7. Debts considered good which are unsecured 4,00,000
8. Debts due by companies in which the directors are interested, fully 5,00,000
secured
9. Maximum amount of debts at any time during the year 10,00,000
10. Doubtful debts 40,000
11. Provision for bad and doubtful debts 35,000
12. Maximum amount of debts due by officers and directors at any
time during the year 4,00,000
Show the items are statutorily required to be entered in the balance sheet of the bank.

UNIT-IV
Unit IV represents - Insurance Company accounts: General Insurance and Life Insurance - Under IRDA 2000
INSURANCE COMPANY ACCOUNTS
Life is full of risk and uncertainty. Man may meet an untimely death. He may suffer the effects of an accident, destruction of
property by fire, floods, earthquakes and what not. And once any such thing happens, life for him and/or his dependents may
become miserable.
Insurance is an invaluable means to provide protection against risks. It is the nature of insurance to mitigate various sorts of risks
about which people are ignorant or careless. Insurance is an agreement between two parties whereby the insurer undertakes to
indemnify the risk of the insured on receipt of a small sum, known as ‘Premium’. According to Justice Tindle, “Insurance is a
contract through which the insurer agrees to pay a stipulated amount to the insured on the occurrence of an eventually in lieu of a
sum of premium”.
TYPES OF INSURANCE
Insurance business can be divided into two well-marked classes, viz.,
1. Life
2. General
1. Life Insurance
A contract of life insurance is a contract under which, in consideration of sums of money called premium, the insurer agrees to
pay a certain amount on the death of the assured or upon the expiry of a certain fixed period, whichever is earlier. Life policies are
or various types, but their main varieties are the following:
➢ Whole life policy
➢ Endowment policy
➢ With profit policy
➢ Without profit policy
➢ Annuity
2. General Insurance
It is the contract under which the insurer, in consideration of a certain premium, undertakes to reimburse the insured for any loss
or liability he/she may incur on the happening of an uncertain event. In practice, all insurance other then life are regarded as
general insurance. The following are the various types of insurance included in it.
➢ Fire insurance
➢ Marine insurance
➢ Accident insurance contract
➢ Other insurance
INSURANCE BUSINESS IN INDIA

Insurance is a federal subject in India. The primary legislations which deal with various aspects relating to accounts and audits of
insurance business are as under:
1. The Insurance Act 1938; Insurance (Amendment) Act 2000.

2. Insurance Rules 1939.
3. The Companies Act 1956.

4. The General Insurance Business Act, 1972.
5. The Insurance Regulatory and Development authority Act 1999.
6. The Insurance Regulatory and Development Authority Regulations, 2002.
COMPANIES CARRYING INSURANCE BUSINESS

At present Life Insurance business in India is carried on by more than a dozen companies.
Life Insurance Corporation of India (LIC) controls more than 85% of the Life Insurance Business in India. The following are the
other private sector companies carrying on Life Insurance Business
1. HDFC Standard Life Insurance Co. Ltd.
2. ICICI Prudential Life Insurance Co. Ltd.
3. SBI Life Insurance
PUBLIC SECTOR INSURANCE COMPANIES

LIFE INSURANCE CORPORATION OF INDIA
LIC of India was incorporated on 1st September, 1956 by amalgamating 243 Companies by the Act of Parliament called Insurance
Act, 1956. LIC is governed by the Insurance Act 1938, LIC Act 1956, LIC Regulations 1959 and Insurance Regulatory and
Development Authority Act 1999. As on 31st March, 2016, LIC has 8 Zonal Offices, 113 Divisional Offices, 2048 Branch
Offices, 73 Customer Zones, 1401 Satellite Offices and 1240 Mini Offices in India.
GENERAL INSURANCE CORPORATION OF INDIA

The General insurance industry was nationalized in 1972 and 107 insurers were grouped and amalgamated into four Companies –
National Insurance Co. Ltd., The New India Assurance Co. Ltd., The Oriental Insurance Co. Ltd. and United India Insurance Co.
Ltd. The GIC was incorporated in the year 1972 and the other four companies became its subsidiaries. In November 2000, GIC
was notified as the Indian Reinsurer, and its supervisory role over its subsidiaries was brought to an end. From 21 March 2003,
GIC's role as a holding company of its subsidiaries also came to an end and the ownership of the subsidiaries was transferred to
the Government of India.
THE NEW INDIA ASSURANCE COMPANY LIMITED

The company was founded by Sir Dorabji Tata on July 23rd, 1919 and nationalized in 1973 with merger of Indian companies. The
Company has 2329 offices and the employee strength is 18783 as on 31.03.2016. The company provides insurance services to the
customers having over 170 products catering to almost all segments of general insurance business. The authorized capital and
paid-up equity capital of the company is Rs.300 crore and Rs.200 crore respectively.
UNITED INDIA INSURANCE COMPANY LIMITED

United India Insurance Company Limited was incorporated in 1938. With the nationalization of General Insurance business in
India, 12 Indian Insurance Companies, 4 Cooperative Insurance Societies and Indian operations of 5 Foreign Insurers, besides
General Insurance operations of southern region of Life Insurance Corporation of India were merged with United India Insurance
Company Limited. The Company has 2080 offices and employee strength of 16345 as on 31.03.2016. The company provides
insurance services to the customers catering to almost all segments of general insurance business. The authorized capital and paid-
up equity capital of the company is Rs.200 crore and Rs.150 crore respectively.
THE ORIENTAL INSURANCE COMPANY LIMITED

The Oriental Insurance Company Ltd was incorporated in the year 1947. In 2003 all shares of the company held by the General
Insurance Corporation of India were transferred to the Government of India. The Company has 1924 offices in the country and
has employee strength of 13923 as on 31.03.2016. The company provides insurance services to the customers catering to almost
all segments of general insurance business. The authorized capital and paid-up equity capital of the company is Rs.200 crore.
NATIONAL INSURANCE COMPANY LIMITED

The Company was incorporated in the year 1906. After nationalization it was merged, along with 21 foreign and 11 Indian
companies, to form National Insurance Company Ltd. The Company has 1998 offices all over India and employee strength of
15079 as on 31.03.2016. The company provides insurance services to the customers catering to almost all segments of general
insurance business. The authorized capital and paid-up equity capital of the company is Rs.200 crore and Rs.100 crore
respectively.
AGRICULTURE INSURANCE COMPANY OF INDIA LIMITED

'Agriculture Insurance Company Of India Limited’ (AIC) was incorporated to exclusively cater to the insurance needs of the
persons engaged in agriculture and allied activities in India under the Companies Act, 1956 on 20th December 2002. General
Insurance Corporation of India (GIC), NABARD and four public sector general insurance companies have contributed towards
the share capital of the Company. The Authorized Share Capital of the Company is Rs. 1500 crore with initial Paid-up Equity
Share Capital of the Company of Rs. 200 crore.
LIFE INSURANCE
PROBLEM NO.1
ASCERTAINING CORRECT ASSURANCE FUND
A Life Assurance Company prepared its Revenue A/c for the year ended 31.3.2006 and ascertained its Life Assurance fund to be
Rs. 2835000. It was found later that the following had been omitted from the accounts:
1. Interest accrued on investments Rs. 39,000; Income tax liable to be deducted thereon is estimated to be Rs. 10,500
2. Outstanding Premiums Rs. 32,800
3. Bonus utilized for reduction of premium Rs. 6750
4. Claims intimated but not admitted Rs. 17400
5. Claims covered under reinsurance Rs. 6,500
What is the true Life Assurance Fund?
PROBLEM NO: 2
The Revenue account of a Life Insurance Company showed the life fund at Rs.7317000 on 31.3.2006 before taking into account
the following items:
1. Claims intimated but not admitted Rs.98250
2. Bonus utilized in reduction of premium Rs.13500
3. Interest accrued on investments Rs. 29750
4. Outstanding Premiums Rs. 27,000
5. Claims covered under re insurance Rs. 40500
6. Provision for taxation Rs. 31500
Pass Journal entries giving effect to the above adjustments and show the adjusted life fund.

PROBLEM NO: 3
The Life fund of a Life Insurance Company on 31.3.2006 showed a balance of Rs. 54,00,000. However, the following items were
not taken into account while preparing the Revenue A/c for 2005-06. Ascertain the correct life fund balance.
1.Interest and dividends accrued on investments Rs.20000

2. Income tax deducted at source on the above Rs. 6000
3. Reinsurance claims recoverable Rs. 7000
4. Commission due on reinsurance premium paid Rs. 10000
5. Bonus in reduction of premiums Rs. 3000
PROBLEM NO. 4
From the following, you are required to calculate the loss on account of claims to be shown in the Revenue Account for the year
ending 31.3.2006.
Intimated in Admitted in Paid in Rs.
2004-05 2004-05 2005-06 45000
2005-06 2005-06 2006-07 30000
2003-04 2004-05 2004-05 15000
2003-04 2004-05 2005-06 36000
2005-06 2006-07 2006-07 24000
2005-06 2005-06 2005-06 306000
Claim on account of reinsurance was Rs. 75,000
PROBLEM NO: 5
A Life Insurance Co. disclosed a fund of Rs. 20,00,000 and the Balance sheet total Rs.45,00,000 on 31.3.2006 before taking into
consideration:
1. A Claim of Rs. 10,000 intimated and admitted but not paid during the year
2. A claim of Rs. 6000 outstanding in the books for 8 years and written back.
3. Interest on securities accrued Rs. 800 but not received during the year.
4. Premium of Rs. 600 is payable under reinsurance.
5. Reinsurance recoveries Rs. 26000
6. Bonus utilized in reduction of premiums Rs. 10000
7. Agent’s commission to be paid Rs. 8000
Pass the necessary journal entries for the above omissions, recomputed the fund and show the balance sheet total after making the
above adjustments.

PREPARATION OF REVENUE ACCOUNT
PROBLEM NO.6
The following balances are abstracted from the books of New Bharat Life Insurance Co. Ltd., as on 31.3.2006
Rs. Rs.
Life Assurance Fund (1-4-2005) 15,00000 Claims paid during the year 64900
Premiums 496000 Annuities 2050
Consideration for annuities granted 15000 Bonus in reduction of premiums 1600
Interest & Dividends 100000 Medical fees 2400
Fines for revival of policies 750 Surrenders 4000
Reinsurance premium 20750 Commission 18650
Claims outstanding (1.4.2005) 4500 Management expenses 22000
Income tax on Dividends 8500
Prepare Revenue A/c after making the following adjustments:
1. Outstanding balances: Rs. (‘000)
Claims Rs. 14000
Premiums Rs. 4600
2. Further Bonus for premium Rs. 2400
3. Claim under reinsurance Rs. 8000
PROBLEM NO.7
From the following balances extracted from the books of the LIC as at 31.3.06, prepare a Revenue A/c for the year ending
31.3.2006 in the prescribed form:
Rs. Rs.
Claims by death 330000 Life Assurance Fund (1.4.05) 6331000
Claims by maturity 215000 Premiums 2065000
Agents & Canvasser’s allowance 26500 Bonus in reduction of premiums 1000
Salaries 44200 Income tax on interest and 5700
Travelling expenses 1200 dividends
Director’s fees 8700 Printing & stationary 13900
Auditor’s fees 1000 Postage & telegrams 14300
Medical fees 52000 Receipt stamps 2300
Commission 218000 Reinsurance premiums 40950
Rent 2800 Interest & Dividend (Gross) 272000
Law charges 200 Policy renewal fees 9600
Advertising 4300 Assignment fees 540
Bank charges 1500 Endowment fees 690
General charges 2000 Transfer fees 1400
Surrenders 47500
Provide Rs. 1500 thousands for depreciation of furniture and Rs. 220000 thousands for depreciation on investments.

PROBLEM NO: 9
Prepare from the following LIC revenue A/c and Balance sheet as on 31.3.2006
Rs. Rs.
Claims by death 16890 Outstanding interest on Advances
Agent’s salaries & allowances 6420 (31.3.06) 1944
Surrender values paid 2810 Bonus paid with claims 2700
Actuarial expenses 1520 Endowment assurance matured 24415
Premiums 94836 Annuities paid 1350
Commission to Agents 8900 Interest revenue 19060
Salaries 13500 Rent, Rates & Taxes 5475
Medical fees 1200 General charges 1860
Travelling expenses 1800 Fees Received 172
Directors’ fees 900 Bonus paid in cash 2825
Agents balances 750 Advertisement 726
Claim expenses 1432 Consideration for annuities 12853
Premium outstanding (1.4.2005) 2134 Printing & Stationery 650
Premium outstanding ( 31.3.2006) 3143 Claims O/S (1.4.05) 2376
Investments 146700 Claims O/S (31.3.06) 3735
Share capital 200000 Loans on policies 38300
Sundry creditors 9200 Loans on mortgages 290560
Life assurance fund (1.4.05) 353672 Freehold premises 122600
Reserve fund 146000 Furniture & fittings 64100
Cash on hand & deposits 76300
PROBLEM NO: 9
From the following Trial Balances, prepare the Revenue A/c and the Balance Sheet of the Great Life Assurance Co. Ltd
Trial Balance on 31.3.2006
Rs. Rs.
Loans on life policies 4200 Premiums 365900
Expenses of management 18200 Profit on sale of investments 10800
Deposit with RBI Govt. of India Claims admitted but not paid 58400
securities 200000 Sundry trade creditors 7700
Commission 9800 Life Assurance fund (1.4.05) 2800000
Freehold ground rents 168000 Consideration for annuities granted 12200
Bonus in cash 4200 Interest, dividends & rents –gross 120500
Surrenders 21100
Claims by maturity 104700
Claims by death 172600
House property 59800
Annuities paid 7600
Outstanding premiums 21600

Income tax on interest receipts 7100
Agents balances 6800
Port Trust debentures, interest and 528200
Principal guaranteed by Govt.
Cash at Bank, current A/c 12700
Cash in hand 1750
Foreign Govt. Securities 142500
Office furniture 1500
Fully paid up share capital in limited
liability companies registered in India 121600
Stock of policy stamps in hand 150
Mortgage in India 661400
Mortgage out of India 206400
Loans of Govt. Securities 719000
Loans on company policies 174600
PROBLEM NO: 11
Schedule 14 – Provisions – Nill
Schedule 15 – Miscellaneous Expenditure – Nil
From the following Trial balance of National Life Assurance Co. Ltd prepare Revenue A/c and Balance Sheet as on 31.3.2006
Rs. Rs.
Claims by death 76980 Life Assurance fund (1.4.05) 1470562
Claims by maturity 36420 Premiums 210572
Expenses of management 19890 Consideration for annuities granted 10620
Commission 26541 Interest, Dividends & Rents 52461
Dividend paid 20000 Fines 92
Income tax on interest etc. 3060 Annuities due but not paid 22380
Surrenders 21860 Share capital: 40,00,000
Annuities 29420 Shares of Rs. 100 each 400000
Bonus paid in cash 9450 Claims admitted but not paid 80034
Bonus in reduction of premium 2500
Preliminary expenses 200
Stamps on hand 400
Govt. Securities 870890
Furniture 20000
Mortgage 309110
Loans on company’s policies 200000
Freehold premises 300000
Leasehold ground rents 200000
House property 100000
2246721 2246721

R.s (‘000)
1. Management Expenses due Rs 600
2. Premium outstanding Rs. 7400
3. Reinsurance Premium Rs. 6000
4. Interest accrued Rs. 15 400
5. Surrenders adjusted against loans Rs. 5000
6. Further bonus utilized in reduction of premium Rs. 1500
7. Further claim intimated Rs. 8000
8. Claim covered under reinsurance Rs. 10000
PROBLEM NO: 11
Schedule 14 – Provision – Nil
Schedule 15 – Miscellaneous Expenditure – Nil
Prepare in the proper statutory for the revenue account of the Jai Hin Life Assurance Co. Ltd for the year ended 31 st March 2006
from the following figures.
Rs. Rs.
Claims by death 76140 Exp. Of management 31920
Claims by maturity 30110 Commission 9574
Premiums 705690 Interest, dividend & rent 97840
Transfer fees 129 Income Tax thereon 35710
Consideration for annuities granted 82127 Surrenders 13140
Annuities paid 53461 Bonus in reduction of premium 980
Bonus paid in cash 2416 Dividend paid to share holders 5500
Life assurance fund (1.4.2005) 1521000
Paid up share capital of the above life assurance company is Rs. 500000 thousand and net liability as per actuary’s valuation is Rs.
11,05000 thousands as on 3.3.06
Prepare a valuation Balance Sheet of the company as on that date.
PROBLEM NO: 12
At the valuation on 31.3. 2006 of a life office, the actuary’s certificate disclosed a net liability on policies and annuities at Rs.
4040 thousands. The following were the revenue items for the year 2005-06.
Rs. Rs.
Bonus in cash 95 Annuities 810
Bonus in reduction of premium 5 Consideration for annuities granted 1120
Surrenders 160 Life Assurance fund on 1.4.97 4000
Premiums 3000 Interim bonus paid for the valuation
Interest, dividends & rents 1100 period 90
Claims 2200
Expenses of management 220

Commission 80
Prepare revenue account and ascertain the balance of life assurance fund. It was decided by the company to write down
investments from Rs. 4540 thousands to Rs. 4360 thousands, if the valuation revealed surplus. There was an investment
fluctuation reserve amounting to Rs.130 thousands
As a result of the valuation, the company declared a reversionary bonus of Rs.45 per Rs.1000 and gave the policy holders the
option to get the bonus in cas @ Rs.19 per Rs. 1000. The total business in force was Rs. 4 crores. ¼ of the policy holders in value
decided to get the bonus in cash. Draft journal entries to give effect to utilization of the surplus. Show how much the policy
holders can get by way of share of profit. Ignore taxation.
PROBLEM NO: 13
A Life Insurance Company gets its valuation made once in every two years. Its Life Assurance fund on 31.3.06 amounted to Rs.
63,84,000 before providing Rs. 64000 for the shareholders’ dividend for the year 2005-06. Its actuarial valuation due on 31.3.06
disclosed a net liability of Rs. 60,80,000 under assurance annuity contracts. An interim bonus of Rs. 80,000 was paid to the policy
holders during the two years ending 31.3.2006.
PROBLEM NO: 14
Life fund of a life assurance company was Rs.8648000 as on 31.3.2006. The interim bonus paid during the intervaluation period
was Rs. 148000. The periodical actuarial valuation determined the net liability at Rs.7425000. Surplus brought forward from the
previous valuation was Rs.850000. the directors of the company proposed to carry forward Rs.931000 and to divide the balance
between the share holders and the policy holders in the ration of 1:10.
Show
1. The valuation Balance Sheet
2. The net profit for the valuation period
3. The distribution of the surplus
PROBLEM NO: 15
The Life Assurance fund of a company on 31.3.2006 was Rs.2900000. Its net liability on that date was estimated to be
Rs.1900000 by the company’s actuary. The investment held by the company amounted Rs. 16000000 against which the
investment reserve stood at Rs. 250000. The investments have to be written down by Rs.350000.
The company declared a reversionary bonus of Rs.20 per Rs.1000 with the option to policy holders of bonus in cash at the rate of
Rs.8 per Rs. 1000. Total value of policies in force was Rs.8 crores.1/4 th of the policy holders decided to receive the bonus in cash.
The company estimated that its liability for income tax would be Rs.160000.
Draft journal entries to record the above.

GENERAL INSURANCE
PROBLEM NO. 16
From the following figures appearing in the books of Fire Insurance division of a General Insurance Company, show the amount
of claim as it would appear in revenue account by preparing schedule 2, claims incurred.
Direct Business Re-Insurance
Rs. (‘000) Rs. (‘000)
Claims paid during 2005-06 4670 700
Claims payable 1-4-2005 763 87
31-3-2006 812 53
Claims received - 230
Claims receivable 1-4-2005 - 65
31- 3 – 2006 - 113
Expenses of Management 230
(Include Rs. 35 Thousand Surveyor’s fees and Rs.45 Thousand
legal expenses for settlement of claims)
PROBLEM NO: 17
Indian Insurance Co., Ltd furnishes you the following information:
1. On 31.3.2005 it had reserve for unexpired risks to the tune of Rs. 40 crores. It comprised of Rs.15 crores in respect of Marine
insurance business, Rs. 20 crores in respect of Fire insurance business and Rs. 5 crores in respect of Miscellaneous insurance
business.
2. It is the practice of the company to create reserves at 100% of net premium income in respect of Marine insurance policies and
at 50% of net premium income in respect of Fire and miscellaneous insurance policies.
3. During 2005-06, the following business was conducted.
Figures Rs.in Crores

Marine Fire Miscellaneous
Permia collected from:
1. Insureds in respect of policies issued 18 43 12
2. Other insurance companies in respect of risks
undertaken 7 5 4
Permia paid/payable to other Insurance companies on
business ceded. 6.7 4.3 7
Indian Insurance company asks you to:

1. Pass journal entries relation to “unexpired risks reserve”.
2. Show in columnar form “Unexpired risks reserve A/c” for 2005-06.

PROBLEM NO:18
The books of Jai Prakash Insurance Co. Ltd. contain the following information in respect of fire insurance as on 31.3.2006.
Rs. Rs.
Provision for unexpired risks (1.4.05) 80000 Refund of double taxation 600
Estimated liability in respect of Management expenses 55000
outstanding claims on 1.4.05 10000 Interest & Dividends 8000
On 31.3.06 15000 Legal expenses regarding claims 1500
Medical expenses regarding claims 1000 Profit on sale of investments 1750
Claims paid 70000 Additional reserve on 31.3.05 60000
Reinsurance premium 14500
Reinsurance recoveries 1500
Premiums 190000
Commission on direct business 25000
Commission on re insurance ceded 3000
Commission on re insurance accepted 1000
Additional reserve is to be increased by 10% of the net premium income. Prepare revenue A/c keeping the reserve for unexpired
risks at 50% of premium income.
PROBLEM NO: 19
From the following particulars relating to Z Insurance Co. Ltd., Prepare Fire Revenue A/c for the year ending 31.3.2005:
Rs. Rs.
Claim paid 480000 Premium received 1200000
Claims outstanding on 1.4.044 40000 Reinsurance premium paid 120000
Claims intimated but not accepted & 10000 Commission 200000
paid on 31.3.05 Commission on reinsurance ceded 10000
Claims intimated and accepted but not 60000 Provision for un expired risk on
paid on 31.3.05 1.4.04 400000
Commission on reinsurance accepted 5000 Additional provision for unexpired
Expenses of management 305000 risk on 1/4/04 20000
Bonus in reduction of premium 12000
You are required to provide for additional reserve for unexpired risk at 1% of the net premium in addition to the opening balance.

PROBLEM NO: 20
From the following information as on 31.3.2002, prepare the Revenue Account of sagar Bhima Co. Ltd., engaged in Marine
Insurance business
Particulars Current Previous
year Rs. Year Rs.
I Premium:
Received 2400 360
Receivable 1-4-2001 120 21
31-3-2002 180 28
Payable 1-4-2001 - 240
31-3-2002 - 20
II Claims: - 42
Paid 1650 125
Payable 1-4-2001 95 13
31-3-2002 175 22
Received - 100
Receivable 1-4-2001 - 9
31-3-2002 - 12
III Commission:
On Insurance Accepted 150 11
On Insurance ceded - 14
Other expenses and Incomes:

Rs. Rs.
Salaries 260 Indian Income tax paid 240
Rent rates and taxes 18 Interest dividend and rend received 1155
Printing and stationary 23 (Net)
Legal expenses ( Inclusive of 20 Income Tax deducted at Source 24.5
thousands in connection settlement of 60 Bad Debts 5
claims) Double Income Tax refund 12
Profit on sale of Motor car 5
Balance of fund on 1-4-2001 was 2650 thousand including additional reserve of 325 thousand. Additional reserve has to be
maintained at 5% of the net premium of the year.

PROBLEM: 21
From the following balances, prepare the fire insurance revenue account for the year ended 31.3.2006 of ABC fire insurance Co.
Ltd.
Rs. ‘0000 Rs. ‘000
Commission on reinsurance accepted 186458 Audit fees 2500
Commission on direct business 195172 Profession taxes 2875
Depreciation on Furniture 650 Bad debts written off 2206
Depreciation on Library 148 Claims under policies less reinsurance
Depreciation on Motor Car 6240 paid during the year 152930
Loss on sale of Motor car 12074 Reserve for unexpired risk as at 31.3.05 366594
General Manager’s salary 24000 Additional reserve for unexpired risk at
Telephone 5100 3.3.05 45824
Postage & Telegrams 5150 Premiums received less reinsurance 989980
Rent 62500 Commission on reinsurance ceded 341208
Travelling expenses 45600 Unpaid claims on 31.3.06 6264
Motor car expenses 45500 Unpaid claims on 31.3.05 1198
Establishment 145500 Miscellaneous expenses 250
Bonus 24000
Stationery 35550
Newspapers & periodicals 14062
Legal expenses 23400
Electricity charges 16100
Provident fund contribution 11875
You are required to make 40% of the net premium received as provision for unexpired risk as at 31.3.06 and 10% of the net
premiums as additional reserve for the same.
PROBLEM NO : 22
Zaldi Pay Insurance Co. Ltd. has furnished the following information for preparation of revenue account for fire insurance
business for the year ended 31.3.2006 and its Profit and Loss A/c for the year.
Rs. ‘0000 Rs. ‘000

Claims admitted but not paid 42376 Bad debts 2500
Commission paid 50000 Claims paid 15000
Commission on re insurance received 12000 P & L Appn A/c 10000
Share transfer fees 5000 Premiums received less reinsurance 552000
Expenses of management 78000 Claims outstanding as on 1.4.05 27000
Reserve for unexpired risk as on 1.4.05 230000 Dividend on share capital 18500
Additional reserve on 1.4.05 40000
The following further information has also to be considered:

1. Premium outstanding at the end of the year Rs.40000 thousands

2. Additional reserve at 10% of net premium to be maintained.
3. It is the policy of the company to maintain 50% of premium towards reserves for unexpired risks.
PROBLEM: 23
From the following balances of United General Insurance Co. Ltd as on 31.3.2006 prepare:
i) Fire revenue A/c ii) Marine revenue A/c and iii) Profit & Loss A/c
Rs. ‘0000 Rs. ‘000
Provision for unexpired risk on 1.4.05 Interest, dividends, etc 28
Fire 500 Difference in exchange (Cr) .6
Marine 1640 Miscellaneous receipts 10
Additional reserve on 1.4.05 Profit on sale of land 120
Fire 100 Premium received:
Bad debts: Fire 1200
Fire 10 Marine 2160
Marine 24 Expenses of management:
Auditor’s fees 2.4 Fire 290
Director’s fees 10 Marine 800
Share transfer fees 1.6 Commission earned on reinsurance
Bad debts recovered 2.4 ceded:
Claims paid & outstanding: Fire 60
Fire 380 Marine 120
Marine 760
Commission paid:
Fire 180
Marine 216
depreciation 70
Provision for unexpired risk is to be kept at 50% of the premiums for fire and at 100% for marine departments. The additional
reserve in case of fire insurance is to be increased by 5% of the net premium.
PROBLEM : 24
Given below is the trial balance of Mysore fire Insurance Co. Ltd. as on 31.3. 2006
Rs. ‘0000 Rs. ‘000
Claims paid 114315 Reserve for unexpired risk 247495
Commission to agents 60590 Claims outstanding (1.4.05) 5085
Expenses of management 199696 Premium income 403932
Depreciation 15419 Interest, dividend & rent 34692
Loss on sale of investment 23169 Share capital 250000
Income tax on interest, dividend & rent 10625 Investments reserve 24690
Agents balance 54792 P & L A/c balance (1.4.05) 33581
Investments in Govt. bonds 386921 Provision for taxes 43618
Interest accrued on investment 6028 Sundry creditor 4919

Outstanding premium 4019
Advances & deposits 12122
Cash &Bank balances 65650
Furniture & Motor car 94666
1048012 1048012
You are required to prepare the Revenue A/c , P&L A/c and Balance sheet as on 31.3.2006 having regard to the following:
i) The entire authorized capital has been issued & subscribed
ii) Reserve for unexpired risks is at 50%
iii) Claims outstanding as on 31.3.06 amounted to Rs. 3137 Thousands.
iv) Provide Rs. 20000 Thousands towards taxation.

UNIT – V
Unit – V - represents Statements of Accounts for Electricity Companies – Treatment of Repairs and Renewals.
Public utility undertakings supplying or operating Electricity, Gas, Water, Power, Railways, Tram ways etc,. which operate under
special acts of Parliament enjoy monopolistic rights in their business of rendering service to the community. These undertakings
require huge amount of fixed or long term capital to be invested on fixed or permanent assets. They raise most part of their fixed
capital from the public by the issue of shares and debentures. So , they are bound to give information nto the public as to what
amount of fixed capital has been raised by them from the public and how much of it has been invested on fixed assets. To provide
such information to the public, the public utility undertakings split their balance sheet into two parts viz.,
i) Receipts and Expenditure on capital account disclosing the amount of fixed capital raised from the public and the manner in
which the fixed capital has been invested on fixed assets, and
ii) the general balance sheet disclosing the other liabilities and assets.
The system of presenting balance sheet in two parts is called the ‘Double account System’. It other words, it is an alternative
system of presenting final accounts.
SPECIAL FEATURES OF DOUBLE ACCOUNT SYSTEM:
The following are the special features of the double account system
i) it is not a system of maintaining accounts, but only a system of presenting the final accounts.
ii) It is generally adopted by public utility concerns formed under special acts of parliament.
iii) As indicated earlier, under this system, the balance sheet is bifurcated into two parts viz.,
a) Receipt and Expenditure on capital A/c and
b) General Balance Sheet
iv) The main purpose of this system is not to reveal the financial position of the Public utility concern as on the last date of the
accounting year but to reveal the amount of fixed capital raised from the public and the manner in which the fixed capital has been
utilized in the acquisition of fixed assets.
v) Under this system, the account prepared for disclosing the appropriations of Profits is known as ‘Net Revenue A/c’ and not
Profit & Loss A/c
vi) The account prepared, under this system, for disclosing the appropriations of Profits is known as ‘Net Revenue A/c’ and not
Profit & Loss Appropriation A/c.
vii) Under this system, interest on debentures and loans is shown on the debit side of Net Revenue Account as an appropriation.
Similarly, interest received/receivable is also shown on the credit side of Net Revenue Account.

viii) Under the system, the fixed assets are shown in the ‘Capital Account’ at cost, but not at depreciated value. The depreciation
on fixed assets is, usually, debited to revenue account and credited to depreciation reserve or fund account which appears in the
general B/S.
ix) Discount and Premium on issue of shares and debentures are permanently retained as capital items. The discount on issue of
shares and debentures is not shown separately in the capital account. Instead, it is deducted from the proceeds of issue of shares
and debentures and only the net proceeds after such deduction is shown in the capital account.
x) Loans and debentures are treated as capital and shown in the capital account.
xi) General reserve, investment fluctuation reserve and other reserves are shown in the general balance sheet on the liabilities side.
xii) Renewals are provided out of current revenue.
Double Account System Vs. Double Entry System
The double account system is entirely different from double entry system. The double entry system is s system of maintaining
records in the books of account, whereas the double account system is s system of presenting the final accounts of Public utility
concerns. However, both the system go together. Usually, the final accounts of the Public utility concerns, which are presented
under the double account system, are maintained on the double entry system.
Double Account System Vs. Single Account System
The single account system is nothing but preparation of a single balance sheet disclosing the financial position of a business
concern on a particular date. This system differs from double account system in many respects. The main difference between these
two are summarized as follows:
FINAL ACCOUNTS UNDER DOUBLE ACCOUNT SYSTEM:
From the above discussion, it is clear that the funal accounts prepared under the double account system consist of :
i) Revenue A/c
It is in the nature of Profit & Loss A/c. All the expenses are shown on the debit side of this account and all the incomes are shown
on the Credit side of this account. The balance found in this account represents either Profit or Loss which will be transferred to
Net Revenue Account. The following is a specimen form of a Revenue Account.

Revenue A/c for the year ended……………..
Particulars Rs. Particulars Rs.
To Staff Salaries xxxx By Incomes (except interest xxxx
To Rent, rates & taxes xxxx earned and government
To Printing & Stationery xxxx subsidy)
To Postage & Telegrams xxxx By Net Revenue A/c xxxx
To Repairs & Renewals xxxx (Loss – if any, transferred) b/f xxxx
To Depreciation on Fixed assets xxxx
To Discount allowed xxxx
To Miscellaneous expenses xxxx
To Net Revenue A/c (b/f) xxxx
ii) Net Revenue A/c
It is similar t the ordinary Profit & Loss Appropriation Account. This account starts with the balance of the net revenue account
brought forward from the last year. The balance disclosed by the Revenue Account of the current year is shown in the account. All
interest paid are entered on the credit side of this account. In the case of railway companies, even the rents paid on leased lines and
rent charges and Chief rents(i.e., rent paid on leasehold properties) are entered on the debit side of this account. All appropriations
of Profit such as transfer to any reserve, income tax on profits, interim dividends and final dividends are entered on the debit side.
Government subsidy (i.e. Govt. grant) and not Government loan, is entered on the credit side. The balance of this account is
transferred to the General Balance Sheet. the following is a specimen form of Net Revenue Account.
Net Revenue A/c for the year ended ……………….
Particulars Rs. Particulars Rs.
To Balance b/d (if any) xxxx By Balance b/d xxxx
To Revenue A/c (loss of current xxxx (Balance from last year)
year transferred from Revenue A/c By Revenue A/c xxxx
To interest on debentures xxxx (Profit of Current year
To Interest on loans xxxx transferred from Revenue A/c)
To Interest on Security deposits xxxx By Government subsidy xxxx
To Contingency Reserve xxxx By Interest earned xxxx
To Dividend Control Reserve xxxx By transfer from reserve xxxx
To General B/s (Bal. Fig) xxxx By General Balance sheet (Loss xxxx
– if any, transferred to general
balance sheet Bal.fig)
iii) A Capital A/c i.e. Receipts and Expenditure on Capital A/c
This account is mainly prepared to show as to how much fixed or long term capital has been raised by a Public utility concern and
how it has been utilized. The account is usually prepared in a tree columnar form on either side. On the left side is recorded the
Capital expenditure and on the right side Capital Receipts. The first column is meant for recording the receipts or expenditure, as
the case may be, of the items pertaining to the previous financial year. In the second column items relating to the current financial
year. In the second column items relating to the current financial year are recorded and the last column is meant for the total of the

first two columns. The balance of the capital account is carried down and shown as a separate item in the General Balance sheet.
In case of Electricity supply companies, the total capital receipts and the total capital expenditure are shown in the General B/S.
If the total of credit side of capital account is more than the total of credit side, the balance is transferred to the assets side of
General Balance sheet. Following is the Specimen form of this account:
Receipt and Expenditure on Capital A/c for the year ending………………

Expenditure Upto the end During Total Receipts Upto the end During the Total
of previous the year Rs. of previous year Rs.
year Rs. year Rs.
Rs. Rs.
To Preliminary By Equity shares xxxx xxxx xxxx
expenses xxxx xxxx xxxx By Preference shares xxxx xxxx xxxx
To Land xxxx xxxx xxxx By Debentures xxxx xxxx xxxx
To Building xxxx xxxx xxxx By Loans xxxx xxxx xxxx
- By Calls – in – advance xxxx xxxx xxxx
Total Expenditure xxxx xxxx Xxxx
To Balance transferred Total Receipts xxxx xxxx xxxx
to General Balance
sheet Xxxx
xxxx xxxx
iv) A General Balance Sheet
In the General Balance Sheet the balance of the capital account, the current assets and liabilities are recorded. As usual on the left
side various funds created and other current liabilities are recorded such as depreciation fund, General fund, sinking fund,
investment fluctuation funds, creditors etc. on the right side, the current and floating assets and other debit balances are recorded.
The proforma of General Balance sheet is given below:
General Balance Sheet
Liablilities Rs. Assets Rs.
Capital A/c (Balance Brought Stores xxxx
forward from capital A/c) xxxx Sundry debtors xxxx
Sundry creditors for capital A/c xxxx Cash at bank xxxx
Sundry creditors on open A/c xxxx Cash in hand xxxx
Net Revenue A/c (Balance brought Securities xxxx
forward from Net Revenue A/c) xxxx Special items xxxx
Reserve fund xxxx Other assets xxxx
Depreciation fund xxxx
Sinking fund xxxx
Investment fluctuation fund xxxx
Other Liabilities xxxx
------------ -----------
xxxx xxxx

REPLACEMENT OF ASSETS
It is not uncommon with a concern, especially with a Public utility concern, to spend huge sums of money on the replacement of
old fixed assets by new ones with a view to providing better services to the public. When a concern spends a huge sum of money
on the replacement of an old fixed assets by a new one, a problem arises as to what portion of the expenditure should be charge to
capital or revenue expenditure. Under Single accounting system, whenever an asset is replaced, old asset is completely written off
and cost of new asset is capitalized. But under double account system, the treatment is based on the following situations:
i) When the replacement does not involve any extension or improvement over the existing asset.:
In this case, the original cost of the existing asset itself remains in the books of accounts and the cost of new asset will be charged
to Revenue Account. The actual cost of replacement that will be charged to Revenue Account will be calculated as given below.
Cost of New assets Xxxx

Less: Amount realized on sale of old materials xxxx
Old materials used in new asset xxxx xxxx
Cost of replacement to be charges to Revenue A/c Xxxx
ii) When the replacement involves extension or improvement over the existing asset.
In this case, a portion of replacement cost will be charged to capital account and the balance of replacement cost will be charged
to Revenue Account. That is, a portion of replacement cost will be treated as capital expenditure and the balance will be treated as
‘Revenue Expenditure’.
The amount of replacement to be capitalized ( to be treated as capital expenditure) can be ascertained as given below:
Total Cost of New assets Xxxx

Less: Estimated cost of replacement xxxx
Cost of replacement to be capitalised Xxxx
The amount of replacement cost to be charged to Revenue Account can be ascertained as follows:
Estimated present cost of replacement Xxxx

Less: Amount realized on sale of old asset xxxxx
Value of old asset’s materials used in new asset xxxxx xxxx
Cost of replacement to be charged to Revenue A/c Xxxx
Note:
1. Estimated cost of replacement should be calculated on the basis of data given in the problem.
2. Total cost of New asset can be ascertained as follows:

Amount spent on new asset Xxxx
Less: Value of old asset’s materials used in new asset xxxx
Xxxx
If the problems mention no details, but only the total cost of new asset, it should be considered as inclusive of value of old
materials used.
3. When the total cost of the new asset is given, the actual Cash spent on new asset can be determined as follows:
Total actual cost of new assets Xxxx

Less: Value of old materials used for new assets xxxx
Actual cash spent on new asset Xxxx
The following journal entries are passed for replacement of an asset:
For amount spent on new asset:

Replacement A/c (cost of replacement) Dr. xxxx
New asset A/c (Bal.fig) Dr. xxxx
To Bank A/c xxxx
For sold of old materials:
Bank A/c Dr. xxxx
To Replacement A/c xxxx
For the Value of old materials used in the new asset:
New Asset A/c Dr. Xxxx
For amount entirely spent on extensions:
New Asset A/c Dr. Xxxx
To Bank A/c xxxx
For transfer of Balance of Replacement A/c to Revenue A/c:
Revenue A/c Dr. Xxxx
FINAL ACCOUNTS OF ELECTIRICITY COMPANIES
Electricity supply being a Public utility service, the business is controlled by the government. These undertakings are governed by
the Indian Electricity Act 1910 and the Electricity (Supply) Act 1948. The published accounts of electricity companies are to be
prepared in accordance with the Provisions of Companies Act 1956 to ensure greater transparency and maximum disclosure. The
electricity companies are required to present their final accounts according to the Double account system. The preparation of final
accounts involves preparation of ‘Revenue A/c’, ‘Net Revenue A/c’, ‘Capital A/c’, and ‘General Balance Sheet’. However, the
Revenue account of electricity companies is different from the generalized Revenue Account given earlier. The specimen form of
Revenue Account of Electricity Companies is as follows:

Revenue A/c for the year ended…………
Liablilities Rs. Assets Rs.
A. Generation: By Sale of energy for lighting xxxx
To Fuel xxxx By Sale of energy for power xxxx
To Oil, wastage, water etc xxxx By Sale of energy under special xxxx
To Salary and engineers xxxx contracts
To Wages and gratuities xxxx By Public lighting xxxx
To Repairs & Maintenance xxxx By Rent receivable xxxx
B. Distribution By Transfer fees xxxx
To Salary of engineers xxxx By Other items xxxx
To Wages & Gratuities xxxx By Miscellaneous Receipts xxxx
To Repairs & Maintenance xxxx By Sale of Ashes xxxx
C. Public Lamps: By Reconnection and
To Attendance & Repairs xxxx Disconnection fees xxxx
To Repairs xxxx
D. Rent, Rates & Taxes:
To Rent Payable xxxx
To Rates & Taxes xxxx
E. Management Expenses:
To Directors Remuneration xxxx
To General Establishment xxxx
To Auditors of the company xxxx
F. Law Charges:
To Lease xxxx
To Building xxxx
To Plant & Equipment xxxx
H. Special Charges
To Bad debts xxxx
To Net Revenue A/c (Bal. fig. xxxx
transferred) --------- ------------
xxxx
xxxx
Rule 26 of the Indian Electricity Rules 1956 makes the following Provisions accordance with Section 11 of the Indian Electricity
Act 1910 for final accounts of Electricity Companies.
1. Every Electric supply company shall prepare its accounts to 31 st March and shall render them to the State Government within
Six month, from such date.
2. The accounts shall be made in the prescribed forms as set in Annexure IV and Annexure V of the Indian Electricity Rules 1956.

The following are the forms of the annual accounts of the Electricity Supply Companies as prescribed by the Indian Electricity
Rules:
a) Annexure IV - Summary of Technical and Financial Particulars

b) Annexure V N0.1 Statement of share and loan capital
c) Annexure V NO.1 A(1) Statement of loans raised and redeemed
d) Annexure V NO. 1 A(2) Statement of loan and other capital
e) Annexure V NO. II Statement of capital expenditure
f) Annexure V NO. 2(A) Statement showing the written down cost of fixed assets retired
on account of obsolescence, inadequacy, super fluity, etc.
g) Annexure V NO.III Statement of Operating Revenues
h) Annexure V NO. IV Statement of Operating Expenses
i) Annexure V NO. V Statement of Provision for depreciation
j) Annexure V NO. VI Statement of contingencies Reserve
k) Annexure V NO. VII Statement of Tariffs and Dividends Control Reserve
l) Annexure V NO. VIII Statement of consumer Rebate Reserve
m) Annexure V NO. IX Statement of special appropriations permitted by State Govt.
n) Annexure V NO. X Statement of Net Revenue and Appropriation Account
o) Annexure V NO. XI General Balance Sheet
IMPORTANT ACCOUNTING TERMS AND PROVISIONS RELATING TO ELECTRICITY SUPPLY COMPANEIS
Some of the important Provisions of Electricity (supply) Act of 1948 (sixth schedule) which have a bearing on the preparation of
final accounts are discussed below:
1. Depreciation:
Every fixed asset must be depreciated; and for the purpose of depreciation, the life of each asset is to be taken as stated in the table
given in the Seventh Schedule. As regards the depreciation method that can be applied, the Act makes provision for only two, viz.,
(a) Compound Interest or Sinking Fund Method, and (b) Straight Line Method.
Under the Compound Interest Method a certain sum is set aside every year and accumulated at compound interest of 4% p.a. This
process of setting aside a certain sum continues throughout the prescribed period of the life of the asset till an amount equal to
90% of the original cost of the asset is reached.
Under this method interest at the rate of 4% p.a. on the opening balance of the Depreciation Reserve must be transferred from the
Revenue Account to the Depreciation Reserve Account.
Under the Straight Line Method of depreciation, an allowance is made each year which is equivalent to 90% of the cost of the
asset divided by the prescribed period of the life of the asset.
When an asset has been written down to 10% (or less) of its original cost, no further depreciation is allowed in respect of that
asset.
When a fixed asset becomes obsolete or inadequate or superfluous or is discarded for any other reason, it cannot be depreciated
any further.
2. Contingency Reserve:
Every electricity company is required to maintain a contingencies reserve. Reserve is created by transferring from the Revenue
Account every year an amount equivalent to not less than 1/4 per cent and not more than 1/2 per cent of the original cost of the
fixed assets until it equals 5 per cent of the original cost of the fixed assets. The amount is to be invested in trust securities.
It can be utilised with the approval of the State Government for the following purposes:
(i) Meeting expenses or loss of profits arising out of accidents, strikes or circumstances beyond the control of the management.
(ii) Meeting expenses of replacement or removal of plant or works other than the expenses necessary for normal maintenance or
renewal.
(iii) Paying compensation payable under law for which no other provision has been made.
3. Development Reserve:
The reserve is created by transfer of an amount equivalent to income-tax and super-tax (calculated at current rates) saved on
account of development rebate allowed by the income-tax authorities. If in any accounting year the clear profit excluding the
special appropriations together with the accumulations, if any, in the Tariffs and Development Control Reserve fall short of
reasonable return, the appropriations to this reserve can be reduced by the amount of shortfall. The amount of such reserve is to be
invested in the same electricity undertaking and is to be handed over to purchaser of the business in case the business is sold away.
4. Tariffs and Dividend Control Reserve
a. This reserve is created out of Profits in excess of the reasonable return earned by an electricity undertaking.
b. This reserve can be utilized by the undertaking only to the extent to which the clear profit is less than the reasonable return in
any year of account.
c. When an undertaking is sold, any balance remaining in this Reserve should be handed over to the purchaser and this Reserve
should continue to be maintained as the Tariffs and Dividend Control Reserve.
5. General Reserve:
Section 67 of the Act provides for the creation of a General Reserve. An annual contribution at a rate not exceeding ½% of the
original cost of the fixed asset can be made after providing for interest and depreciation. This Reserve can be created until the total
of such Reserve exceeds 8 per cent of the original cost of the assets.

6. Clear Profits:
Para XVII of the Sixth Schedule of the Act provides guidelines for the computations of clear profits which means the difference
between the amount of the income and the sum of expenditure plus specific appropriations. This can be calculated in the following
manner.
7. Reasonable Return:
The Electricity (Supply) Act, 1948, imposes restrictions on electricity undertakings on earning too high a profit, by means
of the concept of reasonable return, which stipulates the following:
1. A yield at the standard rate which is the Bank Rate stipulated by the Reserve Bank of India from time to time, plus 2% on the
Capital Base.
2. Income derived from investments excluding investments made against the Contingencies Reserve.

3. An amount equal to ½% on any loans advanced by the board.
4. An amount equal to ½% on the amounts borrowed from organizations or institutions approved by the State Government.
5. An amount equal to 1/2% on the amounts realized by the issue of debentures.
6. An amount equal to ½% on the accumulations in the Development Reserve.
7.Any other amount as may be allowed by the Central Government having regard to the prevailing tax structure in the country.
8. Capital Base:
The Capital Base can be, computed as given below:
THE PROCEDURE FOR COMPUTING THE CAPITAL BASE IS GIVEN BELOW:

9. Disposal of Surplus:
Surplus is the excess of clear profits over reasonable return. If the clear profits exceeds the reasonable return, the surplus has to be
disposed of as under:
(i) 1/3 of the surplus not exceeding 5 per cent of the reasonable return will be at the disposal of the undertaking.
(ii) Of the balance, 1/2 will be transferred to the Tariffs and Dividend Control Reserve.
(iii) The balance left will be distributed among consumers by way of reduction of rates or by way of special rebate.

PROBLEM NO: 1
[REPLACEMENT OF ASSET]
The Bangalore Municipal Corporation replaces part of its existing water mains with larger mains at the cost of Rs. 75,00,000. The
original cost of laying the old mains was Rs. 15,00,000 and the present cost of laying those main would be three times the original
cost Rs. 125000 was realized by the sale of old materials and old materials of Rs. 375000 were used in the replacement and
included in the cost given above.
Give the journal entries to record the above and show the allocation of expenses between revenue and capital along with
replacement account.
PROBLME NO:2
The Pioneer Gas Co. rebuilt and re-equipped part of their works ata cost of Rs. 1500000. The part of the old works thus
superseded cost Rs. 900000. Rs. 60000 is realized by the sale of old materials and old materials valued Rs. 2000 are used in the
reconstruction and included in the cost of Rs. 15,00,000 mentioned above.
The cost of labour and materials is 20% higher now than when the old works were constructed. Give Journal entries and prepare
the necessary ledger accounts.

PROBLEM NO: 3
the XYZ Electricity Company decided to replace some parts of its plant by an improved plant. The plant to be replaced was built
in 2003 for Rs. 5400000. It is estimated that it would now cost Rs. 80,00,000 to build a new Plant of the same size and capacity.
The cost of the new Plant as per the improved design was Rs. 1,70,00,000 and in addition, material belonging to the old Plant
valued at Rs. 550000 was used in the construction of the new Plant. The balance of the old Plant was sold for Rs. 300000.
Compute the amount to be capitalized. Also pass the journal entries and Replacement Account.
PROBLEM NO. 4
[SPECIAL ADJUSTMENT ON ESTIMATED COST OF REPLACEMENT]
The Mettur Electricity company Ltd decides to replace one of its old plants with a modern one with a larger capacity. The Plant
when installed in 1950 cost the company Rs.4800000 the components of materials, labour and overhead being in the ratio of 5:3:2
It is ascertained that the cost of material and labour have gone up by 40% and 80% respectively. The proportion of overheads t
total costs is expected to remain the same as before.
The cost of the new plant as per improved design is Rs.12000000 and in addition, materials recovered from the old Plant of a
value of Rs.480000 has been used in the construction of the new Plant. The old Plant was scrapped and sold for Rs. 1500000.
The accounts of the company are maintained under Double Account system. Indicate how much would be capitalized and the
amount that would be charged to revenue. Show journal entries and prepare necessary ledger accounts.
PROBLEM NO:5
[PARTIAL REPLACEMENT]
An Electricity company laid down a main at cost of Rs.24,00,000. Some years later, the company laid down an auxiliary main for
one-fourth of the length of the old main at a cost of Rs.900000. It also replaced the rest of the length of the old main at a cost of
Rs. 2700000. The cost of materials and labour has gone up by 15%. Sale of old materials realized Rs. 60000. Old Materials valued
at Rs. 60000 were used in the renewal and old materials valued at Rs. 90000 were used in the auxiliary main.
Give the journal entries for recording the above transactions. Show the capital expenditure and the revenue expenditure.
PROBLEM NO: 6
[PARTIAL REPLACEMENT, WITH SPECIAL ADJUSTMENT ON ESTIMATION OF PRESENT COST]

Bilapet Power Supply Co. Ltd has built a Power Station and the connecting lines during the year 2000. The following further
particulars are furnished to you:
1. in the year 2000 the company incurred an amount of Rs. 894550 towards purchase of Machinery items and Rs. 99375 towards
labour expenses. The company also used stores worth Rs. 195575 from its existing stock which was in the godown.
2. Extension and replacement was carried out to the power station in the year 2003 at a cost of Rs. 480000 out of which material
worth Rs. 7500 was used from existing stock for replacement purposes. The extent of replacement was estimated at 25% of
original cost.
3. The cost of materials and wages in 2003 have gone up by 30%

4. The old material discarded in the process of extension and replacement was of the value of Rs. 35500
5. Out of the above, material valued at Rs. 18750 was used for extension purposes and the balance not being used was sold for Rs.
16750.
Yor are required to show the journal entries in respect of the above transaction for the year 2003. Working should form part of
your answer.
PROBLEM NO: 7
[DISPOSAL OF PROFITS]
City Electricity Ltd earned a profit of Rs.845000 during the year ended 31 st Marh 2004 after debenture interest @ 71/2% on
Rs.250000. with the help of the figure given below. Show the disposal of profits.
Dr.
Rs.
Original cost of fixed assets 10000000
Formation and other expenses 500000
Monthly average of current assets(net) 2500000
Reserve fund (represented by 4% Govt securities) 1000000
Contingencies Reserve fund Investments 250000
Loan from Electricity Board 1500000
Total depreciation written off to date 2000000
Tariff and Dividend control reserve 50000
Security Deposits received from customers 200000
Asssume Bank Rate to be 6%
PROBLEM NO: 8
[DISPOSAL OF SURPLUS, WITH AMOUNT REFUNDABLE TO CUSTOMERS]
The following balance relate to an electricity company and pertaining to its accounts for the year ended 31st Dec. 2003
Dr.
Rs.
Share Capital 10000000
Reserve fund (invested in 5% Govt. Securities at par) 6000000
Contingencies Reserve invested in 6% State Govt. Loans 2000000
Loan from state electricity Board 3000000
11% Debentures 800000
Development Reserve 1000000
Fixed Assets 20000000
Depreciation Reserve on Fixed assets 8000000
Customers Deposit 7500000
Amounts contributed by consumer towards Fixed Assets 200000
Intangible Assets 500000
Tariffs and Dividend Control Reserve 600000
Current Assets – Monthly average 2000000

The Company earned a post-tax profit of Rs. 9 lakhs. Show how the profits of the company will be dealt with under the provisions
of assuming that the bank rate during the year was 8%.
PROBLEM NO: 9
H Electriicity co. earned a profit of Rs 849250 after paying Rs.30000 @ 6% as debentures interest for the year ended 31.3.2004.
The following further information is supplied to you:
Rs.
Fixed assets 18000000
Depreciation written off 5000000
Loan from Electricity board 4000000
Reserve fund investment at Par (4%) 1000000
Contingencies reserve investment at par (4%) 750000
Tariffs and dividends control reserve 100000
Security deposits of customers 150000
Customers contribution to assets 50000
Monthly average of current assets, including amount due from 760000
customers Rs.250000
Development reserves 250000
Show the disposal of the profits.
PROBLEM NO. 10
[CALCULATION OF CLEAR PROFIT]
From the following details of an electricity supply company, maintaining accounts under Double Account System, Calculate the
following:
a) Capital Base; b) Reasonable return; c) Clear profit; and d) Amounts available for dividends and contribution to tariff and
dividend control reserve and consumers’ rebate reserve.
Rs.
Salary of energy 730000
Meter rents 30000
Transfer fees 750
Cost of generation 440000
Distribution & Selling expenses 40000
Rent, Rates and Taxes 15000
Audit fees 1200
Intangible written off 4500
Management expenses 13000

Depreciation 48000
Interest on loan of State Electricity Board 2500
Contingency Reserve Investment Income 2500
Interest on Security deposit 500
Interest from Bank 400
Contribution to providend fund 35000
No tax is payable for the year
Original cost of fixed assets Rs. 240000; Contribution by consumers for acquisition of such fixed assets Rs. 120000; Cost of
intangibles Rs. 80000; Contingency Reserve Investments Rs. 60000; Stores : Opening Rs. 50000 and Closing Rs. 70000; Cash and
Bank balances : Operating Rs. 60000 and Closing Rs. 40000.
Depreciation upto the beginning of the year Rs. 435000; Intangible written off upto the beginning of the year Rs. 35000; Security
Deposit of customers held in cash Rs. 15000; Tariffs and Dividend control Reserve at the beginning of the year: Rs. 130000.
Amount carried forward for distribution to consumers Rs. 20000; Loan from State Electricity Board Rs. 60000. There is no
addition to Plant & Machinery. Transfer to Contingency Reserve Rs. 70000. Assume RBI Rate at 8%.
FINAL ACCOUNTS
PROBLEM NO: 11
[COMPARATIVE PROBLEM UNDER SINGLE AND DOUBLE ACCOUNTS SYSTEMS]
(Comparative Problem under Single and Double Accounts systems)

From the following particulars, draw up:
a) Balance Sheet as on 31-12-03 under the single Account system; and
b) The Capital A/c and General Balance Sheet as at the same date under the Double Account System.
Authorized capital – 20000 shares of Rs. 100 each
Issued and Paid up capital – 10000 shares of Rs. 100 each including 1000 shares issued in 2003.
Rs.
Reserve fund 300000
Trade Creditors 100000
Trade Debtors 220000
Cash at Bank 60000
Stock 120000
Reserve Fund Investments – at cost Rs. 300000 (Market Value Rs. 360000)
Fixed Assets Expenditure upto 31-12-02:Rs.

Building 500000
Machinery 500000

Expenditure during the year 2003:
Rs.
Building 60000
Machinery 100000
PROBLEM NO: 12
The following are the balances on 31-03-04 in the books of the Ernakulam Power and Light Company Ltd.
Rs. Rs.
Lands on 31-3-03 120000 -
Lands expended during 2003-04 4000 -
Machinery on 31-3-03 480000 -
Machinery expended during 2003-04 4000 -
Mains including cost of laying 160000 -
Mains expended during 2003-04 40800 -
Equity shares - 439200
Debentures - 160000
Sundry Creditors - 800
Depreciation Fund A/c - 200000
Sundry Debtors for Current Supplied 32000 -
Other Debtors 400 -
Cash 4000 -
Cost of generation of electricity 28000 -
Cost of Distribution of electricity 4000 -
Rent Rates and Taxes 4000 -
Management Expenses 9600 -
Depreciation 16000 -
Sale of current - 104000
Rent of Meters - 4000
Interest on Debentures 8000 -
Interim Dividend 16000 -
Net Revenue A/c Balance on 31-03-03 - 22800
From the above Trial Balance, Prepare Revenue A/c, Net Revenue A/c Capital A/c and General Balance Sheet.
PROBLEM No: 13 (Double Account System with adjustments)

From the following Trial Balance and other information relating to Mysore Electric Light and Power Company, Prepare final
accounts in proper form:
Trial Balance as on 31st March 2004
Amount on Particulars Debit Credit

31-3-2003 Rs. Rs.
Capital:
Authorised: 20000 shares of Rs. 100 each

400000 Subscribed: 10000 shares of Rs. 100 each Rs.
50 paid - 500000
Depreciation fund 20000
Calls-in-arrears 20000 -
Land 186000 -
Buildings 100000 -
Machinery 200000 -
Mains 160000 -
Motors 40000 -
Meters 30000 -
Electrical Investments 8000 -
Furniture 5000 -
Cables and Lamps 47000 -
Coal and oil 53000 -
Coal and Oil in Stock 2000 -
Wages and salaries 90000 -
Repairs 10000 -
Printing & Stationery 38000 -
Law charges 6000 -
Sales by Meter - 175000
Sales by Contract - 100000
Meter Rents - 6000
Sundry Creditors - 20000\
Sundry Debtors 60000 -
Cash at bank 66000 -
A call of Rs. 10 per share was payable on 30 th Sep 2003 and arrears are subject to interest at 55 PER ANNUM.
Depreciation to be provided for
Buildings 2 1/2 % per annum.
Machinery 7 ½% per annum
Mains 5% per annum
Motors 10% per annum.
Meters and electrical instruments 15% per annum.
PROBLEM No: 14
From the following Trial Balance extracted from the books of water supply company, prepare its final accounts under the Double
Account system for the year ending Dec 31 st 2003:
Trial Balance of Water Supply Company Ltd. as on 31-12-2003.
Rs. Rs.
Stores in hand 6000 Equity shares 4200000

Cash in hand 10000 12% Preference Shares 2000000
Cash in Bank 50000 10% Debentures 1600000
Investments 628000 Water charges 680000
Printing & stationery 4000 Meter charges 100000
Sundry Debtors 128000 Reserve fund 30000
Salaries 240000 Unclaimed Dividends 10000
Dividend on Preference Shares 240000 Balance to Net Revenue 214000
Land & Building 1000000
Pant & Machinery 2000000
Pipelines and Reservoir 4000000
Miscellaneous Expenses 8000
Water Meters 100000
Maintenance of:
a) Pipelines & Reservoir 20000
b) Filter Beds 6000
c) Plant & Machinery 12000
General Repairs 34000
Taxes and Rates 4000
Overhead Expenses 56000
Interest on Debentures 160000
Interim dividend on Equity 120000
shares
Adjustments:
a) Outstanding expenses (a) Taxes and Rates Rs.8000
(b) Salaries Rs. 12000
b) Reserve fund should be raised to Rs. 40000
PROBLEM NO. 15
From the following Trial Balance extracted from the books of Electricity Supply Company for the year ending March 31, 2004.
Prepare the Final Accounts under the Double Account system.
Trial Balance of Electricity Supply Company as on 31.03.04

Rs. Rs.
Land & Building: Share capital 3400000
a) Office 1000000 Debentures 2550000
b) Power Station 700000 Depreciation fund 850000
Furniture: Sale of Energy 6961500
a) Office 50000 Sundry Creditors 246500
b) Power Station 35000 Reserve fund 850000
Plant & Machinery: Meter Rent 125000

a) Generation of Power 4250000 Sale of sundry assets 17000
b) Transmission Plant 1100000 Miscellaneous incomes 8500
c) Distribution cables 600000 Reconnection and Disconnection
Sundry debtors for supply of fees 1000
Electricity 314500 Transfer fees 1500
Salaries to Officers: Net Revenue A/c Balance 425000
a) Generation 255000
b) Distribution 170000
c) Office 300000
Wages to Workers:
a) Generation 1445000
Repairs & Maintenance:
a) Generation 25500
Management Expenses:
a) Director’s Remuneration 70000
b) General Establishment
charges 140000
c) Auditor’s fees 17000
Other items:
Cash in hand 85000
Cash at Bank 340000
Bad debts 8500
Oil waste for power-station 425000
Legal charges 42500
Insurance premia 68000
Interest on debentures 136000
Sundry assets 427000
Rent & Taxes 85000
Fuel, Coal, Carriage, etc. 1275000
Securities ( Investment) 1700000
Attendance of Public
Lamps (operation &
Maintenance) 100000
15436000 15436000
1. During the year, and additional room was constructed for the Managing Director at a cost of Rs. 50000
2. A new transformer was purchased for Rs. 150000
3. Share capital and debentures to the extent of Rs. 100000 each were issued.
4. The following assets to be depreciated as follows:
a) Land & Building – office and Power Station at 5%
b) Furniture – Office and Power station at 10%
c. Plant & Machinery – Generation of Power, transformers, distribution cables and transmission lines at 20%
5. An amount of Rs. 255000 should be provided for the Reserve fund out of last year’s balance.
6. Sale of energy include Rs. 1933500 for domestic consumption; Rs. 1160500 for public lighting; Rs. 3094000 for industrial
purposes and Rs. 773500 for special contracts.
7. provide for income tax Rs. 68000.

Corporate Accounting I I Final

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UNIT- I

➢ To acquire cash resources

PROCEDURE FOR AMALGAMATION

➢ In the Nature of Merger

Corporate Accounting - II Page 1

AMALGAMATION IN NATURE OF MERGER AMALGAMATION IN NATURE OF PURCHASE

DIFFERENCE BETWEEN AMALGAMATION AND MERGER

Example: Takeover of Myntra by Flipkart.

Corporate Accounting - II Page 2

1. Lump Sum Method

2. Net Worth or Net Assets Method

BALANCE SHEET OF A CO. LTD

Corporate Accounting - II Page 3

1. Net Payment Method

Purchase Consideration 87,000

2. Shares Exchange Method

Corporate Accounting - II Page 4

COMPUTATION OF PURCHASE CONSIDERATION

Net Payments Method

Net Asset Method

Corporate Accounting - II Page 5

Accounting in the Books of Transferor Company

Closing of assets accounts Realisation Asset

Closing of Liabilities Liability Realisation

Purchase consideration payable by the transferee

Realization of assets not taken over by transferee

Payment liabilities not taken over by transferee Realisation Bank

Realization expenses borne by transferor company Realisation Bank Pref. Shareholders

Premium on redemption of preference shares Realisation Equity Shareholders

Profit on realisation Realisation Realisation

Loss on realisation Equity Shareholders Equity Shareholders A/c

Transfer of capital, Reserves, etc. to Equity Equity Share Capital

Corporate Accounting - II Page 6

Transfer of Preference Share Capital to Preference Profit & Loss (Dr.)

Transfer of accumulated losses and fictitious assets to

Receipt of purchase consideration Shares/Debentures/Bank Shares/Debentures/Bank

Payment of Preference Shareholders Preference Shareholders Bank

Payment of Equity Shareholders Equity Shareholders Shares/Debentures/Bank

Make Journal Entries in the Book of Transferor Company

General Reserve 8,000 - Plant and Machinery 15,500 -

Profit and Loss Account 900 320 Motor Vehicles - 400

Creditors 500 210 Furniture - 250

Stocks 3,500 2,390

Debtors 800 620

Cash at bank 450 170

Corporate Accounting - II Page 7

Accounting in the Books of Transferee Company

Pooling of Interest Method

Corporate Accounting - II Page 8

Reserve & Surplus

General Reserve 200 150

Current Liabilities & Provisions 204 95

2,080 1,565 2,080 1,565

Corporate Accounting - II Page 9

Reserve and Surplus Current Assets:

2,400 1,300 2,400 1,300

Corporate Accounting - II Page 10

Balance Sheet of A Ltd. and B Ltd. as on 31st March 2002

Share Capital Fixed Assets