Accounts Theory 21 Marks CTC Classes

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CA Foundation – PAPER – 1 - Accounts

SELECTED THEORY QUESTIONS – 12 + 4 + 5 MARK’S

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Question 1(a) State with reasons, whether the following statements are True or False.

(i) In case of admission of a new partner in a partnership firm, the profit/ loss on revaluation
account is transferred to all partners in their new profit sharing ratio.

(ii) In the balance sheet of X Limited, preliminary expenses amounting to`5 lakhs and securities
premium account of`35 lakhs are appearing; The accountant can use the balance in securities
premium account to write off preliminary expenses.

(iii) Insurance claim received on account of plant and machinery completely damaged by fire is
a capital receipt.

(iv) Purchase of office furniture & fixtures of `2,500has been debited to General Expense
Account. It is an error of omission.

(v) A Limited is sending goods costing`50,000 to B Limited on consignment basis. The


accountant of A Limited is of the opinion that these goods should be sent under a sale invoice.

(vi) A concern proposes to discontinue its business from December 2020 and decides to
dispose off all its plants with in a period of 3 months. The Balance Sheet as on 31stDecember,
2020 should continue to indicate the plants at its historical costs as the assets will be disposed
off after the Balance Sheet date.(6 x2=12 Marks)

(i)False; In case of admission of new partner in a partnership firm, profit/loss on revaluation


account is transferred to old partners in their old profit-sharing ratio.

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(ii)True; According to Section 52 of the Companies Act, 2013, Securities Premium Account may
be used by the company to write off preliminary expenses of the company. Thus, the
accountant can use the balance in securities premium account to write off the preliminary
expenses amounting `5 lakhs.

(iii)True; Insurance claim received on account of plant and machinery completely damaged by
fire is a capital receipt as it is not obtained in course of normal business activities.

(iv)False; When a transaction is recorded in contravention of accounting principles, like


treating the purchase of an asset as an expense, it is an error of principle. Purchase of office
furniture and fixtures is a capital expenditure, if debited to General Expenses account, is an
error of principle and not an error of omission.

(v)False; Goods sent on consignment basis should be sent under a proforma invoice not a sale
invoice.

(vi)False; If the fundamental accounting assumption of going concern is not followed, then the
assets and liabilities should be stated at realizable value not historical cost.

2. What services can a Chartered Accountant provide to the society ? (4 Marks)

(b)The practice of accountancy has crossed its usual domain of preparation of financial
statements, interpretation of such statements and audit there of. Chartered Accountants are
presently taking active role in company laws and other corporate legislation matters, in
taxation laws matters (both direct and indirect) and in general management problems. Some of
the services rendered by chartered accountants to the society are briefly mentioned hereunder:

(i)Maintenance of books of accounts;

(ii)Statutory audit;

(iii)Internal Audit;

(iv)Taxation;

(v)Management accounting and consultancy services; (vi)Financial advice and financial


investigations etc.

(vii)Other services like secretarial work, share registration work, company formation
receiverships, arbitrations etc

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3. Discuss the factors taken in to consideration for calculation of depreciation. (5Marks)

Following factors are taken in to consideration for calculation of depreciation.

1.Cost of asset including expenses for installation, commissioning, trial run etc.-Cost of a
depreciable asset represents its money outlay or its equivalent in connection with its
acquisition, installation and commissioning as well as for additions to or improvement thereof
for the purpose of increase in efficiency.

2.Estimated useful life of the asset-Useful Life’ is either (i) the period over which a depreciable
asset is expected to be used by the enterprise or (ii) the number of production or similar units
expected to be obtained from the use of the asset by the enterprise. Determination of the useful
life is a matter of estimation and is normally based on various factors including experience with
similar type of assets. Several other factors like estimated working hours, production capacity,
repairs and renewals, etc. are also taken into consideration on demanding situation.

3.Estimated scrap value(if any) is calculated at the end of useful life of the asset. If such value is
considered as insignificant, it is normally regarded as nil. On the other hand, if the residual
value is likely to be significant, it is estimated at the time of acquisition/installation, or at the
time of subsequent revaluation of asset

4. (a)State with reasons, whether the following statements are True or False:

(i) Trade Discount is a reduction granted by a supplier from the list price of goods or services
on business considerations for prompt payment.

(ii) M/s. XYZ & Co. runs a cafe. They renovated some of the old cabins. Because of this
renovation some space was made free and number of cabins was increased from 15 to 18.The
total expenditure incurredwas`30,000 and was treated as a revenue expenditure.

(iii) Valuation of inventory, at cost or net realizable value, whichever less, is based on principle
of Conservatism.

(iv) In case of bill of exchange, the drawer and the payee may not be the same person but in
case of a promissory note, the maker and the payee may be the same person.

(v)A Partnership firm cannot own any Assets.

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(vi)Since company has existence independent of its members, it continues to be in existence


despite the death, insolvency or change of members. (6 x 2= 12 Marks)

(i)False: Trade Discount is a reduction granted by a supplier from the list price of goods or
services on business considerations other than for prompt payment.

(ii)False: Renovation of cabins increased the number of cabins. This has an effect on the future
revenue generating capability of the business. Thus the renovation expense is capital
expenditure in nature.

(iii)True: The conservatism concept states that one shall not account for anticipated profits but
shall provide all prospective losses. Valuing inventory at cost or net releasable value whichever
is less, therefore is based on principle of Conservatism.

(iv)False: The drawer and payee may be same person in case of bill of exchange whereas in
promissory note maker and payee can’t be same person

(v)True: A partnership firm is not a distinct legal entity and therefore can’t own any assets. The
partners own the assets of the firm.

(vi)True: As per Perpetual Existence company has existence independent of its members, it
continues to be in existence despite the death, insolvency or change of members

5 (b) Distinguish between Provision and Contingent Liability. (4 Marks)

(b)Provision means “any amount written off or retained by way of providing for depreciation,
renewal or diminution in the value of assets or retained by way of providing for any known
liability of which the amount cannot be determined with substantial accuracy”. It is important
to know the difference between provisions and contingent liabilities.

The distinction between both of them can be explained as follows:

(1)Provision is a present liability of uncertain amount, which can be measured reliably by using
a substantial degree of estimation.

A Contingent liability is a possible obligation that may or may not crystallize depending on the
occurrence or non-occurrence of one or more uncertain future events.

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(2)A provision meets the recognition criteria.

A contingent liability fails to meet the same.

(3)Provision is recognized when (a) an enterprise has a present obligation arising from past
events; an outflow of resources embodying economic benefits is probable, and (b) a reliable
estimate can be made of the amount of the obligation.

Contingent liability includes present obligations that do not meet the recognition criteria
because either it is not probable that settlement of those obligations will require outflow of
economic benefits, or the amount cannot be reliably estimated.

(4)If the management estimates that it is probable that the settlement of an obligation will
result in outflow of economic benefits, it recognizes a provision in the balance sheet.

If the management estimates, that it is less likely that any economic benefit will outflow from
the firm to settle the obligation, it discloses the obligation as a contingent liability.

6.

S.N Basis Of Diff Periodic Inventory System Perpetual Inventory System

1. Inventory Inventory is ascertained by taking an Inventory is ascertained on the


Ascertaining actual physical count. basis of records.

2. Calculation Of Inventory is directly calculated by Inventory is calculated as a


Inventory applying the method of valuation of residual figure as under: Closing
inventories Inventory= Opening inventory +
Purchases-Cost of goods sold

It facilitates the continuous


3. Continuous It does not facilitate the Checking stock checking.
Stock
Checking It is elaborated and expensive.
4. Cost It is simple and inexpensive
Effectiveness
It does not require closing down
It requires closing down of work for of work for Stock taking.
5. Closing Down
stock taking.
of Work

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7. (a)State with reasons, whether the following statements are True or False:

(i)Any amount spent to minimize the working expenses is revenue expenditure.

(ii)Expenses incurred on the repairs for the first time on purchase of an old building are capital
expenditure.

(iii)The provision for bad debts is debited to sundry debtors account.

(iv)Non-participating preference shareholders enjoy voting rights.

(v)There is no entry passed by the consigneein his books for the remaining stockofgoods lying
with him.

(vi)Discountcolumn of the cash book is never balanced. (6x 2 = 12 Marks)

Answer (a)

(i)False: It may be reasonably presumed that money spent for reducing revenue expenditure
would have generated long-term benefits to the entity. So this is capital expenditure.

(ii)True: Repairs for the first time of an old building are incurred to put the building in usable
condition. This is apart of the cost of building. Accordingly, this is a capital expenditure.

(iii)False: The provision for bad debts is debited to Profit and loss Account, in Balance Sheet it
is shown either on liability side or deducted from the head debtors.

(iv)False: A share on which only a fixed rate of dividend is paid every year, without any
accompanying additional rights in profits and in the surplus on winding-up, is called 'Non-
participating Preference Shares. Non-participating preference shareholders do not enjoy voting
rights.

(v)True: It is the consignor who has to record the closing stock of the consigned goods since he
is the owner of the goods. There is no entry passed in the books of the consignee.

(vi)True: Discount column is to talled and transferred to the discount allowed or received
account.

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8. (c)Explain the followings:

(i)Accrual Basis of Accounting

(ii)Amortisation

(iii)Contingent Assets

(iv)Contingent Liabilities (4 Marks)

1.Accrual Basis of Accounting The method of recording transactions by which revenues, costs,
assets and liabilities are reflected in the accounts in the period in which they accrue.

2.AmortisationThe gradual and systematic writing off of an asset or an account over an


appropriate period.

3.Contingent Asset An asset the existence, ownership or value of which may be known or
determined only on the occurrence or non-occurrence of one or more uncertain future events.

4.ContingentLiabilityAn obligation relating to an existing condition or situation which may


arise in future depending on the occurrence or non-occurrence of one or more uncertain future
events.

9. (b)Discuss the following:

(i)What do you mean by principal books of accounts?

(ii)What are the rules of posting of journal entries into the Leger? (5 Marks)

(i)Ledger is known as principal books of accounts as it provides full information regarding all
the transactions pertaining to any individual account. Ledger contains all set of accounts (viz.
personal, real and nominal accounts)(ii)Rules regarding posting of entries in the
ledger:1.Separate account is opened in ledger book for each account and entries from
journalareposted to respective ledger account accordingly.

2.It is a practice to use words ‘To’ and ‘By’ while posting transactions inthe ledger. The word
‘To’ is used in the particular column with the accounts written on the debit side while ‘By’ is
usedwith the accounts written in the particular column of the credit side. These ‘To’ and ‘By’ do
not have any meanings but are used to the account debited and credited.3.The concerned

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account debited in the journal should also be debited in the ledger but reference should be of
the respective credit account.

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