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Test Series: September, 2023

MOCK TEST PAPER 1
INTERMEDIATE: GROUP – I
PAPER – 1: ACCOUNTING
ANSWERS
1. (a) As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are reclassified
as current investments, transfers are made at the lower of cost and carrying amount at the date of
transfer. And where investments are reclassified from current to long term, transfers are made at
lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence
this re-classified current investment should be carried at ` 9 lakhs in the books.
(ii) The carrying / book value of the long-term investment is same as cost i.e.,
` 14 lakhs. Hence this long-term investment will be reclassified as current investment at book
value of ` 14 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be made at
` 12 lakhs as cost are less than its market value of ` 13.5 lakhs.
(iv) Market value of the investment is ` 16.5 lakhs, which is lower than its cost i.e., ` 18 lakhs.
Therefore, the transfer to long term investments should be done in the books at the market
value i.e., ` 16.5 lakhs.
(b) As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use in the
production of inventories are not written down below cost if the finished products in which they will
be incorporated are expected to be sold at cost or above cost. However, when there has been a
decline in the price of materials and it is estimated that the cost of the finished products will exceed
net realizable value, the materials are written down to net realizable value. In such circumstances,
the replacement cost of the materials may be the best available measure of their net realizable
value. In the given case, selling price of product P is ` 266 and total cost per unit for production is
` 295.
Hence the valuation will be done as under:
(i) 900 units of raw material X will be written down to replacement cost as market value of finished
product is less than its cost, hence valued at ` 80 per unit.
(ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower of cost
(` 245) or Net realizable value ` 216 (Estimated selling price ` 266 per unit less additional
cost of ` 50).
(iii) 800 units of finished product P will be valued at NRV of ` 266 per unit since it is lower than
cost ` 295.
Valuation of Total Inventory as on 31.03.2023:
Units Cost (`) NRV / Value = units x cost or
Replacement NRV whichever is less
cost (`)
Raw material X 900 100 80 72,000
Partly finished goods 400 245 216 86,400
Finished goods P 800 295 266 2,12,800
Value of Inventory 3,71,200
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(c) As per AS 16 A qualifying asset is an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale. Other investments and those inventories that are routinely
manufactured or otherwise produced in large quantities on a repetitive basis over a short period of
time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired
also are not qualifying assets. Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of the cost of that
asset. Other borrowing costs should be recognized as an expense in the period in which they are
incurred.
Construction of factory shed amounting ` 240 lakhs is qualifying asset in the given case. The
interest for this amount during the year will be added to the cost of factory shed. All others
(purchase of machinery, vehicles and technical know how, working capital, advance for
tools/cranes) are non-qualifying assets and related borrowing cost will be charged to Profit and
Loss statement.
Qualifying Asset as per AS 16 (construction of a shed) = ` 240 lakhs
Borrowing cost to be capitalized = ` 40 lakhs x 240/320 = ` 30 lakhs
Interest to be debited to Profit or Loss account: ` (40 – 30) = ` 10 lakhs.
Note: Assumed that construction of factory shed completed on 31 st March, 2023.
(d) Computation of amount of depreciation as per AS 10
`
(i) Machinery purchased on 1/4/18 for ` 10 lakhs (having residual value of ` 10 lakhs) Nil
Reason: The company considers that the residual value, based on prices
prevailing at the balance sheet date, will equal the cost. Therefore, there is no
depreciable amount and depreciation is correctly zero.
(ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore, it is not depreciated.
(iii) Machinery constructed for own use (` 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from the date the machine
is ready for use i.e. 1st April,2022. The fact that the machine was not used for a
period after it was ready to be used is not relevant in considering when to begin
charging depreciation.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the straight-line method at
` 10,000 per annum i.e (50,000/5 years). On 1 st April,2022 the asset's net book
value is [50,000 – (10,000 x 2)] i.e. ` 30,000. The remaining useful life is 2 years
as per revised estimate. The company should amend the annual provision for
depreciation to charge the unamortized cost over the revised remaining life of 2
years. Consequently, it should charge depreciation for the next 2 years at
` 15,000 per annum i.e. (30,000 / 2 years).
2. (a) Journal Entries in the Books of Noida Branch
Particulars Debit (`) Credit (`)
Salary Advance A/c Dr. 5,000
To Salaries A/c 5,000
(Being the amount paid as advance adjusted by debit to
Salary Advance A/c)

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Prepaid Insurance A/c (11,200 X 6/12) Dr. 5,600

To Fire Insurance A/c 5,600
(Being the six months premium transferred to the Prepaid
Insurance A/c)
Head Office A/c Dr. 1,44,900
To Purchases A/c 64,500
To Wages A/c 24,000
To Salaries A/c (15,600 – 5,000) 10,600
To General Expenses A/c 7,800
To Fire Insurance A/c (11,200 X 6/12) 5,600
To Manager’s Salary A/c 16,400
To Discount Allowed A/c 16,000
(Being the transfer of various revenue accounts to the HO
A/c for closing the accounts)
Sales A/c Dr. 2,78,000
Discount Earned A/c Dr. 4,600
To Head Office A/c 2,82,600
(Being the transfer of various revenue accounts to HO)
Head Office A/c Dr. 14,000
To Building A/c 14,000
(Being the transfer of amounts spent on building extension to
HO A/c)
Head Office Account
2023 Particulars Amount 2023 Particulars Amount
(`) (`)
Sept 30 To Cash Remittance 52,900 April 1 By Balance b/d 1,88,000
To Sundries* (Revenue) 1,44,900 By Sundries* (Revenue) 2,82,600
To Building A/c 14,000
To Balance c/d 2,58,800
Total 4,70,600 Total 4,70,600
* Instead of using Sundries (Revenue) A/c, the concerned revenue accounts can be posted in the
ledger.
Balance Sheet of Noida Branch
As at 30th Sept 2023
Liabilities Amount Assets Amount
(`) (`)
Creditors 33,400 Debtors 2,29,000
Head Office A/c 2,58,800 Salary Advance 5,000
Prepaid Insurance 5,600
Building Extension A/c transferred to HO -
Cash in Hand 5,600

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Cash at Bank 47,000

Total 2,92,200 Total 2,92,200
Working Notes
Cash and Bank Account
Particulars Amount Particulars Amount (`)
(`)
To Balance b/d 26,000 By Wages 24,000
To Collection from debtors 2,57,000 By Salaries 15,600
By Insurance 11,200
By General Expenses 7,800
By HO A/c 52,900
By Manager’s Salary 16,400
By Creditors 88,500
By Building A/c 14,000
By Balance c/d
- Cash in Hand 5,600
- Cash at bank 47,000
Total 2,83,000 Total 2,83,000
Debtors Account
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 2,24,000 By Cash Collection 2,57,000
To Sales A/c 2,78,000 By Discount (Allowed) 16,000
By Balance c/d 2,29,000
Total 5,02,000 Total 5,02,000
Creditors Account
Particulars Amount (`) Particulars Amount (`)
To Cash A/c 88,500 By Balance b/d 62,000
To Discount (Earned) 4,600 By Purchases 64,500
To Balance c/d 33,400
Total 1,26,500 Total 1,26,500
Note:
Since the date of payment of fire insurance has not been mentioned in the question, it is assumed
that it was paid on 01 April 2023. Alternative answer considering otherwise also possible.
(b) Trading and Profit and Loss Account of M/s Rohan & Sons
for the year ended 31st March, 2023
` `
To Opening stock 3,75,000 By Sales 24,60,000
To Purchases 18,85,000 By Closing stock 4,15,000

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To Gross Profit c/d (25%) 6,15,000 (Balancing Figure)

28,75,000 28,75,000
To Depreciation 80,000 By Gross profit b/d 6,15,000
To Expenses (15% of 3,69,000 By Profit on sale of Fixed assets 2,000
` 24,60,000)
To Net Profit (b.f.) 1,68,000
6,17,000 6,17,000
Balance Sheet of M/s Rohan Sons as on 31st March, 2023
Liabilities Assets `
Capital 12,50,000 Fixed assets (less Dep.) 6,66,000
Profit & Loss A/c 3,13,000 Stock 4,15,000
(1,45,000 + 1,68,000)
Trade Creditors 1,25,000 Debtors 3,85,000
_______ Cash and bank 2,22,000
16,88,000 16,88,000
Cash and Bank Account
To Bal. b/d 1,95,000 By Creditors (1,90,000 + 16,20,000 19,50,000
+ 1,40,000)
To Debtors 24,40,000 By Expenses 3,69,000
(3,65,000 + 20,75,000)
To Fixed assets 56,000 By Fixed assets 1,50,000
By Bal. c/d 2,22,000
26,91,000 26,91,000
Fixed Assets Account
To Bal. b/d 6,50,000 By Cash 56,000
To Profit on sale of Fixed asset 2,000 By Depreciation on sold fixed 6,000
asset
By Depreciation 74,000
(59,000 + 15,000)
To Bank A/c 1,50,000 By Bal. c/d 6,66,000
8,02,000 8,02,000
3. (a) Manan Ltd.
Cash Flow Statement
for the year ended 31st March, 2023
` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 30,00,000
Adjustments for:
Depreciation on Property, plant and equipment 7,50,000
Discount on issue of debentures 45,000
Interest on debentures paid 5,25,000
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Interest on investments received (90,000)

Profit on sale of investments (30,000) 12,00,000
Operating profit before working capital changes 42,00,000
Adjustments for:
Increase in inventory (1,77,000)
Decrease in trade receivable 7,350
Increase in trade payables 450
Increase in outstanding expenses 10,200 (1,59,000)
Cash generated from operations 40,41,000
Income tax paid (15,75,000)
Cash flow from ordinary items 24,66,000
Cash flow from extraordinary items:
Compensation received in a suit filed 1,35,000
Net cash flow from operating activities 26,01,000
Cash flow from Investing Activities;
Sale proceeds of investments 4,80,000
Interest received on investments 90,000
Purchase of land (3,00,000 less 2,64,000) (36,000)
Net cash flow from investing activities 5,34,000
Cash flow from Financing Activities
Proceeds of issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (23,62,500)
Preference dividend paid (2,25,000)
Interest on debentures paid (5,25,000)
Dividend paid (7,50,000 + 2,50,000) (10,00,000)
Net cash used in financing activities (35,12,500)
Net decrease in cash and cash equivalents during the year (3,77,500)
Add: Cash and cash equivalents as on 31.3.2022 3,94,450
Cash and cash equivalents as on 31.3.2023 16,950
(b) Memorandum Trading Account for the period 1 st April, 22 to 31st Dec. 2022
` `
To Opening Stock 1,50,000 By Sales 6,00,000
(6,10,000 - 10,000)
To Purchases 4,20,000 By Consignment stock 25,000
Less: Tools purchased (5,000) By Closing Stock (Bal. fig.) 1,32,000
Goods distributed as (4,000)
Charity
Cost of goods taken
by proprietor (8,000)
4,03,000

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To Wages 84,000
(90,000 – 6,000)
To Gross Profit 1,20,000
[20% of Sales)
7,57,000 7,57,000
* For financial statement purposes, this would form part of closing stock (since there is no sale).
However, this has been shown separately for computation of claim for loss of stock since the goods
were physically not with the concern and, hence, there was no loss of such stock.
Statement of Insurance Claim
`
Value of stock destroyed by fire 1,32,000
Less: Salvaged Stock (31,000)
Loss of stock 1,01,000
Note:
Since policy amount is less than value of stock on date of fire, average clause will apply. Therefore,
claim amount will be computed by applying the formula:
Insured value
Claim = × Loss suffered
Total cost
Claim amount = ` 1,01,000/1,32,000X1,00,000 = ` 76,515 (Rounded off)
NOTE: The average rate of 20% has been given in the question. In the above solution, Gross Profit
is calculated @ 20% on sales. Alternative answer considering Gross Profit of 20% is also possible.
4. (a) Journal Entries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 84,500
To Equity Share Capital A/c 84,500
(Being the issue of 8,450 Equity Shares of
` 10 each as per Board’s Resolution No…..dated…….)
9% Redeemable Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 40,500
Profit and Loss A/c (loss on sale) A/c Dr. 4,500
To Investment A/c 45,000
(Being investment sold at loss of ` 4,500)
Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000
(Being the amount paid on redemption of preference
shares)

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Profit & Loss A/c Dr. 20,000

To Premium on Redemption of 20,000
Preference Shares A/c
(Being the premium payable on redemption is adjusted
against Profit & Loss Account)
General Reserve A/c Dr. 80,000
Profit & Loss A/c Dr. 35,500
To Capital Redemption Reserve A/c 1,15,500
(Being the amount transferred to Capital Redemption
Reserve Account)
Balance Sheet as at 31st March, 2023(Extract)
Particulars Notes No. `
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 3,84,500
b Reserves and Surplus 2 1,70,500
ASSETS
2. Current Assets
Cash and cash equivalents 1,00,000
(1,95,000 + 84,500+ 40,500 – 2,20,000)
Notes to accounts
1. Share Capital
38,450 Equity shares (30,000 + 8,450) of `10 each fully paid up 3,84,500
2. Reserves and Surplus
General Reserve 40,000
Profit and loss account NIL
Capital Redemption Reserve 1,15,500
Investment Allowance Reserve 15,000
1,70,500
Working Note:
Number of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed ` 2,00,000
Less: Profit available for distribution as dividend:
General Reserve: ` (1,20,000-40,000) ` 80,000
Profit and Loss (60,000 less 20,000 set aside for
adjusting premium payable on redemption of Pref.
shares less 4,500 loss on sale of investments) ` 35,500
` (1,15,500)
` 84,500

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Therefore, No. of shares to be issued = 84,500/`10 = 8,450 shares.

(b) Calculation of interest
Total Interest in each Cash price in each
(`) instalment instalment
(1) (2)
Cash Price 1,20,000
Less: Down Payment (32,433) Nil ` 32,433
Balance due after down payment 87,567
Interest/Cash Price of 1st instalment - ` 87,567x10/100 ` 23,100 - ` 8,757
= ` 8,757 = ` 14,343
Less: Cash price of 1st instalment (14,343)
Balance due after 1st instalment 73,224
Interest/cash price of 2nd instalment - ` 73,224x 10/100 ` 23,100 - ` 7,322
= ` 7322 = ` 15,778
Less: Cash price of 2nd instalment (15,778)
Balance due after 2nd instalment 57,446
Interest/Cash price of 3rd instalment - ` 57,446 x 10/100 ` 23,100 - ` 5745
= ` 5745 = ` 17,355
Less: Cash price of 3rd instalment (17,355)
Balance due after 3rd instalment 40,091
Interest/Cash price of 4th instalment - ` 40,091 x 10/100 ` 23,100 - ` 4,009
= ` 4,009 = ` 19,091
Less: Cash price of 4th instalment (19,091)
Balance due after 4th instalment 21,000
Interest/Cash price of 5th instalment - ` 21,000 x 10/100 ` 23,100 – ` 2,100
= ` 2,100 = 21,000
Less: Cash price of 5th instalment (21,000)
Total Nil ` 27,933 `1,20,000
Total interest can also be calculated as follow:
(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – ` 1,20,000 =
` 27,933
KM Ltd. Account in the books of Jai Ltd
Date Particulars ` Date Particulars `
1.1. 2018 To Bank A/c 32,433 1.1.2018 By Machine A/c 1,20,000
31.12.2018 To Bank A/c 23,100 31.12.2018 By Interest A/c 8,757
31.12.2018 To Balance c/d 73,224
1,28,757 1,28,757
31.12.2019 To Bank A/c 23,100 1.1.2019 By Balance b/d 73,224
31.12.2019 To Balance c/d 57,446 31.12.2019 By Interest A/c 7,322
80,546 80,546
31.12.2020 To Bank A/c 23,100 1.1.2020 By Balance b/d 57,446
31.12.2020 To Balance c/d 40,091 31.12.2020 By Interest A/c 5,745
63,191 63,191

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31.12.2021 To Bank A/c 23,100 1.1.2021 By Balance b/d 40,091

31.12.2021 To Balance c/d 21,000 31.12.2021 By Interest A/c 4,009
44,100 44,100
31.12.2022 To Bank A/c 23,100 1.1.2022 By Balance b/d 21,000
31.12.2022 By Interest A/c 2,100
23,100 23,100
5. (a) (i) In the books of Mr. Z
Investment in 8% Corporate Bonds Account
For the period 01 April 2022 to 31 March 2023
Date Particulars Nos Interest Amount Date Particulars Nos Interest Amount
(`) (`) (`) (`)
1/6/22 To Bank 36,000 48,000 30,48,000 30/9/22 By Bank A/c (Interest 1,44,000
A/c (WN1) 36,000 x 100 x 8% x 6/12)
15/2/23 To Profit & 1,76,000 15/2/23 By Bank A/c (WN2) 24,000 72,000 22,08,000
Loss A/c
(WN 3)
31/3/23 To Profit & 2,16,000 31/3/23 By Bank A/c (Interest 48,000
Loss A/c 12,000 x 100 x 8% x 6/12)
By Balance c/d (WN 4) 12,000 10,16,000
Total 36,000 2,64,000 32,24,000 Total 36,000 2,64,000 32,24,000

Note: For computing the interest on the bonds sold on 15 Feb 2023, if number of days (138 days)
is taken instead of months, the interest received on 15.02.2023 should be `72,592 and the total
interest transferred to Profit & Loss Account should be ` 2,16,592.
Investment in Equity Shares of G Ltd
For the period 1st April 2022 to 31 March 2023
Date Particulars Nos Dividend Amount Date Particulars Nos Dividend Amount
(`) (`) (`) (`)
01/4/22 To Balance b/d 8,000 15,20,000 16/9/22 By Bank A/c 48,000 42,000
(WN 7)
01/5/22 To Bank A/c (WN 7,000 16,26,100 1/12/22 By Bank A/c 7000 18,01,800
5) (WN 8)
15/6/22 To Bonus Shares 6,000 25/1/23 By Bank A/c 48,300
(WN 10)
25/8/22 To Bank A/c (Right 2,100 4,83,000 31/3/23 By Balance c/d 16,100 25,00,100
Shares) (WN 11)
(WN 6)
01/12/22 To Profit & Loss 7,14,800
A/c (Sale of
shares)
(WN 9)
31/3/23 To Profit & Loss 96,300
A/c

Total 23,100 96,300 43,43,900 Total 23,100 96,300 43,43,900

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Working Notes
1. Computation of the Interest element in the bonds purchased on 01 June 2022
No of Bonds purchased 36,000
Face value per bond ` 100
Face value of the bonds purchased ` 36,00,000
Interest Rate 8%
Interest Amount 36,00,000 x 8% x 2/12
` 48,000
Cum-interest per bond ` 86
Value of bond excluding interest 36,000 x ` 86 – `48,000
` 30,48,000

2. Computation of the Interest element in the bonds sold on 15 Feb 2023

No of Bonds sold 24,000
Face value per bond ` 100
Face value of the bonds sold ` 24,00,000
Interest Rate 8%
Interest Amount ` 24,00,000 x 8% x 4.5/12
= ` 72,000

3. Computation of Profit on Sale of Bonds on 15 Feb 2023

No of Bonds sold 24,000
Face value per bond ` 100
Ex- interest Rate per bond ` 92
Sales proceeds ` 22,08,000
Average Cost of Bonds (30,48,000/36,000) x 24,000
` 20,32,000
Profit on sale of bonds Sale Proceeds – Average Cost
` 22,08,000 – ` 20,32,000
` 1,76,000
4. Valuation of Bonds as on 31 March 2023
No of Bonds held as on 31 Mar 2021 12,000
Average Cost of Bonds (` 30,48,000/36,000) x 12,000
` 10,16,000

5. Computation of the cost of the equity shares purchased on 01 May 2022

No of shares purchased 7,000
Cum right price per share ` 230
Cost of purchase ` 16,10,000
Brokerage @1% ` 16,100
Cost including brokerage ` 16,26,100

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6. Right Shares
No of Right Shares Issued (8,000+7,000+6,000)/7 = 3,000 shares
No of right shares sold 3,000 shares x 30% = 900 shares
Proceeds from sale of right shares to be 900 shares x ` 75 = ` 67,500
credited to statement of profit & loss
No of right shares subscribed 3,000-900 = 2,100 shares
Amount of right shares subscribed 2,100 x 230 = ` 4,83,000
7. Computation of Dividend Received on 16 Sept 2022
No of shares held during the period of dividend 8,000 shares
Dividend per share `6
Dividend Amount 8,000 x 6 = ` 48,000
No of shares received after the period of dividend 7,000 shares
(excluding bonus & right shares)
Dividend per share `6
Dividend Amount 7,000 x ` 6 = ` 42,000
The amount of dividend for the period for which the shares were not held by the investor
has been treated as capital receipt. Thus ` 42,000 shall be treated as capital receipt.
8. Sale Proceeds for the shares sold on 1st Dec. 2022
No of shares sold 7,000 Shares
Sale price per share ` 260
Proceeds from sale of share 7,000 x 260 = ` 18,20,000
Less: Brokerage @ 1% ` 18,200
Net Sale Proceeds ` 18,01,800

9. Profit on sale of shares on 1st Dec. 2022

Sales Proceeds ` 18,01,800
Average Cost (15,20,000+16,26,100+4,83,000-42,000)/23,100 x 7,000
= ` 10,87,000
Profit on sale of shares Sales Proceeds – Average Cost
= ` 18,01,800 - ` 10,87,000
= ` 7,14,800
10. Computation of Amount of Interim Dividend
No of shares held 8,000+7,000+6,000+2,100-7,000
= 16,100
Dividend per share ` 3 per share
Dividend Received 16,100 shares x ` 3 per share
= ` 48,300

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11. Valuation of Shares as on 31 March 2023

Cost of Shares (15,20,000 + 16,26,100 + 4,83,000 – 42,000) / 23,100
x 16,100
= 25,00,100
Market Value of Shares ` 260 x 16,100 = ` 41,86,000
Closing stock of equity shares has been value at ` 25,00,100 i.e. cost being lower
than its market value.
(ii) Profit & Loss Account (Extract)
For the period 01 April 2022 to 31 March 2023
Particulars Amount Particulars Amount
(`) (`)
To Balance c/d 12,70,600 By Investment in 8% Corporate Bonds 1,76,000
Account (Profit on sale of bonds)
By Investment in 8% Corporate Bonds 2,16,000
Account (Interest on bonds)
By Sale of Right Shares 67,500
By Investment in Equity Shares of G Ltd 7,14,800
(Profit on sale of shares)
By Investment in Equity Shares of G Ltd 96,300
(Dividend Income)

Note: The entire amount of sale proceeds from rights has been credited to Profit and Loss account
in the above solution. However, the sale proceeds of rights in respect of 7,000 shares
(purchased cum right on 1.5.20) can be applied to reduce the carrying amount of such
investments (without crediting it to profit and loss account) considering that the value of these
shares has reduced after becoming their ex-right. In that case, ` 22,500 (67,500X 7/21) will
be applied to reduce the carrying amount of investment and ` 45,000 will be credited to profit
and loss account.

(b) Calculation of number of equity shares to be allotted

Number of debentures
Total number of debentures 20,000
Less: Debenture holders not opted for conversion (2,500)
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500
Redemption value of 3,500 debentures at a premium of 5%
[3,500 x (100+5)] ` 3,67,500
Equity shares of ` 10 each issued on conversion
[` 3,67,500/ ` 15] 24,500 shares
6. (a) Calculation of unrealized profit of each department
Dept. A Dept. B Dept. C Total
` ` ` `
Unrealized Profit of:
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Department A 1,14,000 x 20/120 60,000 x 50/150 39,000

= 19,000 = 20,000
Department B 55,000 x .15 15,200 x.10 9,770
= 8,250 = 1,520
Department C 52,800 x 10/110 1,11,300 x 5/105
= 4,800 5,300 10,100
(b) Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
` ` `
Gross Profit (W.N.2) 6,30,000 2:5 (sales) 1,80,000 4,50,000
Less: Salaries 1,56,000 Time (52,000) (1,04,000)
Rent, rates and taxes 72,000 Time (24,000) (48,000)
Commission on sales 40,600 2:5 (sales) (11,600) (29,000)
Depreciation 60,000 Time (20,000) (40,000)
Interest on debentures 36,000 Post (36,000)
Directors’ fee 24,000 Post (24,000)
Advertisement 48,000 Post (48,000)
Net profit 72,400 1,21,000
Pre-incorporation profit will be transferred to Capital Reserve.
Post-incorporation profit will be transferred to Profit & Loss Account.
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2022 to 31.7.2022) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (1 st August, 2022 to 31st March, 2023)
= x + 25% of x= 1.25x Then, sales for next 8 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x. Hence Sales Ratio = 4 x :10x i.e. 2:5
2. Time ratio
1st April, 2022 to 31st July, 2022 : 1st August, 2022 to 31st March, 2023
= 4 months: 8 months = 1:2. Thus, time ratio is 1:2.
(c) Physical Capital Maintenance at Current Cost
In the given case, the specific price index applicable to the product is 125 (25/20X100).
Current cost of opening stock = (` 1,20,000 / 100) x 125 Or 6,000 units x ` 25
= ` 1,50,000
Current cost of closing cash = ` 1,20,000 (` 1,80,000 – ` 60,000)
Opening equity at closing current costs = ` 1,50,000
Closing equity at closing current costs = ` 1,20,000

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Retained Profit = ` 1,20,000 – ` 1,50,000 = (-) ` 30,000

The negative retained profit indicates that the trader has failed to maintain his capital. The available
fund of ` 1, 20,000 is not sufficient to buy 6,000 units again at increased price of ` 25 per unit. The
drawings should have been restricted to ` 30,000 (` 60,000 – ` 30,000).
If the trader had not withdrawn any amount, then the answer would have been as below:
Current cost of opening stock = ` 1,80,000
Opening equity at closing current costs = ` 1,50,000
Retained Profit = ` 1,80,000 – ` 1,50,000 = ` 30,000
If the trader had not withdrawn any amount, then the retained profit would have been
` 30,000.
(d) Journal Entries in the books of Star Ltd.
2023 Dr. Cr.
` `
April 1 Equity Share Final Call A/c Dr. 1,60,000
To Equity Share Capital A/c 1,60,000
(Final call of ` 2 per share on 80,000 equity shares
made due)
Bank A/c Dr. 1,60,000
To Equity Share Final Call A/c 1,60,000
(Final call money on 80,000 equity shares received)
June 1 Capital Redemption Reserve A/c Dr. 75,000
Capital Reserve Dr. 45,000*
Securities Premium A/c Dr. 60,000
General Reserve A/c (b.f.) Dr. 1,40,000**
To Bonus to Shareholders A/c 3,20,000
(Bonus issue of two shares for every five shares
held, by utilizing various reserves as per Board’s
resolution dated…….)
Bonus to Shareholders A/c Dr. 3,20,000
To Equity Share Capital A/c 3,20,000
(Capitalization of profit)
* considering it as free reserve as it has been realized.
** Alternatively, different combination of profit and loss balance and general reserve may also
be used.
(e) Calculation of net profit of X Ltd. as per the Companies Act, 2013
` `
Balance from Trading A/c 42,53,650
Add: Subsidies received from Government 3,50,000
46,03,650
Less: Administrative expenses 5,96,400
Advertisement expenses 1,10,500
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Sales commission 1,05,550

Director’s fees 1,48,900
Interest on debentures 56,000
Depreciation on fixed assets as per Schedule II 6,51,750 (16,69,100)
Profit u/s 198 29,34,550
Maximum Managerial remuneration under Companies Act, 2013 = 11% of ` 29,34,550
= ` 3,22,800 (rounded off).

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