Edrona Exams | Complete examination management system

Foundation Accounting

Q-1 What do you mean by Accounting? Give its definition.

Answer: According to AICPA, “Accounting” is the art of recording, classifying and summarizing
in a significant manner and in terms of money, transactions and events which are, in part at
least, of a financial character, and interpreting the results thereof.

From the above, it is clear that accounting refers to:
                • A procedure of writing financial transactions and events.
                • A system of recording, classifying, summarizing, analyzing, interpreting and reporting periodically, in terms of money/which provides necessary financial formation.

The said financial information is used for taking necessary and proper decisions about the
allocation of economic resources and running the organisation successfully.

Accounting accumulates data systematically and supplies the necessary information to the
users of financial statements by which the users can take proper economic decisions and also
may make proper predictions, i.e., in short, it conveys financial information about an entity for
a specified period.

 

Q-2 Discuss the limitations which must be kept in mind while evaluating the Financial
Statements.

Answer: Limitations of Financial Statements:

1. Historical Cost:

The financial statements are prepared on the basis of historical cost, i.e. current market value
of the fixed asset is not taken into consideration. The value of the fixed asset continues to
decrease with the passage of time, but the effect of these subsequent changes in price is not
taken into account. The Balance Sheet loses its significance since it does not take into
consideration the economic realities of the business organization. Thus, heavy reliance on
historical cost makes the financial statements misleading & irrelevant for decision making.

2. Perpetual Continuity & Periodical Account:
Financial statements are prepared at the end of the year but the accounting records are
maintained on the going concern assumption (i.e. the business shall continue to exist forever).
As a result, many items of capital expenditure are distributed over a number of beneficial years
arbitrarily which may lead to incorrect preparation of financial statements.

3. Strengths & Weaknesses:
The assets which can be expressed in terms of money are recorded in the financial statements
of a company. The strengths & weaknesses of the business are not taken into consideration
while preparing the Balance Sheet.

For example: services, skills & loyalty of the employees are also important for the business, but
these are not shown in the Balance Sheet. Thus, it should be kept in mind while judging the
company’s financial position, that much non-monetary strength will not be reflected in the
Balance Sheet.

4. Intangible assets:
A company may have a number of intangible assets that are not recorded in its financial
statements, but the expenditure made in regard to those assets are charged to expense. This
policy can drastically affect the reliability of the financial statements of a company.

5. Window Dressing:
There is a possibility of fabrication of the financial statements by the management of the
company. In such a case, financial statements may not provide true & fair view of the financial
position of the company.

6. Different Accounting Policies:
The financial statements of different companies are not always comparable, because the
entities use different accounting policies. For example: One company may charge depreciation
on straight line method & another on written down value method. When different methods are
adopted by different companies for the treatment of a particular item, the results of
comparison between such enterprises shall be misleading.

Q-3 What are the branches of Accounting? Explain.

Answer: Accounting has basically three branches:

(a) Financial Accounting:

  •  It is concerned with the maintenance of books of account of an enterprise.

  • Recording & classifying all its financial transactions and events with a view to prepare

Annual Financial Accounts.

  •  To be used by various interest groups (i e. General Purpose Financial Statement).

(b) Management Accounting:

  • It refers to use of accounting data with proper analysis in reporting, so as to serve the

need of management.

  •  To help them in decision making and exercising proper controls.

  •  It may not have separate books of account but uses the data from financial accounts & cost accounts and Properly analyses it, compares it, calculate ratios etc. and present it to management periodically.

(c) Cost Accounting:

  •  Generally manufacturing concerns maintains cost accounts.

  • With a view to ascertain the cost of goods manufactured or services rendered with

proper break-up of cost.

  • Also providing useful data to management for effective cost control and

  • Govt, also has prescribed maintenance of cost records by specific industries.

(d) Social Responsibility Accounting:

  • Concerned with measurement and reporting of the impact of the operations of an

  • organisation on the society.

  • Attempts to disclose the costs incurred and

  • Benefits accrued to the society as a consequence of the activities of the organization.

 

Q-4 Define Provision & Reserve.

Answer 1. Provision means

  •  “any amount written off or retained by way of providing for depreciation, renewal or diminution in value of assets, or

  •  retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy”.

 

2. Provision is a present liability which by its nature requires a significant amount of estimation.

3. The following are examples of amount retained in the business out of earning for different
purposes that are described as provisions.

  •  Amount provided for meeting claims /liabilities which are admissible in principle but the

amount whereof has not been ascertained.

  •  Amount provided for payment of taxes still to be assessed.

  •  Amount set aside for writing off bad debts or for discounts.

4. The term ‘reserve’ is not defined in Part-III of Schedule VI except negatively in the sense that
profit retained in the business not having any of the attributes of a ‘provision’ is to be treated
as a reserve.

5. Also provisions in excess of the amount considered necessary for the purposes these were
originally made, are to be considered as reserves.

6. It is thus evident that provisions are a charge against profits, while reserve is an
appropriation of profits.

7. Reserve are accumulated profits hence part of owners equity, provision are in the nature of
liability due to outsiders.

8. Provision will be debited to P&L a/c and reserve to P&L appropriation A/c when created.

 

Q-5 Below is the trial balance of Shah as on December 31, 2005 :

Debit Balance

Rs.

Credit Balance

Rs.

Drawings

1,500

Capital Account

50,000

Adjusted purchases

6,99,200

Loan from Desai @ 9% (taken on

1st July, 2004)

20,000

Salaries

4,500

Sales

7,20,000

Carriage on Purchases

 

Discount

500

on sales

 

Sundry Creditors

20,000

Rates and Insurance

400

 

 

Buildings

400

 

 

Furniture

500

 

 

Sundry Debtors

8,000

 

 

Cash on Hand

250

 

 

Cash at Bank

1,500

 

 

Stock (31st December, 2005)

61,250

 

 

 

8,10,500

 

8,10,500

Additional information:
1. Rates have been prepaid to the extent of RS. 175.
2. Bad debts Rs. 500 have to written off. A provision for doubtful debts @ 5% on debtors is
necessary.
3. Building has to be depreciated at 2% and Furniture @ 10%.
4. The manager is entitled to a commission of 5% of net profits before charging such
commission.

Solution: Trading and Profit and Loss Account of Shah for the Year ended on December 31,
2005

Particulars

Rs.

Particulars

Rs.

To Adjusted Purchases

6,99,200

By Sales

7,20,000

To Carriage on Purchases

400

 

 

To Gross Profit c/d

20,400

 

 

 

7,20,000

 

7,20,000

To Salaries

4,500

By Gross Profit b/d

20,400

To Carriage on Sales

500

By Discount

500

To Rates & Insurance
PaidTo Rates & Insurance
Paid

400

225

 

 

Less: Prepaid

175

To Bad Debts written off

500

 

 

To Provision for Doubtful
Debts (5% of t 7,500)

375

 

 

To Depreciation:
Buildings (2%)

540

1,140

 

 

Furniture (10%)

600

To Interest

1,800

 

 

To Commission payable to
manager (5% of Rs. 11,860)

593

 

 

To Net Profit

11,267

 

 

 

20,900

 

20,900

20,900 less Rs. 9,040 (the total of all expenses so far), Manager is entitled to 5% of this figure.

(1) The trial balance gives “Adjusted Purchases”. It means that the opening stock has already
been transferred to the Purchases Account and thus been closed. Further, entry for closing
stock has already been passed by debiting the Closing Stock Account and crediting PurchaseAccount.

That is why closing stock appears inside the trial balance. It will now be shown in the
Balance Sheet and not in the Trading Account since purchases already stand reduced.

(2) There is a Loan of Desai @ 9% taken in 2004 i.e. in last accounting year. As per mercantile
system interest up to 31.12.04 must have been provided in the last years a/c itself. The trial
balance makes no mention of any interest being paid to him. Hence, interest @ 9% must be
provided for the whole of current year only.

 

Balance Sheet of Shah as on December 31, 2005

 

 

 Liabilities

Rs.

Assets

Rs.

 

Capital Account

50,000

 

 

 

59,767

Fixed Assets:

Buildings

 

27,000

 

 

 

26,460

 

Add: Net Profit

11,267

 

Less: Depreciation

540

 

Less: Drawings

1,500

 

Loan from Desai

20,000

21,800

Furniture

6,000

 

5,400

 

Add: Interest Due

1,800

Less: Depreciation

600

 

Sundry Creditors

20,000

Current Assets:

 

 

Commission Payable

593

Cash on hand

250

 

 

 

Cash at Bank

1,500

 

 

 

Sundry Debtors

Less: Provision for

7,500

 

 

 

7,125

 

Doubtful debt

375

 

 

 

Stock

61,250

 

 

 

Prepaid Rates

175

 

 

1,02,160

 

1,02,160

 

 

 

Q-6 Functions of accounting data

Answer: Accounting data serves the following functions:

  • Measurement: Account data helps to measure the performance & financial position of the enterprise. It measures Assets, Liabilities, Expenses & Incomes.

  •  Forecasting: On the basis of past accounting data, forecasting about future plans are made.

  • Decision Making: Various decision requires timely & correct information which is provided by accounts.

  •  Evaluation: Evaluation of an enterprise’s performance & financial health is done from accounting data.

  • Control: By adopting various accounting techniques, checks & balances the activity of the enterprise is controlled.

  • Stewardship : The management, manages the money of shareholders/owners, on their behalf.

  • Govt, regulation & Taxation : Accounting data serves the various requirements of govt, regulations & to assess proper tax liability.

 

Q- 7 What are Fundamental Accounting Assumptions? Explain them in detail.

Answer: Fundamental Accounting Assumptions:

  • Fundamental accounting assumptions underline the preparation and presentation of financial statements.

  • They are usually not specifically stated because their acceptance and use are assumed.

  • Disclosure is necessary if they are not followed.

  • The Institute of Chartered Accountants of India issued Accounting Standard (AS-1)‘Disclosure of

  • Accounting Policies’ according to which the following have been generally accepted as fundamental accounting assumptions: (i) Going Concern, (ii) Consistency and (iii)Accrual.

 

Q- 8 From the following Trial Balance of Hari and additional information prepare Trading and Profit & Loss Account for the year ended 31st March, 2006 and a Balance Sheet as on that date:

Trial Balance as at 31st March, 2006

Particulars

Dr.(Rs.)

Cr.(Rs.)

Capital

-

1,00,000

Furniture

20,000

-

Purchases

1,50,000

-

Debtors

2,00,000

-

Interest Earned

-

4,000

Salaries

30,000

-

Sales

-

3,21,000

Purchase Returns

-

5,000

Wages

20,000

-

Rent

15,000

-

Sales Return

10,000

-

Bad Debt Written off

7,000

-

Creditors

-

1,20,000

Drawings

24,000

-

Provision for Bad Debts

-

6,000

Printing & Stationery

8,000

-

Insurance

12,000

-

Opening Stock

50,000

-

Office Expenses

12,000

-

Provision for Depreciation

-

2,000

 

5,58,000

5,58,000

 

Additional Information:
(1) Depreciate Furniture by 10% on original cost;

(2) A provision for Doubtful Debts is to be created to the extent of 5% on Sundry Debtors;

(3) Salaries for the month of March, 2006 amounting to Rs.3,000 were unpaid which must be provided for. However salaries included Rs. 2,000 paid in advance;

(4) Insurance amounting to Rs. 2,000 is prepaid;

(5) Provide for outstanding office expenses Rs.8,000;

(6) Stock used for private purpose Rs. 6,000;

(7) Closing Stock-in-Trade Rs. 60,000.

Solution: M/s Hari Trading and Profit and Loss Account for the year ended on 31.3.2006

Particulars

Rs.

Particulars

Rs.

To opening stock

 

By sales

3,21,000

3,11,000

(-)return

10,000

To purchases

1,50,000

1,45,000

By goods used

6,000

(-) Return

5,100

To wages

20,000

By closing stock

60,000

To Gross profit c/d

1,62,000

 

 

 

3,77,000

 

3,77,000

To salaries

30,000

31,000

 

 

(+) outstanding salary

3,000

(-) advance salary

2,000

To Rent

15,000

 

 

To bad debts

7,000

11000

 

 

(+) Provisions

4,000

To printing & Stationary

8,000

 

 

To Insurance

12,000

10000

 

 

(-) Prepaid

2,000

To Office Expenses

12,000

20,000

 

 

(+)outstanding

8,000

 

 

To deprecation

2,000

 

 

To Net Profit transferred to
capital a/c

69,000

 

 

 

1,66,000

 

1,66,000

 

M/s Hari. Balance Sheet as on 31.3.2006

Liabilities

Rs.

Assets

Rs.

Capital

1,00,000

1,39,000

Furniture

20,000

16,000

(+)Net Profit

69,000

(-)Drawings

24,000

(-)dep. Provisions: Bal. b/f

2,000

(-)Goods taken

6,000

(+) Current year dep.

2,000

Creditors

1,20,000

Stock

60,000

Salary payable

3,000

Debtors

2,00,000

1,90,000

(-)prov. old b/f

6,000

(+)additional prov.

4,000

Expenses payable

 

 

8,000

Advance salary

2,000

2,70,000

 

2,70,000

 

Adjustment Entries

 

No.

Particulars

Dr.(Rs.)

Cr.(Rs.)

1.

Deprecation a/c Dr.

2,000

 

 

To deprecation Provisions a/c

 

2,000

 

(Deprecation for the current year provided by SLM )

 

 

2.

Bad debts a/c Dr.

4,000

 

 

To provisions for bad debts a/c

 

4,000

 

( Provisions for additional bad debts created. Required

prov. 5% on bad debtors of Rs. 2,00,000 i.e. Rs. 10,000 less existing provisions Rs.6,000)

 

 

3.

Salary a/c Dr.

3,000

 

 

To salary payable a/c

 

3,000

 

(being the salary for the month of march due)

 

 

 

Advance Salary a/c Dr.

2,000

 

 

To salary a/c

 

2,000

 

(Being advance salary paid transferred to advance a/c )

 

 

4.

Prepaid Insurance a/c Dr.

2,000

 

 

To insurance expenses a/c

 

2,000

 

(being premium paid for next year, transferred to prepaid

a/c )

 

 

5.

Office expenses a/c Dr.

8,000

 

 

To Expenses payable a/c

 

8,000

 

Being provision made for expense payable)

 

 

6.

Drawings a/c Dr.

6,000

 

 

To Goods used a/c

 

6,000

 

(Being goods withdrawn by owner for personal use)

 

 

7.

Stock a/c Dr.

60,000

 

 

To Trading a/c

 

60,000

 

(Being closing stock adjusted)

 

 

 

Transfer Entries/Book Closing Entries

 

No.

Particulars

Dr.(Rs.)

Cr.(Rs.)

1.

Purchase return a/c Dr.

5,000

 

 

To Purchase a/c

 

5,000

 

(Being purchase return balance transferred to purchases a/c)

 

 

2.

Trading a/c Dr .

2,15,000

 

 

To Opening stock a/c

 

50,000

 

To Purchase a/c

 

1,45,000

 

To Wages a/c

 

20,000

 

(Being direct expenses of goods transferred to trading a/c)

 

 

3.

Sales a/c Dr.

10,000

 

 

Sales return a/c

 

10,000

 

(Being direct expenses of goods transferred to trading a/c)

 

 

4.

Sales a/c Dr.

3,11,000

 

 

Goods used a/c

6,000

 

 

To Trading a/c

 

3,17,000

 

(Being sales a/c and goods used a/c transferred to trading

a/c)

 

 

5.

Trading a/c Dr.

1,62,000

 

 

To Profit & Loss a/c

 

1,62,000

 

(Being gross profit shown by trading a/c transferred to P&L

a/c)

 

 

6

Interest a/c Dr.

4,000

 

 

To Profit & Loss a/c

 

4,000

 

(Being indirect incomes transferred to P&L a/c)

 

 

7

Profit & Loss a/c Dr.

97,000

 

 

To Salary a/c

 

31,000

 

To Rent a/c

 

15,000

 

To Bad debt a/c

 

11,000

 

To Printing and stationery a/c

 

8,000

 

To Insurance a/c

 

10,000

 

To Office expense a/c

 

20,000

 

To Depreciation a/c

 

2,000

 

(Being expenses a/c transferred to P&L a/c)

 

 

8.

Profit & Loss a/c

69,000

 

 

To Capital a/c

 

69,000

 

(Being net profit as per P&L a/c transferred to capital a/c)

 

 

9.

Capital a/c Dr.

30,000

 

 

To Drawings a/c

 

30,000

 

(Being drawing adjusted against capital a/c)

 

 

 

Q-9 Explain Deferred Revenue Expenditure & Prepaid Expenses

Answer: Deferred Revenue Expenditure & Prepaid Expenses:

  → The Guidance Note on ‘Terms used in Financial Statement’, issued by the Institute of Chartered Accountants of India, defines “deferred revenue expenditure as those expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods.”
→ In short, it refers to that expenditure that is, for the time being, deferred from being charged against income.

→ So long as deferred revenue expenditure is not written off, this is shown on the assets side of the balance sheet under the head “Miscellaneous Expenditure.”
→ Deferred revenue expenditure should be revenue expenditure by nature in the first instance, for example, advertisement. But its matching with revenue may be deferred considering the benefit to be accrued in future.
→ A thin line of difference exists between deferred revenue expenses and prepaid expenses.
→ The benefits available from prepaid expenses can be precisely estimated but that is not so in case of deferred revenue expenses.
→ Heavy advertising to launch a new product is a deferred expenses since the benefit from it will be available over the next three to five years but one cannot say precisely how long.
→ On the other hand, insurance premium paid, say, for the year ending 30th June, 2006, when the accounting year ends on 31st March, 2006 will be an example of prepaid expense to the extent of premium relating to three months’ period i.e. from 1st April, 2006 to 30th June, 2006.
→ Thus the insurance protection will be available precisely for three months after close of the year and the amount of the premium to be carried forward can be calculated exactly.
As per Accounting Standard 26 only those expenditures should be deferred which are expectedto give future benefits. While solving problem, student should defer an expense item only if specifically so required by the question.

Q-10 What are the basis of Accounting Policies selection? What are the different areas in which different accounting policies are possible?

Answer: The major considerations governing the selection and application of accounting
policies are:
 As per concept of Substance over form, the transaction should be recognized as per the
economic reality of the transaction & not mere legal form.
 All material information which is relevant for the proper disclosure of true & fair
position, should be disclosed prominently in the accounts & financial statements.
 If any fundamental accounting assumption is not followed – (Going concern,
Consistency or Accrual)
 The expenses or Income of periodic nature accrues on day to day basis.
 It implies that the concern will be continuing the business for foreseeable future.
 It is assumed that the enterprise has neither the intention nor the necessity of
liquidation or of curtailing materially the scale of the operations.
Areas in which differing accounting policies are encountered:

Areas

Differing Accounting Policies possible

Differing Accounting Policies
possible

Straight line method, Written down value method

Treatment of expenditure during
construction

Treatment of expenditure during construction

Valuation of inventories.

Different cost formulas FIFO, Weighted average cost, etc.

Treatment of goodwill.

Amortize, do not amortize.

Amortize, do not amortize.

Cost, lower of cost and fair value, fair value

Recognition of profit on long-
term contracts.

Percentage of completion method, completed contract
method, different ways of measuring percentage of

completion.

Valuation of fixed assets

Costs less depreciation, costs, Costs less depreciation less

impairment

Treatment of contingent liabilities.

Make provision, disclosures only.

 

Q-11 Classify the following accounts into Personal, Real and Nominal.

a. Cash Account

b. Wages Account

c. Building Account

d. Calcutta Tramway Co. Account

e. East Bengal Club Account

f. Rent Account

g. Capital Account

h. Drawings Account

i. Interest Account

j. Trade Mark Account

k. Dividend Account

l. Land Account

m. Goodwill Account

n. Patent Account

o. Bad Debts Account

p. Bank Account

q. Discount Allowed Account

r. Interest Received Account

s. Discount Received Account

t. Salary Payable

u. Bills Receivable

Solution:

Personal Accounts

d, e, g, h, p, t, u

Real Accounts

a, c, j, l, m, n

Nominal Accounts

b, f, i, k, o, q, r, s

 

Q-12 Pass necessary journal entries to rectify the following errors:

(i) An amount of Rs. 200 withdrawn by the proprietor for his personal use has been debited to
trade expenses account.

(ii) A purchase of goods from Nathan amounting to Rs. 300 has been wrongly entered through
the sales-book.

(iii) A credit sale of Rs. 100 to Santhanam has been wrongly passed through the purchases-
book.

(iv) Rs. 150 received from Malhotra have been credited to Mehrotra.

(v)Rs. 375 paid on account of salary to the cashier Dhawan stands debited to his personal account.

(vi) A contractor’s bill for extension of premises amounting to Rs. 2,750 has been debited to building repairs account.

(vii) On 25th June, goods of the value of Rs. 500 were returned by Akash Deep and were taken into stock but the returns were entered in the books under date 3rd July, ie., after the expiration of the financial year on 30th June.

(viii) A bill of Rs. 200 for old office furniture sold to Sethi were entered in the sales-day-book.

(ix) The periodical total of the sales-book was cast short by Rs. 100.

(x) An amount of Rs. 80 received on account of interest was credited to commission account.

Solution: Rectification of Entry in same Year

Solution: Rectification of Entry in same Year

 

 

Particulars

 

Dr.

Cr.

(i)

Drawings a/c

Dr.

200

 

 

To trade expenses a/c

 

 

200

 

(being rectification of drawing wrongly debited to trade

expenses a/c)

 

 

 

(ii)

Sale a/c

Dr.

300

 

 

Purchase a/c

 

300

 

 

To Nathan a/c

 

 

600

 

(Being Purchase entered in sales book, consequently sales is credited & Nathan a/c debit instead of debiting purchase &

crediting Nathan, now rectified)

 

 

 

(iii)

Santhanam a/c

Dr.

200

 

 

To Purchase a/c

 

 

100

 

To Sales a/c

 

 

100

 

Being sale wrongly entered in purchase book now rectified)

 

 

 

(iv)

Mehrotra a/c

Dr.

150

 

 

To Malhotra a/c

 

 

150

 

Being sale wrongly entered in purchase book now rectified)

 

 

 

(v)

Salary a/c

Dr.

375

 

 

To Dhawan's a/c

 

 

375

 

(Being rectification of wrong debit to Dhawan's a/c in-stead

of salary a/c)

 

 

 

(vi)

Premises a/c

Dr.

2750

 

 

To Repairs a/c

 

 

2750

 

(Being Capital expenditure wrongly debited to revenue exp.

Now rectified)

 

 

 

(vii)

Sales Return a/c

Dr.

500

 

 

To Akash deep a/c

 

 

500

 

Being sales return was not recorded in current year now entered. Goods have been already correctly included in stock hence no correction there. Entry already passed in

the next year's books will have to be reversed)

 

 

 

(viii)

Sales a/c

Dr.

200

 

 

To Furniture a/c

 

 

200

 

(Being sale of asset wrongly entered in sales book now

rectified)

 

 

 

(ix)

Suspense a/c

Dr.

100

 

 

To Sales a/c

 

 

100

 

(Being short totalling sales book resulting into short credit

to sale a/c, now rectified)

 

 

 

(x)

Commission a/c

Dr.

80

 

 

To Interest a/c

 

 

80

 

Being wrong credit to commission instead of Interest a/c
now rectified)

 

 

 

 

Comment:

 Credit side of Trial balance was short by Rs. 100/-

 (i) to (viii) & (x) are double sided error, hence their rectification does not involve
suspense a/c but (ix) is one sided error, hence their rectification involves suspense a/c.

 (i), (vi), (viii) is Error of Principle, and (ii) to (v), (vii), (ix) & (x) are Error of commission.

 

Q-13 From the following particulars prepare a Bank Reconciliation Statement as on 31st December,2005

1. On 31st December, 2005 the Cash-book of a firm showed deposit with bank Dr. balance of Rs. 6,000.

2. Cheques had been issued for Rs. 5,000, out of which cheques worth Rs. 4,000 only were presented for payment.

3. Cheques worth Rs. 1,400 were deposited in the bank on 28th December, 2005 but had not been credited by the bank. In addition to this, one cheque for Rs. 500 was entered in the Cash- book on 30th December, 2005 but was banked on 3-1-2006.

4. A cheque from Susan for Rs.400 was deposited in the bank on 26th December, 2005 but was dishonoured and the advice was received on 2-1-2006.

5. Pass-book showed bank charges of Rs. 20 debited by the bank.

6. One of the debtors deposited a sum of Rs. 500 in the bank account of the firm on 20th December, 2005 but the intimation in this respect was received from the bank on 2-1-2006.

7. Bank Pass-book showed a credit balance of Rs. 5,180 on 31st December, 2005.

Solution: BRS in Add less form

Balance as per Cash Book (deposit)

 

6,000

Add: Cheques issued but not yet paid

1,000

 

Add: Cheques directly deposited in Bank

500

1,500

 

 

7,500

Less: Cheques deposited but not yet realized

1,400

 

Cheques received & entered but not yet deposited

500

 

Cheques deposited & dishonoured

400

 

Bank charges charged by Bank

20

2,320

Balance as per Pass book (deposit)

 

5,180

 

 

Q-14 Explain Periodic inventory system

Answer: Periodic/Physical inventory system
 No records of inventory are maintained.

 Inventory is ascertained by physical counting at the end of the year and then valued.

 It is simple and commonly followed by small organisations.

Unless otherwise specified, we can always assume that inventory/closing stock for annual financial account purposes is ascertained by physical counting and then valuing.

 

Q-15 The following are the details of a spare part of Sriram Mills:

1-1-06

Opening stock

Nil

1-1

Purchases

100 units @ Rs. 30 per unit

15-1

Issued for consumption

50 units

1-2

Purchases

200 units @ Rs. 40 per unit

15-2

Issued for consumption

100 units

20-2

Issued for consumption

100 units

1-3

Purchases

150 units @ Rs. 50 per unit

15-3

Issued for consumption

100 units

 

Find out the value of stock as on 31-3-06 if the company follows:

1. First in First Out basis

2. Last in First Out basis

3. Weighted Average basis

Solution: Stores card/Stores ledger

 

Fifo Method: Item – Spare parts → Method of Valuation of issues → FIFO

Date

 

 

Receipt

Issue

Balance

2006

Particulars

V.no.

Qty.

Rate

Amt.

Qty.

Rate

Amt.

Qty.

Rate

Amt.

1.1

Open. Bal.

 

 

 

 

 

 

 

-

-

-

1.1

Purchase

 

100

30

3000

 

 

 

100

30

3000

15.1

Issue

 

 

 

 

50

30

1500

50

30

1500

1.2

Purchase

 

200

40

8000

 

 

 

50

30

1500

 

 

 

 

 

 

 

 

 

200

40

8000

15.2

issue

 

 

 

 

100

50×30

1500

150

40

6000

 

 

 

 

 

 

 

50×40

 

 

 

 

20.2

issue

 

 

 

 

100

100×40

4000

50

40

2000

1.3

Purchase

 

150

50

7500

 

 

 

50

40

2000

 

 

 

 

 

 

 

 

 

150

50

7500

15.3

Issue

 

 

 

 

100

50 × 40

2000

 

 

 

 

 

 

 

 

 

 

50 × 50

2500

100

50

5000

 

Total

 

450

 

18500

350

 

13500

100

 

5000

 

Particulars

Qty.

Value

Purchases

450

18,500

Consumption

350

13,500

Closing Stock (Cost by FIFO Method)

100

5,000

 

Without making stores card, if we simply value the stock of 100 units from the last lot because the earlier lots have been issued, we get the same valuation 100 units @ Rs. 50/- = Rs. 5,000.

 

Lifo Method: Item – Spare parts → Method of Valuation of issues → LIFO

Date

 

 

Receipt

Issue

Balance

2006

Particulars

V.no.

Qty.

Rate

Amt.

Qty.

Rate

Amt.

Qty.

Rate

Amt.

1.1

Open. Bal.

 

 

 

 

 

 

 

-

-

-

1.1

Purchase

 

100

30

3000

 

 

 

100

30

3000

15.1

Issue

 

 

 

 

50

30

1500

50

30

1500

1.2

Purchase

 

200

40

8000

 

 

 

50

30

1500

 

 

 

 

 

 

 

 

 

200

40

8000

15.2

Issue

 

 

 

 

100

40

4000

50

30

1500

 

 

 

 

 

 

 

 

 

100

40

4000

20.2

Issue

 

 

 

 

100

40

4000

50

30

1500

1.3

Purchase

 

150

50

7500

 

 

 

50

30

1500

 

 

 

 

 

 

 

 

 

150

50

7500

15.3

Issue

 

 

 

 

100

50

5000

50

30

1500

 

 

 

 

 

 

 

 

 

50

50

2500

 

Total

 

450

 

18,500

350

 

14,500

100

 

4000

 

Particulars

Qty.

Value

Purchases

450

18,500

Consumption

350

14,500

Closing Stock (Cost by LIFO Method)

100

4,000

 

Alternatively:
The shortcut valuation of closing stock by LIFO i.e. without preparing stores card, would have been 100 units @30/- = 3,000. It differs from the above valuation which is more correct if date  wise issue is known.

Weighted Average Method: Item – Spare parts → Method of Valuation of issues → Weighted Average Method

 

 

Date

 

 

Receipt

Issue

Balance

2006

Particulars

V.no.

Qty.

Rate

Amt.

Qty.

Rate

Amt.

Qty.

Rate

Amt.

1.1

Open. Bal.

 

 

 

 

 

 

 

-

-

-

1.1

Purchase

 

100

30

3000

 

 

 

100

30

3000

15.1

Issue

 

 

 

 

50

30

1500

50

30

1500

1.2

Purchase

 

200

40

8000

 

 

 

250

38

9500

15.2

Issue

 

 

 

 

100

38

3800

150

38

5700

20.2

Issue

 

 

 

 

100

38

3800

50

38

1900

1.3

Purchase

 

150

50

7500

 

 

 

200

47

9400

15.3

Issue

 

 

 

 

100

47

4700

100

47

4700

 

Total

 

450

 

18500

350

 

13800

100

 

4700

 

Alternatively periodic weighted average can be applied say quarterly weighted average = 3000 + 8000 + 7500/100 + 200 + 150 = 41.11
Closing stock = 41.11 x 100 = 4111

 

Particulars

Qty.

Value

Purchases

450

18,500

Consumption

350

13,800

Closing Stock (Cost by weighted Method)

100

4,700

 

Q-16 Raj Ltd. prepared their accounts for financial year ended on 31st March 2019. Due to unavoidable circumstances actual stock has been taken on 10th April 2019, when it was ascertained at Rs. 1,25,000. It has been found that;

(i) Sales are entered in the Sales Book on the day of dispatch and return inwards in the Returns
Inward Book on the day of the goods received back.

(ii) Purchases are entered in the Purchase Book on the day the Invoices are received.

(iii) Sales between 1st April 2019 to 9th April 2019 amounting to Rs. 20,000 as per Sales Day Book.

(iv) Free samples for business promotion issued during 1st April 2019 to 9th April 2019 amounting to Rs. 4,000 at cost.

(v) Purchases during 1st April 2019 to 9th April 2019 amounting to 110,000 but goods amounts to Rs. 2,000 not received till the date of stock taking.

(vi) Invoices for goods purchased amounting to Rs. 20,000 were entered on 28th March 2019 but the goods were not included in stock.

Rate of Gross Profit is 2596 on cost.

Ascertain the value of Stock as on 31st March 2019.

Particulars

Rs.

Stock as on 10th April, 2019

1,25,000

Add: Cost of Goods sold (20,000/100 x 80)

 

[Note:- Profit 25% on cost= 20% on sale]

16,000

Add: Free samples distributed

4,000

Less: Goods purchased & received (10,000-2,000)

8,000

Add: Invoices entered but goods not included in stock

20,000

(Stock as on 31st March, 2019

1,57,000

 

Q-17 Define Sum of Years of Digits Method.

Answer: Sum of Years of Digits Method:
In this method the depreciation is calculated in the ratio of the remaining life of the asset in the beginning of that year to the sum of digits of the life remaining for all the year.

                                                                                                Dep. Of the year = Depreciable value ×

\(Number of years including the present year  of remaining  life  of the asset  \over Total of all digits of the life of the asset (in years )\)

 

Q-18 On 1st January, 2002 Hari Om purchased 6 machines for Rs. 15,000 each. His accounting year ends on 31st December. Depreciation at the rate of 10% on initial cost has been charged to profit and loss account and credited to a separate depreciation provision account.
On 1st January, 2003 one machine was sold for Rs.12,500 and on 1st January, 2004 a second machine was sold for Rs. 12,500. An improved model which cost Rs. 28,000 was purchased on
1st July, 2003. The same rate of depreciation was decided for the new machine was well. You are required to show:
1. The asset account
2. The asset disposal account
3. The depreciation provision account.
Solution: Ledger of Hari Om Machinery Account

2002

Particulars

Rs.

2002

Particulars

Rs.

Jan.1

To Bank a/c

90,000

Dec.31

 

90,000

 

 

90,000

 

 

90,000

2003

 

 

2003

 

 

Jan.1

To Balance b/d

90,000

Jan. 1

Machinery disposal

a/c

15,000

July 1

To Bank a/c

28,000

Dec. 31

By Balance c/d

1,03,000

 

 

1,18,000

 

 

1,18,000

 

2004

 

 

2004

 

 

Jan. 1

To Balance b/d

1,03,000

Jan. 1

 

15,000

 

 

 

 

To Balance c/d

88,000

 

 

1,03,000

 

 

1,03,000

2005

 

 

2005

 

 

Jan. 1

To Balance c/d

88,000

 

 

 

 

Note: The balance in the asset account at any time represents the cost of assets retained by the firm.

Machinery Disposal Account

2003

Particulars

Rs.

2003

Particulars

Rs.

Jan. 1

To Machinery a/c

15,000

Jan. I

By Provision for

depreciation a/c

1,500

 

 

 

Jan. 1

By Cash a/c

12,500

 

 

 

Dec. 31

By Profit and loss a/c

(loss)

1,000

 

 

15,000

 

 

15,000

2004

 

Rs.

2004

 

Rs.

Jan. 1

To Machinery a/c

15,000

Jan. 1

By Provision for

depreciation a/c

3,000

Dec. 31

To P&L a/c (profit)

500

Jan. 1

By Cash a/c

12,500

 

 

15,500

 

 

15,500

 

Note: Machinery disposal account is not a continuous account like machinery account. It must be prepared separately for each year.

Provision for Depreciation Account (SLM 10%)

2002

Particulars

Rs.

2002

Particulars

Rs.

Dec. 31

To Balance c/d

9,000

Dec.31

By Depreciation a/c

9,000

 

 

9,000

 

 

9,000

2003

 

 

2003

 

 

Jan. 1

To Machinery disposal

a/c- transfer

1,500

Jan. 1

By Balance b/d

9,000

Jan. 1

To Balance c/d

16,400

Dec.31

By Depreciation a/c

(7500 + 1400)

8,900

 

 

17,900

 

 

17,900

2004

 

 

2004

 

 

Jan. 1

To Machinery disposal

a/c- transfer

3,000

Jan. 1

By Balance b/d

16,400

Dec. 31

To Balance c/d

22,200

Dec.31

By Depreciation a/c

(6000+2800)

8,800

 

 

25,200

 

 

25,200

2005

 

 

2005

 

 

 

 

 

Jan. 1

By Balance b/d

22,200

 

Note : The balance in the provision account at any time shows the balance of accumulated depreciation in respect of retained assets.

 

Working of depreciation

Rs.

(1) On Rs. 75,000 (Rs. 90,000 – Rs. 15,000) @ 10% per annum

7,500

On Rs.28,000 @ 10% p.a. for 6 months

1,400

Depreciation for the year 2003

8,900

(2) On Rs. 60,000 (Rs. 75,000 – Rs. 15,000) @ 10% p.a.

6,000

On Rs. 28,000 @ 10% p.a. for one year

2,800

Depreciation for the year 2004

8,800

 

Q-19 Mr. A purchased a Plant costing 60,000 on 1st January, 2015. He purchased another Plant for Rs.50,000 on 1st July in the same year. On 1st October 2016, he sold 1/3rd part of 1st Plant for Rs.11,000 and purchased another Plant for Rs.30,000 on the same date. Prepare Plant A/c for three years in the following cases:
Case I- If rate of depreciation is 10% p.a. on SLM
Case II- If rate of depreciation is 10% p.a. on WDV
Solution: Case I:
Working Note:

 

Plant I

Plant II

Plant III

On Jan 1, 2015

60,000

On July 1, 2015

50,000

On Oct 1. 2016

30,000

Part I- 60,000 X

1/3

20,000

Less: Dep.

2,500

Less: Dep.

750

Less: Dep.

2,000

 

47,500

 

29,250

 

18,000

Less: Dep

5,000

Less: Dep

3,000

Less: Dep

1,500

 

42,500

 

26,250

 

16,500

Less: Dep

5,000

 

 

Less: Sold

11.000

 

 

 

 

Loss

5,500

 

 

 

 

Part II- 60,000 X

2/3

40,000

 

 

 

 

Less: Dep.

4,000

 

 

 

 

 

36,000

 

 

 

 

Less. Dep.

4,000

 

 

 

 

 

32,000

 

 

 

 

Less: Dep.

4,000

 

 

 

 

 

28,000

 

 

 

 

 

Plant Account:

 

Date

Particulars

L.F.

Amount

Date

Particulars

L.F.

Amount

2015

 

 

 

2015

 

 

 

Jan 1 July I

To Bank: Plant I To Bank: Plant II

 

60,000

 

50,000

Dec.31

By Depreciation on Plant I 6,000

Plant II 2,500

 

 

 

 

 

 

8,500

 

 

 

 

 

By Bal. c/d Plant I             54,000

Plant II  47,500

 

 

 

 

 

 

1,01,500

 

 

 

1,10,000

 

 

 

1,10,000

2016

 

 

 

2016

 

 

 

Jan. 1

To Balance b/d Plant I 54,000

Plant II 47,500

 

 

 

 

 

 

1,01,500

Oct.1

By Depreciation on Plant I

 

1,500

Oct.1

To Bank plant III

 

30,000

 

By Cash

 

11,000

 

 

 

 

 

By P & L a/c (loss)

 

5,500

 

 

 

 

Dec.31

By Depreciation on Plant I 4,000

Plant II 5,000

 

Plant III 750

 

 

 

 

 

 

 

 

9,750

 

 

 

 

 

By Bal. c/d Plant I 32,000

Plant II 42,500

 

Plant III 29,250

 

 

 

 

 

 

 

 

1,03,750

 

 

 

1,31,500

 

 

 

1,31,500

2017

 

 

 

2017

 

 

 

Jan1

To Bal. b/d Plant I 32,000

Plant II 42,500

 

Plant III 29,250

 

 

 

 

 

 

 

 

1,03,750

Dec.31

By Depreciation on Plant I 4,000

Plant II 5,000

 

Plant III 3000

 

 

 

 

 

 

 

 

12,000

 

 

 

 

 

By Bal. c/d Plant I 28,000

Plant II 37,500

 

Plant III 26,250

 

 

 

 

 

 

 

 

91,750

 

 

 

1,03,750

 

 

 

1,03,750

 

Case II: Working Note:

 

Plant I

Plant II

Plant III

On Jan 1, 2015

60,000

On July 1, 2015

50,000

On Oct 1. 2016

30,000

Part I- 60,000 X

1/3

20,000

Less: Dep.

2,500

Less: Dep.

750

Less: Dep.

2,000

 

47,500

 

29,250

 

18,000

Less: Dep

4,750

Less: Dep

2,925

Less: Dep

1,350

 

42,500

 

26,325

 

16,650

Less: Dep

4,275

 

 

Less: Sold

11.000

 

 

 

 

Loss

5,650

 

 

 

 

Part II- 60,000 X

2/3

40,000

 

 

 

 

Less: Dep.

4,000

 

 

 

 

 

36,000

 

 

 

 

Less: Dep.

3,600

 

 

 

 

 

32,400

 

 

 

 

Less: Dep.

3,240

 

 

 

 

 

29,160

 

 

 

 

 

 

Plant Account:

 

Date

Particulars

L.F.

Amount

Date

Particulars

L.F.

Amount

2015

 

 

 

2015

 

 

 

Jan 1 July I

To Bank: Plant I To Bank: Plant II

 

60,000

 

50,000

Dec.31

By Depreciation on Plant I 6,000

Plant II 2,500

 

 

 

 

 

 

8,500

 

 

 

 

 

By Bal. c/d Plant I             54,000

Plant II  47,500

 

 

 

 

 

 

1,01,500

 

 

 

1,10,000

 

 

 

1,10,000

2016

 

 

 

2016

 

 

 

Jan.

1

To Balance b/d

 

 

Oct.1

By Depreciation on

Plant I

 

1,350

 

Plant I 54,000

 

Plant II 47,500

 

 

 

1,01,500

 

 

 

 

Oct.1

To Bank plant III

 

30,000

 

By Cash

 

11,000

 

 

 

 

 

By P & L a/c (loss)

 

5,650

 

 

 

 

Dec.31

By Depreciation on Plant I 3,600

Plant II 4,750

 

Plant III 750

 

 

 

 

 

 

 

 

9,100

 

 

 

 

 

By Bal. c/d Plant I 32,400

Plant II 42,750

 

Plant III 29,250

 

 

 

 

 

 

 

 

1,04,400

 

 

 

1,31,500

 

 

 

1,31,500

2017

 

 

 

2017

 

 

 

Jan1

To Bal. b/d Plant I 32,400

Plant II 42,750

 

Plant III 29,250

 

 

 

 

 

 

 

 

1,04,400

Dec.31

By Depreciation on Plant I 3,240

Plant II 4,275

 

Plant III 2,925

 

 

 

 

 

 

 

 

10,440

 

 

 

 

 

By Bal. c/d

 

Plant I 29,160

 

 

 

 

 

 

 

Plant II 38,475

 

Plant III 26,325

 

 

 

93,960

 

 

 

1,04,400

 

 

 

1,04,400

 

 

Q-20 Meaning of Bills of exchange.

Answer: Meaning of Bills of exchange:

A bill of exchange has been defined as:
• an “instrument in writing

• containing an unconditional order

• signed by the maker/drawer

• directing a certain person (drawee)

• to pay a certain sum of money only

• to a certain person or to the order of a certain person or to the bearer of the instrument” (payee)

Draft of a Bill of Exchange:

→ When such an order is accepted by writing on the face of the order itself, it becomes a valid bill of exchange.

→ A cheque is a bill of exchange but all bill of exchanges are not cheque.

 

→ In above bill of exchange ‘A’ is drawer as well as payee and ‘B’ is drawee

 

On 1st January 2018, Akshay draws two bills of exchange for Rs.16,000 and Rs. 25,000. The bill of exchange for Rs. 16,000 is for two months while the bill of exchange for Rs. 25,000 is for three months. These bills are accepted by Vishal. On 4th March, 2018, Vishal requests Akshay to renew the first bill with interest @ 1596 p.a. for a period of two months. Akshav agreed to this proposal. On 25th March, 2018, Vishal retires the acceptance for Rs. 25,000, the interest rebate i.e. discount being Rs.250. Before the due date of the renewed bill, Vishal becomes insolvent and only 50 paisa in a rupee could be recovered from hisestate.

Show the Journal Entries (with narrations) in the books of Akshay.

Solution: In the Books of Akshay:

 

Q-21 On 1st January 2018, Akshay draws two bills of exchange for Rs.16,000 and Rs. 25,000. The bill of exchange for Rs. 16,000 is for two months while the bill of exchange for Rs. 25,000 is for three months. These bills are accepted by Vishal. On 4th March, 2018, Vishal requests Akshay to renew the first bill with interest @ 1596 p.a. for a period of two months. Akshav agreed to this proposal. On 25th March, 2018, Vishal retires the acceptance for Rs. 25,000, the interest rebate i.e. discount being Rs.250. Before the due date of the renewed bill, Vishal becomes insolvent and only 50 paisa in a rupee could be recovered from his estate.

Show the Journal Entries (with narrations) in the books of Akshay

Solution: In the Books of Akshay:

Date

Particulars

Rs.

Rs.

2018

Bill Receivable a/c (I) Dr

16,000

 

 

Bill Receivable a/c (II) Dr.

25,000

 

 

To Vishal

 

41,000

 

(Being two bills accepted by Vishal of 2 months & 3 months, respectively)

 

 

Mar 4

Vishal A/c Dr.

16,000

 

 

To Bill Receivable a/c (I)

 

16,000

 

(Being bill receivable of Rs. 16,000, drawn in favour of Vishal, cancelled)

 

 

 

Vishal Dr

400

 

 

To Interest a/c ( 16000×15%×2/12)

 

400

 

(Being interest receivable from Vishal on the outstanding balance due from him)

 

 

 

Bill Receivable a/c (Ill) Dr.

16,400

 

 

To Vishal

 

16,400

 

Being new bill of Rs.16,400 accepted by Vishal for a period of 2 months )

 

 

Mar.25

Cash a/c Dr.

24,750

 

 

Rebate a/c Dr.

250

 

 

To Bank Receivable a/c (II)

 

25,000

 

(Being payment received and rebate allowed to Vishal)

 

 

 

Vishal Dr.

16,400

 

 

To Bills Receivable a/c (III)

 

16,400

 

(Being 111rd bill of Rs.16,400 dishonoured on account of Vishal's insolvency)

 

 

 

Cash A/c Dr.

8,200

 

 

Bad Debts a/c Dr.

8,200

 

 

To Vishal

 

16,400

 

(Being 50 paisa in a rupee recovered from Vishal's estate)

 

 

 

Q-22 X’ supplied goods on sale or return basis to customers, the particulars of which are as under:

Date of Despatch

Party’s Name

Amount Rs.

Remarks

10.12.2005

ABC Co.

10,000

No information till 31.12.2005

12.12.2005

DEF Co.

15,000

Returned on 16.12.2005

15.12.2005

GHI Co.

12,000

Goods worth Rs. 2,000 Return on 20,12.2005

20.12.2005

DEF Co.

16,000

Goods Retained on 24.12.2005

25.12.2005

ABC Co.

11,000

Goods Retained on 28.12.2005

30.12.2005

GHI Co.

13,000

No information till 31.12.2005

 

Goods are to be returned within 15 days from the date of despatch, failing which it will be treated as Sales. The books of ‘X’ are closed on the 31st December, 2005.

Prepare the following account in the book of ‘X’:

(i) Goods on Sales or Return, Sold and Returned Day Books.

(ii) Goods on Sales or Return Total Account.

Solution: In the Books of ‘X’

(i) Goods on Sales or Return, Sold and Returned Day Books.

Date

Party to whom goods sent

L.F.

Sent Rs

Date sold 

Sold Rs.

Returned Rs.

Balance Rs.

2005

 

 

 

2005

 

 

 

Dec.10

M/s ABC Co.

 

10,000

Dec. 25

10,000

        -

         -

Dec. 12

M/s DEF Co

 

15,000

Dec. 16

 

15,000

 

Dec. 15

M/s GH1 Co.

 

12,000

Dec. 20

10,000

2,000

 

Dec. 20

M/s DEF Co.

 

16,000

Dec. 24

16,000

 

 

Dec. 25

M/s ABC Co.

 

11,000

Dec. 28

11,000

 

 

Dec. 30

M/s GHI Co.

 

13,000

 

 

 

13.000

 

 

 

77,000

 

47,000

17,000

13,000

 

(ii) Goods on Sales or Return Total Account

2005

Particulars

Rs.

2005

Particulars

Rs.

Dec 31

To customers A/c(return)

17,000

Dec 31

By customers a/c (Goods sent on sales or return)

77,000

 

To customers a/c(sales)

47,000

 

 

 

 

To bal. c/d (Sale value of closing stock)

13,000

 

 

 

 

 

77,000

 

 

77,000

 

Note: (1) Entry for recording sales of Rs. 47,000/- will be passed in Accounts book debiting customers (debtors) a/c and crediting sales a/c. & Goods lying with customer sale value Rs. 13,000 will be included in closing stock at cost.

(2) The above are memorandum records.

 

Q-23 Define Del-Credere commission.

Answer: Del-Credere commission and Bad debt losses:

  • In normal course the bad debts loss due to credit sales is the loss of consignor (because he is the owner) and not of consignee.

  • But sometimes the consignee agrees to take the risk of bad debt losses and in return he gets extra commission, known as Del Credere commission.

  • Therefore, whenever Del Credere commission is payable, the bad debts loss will be borne by consignee and not the consignor.

  • The Del Credere commission to be calculated on total sales and not only on credit sales unless otherwise specified

 

Q-24 A trader having accepted the following several bills falling due on different dates, now desires to have these bills cancelled and to accept a new bill for the whole amount payable on the average due date :

Sl. No.

Date of bill

Amount

Usance of the bill

1

1st March 2020

400

2 months

2

10th March 2020

300

3 months

3

5th April 2020

200

2 months

4

20th April 2020

375

1 month

 

Solution:

Calculation of the average due date

                                 Taking 4th May as the base date                       

Sl. No

Date of bill

Due Date of Maturity

Amount

No. of days from starting date (4th May)

Product

1

1st March 2020

4th May

400

0

0

2

10th March 2020

13th June

300

40

12000

3

5th April 2020

8th June

200

35

7000

4

20th April 2020

23rd May

375

19

7125

5

11th May 2020

14th July

500

71

35500

                               Total

1,775

 

61,625

 

Average Due Date is 61,625/1,775 = 34.71 i.e., 35 days after the assumed due date, 4th May, 2020. The new bill should be for Rs. 1,775 payable on June 8th, 2020.

 

Q-25 From the following information, prepare account current on 30th September, 2011 to be submitted by M to F.

2011

Particulars

Amount

July 1

Debit balance b/f

13,500

5

Sold goods to F

9,000

15

Received cash from F

13,500

August 4

Sold goods to F

19,200

16

Received cash from F

9,000

September 1

Bought goods from F

21,000

2

Paid cash to F

7,500

12

Sold goods to F

9,600

15

Paid cash to F

6,000

Interest is to be taken into account @ 1096 per annum; it may be calculated to the nearest rupee.

Solution: Account current rendered (sent/submitted) by ‘M’ to ‘F’ or ‘F’ in Account current with ‘M’ For the period 1.7.2011 to 30.9.2011

Date

Particulars

Rs.

Due Date

Days

Product

Date

Particulars

Rs.

Due Date

Days

Product

1.7

To Balance b/f

13,500

1.7

92

12,42.000

15.7

By cash a/c

13,500

15.7

77

10,39,500

5.7

To Sales a/c

9,000

5.7

87

7,83,000

16.8

By cash a/c

9,000

16.8

45

4,05,000

4.8

To Sales a/c

19,200

4.8

57

10,94,400

1.9

By purchase a/c

21,000

1.9

29

6,09,000

2.9

To Cash a/c

7,500

2.9

28

2,10,000

30.9

by balance c/d

21,722

 

 

 

12.9

To Sales a/c

9,600

12.9

18

1,72,800

 

 

 

 

 

 

15.9

To Cash a/c

6,000

15.9

15

90,000

 

 

 

 

 

 

30.9

To Interest a/c

422

 

 

 

 

 

 

 

 

 

 

 

65,222

 

 

35,92,200

 

 

65,222

 

 

20,53,500

 

Interest recoverable for 1 day on debit products

35,92,200

Interest payable for 1 day on credit products

20,53,500

Net interest recoverable for 1 day on net debit products

15,38,700

 

                                    \(Interest = 15,38,700 × {10\over 100}×{1\over365} = Rs. 422.\)

 

Entry

F a/c Dr.

422

 

 

To Interest a/c

 

422

 

Q-26 Explain Red ink interest.

Answer: Red ink interest:

→ In account current interest is calculated on every transaction from its due date to the end of that period. When the due date is not given the date of transaction itself will be taken as due date

→ In case the due date falls beyond the end of that period, then no interest is to be given on it upto the period end.

→ But the negative interest (opposite interest) from the end of period to the due date should be calculated, & written in red ink on the side of transaction so that this Red ink products will be deducted from the other products of that side, OR alternatively to give this effect this products can be written by the same ink but on the Opposite side of that transaction.

→ Example – Account current is for the period 1.1.04 to 31.3.04. Due date of a particular transaction is say 20th April, then the red ink days (opposite days/negative days) will be 20 days.

 

Q-27 ‘R’ had the following bills receivable and bills payable against ‘S’. Calculate average due date when the payment can be made or received without any loss or gain of interest to either party.

Bills Receivable

Bills Payable

Date of the

bill

Amount

Tenure in

months

Date of the

bill

Amount

Tenure in

months

1.6.08

9,000

3

29.5.08

6,000

2

5.6.08

7,500

3

3.6.08

9,000

3

9.6.08

10,000

1

10.6.08

10,000

2

12.6.08

8,000

2

13.06.08

7,000

2

20.6.08

12,000

3

27.6.08

11,000

1

 

Holiday intervening in the period 15th August, 2008,16th August, 2008 and 6th September, 2008

Solution:

 

Date

Due date

No. of Days from base date

Amount (Z)

Products(t)

01.06.2008

04.09.2008

54

9,000

4,86,000

05.06.2008

08.09.2008

58

7,500

4,35,000

09.06.2008

12.07.2008

0

10,000

0

12.06.2008

14.08.2008*

33

8,000

2,64,000

20.06.2008

23.09.2008

73

12,000

8,76,000

 

 

 

46,500

20,61,000

 

Bills Payable

 

Date

Due date

No. of Days from base date

Amount (Rs.)

Products(Rs.)

29.05.2008

01.08.2008

20

6,000

1,20,000

03.06.2008

05.09.2008*

55

9,000

4,95,000

10.06.2008

13.08.2008

32

10,000

3,20,000

13.06.2008

14.08.2008*

33

7,000

2,31,000

27.06.2008

30.07.2008

18

11,000

1,98,000

 

 

 

43,000

13,64,000

 

Difference of Products = Rs.20,61,000 – Rs. 13,64,000 = Rs. 6,97,000

Difference of Amount = Rs. 46,500 – Rs.43,000 = Rs. 3,500 receivable

Average Due Date = Base Date +\( Diffrence of Product\over Diffrence of amount\)

\(= July 12 + {6,97,000\over3,500} = July 12 + 199.14 or 199 days\)

= 27th January, 2009

 

Q-28 Rs. 10,000 lent (advanced) by Das Bros, to Kumar & Sons, on 1st Jan. 2009, is repayable in 5 equal annual instalments commencing on 1st January 2010. Find the Average Due Date & Calculate Interest at 5% p.a. which Das Bros, will recover from Kumar & Sons.

Solution: Average due date = Date of lending + \(Sum of years each installmentsis away from date of lending \over No .of instalments\)

Average due date = \(1.1.2009 + {1+2+3+4+5\over 5} =1.1.2009 + 3 years = 1.1.2012\)

Interest = 10000 × \({5 \over100} × 3 (1.1.2009 to 1.1.12) = 1500\)

 

 

Due Date (1)

Amount (2)

Years(3)

Product (4)

1.1.2010

2,000

1

2,000 x 1

1.1.2011

2,000

2

2,000 x 2

1.1.2012

2,000

3

2,000 x 3

1.1.2013

2,000

4

2,000 x 4

1.1.2014

2,000

5

2,000 x 5

 

2000× 5

 

2,000(1+2+3+4+5)

 

Average due date \(= Date of lending +{Sum of years each instalment is away\over ???????????????????????? ???????? ????????????????????????????????????ts}\)

 

 

Q-29 Somesh of Calcutta consigned 100 cases of candles to Sailesh of Bankura. Which cost him Rs. 30 per case. He incurred the following costs packing Rs.40 carriage Rs.20 and Railway Freight (paid in advance) Rs.40. Some of the cases were damaged in transit and Sailesh took delivery of 90 cases only. He (Sailesh) spent Rs. 10 for carriage and Rs. 40 for godown rent and sold consignment at RS. 35 per case. He sent the net amount to Somesh after deducting his expenses and commission at the rate of 5 per cent on the sale proceeds together with his Account sales. Somesh also received Rs. 180 from the Railway as damages. Show how the transactions would appear in the books of Somesh.

Solution: In the book of Somesh (consignor)

Consignment Account

Particulars

Amount

Particulars

Amount

To Goods Sent On Consignment A/c

3,000

By Sailesh (Sales) A/c

3,150

To Cash A/c

 

By Abnormal Loss A/c

310

Packing

40

 

 

Carriage

20

 

 

Freight

40

 

 

To Sailesh A/c

 

 

 

Carriage

10

 

 

Rent

40

 

 

To Sailesh A/c (Commission)

158

 

 

To Profit Transferred to P&L A/c

152

 

 

 

3,460

 

3,460

 

With the freight, words ‘paid in advance’ is written it should not be mis-understood as ‘prepaid’ which means for the next financial year. Here it is paid before the journey starts hence advance is written, but it is for this consignment only and hence treated as expense.

Sailesh Account (Consignee):

Particulars

Amount

Particulars

Amount

To Consignment A/c (sales)

3,150

By Consignment A/c (exp. paid)

50

 

 

By Consignment A/c (exp. paid)

158

 

 

By Cash/Bank A/c (bal. recov- ered)

2,942

 

3,150

 

3,150

 

Goods sent on consignment A/c:

Particulars

Amount

Particulars

Amount

To Trading A/c

3,000

By Consignment A/c

3,000

 

3,000

 

3,000

 

 

 

Abnormal loss A/c

 

Particulars

Amount

Particulars

Amount

To Consignment A/c

310

By Cash (claim from Railway)

180

 

 

By Net abnormal Loss trf. to P&L A/c

130

 

310

 

310

 

Calculation:

Particulars

Abnormal loss (10 class)

Basic cost @ (3,000/100 = 30)

300

Freight, packing @ (100/100 = 1)

10

Total cost

310

 

In the books of Sailesh (Consignee) Somesh (Consignors) a/c

Particulars

Amount

Particulars

Amount

To Cash bank (exp. paid)

50

By Cash/ bank/debtors (sales

made)

3,150

To Commission a/c (due)

158

 

 

To Cash/Bank (net balance paid)

2,942

 

 

To Cash/Bank (net balance paid)

2,942

 

 

 

3,150

 

3,150

 

Commission a/c

Particulars

Amount

Particulars

Amount

To P&L a/c (income transferred)

158

By Somesh a/c

158

 

158

 

158

 

Q-30 Mr. Badhri sends goods to his customers on Sale or Return. The following transactions took place during the month of December 2017.

 December 2nd – Sent goods to customers on sale or return basis at Rs. 80,000 cost plus 25%

 December 10th – Goods returned by customers Rs. 35,000

 December 17th – Received letters from customers for approval Rs. 30,000

 December 23rd – Goods with customers awaiting approval Rs. 15,000 Mr. Badhri records sale or return transactions as ordinary sales.

You are required to pass the necessary Journal Entries in the books of Mr. Badhri assuming that the accounting year closes on 31st Dec. 2017.

Solution: (I) In the books of Mr. Badhri

Date

Particulars

L.F.

Dr.

Cr.

2017Dec.2

Trade recoverable A/c Dr.

 

80,000

 

 

To Sales A/c

 

 

80,000

 

Being the goods sent to customers on sale or

return basis)

 

 

 

Dec 10

Return inward A/c Dr.

 

35,000

 

 

To trade receivable A/c

 

 

35,000

 

(being the goods returned by customers to whom

the goods were sent on sale or return basis)

 

 

 

Dec 23

Sales A/c Dr.

 

15,000

 

 

To Trade relievable

 

 

15,000

 

(being the cancellation of original entry of sale in

respect of goods on sale or return basis)

 

 

 

Dec 31

Inventories with customer on sale/return Ac/Dr.

 

12,000

 

 

To Trading A/c

 

 

12,000

 

(Being the adjustment for cost of goods lying with

customers awaiting approval )

 

 

 

 

Note:

 

  • Alternatively, Sales account or Sales returns can be debited in place of Return Inwards account.

  • No entry is required for receiving letter of approval from customer.

  • Cost of goods with customers = Rs. 15,000 x 100/125 = Rs. 12,000

  • It has been considered that the transaction values are at invoice price (including profit margin).

 

Q- 31 Ramesh sends goods on approval basis as follows:

 

Date January,

2006

Customer's

name

Sale price of

Goods sent (Rs.)

Goods accepted

(Rs.)

Goods returned

(Rs.)

8

Jay

3500

3000

500

10

Vijay

2800

2800

-

15

Sanjay

3680

-

3680

22

Dhananjay

1260

1000

260

 

Show how the transactions will be dealt with when memorandum books are kept on double entry system.

Solution: Memorandum Records

Goods on sale or return register

 

 

Date

Party

Goods sent

Goods returned

Goods sold

Balance

8.1.2006

Jay

3500

500

3000

-

10.1.2006

Vijay

2800

-

2800

-

15.1.2006

Sanjay

3680

3680

-

-

22.1.2006

Dhananjay

1260

260

1000

-

 

 

11240

4440

6800

-

 

(i) When goods are sent on approval

Individual customer a/c Dr. 11,240

To Sales on approval a/c 11,240

(ii) When goods are returned

Sales on approval a/c Dr. 4,440

To Individual customer a/c 4,440

(iii) When the goods are accepted/time expired

Sales on approval a/c Dr. 6800

To Individual customer a/c 6800

Note: Now this is the actual sales hence it will be recorded in accounts books in the usual manner debiting individual customer account and crediting sales a/c.

(iv) Balance of goods at the end of the year

This will show the sales value of goods still lying unsold with customers. Cost of such goods will be included and accounted as stock in books of account

 

Q-32 Mr. A consigned 200 cycles @ Rs. 500 each and paid Rs. 3,000 on freight. During the transit 20 cycles were lost by theft. Mr. B received the remaining stock and paid Rs. 3,600 on its clearing. He sold 150 cycles @ 2 800 per cycle. He was entitled for 10% commission on sales. He paid Rs. 5,000 as miscellaneous expenses. Prepare Consignment Account in books of Mr. A.

Solution: Consignment Account:

Particulars

Amount

Particulars

Amount

To goods sent on consignment

A/c (200@ Rs. 500)

1,00,000

By Profit & Loss A/c (abnormal

loss)

10,300

To Cash (freight)

3,000

By agent (150 @ Rs. 800)

1,20,000

To agent :

 

By stock on consignment A/c

16,050

Clearing charges

3,600

 

 

Commission

12,000

 

 

Miscellaneous exp.

5,000

 

 

To profit & Loss A/c

22,750

 

 

 

1,46,350

 

1,46,350

 

Working Notes:

1.Calculation of Abnormal Loss

Rs.

20 Cycles @ Rs. 500 each

= 10,000

3000

Direct expenses [     × 20]

200

= + 300

 

10,300

2. . Stock valuation (at invoice price)

 

30 cycles @ Rs. 500 each

= 15,000

3000

Direct expenses [     × 30] (before loss)

200

= + 450

3,600

Direct expenses [     × 30]

180

= + 600

(After loss)

16,050

 

Q-33 Mr. David draws two bills of exchange on 1-1-2006 for Rs.6,000 and Rs. 10,000. The bills of exchange for Rs. 6,000 is for two months while the bill of exchange for Rs. 10,000 is for three months. These bills are accepted by Mr. Thomas. On 4-3-2006 Mr. Thomas requests Mr. David to renew the first bill with interest at 18% p.a. for a period of two months. Mr. David agrees to this proposal.

On 20-3-2006 Mr. Thomas retires the acceptance for Rs. 10,000, the interest rebate i.e. discount being Rs.100. Before the due date of the renewed bill, Mr. Thomas becomes insolvent and only 50 paise in a rupee could be recovered from his estate. You are to give the journal entries in the books of Mr. David.

 

Solution: (Renewal & Retirement):

 

Transaction

Books of David

1.1.06

 

 

 

Bills Drawn

B.R. A/c Dr.

6,000

 

 

B.R. A/c Dr.

10,000

 

To Thomas' A/c

 

16,000

Renewal of 1st bill, old bill

cancelled

Thomas' A/c Dr.

6,000

 

To B.R. A/c

 

6,000

Interest due 18/100 × 2/12

×6000

Thomas' A/c Dr.

180

 

To Int. A/c

 

180

Settlement by net will (3rd

bill)

B.R. A/c Dr.

6,180

 

To Thomas A/c

 

6,180

20.3.06

 

 

 

Retirement of 2nd bill

Cash/ Bank A/c Dr.

9,900

 

Rebate A/c Dr.

100

 

To B.R. A/c

 

10,000

Thomas declared insolvent

hence 3rd bill dishonoured

Thomas A/c Dr.

6,180

 

To B.R. A/c

 

6,180

Full and final settlement at 50%

Cash/Bank A/c Dr.

3,090

 

Bad Debts A/c Dr.

3,090

 

To Thomas A/c

 

6,180

 

Transaction

Books of Thomas

 

 

1.1.06

 

 

 

Bills Drawn

David A/c Dr.

16,000

 

B.R. A/c Dr.

 

6,000

To B.P. A/c

 

10,000

Renewal of 1st bill, old bill cancelled

B.P. A/c Dr.

6,000

 

To David's A/c

 

6,000

Interest due 18/100 × 2/12

Int. A/c Dr.

180

 

×6000

To David's A/c

 

180

Settlement by net will (3rd

bill)

David A/c Dr.

6,180

 

To B.P. A/c Dr.

 

6,180

20.3.06

 

 

 

Retirement of 2nd bill

B.P. A/c Dr.

10,000

 

To Cash/ Bank A/c

 

9,900

To Rebate A/c

 

100

Thomas declared insolvent

hence 3rd bill dish-onoured

B.P. A/c Dr.

6,180

 

To David A/c

 

6,180

Full and final settlement at 50%

David A/c Dr.

6,180

 

To Cash/ Bank A/c

 

3,090

To DeficiencyA/c

 

3,090

 

Q-34 B owes C a sum of Rs. 600/- On 1st April, 2006 he gives promissory note for the amount for 3 months to C who gets it discounted with his bankers for Rs. 590/-. On the due date the bill is dishonoured the bank paying Rs. 5/- as noting charges. B then pays Rs. 200/- in cash and accepts a bill of exchange drawn on him for the balance together with Rs. 10/- as interest. This bill of exchanges is for 2 months and on the due date the bill is again dishonoured, C paying Rs. 5/- for noting charges. Draft the journal entries to be passed in the books of B and C.

Date

Transaction

Journal of C

Dr,.

Cr.

1.4

Promissory note given by B to C

B.R. A/c Dr.

600

 

To B A/c

 

600

 

Bill discounted with

bank

Bank/cash A/c Dr

590

 

Discount A/c Dr.

10

 

 

 

To B.R. A/c

 

600

4.7

Bill dishonoured, bank recovers from 'C' bill amount + noting charges

B A/c Dr.

605

 

To Bank A/c

 

605

 

 

 

B A/c Dr.

10

 

To Int. A/c

 

10

 

Settlement partly in Cash & balance by

new bill.

Cash/bank a/c Dr.

200

 

B.R. A/c Dr.

415

 

To B A/c

 

615

7.9

Second bill dishonoured& noting charges paid by 'C'

B A/c Dr.

420

 

To B.R. A/c

 

415

To cash A/c

 

5

 

 

Date

Transaction

Journal of B

Dr.

Cr.

1.4

Promissory note given

by B to C

C A/c Dr.

600

 

To B.P. A/c

 

600

 

Bill discounted with bank

No entry

 

 

 

 

 

 

 

 

4.7

Bill dishonoured, bank recovers from 'C' bill amount + noting charges

B.P. A/c Dr.

600

 

Noting charges Dr.

5

 

To C A/c

 

605

Int. A/c Dr.

10

 

To C A/c

 

10

 

Settlement partly in

Cash & balance by new

C A/c Dr.

615

 

To B A/c

 

415

 

bill.

To Cash A/c

 

200

7.9

Second bill dishonoured& noting charges paid by 'C'

B. P. A/c Dr.

415

 

Noting charges Dr.

5

 

 

 

 

To C A/c

 

420

 

Q-35 On 1.1.03 machinery was purchased for Rs. 80,000. On 1.7.04 addition were made to the amount of Rs. 40,000. On 31.3.05 machine purchased on 1.7.04 costing Rs. 12,000 was sold for Rs. 11,000 & on 30.6.05 machinery purchased on 1.1.03 costing Rs. 32,000 was sold for Rs. 26,700. On 1.10.05 addition were made to the amount of Rs. 20,000. Show Machinery a/c & Depreciation a/c for 3 years 2003, 04, 05. Depreciate Machinery at 10% p.a. by S.L.M.

Solution: Machinery A/c (SLM 10%)

Date

Particulars

Rs.

Date

Particulars

Rs.

1.1.03

To Bank a/c

80,000

31.12.03

By Depreciation a/c

8,000

 

 

 

 

By Balance c/d

72,000

 

 

80,000

 

 

80,000

1.1.04

To Balance b/d

72,000

31.12.04

By    Deputation        a/c

(8000+2000)

10,000

 

 

 

 

By Balance c/d

1,02,000

 

 

1,12,000

 

 

1,12,000

1.1.05

To Balance b/d

1,02,000

31.3.05

By Bank a/c

11,000

30.6.05

To Profit on sale of

Machinery a/c

2,700

 

By Depreciation a/c

300

1.10.05

To Bank a/c

20,000

30.6.05

By    Lesson        sale        of

Machinery a/c

100

 

 

 

 

By Bank a/c

26,700

 

 

 

 

By Depreciation a/c

1,600

 

 

 

 

By   Depreciation       a/c

(7600+500)

8,100

 

 

 

 

By Balance c/f

76,900

 

 

1,24,700

 

 

1,24,700

 

Depreciation a/c

 

Date

Particulars

Rs.

Date

Particulars

Rs.

31.12.03

To Machinery a/c

8,000

31.12.03

By P&L a/c

8,000

 

 

8,000

 

 

8,000

31.12.04

To Machinery a/c

10,000

31.12.04

By P&L a/c

10,000

 

 

10,000

 

 

10,000

31.3.05

To Machinery a/c

300

31.12.05

By P&L a/c 10,000

 

30.6.05

To Machinery a/c

1,600

 

 

 

31.12.05

To Machinery a/c

8,100

 

 

 

 

 

10,000

 

 

10,000

 

 

Working notes

 

(1) Sold on 31.3.2005

1.7.2004

Cost

12,000

31.12.04

Depreciation

600

1.1.05

Balance

11400

31.3.05

Depreciation

300

 

Balance

11,100

 

Sold for

11,000

 

Loss

100

(2) Sold on 30.6.2005    

 

1.1.03

Cost

32,000

31.12.03

Depreciation

3,200

 

Balance

28,800

31.12.04

Depreciation

3,200

1.1.05

Balance

25,600

30.6.05

Depreciation

1,600

 

Balance

24,000

 

Sold for

26,700

 

Profit

2,700

 

(3) Depreciation on 31.12.2005

Original cost of remaining old machine

 

80,000 - 32,000

48.000

40,000 - 12,000

28,000

 

7,6000

Depreciation @10%

7,600

 

 

On new machine

 

20,000 X 10 ÷ 100 X 3÷ 12

500

 

8,100

 

Depreciation: Calculation by WDV and Accounting by credit to Depreciation Provision a/c

Q-36 From the following particulars for the years 2004 and 2005 determine the value of the closing stock at the end of 2005.

Particulars

2004 (Rs.)

2005 (Rs.)

Opening Stock

20,000

30,000

Purchases

1,20,000

1,90,000

Sales

2,00,000

2,40,000

 

Uniform rate of gross profit may be assumed. At the end of 2005, goods purchased were received, but no entry was made for this credit purchase since invoice was not received. These goods cost Rs. 20,000.

Solution: Closing stock of 2005 can be ascertained by preparing Trading a/c but gross profit ratio for 2005 is not given hence the same is ascertained by preparing Trading a/c of 2004. For this remember the closing stock of this year is the opening stock of next year.

Trading Account: For the year ending 31st December, 2004

Particulars

Rs.

Particulars

Rs.

To Opening Stock

20,000

By Sales

2,00,000

To Purchases

1,20,000

By Closing Stock

30,000

To Gross Profit

(Balancing figure)

90,000

 

 

 

2,30,000

 

2,30,000

Calculation of Rate of Gross Profit

\(Gross Profit Ratio = {Gross Profit \over????????????????????} × 100\)

\(Gross Profit Ratio = {90,000\over2,00,000} × 100 = 45%\)

Trading Account: For the year ending 31st December, 2005

Particulars

Rs.

Particulars

Rs.

To Opening Stock

30,000

By Sales

2,40,000

To Purchases 1,90,000 +

unrecorded purchase 20,000

2,10,000

By Closing Stock (Balancing

Figure)

1,08,000

To Gross Profit (45% of 1,08,000

2,40,000)

1,08,000

 

 

 

3,48,000

 

3,48,000

 

Uniform Rate of gross Profit = 45% is taken from 2004. Stock as on 31-12-2005 including goods for which invoice was not accounted is Rs. 1,08,000

Ascertaining Stock, when stock of different date is known (Stock of latter date is known)

 

Q-37 Prepare a bank reconciliation statement from the following particulars as on 31 st March 2018:

Particulars

Rs.

Debit balance as per bank column of the cash book

18,60,000

Cheque issued to creditors but not yet presented to the bank for payment

3,60,000

Dividend received by the bank but not entered in the Cash book

2,50,000

Interest allowed by the bank

6,250

Cheque deposited into bank for collection but not collected by bank upto this date

7,70,000

Bank charges not entered into cash book

1,000

A cheque deposited into bank was dishonored, but no intimation received

1,60,000

Bank paid house tax on our behalf, but no intimation received from bank in this

connection

 

Solution: Bank Reconciliation Statement (as on March 31, 2018)

Particulars

Amount (Rs.)

Amount (Rs.)

Debit balance as per Cash book

 

18,60,000

Add: cheque issued but not yet presented

3,60,000

 

Dividend received by the bank

2,50,000

 

Interest allowed by the bank

6,250

6,16,250

 

 

24,76,250

Less: cheque deposited but not collected

7,70,000

 

Bank charges not entered in cash book

1,000

 

Cheque deposited into bank but dishonored

1,60,000

 

House tax paid by bank

1,75,000

11,06,000

Credit balance as per Pass Book

 

13,70,250

 

Q-38 The following mistakes were located in the books of a concern after its books were closed and a suspense Account was opened in order to get the Trial Balance agreed.

(a) Sales Day Book was over cast by Rs.100.

(b) A sales of Rs. 50 to X was wrongly debited to the account of Y.

(c) General Expenses of Rs. 18 was posted in the General Ledger at Rs.80.

(d) A bill receivable for Rs. 155 was passed through Bills payable Day Book – This bill was given by Z.

(e) Legal expenses Rs. 119 paid to Mr. Dufty was debited to his personal account.

(f) Cash received from C. Dass was debited to G. Dass Rs. 150.

(g) While carrying forward the total of one page of the Purchases Book to the next the amount of Rs. 1235 was written as Rs. 1325.

Find out the nature and amount of the Suspense Account and pass entries for the rectification of the above errors in the subsequent year’s books.

Solution: Rectification in Subsequent Year:

 

Effect already given in a/c

a

Party A/c Dr.

1000

 

 

To sales A/c

 

1100

b

Y A/c Dr.

50

 

 

To sales A/c

 

50

c

General Exp. A/c Dr.

80

 

 

To Cash A/c

 

18

d

Z a/c Dr.

155

 

 

To B.P A/c

 

155

e

Mr. Dufty A/c Dr.

119

 

 

To Cash A/C

 

119

f

G. Dass A/c Dr.

150

 

 

Cash a/c Dr.

150

 

g

Purcahse a/c Dr.

1325

 

 

To party a/c

 

1235

Note: balance of P& L Account after all rectification is transferred to capital account

 

Correct effect

a

Party A/c Dr.

1000

 

 

To sales A/c

 

1000

b.

X A/c Dr.

50

 

 

To sales A/c

 

50

c

General Exp. A/c Dr.

18

 

 

To Cash A/c

 

18

d

B.R.A/c Dr.

155

 

 

To Z a/c

 

155

e

Legal Exp. A/c Dr.

119

 

 

To cash A/c

 

119

f

cash A/c Dr.

150

 

 

To C.Dass A/c

 

150

g

Purcahase a/c Dr.

1235

 

 

To Party A/c

 

1235

 

 

Rectification

a

P & L adj. A/c Dr.

100

 

 

To suspense A/c

 

100

b

X A/c Dr.

50

 

 

To y a/c

 

50

c

suspense A/c Dr.

62

 

 

To ( General Exp. ) P & L A/C

 

62

d

B.R.A/c Dr.

155

 

 

B.P.A/c Dr.

155

 

 

To Z a/c (155+155)

 

310

e

P & L Adj. A/c (Legel Exp.) Dr.

119

 

 

To Mr. Dufty a/c

 

119

f

suspense A/c Dr.

300

 

 

To C Dass. A/c

 

150

 

To G. Dass A/c

 

150

g

Suspense A/c Dr.

90

 

 

To P & L Adj. A/c

 

90

h

Capital A/c Dr.

67

 

 

To P & L Adj. A/c

 

67

 

                                                     Suspense Account

Particulars

Amount

Particulars

Amount

To sundries

300

By balance b/f

352

To P& L Adj. A/c

62

By P& L Adj. A/c

100

To P& L Adj. A/c

90

 

 

 

452

 

452

 

                                                    P&L Adjustment Account:

Particulars

Amount

Particulars

Amount

To Suspense A/c

100

By Suspense A/c

62

To Mr. Dufty A/c

119

By Suspense A/c

90

 

 

By Capital A/c

67

 

219

 

219

 

Note: Debit balance Rs. 67 indicates that last year’s profit was shown excess.

Comment:

 Balance in suspense a/c indicates that in last year’s Trial balance, Credit side was short by Rs. 352

 As the rectification is being carried out in the next years books of account, the Profit & Loss adjustment account is debited/credited in place of income & expenses account.

 The debit balance of Rs. 67 in Profit & Loss adjustment account indicates that in last year excess profit was shown.

 (b), (d) & (e) is double sided error, hence their rectification does not involve suspense a/c but (a), (c), (f) & (g) are one sided error, hence their rectification involves suspense a/c.

 All errors are Error of commission although error (e) can also be considered as Error of Principle.

 

Q-39 What are the types of errors & their effects on agreement of trial balance?

Answer: Classification of Errors (types of errors) and its effect on agreement of Trial Balance:

1. Errors of Principle: That means there is error in applying some accounting principle.

• Such errors will not affect the agreement of trial balance i.e. these are double sided error.

Example – Treating a revenue expense as capital expenditure or vice versa or the recording of sale of a fixed asset as ordinary sale.

2. Clerical Errors:

• These are the errors committed in applying the accounting procedure.

• Such errors may or may not affect the agreement of trial balance.

These can be further classified as follows:

(a) Errors of Omission:

(i) Omitting an entry completely from the subsidiary book. Full omission hence Trial Balance will agree.

Example : Sale of Rs. 5,000 to A on 30.3.06 is not recorded.

(ii) Omitting to post the ledger account from the subsidiary books. Partial omission hence Trial Balance will not agree.

Example : A sale entry of Rs. 10,000 not posted to A’s a/c.

(b) Errors of Commission:

(i) Writing wrong amount in the Subsidiary book. Trial Balance will agree. Example: A purchase of Rs. 5,000 from ‘X’ is entered in purchase book as Rs. 500

(ii) Posting the wrong account in the ledger. Trial Balance will agree. Example: From Sales book A’s account is debited by Rs. 8000 instead of B’s account.

(iii) Wrong casting of subsidiary books. Example: Total of Bills Receivable book is taken as Rs. 1,05,000 instead of Rs. 1,00,500

(iv) Posting the wrong amount in the ledger.

Example: From Sales Return book A’s account is credited by Rs. 8,000 instead of Rs. 8,800

(v) Posting an amount on the wrong side of an account. Example: From Sales Book L’s account is credited

(vi) Wrong balancing of an account

. Example: Balance of Furniture account is taken as Rs. 7,000 instead of Rs. 3,000

Note: In case of errors described in (iii) to (vi) above, Trial Balance will not agree.

(c) Compensating Errors:

Two or more mistakes which compensate the effect of each other on trial balance & hence Trial Balance will agree.

Example: Excess debit Rs. 1,000 to Furniture a/c & Excess credit of Rs.1,000 to Sales a/c.

 

Q-40 Write up a three column cash book from the following:

 

1,Sep 2006

Cash balance

1,700.00

 

Bank overdraft

5,600.00

5

Received dinanath cash Rs. 750 and cheque of Rs. 860 in full

settlement of Rs. 1,650

 

7

Paid for office rent by cheque

500.00

8

Paid for wages in cash

250.00

9

Sold gold for cash Rs. 1,500 and received half amount in cash

and half by cheque which is deposited in the bank

 

10

Bank pass book states that the bank has collected interest on

investment

660.00

12

Cheque received on 5th paid into bank

 

15

Transferred Rs. 3000 from fixed deposits to current account

 

20

Drew for personal use cash Rs. 250 and a cheque of Rs. 375

 

25

Made cash purchase and paid by cheque Rs. 1595

 

30

Paid Dinesh Rs. 800 by cheque

 

 

Solution :

                                                                     Triple Column Cash Book

Date

Date

Date

Date

Date

Date

Date

Date

Date

Date

Date

Date

1.9.06

To opening Bal.

 

 

1700

0

1.9.06

By Open. Bal.(OD)

 

 

0

5600

5

To Dinesh a/c

 

40

1610

0

7

By Rent a/c

 

 

 

500

 

(cash+cheque)

 

 

 

 

8

By Wages a/c

 

 

250

 

9

To sales a/c

 

 

750

750

12

By Bank (ch. Deposit)

C

 

860

 

10

To Interest a/c

 

 

 

660

20

By Drawings a/c

 

 

250

375

12

To Cash (ch. Dep.

C

 

 

860

25

By Purchases a/c

 

 

 

1595

15

To fixed deposit a/c

 

 

 

3000

30

By Dinesh a/c

 

 

 

800

30

To Bal. c/f.(OD)

 

 

 

3600

30

By Balance c/f

 

 

2700

 

 

 

 

40

4060

8870

 

 

 

 

4060

8870

 

Cheque received but not deposited in bank:

The usual practice in the books on ac-counting is to show such amount as cash and when the same is deposited in bank then cash a/c is credited and bank a/c debited (As done for Rs.860 in above problem). I (author) don’t consider it appropriate and suggest the following –

a. In real life it will be a daily routine to receive cheque and deposit it next day hence to obviate unnecessary confusion and complication, it should be debited to bank a/c on receipt itself.

b. When it is a year end situation, debit such cheque to cheques in hand a/c rather than in cash a/c. So that in balance sheet we will show cash balance (which is actual cash), cheques in hand and bank balance (which does not include cheque received but not deposited).

 

Q- 41 Define the Debit Note and Credit Note.

Answer: Debit Note:

 A debit note is a statement sent by one party to the other stating/informing him that his account has been debited with a specified amount and the reason for debit.

 A debit note is sent to the supplier when the goods purchased from him are returned (purchase return) or for discount to be received from him or for any expenses incurred for him.

 Entry:

In the books of sender of Debit note

In the books of sender of Debit note

Party (to whom it is sent) a/c Dr.

Sales return/Discount allowed etc. a/c Dr.

To Purchase return/Discount received etc.

To Party (who sent it) a/c

 

Credit Note:

 A Credit note is a statement/letter sent by one party to the other stating/informing him that his account has been credited with a specified amount and the reason for credit.

 A credit note is sent to the customer when we receive good returned by them or for discount to be allowed to him or for any expenses incurred for us by him.

Entry:

In the books of sender of Debit note

In the books of receiver of Debit note

Sales return/Discount allowed etc. a/c Dr

To Party (who sent it) a/c

To Party (to whom it is sent) a/c.

To Purchase return/Discount received etc

 

Q-42 Give difference between Provision and Contingent liability.?

Provision

Contingent liability

 

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 crystallise depending on the occurrence or non-occurrence of one or

more uncertain future events

A provision meets the recognition criteria.

A provision meets the recognition criteria.

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.

 

If the management estimates that it is probable that the settlement of an obligation will result in outflow of economic benifts, it recognises 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.

 

Q-43 Following are the transaction between Sanjay and Ravi. Both allows one month credit to each other on sale/purchases.

Date

particulars

Rs.

Jan. 1

Balance due from Sanjay

2,000

Feb. 16

Purchased goods from him

12,000

28

Sold goods to him

20,000

March 16

Received a cheque

6,000

April 20

Sold him goods (invoiced on May 3)

20,000

June 16

Purchased goods from him (invoiced on July 10)

30,000

Sept. 23

Paid him cash

6,000

Oct. 24

Accepted his bill for 3 months

10,000

Nov. 26

Received his acceptance for 2 months

16,000

 

Prepare an account current of Sanjay with Ravi upto 31.12.03 reckoning interest @14% p.a. on the balance due.

Solution : Product of Transaction Method (Red Ink Interest Method)

Sanjay in Account Current with Ravi for the period 1.1.03 to 31.12.03

 

Date

Particulars

Amt.

Due date

Days

Product

Date

particulars

Amt.

Due Date

Days

Product

1.1

To opening balance

2,000

1.1

365

7,30,000

16.2

by Purchase a/c

12,000

16.3

290

34,80,000

28.2

To sales a/c

20,000

28.3

278

55,60,000

16.3

By Bank a/c

6,000

16.3

290

17,40,000

20.4

To sales a/c

20,000

20.5

225

45,00,000

16.6

By Purchase a/c

30,000

16.7

168

50,40,000

23.9

To Cash a/c

6,000

23.9

99

5,94,000

26.11

By B.R.a/c

16,000

29.1

0

0

24.1

To B.P. a/c

10,000

27.1

0

0

 

 

 

 

 

 

 

Contra product

 

 

 

 

 

Contra product

 

 

 

 

 

B.R. 16,000

0

29.1

29

4,64,000

 

B.P. 10,000

 

27.1

27

2,70,000

31.12

To interest

506

 

 

 

 

 

 

 

 

 

31.12

To Balance c/f

5,494

 

 

 

 

 

 

 

 

 

 

 

 

64,000

 

1,18,48,000

 

 

64,000

 

 

1,05,30,000

Working Notes:

Interest recoverable on 1,18,48,000 – 1,05,30,000 = 13,18,000

\(Interest = 13,18,000 * {14\over100}×{1\over365} = ????????. 506\)

Entry for interest due:

Sanjay a/c      Dr.

506

 

 

To Interest a/c

 

506

 

Important points Regarding Due date:

1. When in case of sale, purchase, credit period is given the same will be added to date of transaction to get due date. Where invoice date is given (like in this question) the same will be taken as due date.

2. In case of bill of exchange/promissory note due date will be calculated by adding the period + 3 days of grace.

3. In case of sales/purchase return the due date of sale/purchase should be taken for return also because it is only a cancellation entry, hence interest effect should also get cancelled.

Red Interest/Contra Product: When due date of a transaction falls beyond the cut off date (i.e. 31.12.2003 in this case), there are no days from due date to cut off date rather there are reverse or opposite days from due date to cut off date. Such days are either written on same side by (-) sign or in red ink (followed by bank, hence the name red ink interest) or the same effect is created by writing the products on opposite side known as contra product.

 

Below is the trial balance of Shah as on December 31, 2005:

 

Debit Balance

Rs.

Credit Balance

Rs.

Drawings

1,500

Capital Account

50,000

Adjusted purchases

6,99,200

Loan from Desai @ 9% (taken on

1st July, 2004)

20,000

Salaries

4,500

Sales

7,20,000

Carriage on Purchases

 

Discount

500

on sales

 

Sundry Creditors

20,000

Rates and Insurance

400

 

 

Buildings

400

 

 

Furniture

500

 

 

Sundry Debtors

8,000

 

 

Cash on Hand

250

 

 

Cash at Bank

1,500

 

 

Stock (31st December, 2005)

61,250

 

 

 

8,10,500

 

8,10,500

 

Additional information:

1. Rates have been prepaid to the extent of RS. 175.

2. Bad debts Rs. 500 have to written off. A provision for doubtful debts @ 5% on debtors is necessary.

3. Building has to be depreciated at 2% and Furniture @ 10%.

4. The manager is entitled to a commission of 5% of net profits before charging such commission.

Solution: Trading and Profit and Loss Account of Shah (for the Year ended on December 31, 2005)

Particulars

Rs.

Particulars

Rs.

To Adjusted Purchases

6,99,200

By Sales

7,20,000

To Carriage on Purchases

400

 

 

To Gross Profit c/d

20,400

 

 

 

7,20,000

 

7,20,000

To Salaries

4,500

By Gross Profit b/d

20,400

To Carriage on Sales

500

By Discount

500

To Rates & Insurance

Paid

 

400

 

 

 

225

 

 

Less: Prepaid

175

To Bad Debts written off

500

 

 

To Provision for Doubtful

Debts (5% of t 7,500)

375

 

 

To Depreciation:

Buildings (2%)

 

540

 

 

 

1,140

 

 

Furniture (10%)

600

To Interest

1,800

 

 

To Commission payable to

manager (5% of Rs. 11,860)

593

 

 

To Net Profit

11,267

 

 

 

20,900

 

20,900

 

20,900 less Rs. 9,040 (the total of all expenses so far), Manager is entitled to 5% of this figure. (1) The trial balance gives “Adjusted Purchases”. It means that the opening stock has already been transferred to the Purchases Account and thus been closed. Further, entry for closing stock has already been passed by debiting the Closing Stock Account and crediting Purchases Account. That is why closing stock appears inside the trial balance. It will now be shown in the Balance Sheet and not in the Trading Account since purchases already stand reduced.

(2) There is a Loan of Desai @ 9% taken in 2004 i.e. in last accounting year. As per mercantile system interest up to 31.12.04 must have been provided in the last years a/c itself. The trial balance makes no mention of any interest being paid to him. Hence, interest @ 9% must be provided for the whole of current year only.

 

Balance Sheet of Shah as on December 31, 2005

Liabilities

Rs.

Assets

Rs. 

                      

Capital Account

50,000

 

 

 

59,767

Fixed Assets:

Buildings

 

27,000

 

 

 

26,460

 

Add: Net Profit

11,267

 

Less: Depreciation

540

 

Less: Drawings

1,500

 

Loan from Desai

20,000

21,800

Furniture

6,000

 

5,400

 

Add: Interest Due

1,800

Less: Depreciation

600

 

Sundry Creditors

20,000

Current Assets:

 

 

Commission Payable

593

Cash on hand

250

 

 

 

Cash at Bank

1,500

 

 

 

Sundry Debtors

Less: Provision for

7,500

 

 

 

7,125

 

Doubtful debt

375

 

 

 

Stock

61,250

 

 

 

Prepaid Rates

175

 

 

1,02,160

 

1,02,160

 

 

 

 

 

 

 

 

 

 

Q-45 Rules applicable in absence of partnership deed.

Answer: Rules applicable in absence of partnership deed: In the absence of any provision in partnership deed, following provisions of partnership Act are applicable:

• Profit/Loss sharing ratio will be equal

• No interest is to be allowed on capital

• No interest is to be charged on drawings

• 6% per annum interest is to be given on partner’s loan

• No salary is to be paid to any partner

• Interest and salary, if payable, will be paid only if there is profit unless agreement provides otherwise.

 

Q-46 The Chartered Accountants X, Y and Z form a partnership, profits being divisible in the ratio of 3 : 2 : 1 subject to the following:

i. Z’s share of profit is guaranteed to be not less than Rs. 15,000 p.a.

ii. Y gives guarantee to the effect that gross fees earned by him for the firm shall be equal to his average gross fee of the preceding five years when he was carrying on profession alone (which average works out at Rs. 25,000).

The profit for the first year of the Partnership is Rs. 75,000. The gross fees earned by Y for the firm are Rs. 16,000. You are required to show the distribution of profits.

 

Solution:

Particulars’

Rs.

Profit as given

75,000

Shortfall to be contributed by Y (25,000 - 16,000)

9,000

Total Profit

84,000

Z's share (1/6) Rs. 14,000

 

Minimum allowed to Z

15,000

Balance for X and Y

69,000

X's 3/5

41,400

 

Y's 2/5

27,600

69,000

 

Nil

 

Summary

 

Partner

Share

Adjustment

Total

X

41,400

 

41,400

Y

27,600

- 9,000

18,600

Z

15,000

 

15,000

 

84,000

 

75,000

 

Q-47 A and B were partners in 1:1. They admitted C as a new partner for 1 / 5th share. At the time of his admission following Revaluation were made:

Building of Rs. 60,000 at Rs. 1,00,000

Plant of Rs. 40,000 at Rs. 30,000

Creditors of Rs. 50,000 at Rs. 70,000 At the time of revaluation some unrecorded investment of Rs. 20,000 were found. Show necessary Accounting treatment in the following cases:

Case I. When Revised figures of Assets and Liabilities were to be shown in the Balance Sheet of the New Firm (or When Revaluation A/c is to be prepared)

Case II. When Revised figures of Assets and Liabilities were not to be taken in the Balance Sheet of the New Firm (or When Memorandum Revaluation Account is to be prepared)

Solution:

Case I: Revaluation Account

Particulars

Rs.

Particulars

Rs.

To Plant

10,000

By Building

40,000

To Creditors

20,000

By Investment

20,000

To Profit on Revaluation:

 

 

 

A's Capital A/c

15,000

 

 

B's Capital A/c

15,000

 

 

Total

60,000

Total

60,000

 

Journal entries:

Particulars

L.F.

Dr.

Cr.

1. Building A/c

 

40,000

 

Investment A/c Dr.

 

20,000

 

To Revaluation A/c

 

 

60,000

(Being increase in the value of assets recorded)

2. Revaluation A/c

Dr.

30,000

 

To Plant A/c

 

 

10,000

To Creditors A/c

 

 

20,000

Being reduction in the value of plant & increase in

creditors recorded)

 

 

 

3. Revaluation A/c

Dr.

30,000

 

To A's Capital A/c

 

 

15,000

To B's Capital A/c

 

 

15,000

(Being transfer of profit on revaluation to old partners in their old profit sharing ratio)

 

Case II: Memorandum Revaluation Account

Particulars

Amount

Particulars

Amount

To Plant

10,000

By Building

40,000

To Creditors

20,000

By Investment

20,000

To Profit on Revaluation:

 

 

 

A's Capital A/c

15,000

 

 

B's Capital A/c

15,000

 

 

Total

60,000

Total

60,000

To Building

40,000

By Plant

10,000

To Investment

20,000

By Creditors

20,000

 

 

By Loss on Revaluation:

 

 

 

A's Capital A/c (New Ratio)

12,000

 

 

B's Capital A/c (New Ratio)

12,000

 

 

C's Capital A/c (New Ratio)

6,000

Total

60,000

Total

60,000

 

Particulars

A

B

C

Profit on Revaluation (in old ratio) Cr.

15,000

15,000

-

 

12,000

12,000

6,000

 

3,000 Cr.

3,000 Cr.

6,000 Dr.

 

Journal Entry

C’s Capital A/c             Dr.

6,000

 

 

To A’s Capital A/c

 

3,000

 

To B’s Capital A/c

 

3,000

 

(Being adjustment of profit or loss on revaluation made

among the partners)

 

 

 

Q-48 The following is the balance sheet of A and B who share profits and losses as 4/7 and 3/7:

Particulars

Amount

Particulars

Amount

Creditors

15,000

Land and Buildings

36,000

Bills payable

5,000

Machinery

20,000

Capital Accounts

 

Furniture

2,000

A : 45,000

 

Stock

25,000

B : 35,000

80,000

Sundry Debtors

16,000

 

 

Cash

1,000

 

1,00,000

 

1,00,000

 

They agree to take C into partnership and give him a share of 20 paise in the rupee subject to the following terms and conditions:

1. C is to contribute capital @ Rs. 12000 for each 10 paise share in the rupee.

2. Land and Buildings are to be increased to Rs. 40000.

3. Machinery is to be depreciated by 1096 and Furniture by Rs. 500.

4. Stock is to be appreciated by Rs. 1000.

5. Goodwill of the firm is to be valued at 2 years’ purchase of average profits of the last three years. (Profits for the last three years were Rs. 14500, Rs. 20000 and Rs. 22500.)

6. A provision of 2 1/2% is to be made for bad debts and another of Rs. 2500 for outstanding expenses.

7. A trade creditor for Rs. 1600 is not traceable for a number of years and the amount is to be written back.

Show Journal entries and capital accounts of the partners assuming no goodwill account is to be opened and the book values of assets and liabilities are not to be disturbed.

Also prepare the Balance Sheet of the new firm.

Solution: Working notes:

(1) New Profit sharing ratio:

C comes for 20 paise share in the rupee, i.e., for share, the share left for A and B is (1 – 15) or 45

So, A’s share is 4/7 of 4/5 or 16/35 And, B’s share is 3/7 of 4/5 or 12/35

Hence, new ratio is 16/35 : 12/35 : 7/35

Value of Goodwill:

\(Average profit of the last three years : = {1,500+20,000+22,500 \over3 }= Rs. 19,000\)

Value of Goodwill on the basis of 2 years’ purchase Rs. 19,000 x 2 = Rs. 38,000

 

(2) Profit/Loss on revaluation

Rs.

Rs.

Value of assets to be increased :

 

 

Land and Buildings

4,000

 

Stock

1,000

 

Goodwill

38,000

 

Value of assets to be reduced :

Rs.

Rs.

Machinery

2,000

 

Furniture

500

-2,500

Provision to be made for :

Rs.

Rs.

Bad Debts

400

 

Outstanding Expenses

2,500

- 2,900

Liabilities to be written back :

Rs.

Rs.

Trade Creditors

 

+1,600

Profit on Revaluation & Goodwill

 

+ 39,200

(3) Adjustment required:

Particulars

A

B

C

Profit credited in the old ratio of 4 : 3

+22,400

+ 16,800

 

Profit written back in the new ratio of 16 : 12 : 7

-17,920

-13,440

-7,840

Net adjustment

+ 4,480

+ 3,360

- 7,840

 

Journal Entry

Particulars

L.F.

Dr.

Cr.

Cash A/c (12,000 X 2)

Dr.

24,000

 

To C's Capital A/c

 

 

24,000

(Capital introduced by C's on his admission @ ! 12,000 for

each 10 paise share in the rupee)

 

 

 

C's Capital A/c

Dr.

7,840

 

To A's Capital A/c

 

 

4,480

To B's Capital A/c

 

 

3,360

(Adjustment for Goodwill & Revaluation of assets and

 

 

 

liabilities without altering the book values on admission of C)

 

 

 

 

Capital A/c

Particulars

A (Rs.)

B (Rs.)

C (Rs.)

Particulars

A (Rs.)

B (Rs.)

C (Rs.)

To Capital of

A&B

 

 

7,840

By Balance b/f

45,000

35,000

 

To Balance c/d

49,480

38,360

16,160

By Cash

 

 

24,000

 

 

 

 

By Capital of C

49,480

38,360

 

 

49,480

38,360

24,000

 

49,480

38,360

24,000

 

 

 

 

By Balance b/d

49,480

38,360

16,160

 

Balance Sheet as at …..

Liabilities

Rs.

Assets

Rs.

Creditors

15,000

Land & Buildings

36,000

Bills Payable

5,000

Machinery

20,000

Capital Accounts :

 

Furniture

2,000

A 49,480

 

Stock

25,000

B 38,360

 

Sundry Debtors

16,000

C 16,160

1,04,000

Cash (1,000 + 24,000)

25,000

 

1,24,000

 

1,24,000

 

 

Q-49 Explain Donation. Answer:

Donation:

  •  Donations are the voluntary contribution provided by the well wishers for general or specific purpose.

  • If donations are received for a particular purpose then it will be credited to that particular fund a/c say donation received for construction of building credited to Building fund a/c.

  • Otherwise general donations will be credited to Income & Expenditure a/c.

  • If question requires capitalisation, but does not specify the fund to which it should be credited, then credit such donation to trust fund a/c.

  • Donation may be in kind then stock or fixed asset whatever is received will be debited and the credit will be as explained in above points.

 

Q-50 The following information’s were obtained from the books of Delhi Club as on 31.3.2011 at the end of the first year of the Club. You are required to prepare Receipts and Payments Account for the year ended 31.3.2011:

(i) Donations received for Building and Library Room Rs. 2,00,000.

(ii) Other revenue receipts:

Particulars

Amount receipts (Rs.)

Entrance Fees

17,000

Subscription

19,000

Locker Rents

600

Sundry Income

1,060

Refreshment Account

16,000

 

(iii) Other actual payments:

Particulars

Amount payments (Rs.)

Land (cost Rs. 10,000)

10,000

Furniture (cost Rs. 1,46,000)

1,30,000

Salaries

4,800

Maintenance of Playgrounds

1,000

Rent

8,000

Refreshment Account

8,000

 

Donations to the extent of Rs. 25,000 were utilized for the purchase of Library Books, balance was still unutilized. In order to keep it safe, 9% Govt. Bonds of Rs. 1,60,000 were purchased on 31.3.2011. Remaining amount was put in the Bank on 31.3.2011 under the term deposit.

Solution: Delhi Club Receipt and Payments A/c for the year ended 31st March 2011

Receipts

Rs.

Payments

Rs.

To Building and library fund a/c

2,00,000

By Library book a/c

25,000

 

To Entrance fees a/c

17,000

By Bond 9% govt. a/c

1,60,000

 

To Subscription a/c

19,000

By   Fixed  deposit       a/c

(Bal.fig)

15,000

2,00,000

To Locker rent a/c

600

By Land a/c

10,000

To Sundry income a/c

1,060

By Furniture a/c

1,30,000

To Refreshment a/c

16,000

By Salaries a/c

4,800

To Closing balance (Overdraft

bal. )

1,08,140

By Maintenance of playgrounds a/c

1,000

 

 

By Rent a/c

8,000

 

 

By Refreshment a/c

8,000

 

3,61,800

 

3,61,800

 

Q-51 From the following, find out the amount of subscriptions to be included in the income and expenditure account for the year ended 31st March, 1999.

Subscriptions were received during the year 1998-99 as follows:

Particulars

Rs.

For the year 1997-98

2,000

For the year 1998-1999

30,000

For the year 1999-2000

3,000

 

Subscriptions outstanding as on 31st March, 1998 were Rs. 3,500 out of which Rs. 500 were considered to be irrecoverable. On the same date, subscription received in advance for 1998-99 were Rs. 2,000. Subscriptions still outstanding as on 31st March, 1999 amounted to Rs. 6,000.

Solution: Subscription a/c

Particulars

Rs.

Particulars

Rs.

To Op. outstanding subscription a/c

3,500

By Op. advance subscription a/c

2,000

To I & E a/c (income bal. figure)

37,000

By I& E (irrecoverable amount)

500

To Closing advance subscription a/c

3,000

By Cash/Bank a/c for

 

 

 

1997-98

2,000

 

 

 

1998-99

30,000

 

 

 

1999-2000

3,000

35,000

 

 

By Closing o/s subscription a/c

6,000

 

43,500

 

43,500

 

Q-52 Difference between Authorised Capital and Issued Capital.

Answer:

Basis of Difference

Authorised Capital

Issued Capital

1.Disclosure in Memorandum of Association

It is the amount stated in the company’s Memorandum of Association. It is the maximum amount that a company can issue under each class of capital.

It is not stated in the Memorandum of Association of the company.

2. Limits

It is higher than or equal to the

issued and subscribed capital.

It cannot exceed authorised

capital.

 

Q-53 The following is the Receipt and Payment Account of Park View Club in respect of the year ended 31st March, 2011:

Receipts

Rs.

Payments

Rs.

To Balance b/d

1,02,500

By Salaries

2,08,000

To subscriptions:

 

By Stationery

40,000

2009-10

4,500

 

By Rent

60,000

2010-11

2,11,000

 

By Telephone Exp.

10,000

2011-12

7,500

2,23,000

By Investment

1,25,000

To Profit on sports meet

1,55,000

By Sundry Expenses

92,500

To Income from investments

1,00,000

By Balance c/d

45,000

 

5,80,500

 

5,80,500

 

Additional information:

(i) There are 450 members each paying an annual subscription of Rs. 500. On 1st April, 2010, outstanding subscription was Rs. 5,000.

(ii) There was an outstanding telephone bill for Rs. 3,500 on 31st March, 2011.

(iii) Outstanding sundry expenses as on 31st March, 2010 totalled Rs. 7,000.

(iv) Stock of stationery:

On 31st March, 2010 Rs. 5,000

On 31st March, 2011 RS. 9,000

(v) On 31st March, 2010 building stood in the books at Rs. 10,00,000 and it was subject to depreciation @ 5% per annum.

(vi) Investment on 31st March, 2010 stood at Rs. 20,00,000.

(vii) On 31st March, 2011, income accrued on the investments purchased during the year amounted to Rs. 3,750.

Prepare an Income and Expenditure Account for the year ended 31st March, 2011 and the Balance Sheet as at that date.

Solution: Park View Club : Income and Expenditure Account for the year ended on 31st March 2011

 

Expenditure

Rs.

Income

Rs.

To Salaries

2,08,000

By Subscriptions (W.N. 2)

2,25,000

To Stationery consumed (W.N3)

36,000

By Profit on sports meet

1,55,000

To Rent

60,000

By Income on

investment

1,00,000

 

To Telephone

expenses

10,000

 

Add Income accrued

3,750

1,03,750

Add Closing

Outstanding

3,500

13,500

 

 

To Sundry expenses

92,500

 

 

 

Less Opening

Outstanding

(7,000)

85,500

 

 

 To Depreciation of building                             

50,000

                                                                 

 

To Surplus (Carried to Capital

fund)

30,750

 

 

 

4,83,750

 

4,83,750

 

Balance sheet

Liability

Amount

Rs.

Assets

Amount

Rs.

Capital fund (W.N. I)

31,05,500

 

Outstanding subscriptions

14,500

Add:Surplus

30,750

31,36,250

Investment

(20,00,000+1,25,000)

 

21,25,000

 

Subscriptions received in

advance

7,500

Add Interest accrucd

3,750

21,28,750

Outstanding telephone bills

3,500

Building

10,00,000

 

 

 

Less Depreciation

(50 000)

9,50,000

 

 

Stock of stationery

9,000

 

 

Cash balance

45,000

 

31,47,250

 

31,47,250

 

Working Notes:

(1) Calculation of Opening Capital Fund

Balance Sheet as at 31st March 2010

Liability

Amount Rs.

Assets

Amount Rs.

Outstanding sundry expenses

7,000

Building

10,00,000

Capital fund (Balancing figure)

31,05,500

Investments

20,00,000

 

 

Stock of stationery

5,000

 

 

Cash balance

1,02,500

 

 

Outstanding subscriptions

5,000

 

31,12,500

 

31,12,500

 

(2) Calculation of subscriptions accrued during the year

Subscription A/c

Particulars’

Amount Rs.

Particulars

Amount Rs.

To Opening Outstanding

Subscriptions

5,000

By Cash A/c

(4,500 + 2,11,000 + 7,500)

2,23,000

To Income & Expenditure A/c (450 @ 500)

2,25,000

By Closing Outstanding

subscriptions (Balancing figure)

14,500

To Subscriptions received in

advance c/f

7,500

 

 

 

2,37,500

 

2,37,500

(3) Calculation of stationery consumed during the year

Particulars

Rs.

Opening Stock of stationery

5,000

Add Purchased

40,000

Total

45,000

Less: Closing Stock of stationery

(9,000)

Stationery consumed

36,000

 

Q-54 A company purchased some plant of Rs. 2,00,000 from Mr. R. Company decided to issue its shares of Rs. 10 each against purchase considerations.

Show the necessary journal entries in the books of companies.

(1) If shares were issued @ Rs. 10 per share.

(2) If shares were issued @ Rs. 12.50 per share.

 

S. No.

Particulars

L.F.

Amount(Rs.)

Amount(Rs.)

 

Plant a/c Dr.

 

2,00,000

 

 

To Vendors a/c (Mr. R)

 

 

2,00,000

 

(Being plant purchased by the company from Mr.

R)

 

 

 

Case

1

Vendor's a/c (Mr. R) Dr.

 

2,00,000

 

 

To Equity share capital a/c

 

 

2,00,000

 

Being shares issued by the company @ Rs. 10 per share) NOTE : No. of shares to be issued = Amount payable/ issued price of shares = 2,00,000/10 =

20,000 shares.

 

 

 

Case

2

Vendor's a/c (Mr. R) Dr.

 

2,00,000

 

 

To Equity share capital a/c

 

 

1,60,000

 

To Securities Premium Reserve a/c

 

 

40,000

 

(Being shares issued by the company @ Rs. 12.50

2,00,000

per share) , No. of shares to be issued =     =

12.5

16,000 shares.

 

 

 

 

Q-55 ABC company issued 1000, 9% debentures ofRs.100 each at a discount of 5% on 1st Jan, 2011. These debentures were to be redeemed after 5 years. Show necessary journal entries at the time of issue of debentures. Also prepare discount on issue of 9% debentures a/c.

Solution : At the time of issue: Journal Entries

S. No.

Particulars

L.F.

Amount(Rs.)

Amount(Rs.)

2011

Bank a/c Dr.

 

95,000

 

 

Discount on issue of 9% debentures a/c Dr.

 

5,000

 

 

To 9% debenture a/c

 

 

1,00,000

 

(Being 9% debenture issued @ a discount of 5%)

 

 

 

 

Discount on issue of 9% debenture a/c

 

Date

Particulars

J.F.

Amount

Date

Particulars

J.F.

Amount

2011

 

 

Rs.

2011

 

 

Rs.

1st

Jan.

To 9% debentures

a/c

 

5,000

31st

Dec.

By Statement of

Profit and loss a/c

 

1,000

 

 

 

 

 

By balance c/d

 

4,000

 

 

 

5,000

 

 

 

5,000

2012

 

 

 

2012

 

 

 

1st

Jan.

To balance b/d

 

4,000

 

By Statement of

Profit and loss a/c

 

1,000

 

 

 

 

 

By balance c/d

 

3,000

 

 

 

4,000

 

 

 

4,000

2013

 

 

 

2013

 

 

 

1st

Jan.

To balance b/d

 

3,000

 

By Statement of

Profit and loss a/c

 

1,000

 

 

 

 

 

By balance c/d

 

2,000

 

 

 

3,000

 

 

 

3,000

2014

 

 

 

2014

 

 

 

1st

To balance b/d

 

2,000

 

By Statement of

 

1,000

Jan.

 

 

 

 

Profit and loss a/c

 

 

 

 

 

 

 

By balance c/d

 

1,000

 

 

 

2,000

 

 

 

2,000

2015

 

 

 

2015

 

 

 

1st

Jan.

To balance b/d

 

1,000

 

By Statement of

Profit & loss a/c

 

1,000

 

 

 

1,000

 

 

 

 

Balance sheet as at 31st December 2011

Assets

Note No.

Rs.

Non-current assets other non-current assets

 

3,000

Current assets other current assets

 

1,000

Working Note:

(1) = Rs. 5, 000 / 5 years = Rs. 1,000

Q-56 Pure Ltd. issues 1,00,000 12% Debentures of Rs. 10 each at Rs. 9.40 on 1st January, 2018. Under the terms of issue, the Debentures are redeemable at the end of 5 years from the date of issue.

Calculate the amount of discount to be written-off in each of the 5 years.

Solution: Total amount of Discount = 1,00,000 x 0.60 = Rs. 60,000

At the end of Year

Amount of outstanding debentures

Ratio

Amount of discount to

be written off

1st

10,00,000

1/5

60,000 = 12000

2nd

10,00,000

1/5

60,000 = 12000

3rd

10,00,000

1/5

60,000 = 12000

4th

10,00,000

1/5

60,000 = 12000

5th

10,00,000

1/5

60,000 = 12000

 

Q-57 Premium on issue of debentures and Premium on redemption of debentures.

Answer: Premium on issue of debentures and Premium on redemption of debentures:

Premium on Issue of Debentures

Premium on Redemption of Debentures

1. It is a capital profit and used in writing off

the capital loss.

 

It is a capital loss.

2. The balance of premium on issue of Debentures Account, (Securities Premium) is shown on the liabilities side, under the head ‘Shareholders’ Funds’ and sub-head ‘Reserves and Surplus’.

 

It is a liability and appears under the head ‘Non-Current Liabilities’ and sub-head ‘Long- term Borrowing’ till the redemption of debentures.

 

Q-58 Give necessary journal entries for the forfeiture and re-issue of shares: (i) X Ltd. forfeited 300 shares of Rs. 10 each fully called up, held by Ramesh for non-payment of allotment money of Rs. 3 per share and final call of Rs. 4 per share. He paid the application money of Rs. 3 per share. These shares were re-issued to Suresh for Rs. 8 per share.

(ii) X Ltd. forfeited 200 shares of Rs.10 each (Rs. 7 called up) on which Naresh had paid application and allotment money of Rs. 5 per share. Out of these, 150 shares were re-issued to Mahesh as fully paid up for Rs. 6 per share.

(iii) X Ltd. forfeited 100 shares of Rs. 10 each (Rs. 6 called up) issued at a discount of 10% to Dimple on which she paid Rs. 2 per share. Out of these, 80 shares were re-issued to Simple at Rs. 8 per share and called up for Rs. 6 per share.

Solution: (i) Journal

S. No.

Particulars

L.F.

Amount(Rs.)

Amount(Rs.)

(i)

Equity share capital A/c (300 X 10) Dr.

 

3,000

 

 

To Equity Share Allotment A/c (300 X 3)

 

 

900

 

To Equity Share First & Final Call A/c 1,200 (300 X

4)

 

 

1,200

 

To Share Forfeiture A/c (300 X 3)

 

 

900

 

(Being shares forfeited of X due to non-payment of

allotment and final call)

 

 

 

(ii)

Bank A/c (300 X 8) Dr.

 

2,400

 

 

Share Forfeiture A/c (300 X 2) Dr.

 

600

 

 

To Equity Share Capital A/c (300 X 10)

 

 

3000

 

(Being shares reissued at discount of Rs. 2)

 

 

 

(iii)

Share Forfeiture A/c Dr.

 

300

 

 

To Capital Reserve A/c

 

 

300

 

(Being profit on reissue transferred to Capital

Reserve)

 

 

 

 

(ii) Journal

S. No.

Particulars

L.F.

Amount(Rs.)

Amount(Rs.)

(i)

Equity share capital A/c (200 X 7) Dr.

 

1,400

 

 

To Call in Arrears A/c (200 X 2)

 

 

400

 

To Share Forfeiture A/c (200 X 5)

 

 

1,000

 

Being shares forfeited of X due to non-payment of

 

 

 

 

final call)

 

 

 

(ii)

Bank A/c (150 X 6) Dr.

 

900

 

 

Share Forfeiture A/c (150 X 4) Dr.

 

600

 

 

To Equity Share Capital A/c (150 X 10)

 

 

1,500

 

(Being shares reissued at discount of Rs. 4)

 

 

 

(iii)

Share Forfeiture A/c (150 X 1) Dr.

 

150

 

 

To Capital Reserve A/c

 

 

150

 

(Being profit on reissue transferred to Capital

Reserve)

 

 

 

 

(iii) Journal

S. No.

Particulars

L.F.

Amount(Rs.)

Amount(Rs.)

(i)

Equity share Capital A/c (100 X 6) Dr.

 

600

 

 

To Discount on Issue of Equity 100 Shares (100 X 1)

 

 

100

 

To Calls in Arrears A/c (100 X 3)

 

 

300

 

To Share Forfeiture A/c (100 X 2)

 

 

200

 

(Being shares forfeited of X due to non-payment of

allotment and final call)

 

 

 

(ii)

Bank A/c (80 X 8) Dr.

 

640

 

 

Discount on Issue of Equity Shares (80 X 1) Dr.

 

80

 

 

To Equity Share Capital A/c (80 X 6)

 

 

480

 

Securities premium A/c (80 X 3)

 

 

240

 

(Being share reissued at Rs. 8 and original discount

cancelled)

 

 

 

(iii)

Share Forfeiture A/c (80 X 2) Dr.

 

160

 

 

To Capital Reserve A/c

 

 

160

 

(Being profit on reissue transferred to Capital

Reserve)

 

 

 

 

Note: Although this question 6(a)(iii), containing issue of shares at discount, has been asked in the examination but as per Companies Act, 2013, a company cannot issue shares at discount to general public.

 

Q-59 Monika, Yedhant and Zoya are in partnership, sharing profits and losses equally. Zoya died on 30th June 2018. The Balance Sheet of Firm as at 31st March 2018 stood as:

Liabilities

Rs.

Assets

Rs.

Creditors

20,000

Land and Building

1,50,

000

General Reserve

12,000

Investments

65,000

Capital Accounts :

 

Stock in trade

15,000

Monika

1,00,000

Trade receivables                           35,000

 

Yedhant

75,000

Less:Provision for doubtful debt 2,000

33,000

Zoya

75,000

Cash in hand

7,000

 

 

Cash at bank

12,000

 

2,82,000

 

2,82,000

 

In order to arrive at the balance due to Zoya, it was mutually agreed that:

(i) Land and Building be valued at Rs. 1,75,000

(ii) Debtors were all good, no provision is required

(iii) Stock is valued at Rs.13,500

(iv) Goodwill will be valued at one Year’s purchase of the average profit of the past five years. Zoya’s share of goodwill be adjusted in the account of Monika and Yedhant.

(v) Zoya’s share of profit from 1st April 2018, to the date of death be calculated on the basis of average profit of preceding three years.

(vi) The profit of the preceding five years ended 31st March were :

2018

2017

2016

2015

2014

25,000

20,000

22,500

35,000

28,750

 

You are required to prepare :

(1) Revaluation account

(2) Capital accounts of the partners and

(3) Balance sheet of the Firm as at 1st July 2018.

Solution: Revaluation Account

 

Particulars

Amount

Particulars

Amount

To Stock a/c

1,500

By Land & Building a/c

25,000

To Profit on Revaluation:

 

By Provision for Doubtful Debts

a/c

2,000

Monika 8,500

 

 

 

Yedhant 8,500

 

 

 

Zoya 8,500

 

 

 

 

27,000

 

27,000

 

Capital Account

Particulars

M (Rs.)

Y (Rs.)

Z (Rs.)

Particulars

M (Rs.)

Y (Rs.)

Z (Rs.)

To Zoya

4,375

4,375

 

By Balance b/d

1,00,000

75,000

75,000

To Z's

executor's a/c

 

 

98,125

By Revaluation

a/c (Profit)

8,500

8,500

8,500

To Balance c/d

1,08,125

83,125

 

By General

Reserve a/c

4,000

4,000

4,000

 

 

 

 

By M & Y (2)

 

 

8,750

 

 

 

 

By Profit & Loss

Suspense a/c (3)

 

 

1,875

 

1,12,500

87,500

98,125

 

1,12,500

87,500

98,125

 

Balance Sheet of the firm as at 1st July, 2018(after death)

Liabilities

Rs.

Assets

Rs.

Capital a/c:-

 

Land & Building

1,75,000

Monika 1,08,125

 

Investments

65,000

Yedhant 83,125

1,91,250

Stock

13,500

Creditors

20,000

Debtors

35,000

Zoya's Executor's a/c

98,125

Cash in Hand

7,000

 

 

Cash at Bank

12,000

 

 

Profit & Loss Suspense a/c

1,875

 

3,09,375

 

3,09,375

 

Working Notes:

(1) Calculation of Goodwill

Profits of the past five years

Years

Rs.

2014

28,750

2015

35,000

2016

22,500

2017

20,000

2018

25,000

 

1,31,250

 

Average Profit = \(1,31,250 \over5\)

= Rs.26,250

= 26,250 × 1 year purchase

= Rs. 26,250

(2) Treatment of Goodwill

Monika

Dr.

4,375

 

Yedhant

Dr.

4,375

 

To Zoya

 

 

8,750

(Being goodwill adjusted in the gaining ratio 1:1)

 

 

 

 

(3) Calculation of Zoya’s share of profit, upto the date of death

2016

22,500

2017

20,000

2018

25,000

 

67,500

Average Profit = \({67500 \over3} = ????????. 22,500\)

22,500 × 3/12× 1/3

= 1,875

 

Q-60 X, Y and Z were sharing profits and losses in the ratio of 1/2: 1/3: 1/6 respectively. The firm had insured the partner’s lives severally. The surrender values of the life policies appearing in the balance sheet as at 31st March, 2006 were – X for Rs. 5,000, Y for Rs. 4,000 and Z for Rs. 3,000. The surrender values represents 50% of the sum assured in each case. Y and Z decide to CAtestseries.org (Since 2015) – CA Final Inter Foundation online Test Series Page 102 share equally in future. Give the necessary journal entries assuming (a) If X retires on 31-3- 2006.

(b ) If X dies on 31-3-2006.

Date

Particulars

L.F.

Dr.

Cr.

31-3-06

Case (a)

 

 

 

No entry is to be passed since policies appear at surrender value and its real value is also  surrender           value,                          hence                          no

unaccounted/undivided profit.

1-3-06

Case (b)

 

 

 

Insurance Company's A/c Dr.

 

10,000

 

 

To X's Life Policy A/c

 

 

10,000

(Being the claim due on X's death recorded by

crediting X's Life Policy A/c)

 

X's Life Policy A/c Dr.

 

5,000

 

 

To X's Capital A/c

 

 

2,500

 

To Y's Capital A/c

 

 

1,667

 

To Z's Capital A/c

 

 

833

(Being the transfer of balance in X's life policy A/c being profit)

 

Q-61 From the following information, prepare a Bank reconciliation statement as at 31st December:

1. Bank overdraft as per Cash Book on 31st December, 2017 is 22,45,900'

2. Interest debited by Bank on 26th December, 2017 but no advice received is 2,78,700

3. Cheque issued before 31st December, 2017 but not yet presented to Bank amounted to 6,60,000

4. Transport subsidy received from the State Government directly by the Bank but not advised to the company amounted to 14,25,000

5. Draft deposited in the Bank, but not credited till 31st December, 2017 is 13,50,000

6. Bills for collection credited by the Bank till 31st December, 2017 but no advice received by the company amounted to 8,36,000

7. Amount wrongly debited to company account by the Bank, for which no details are available amounted to 7,40,000

Solution : Bank Reconciliation Statement as on 31st December

Particulars

Amount (Rs.)

Bank overdraft as per cash book

(22,45,900)

Add:

 

Cheque issued but not presented

6,60,000

Subsidy received by back directly

14,25,000

Bills for collection credited by bank

8,36,000

Less:

 

Interest debited by bank

(2,78,700)

Cheque deposited but not cleared

(13,50,000)

Amount wrongly debited by bank

(7,40,000)

Overdraft per passbook

(16,93,600)

 

Q-62 The Pass Book of Ram shows Rs. 1,50,000 balance as on 30th June but you find that it does not agree with the balance as per the cash Book. On scrutiny, you find the following discrepancies:

1. Two cheques one from Vibhishan for Rs. 50,000 and another from Raavan for Rs. 1,12,500 were collected in first week of July although they were banked on 25th June

2. Am amount of Rs. 1,00,000 representing collection of Sita’s cheque was wrongly credited to the account of Ram by the bank in their bank statement.

3. A customer of the firm who received a cash discount of 4% on his account of Rs. 4,000 paid the firm a cheque on 12th June which has been cleared. The cashier erroneously entered the gross amount in the bank column of the cash book.

4. A debit of Rs. 100 appeared in the bank statement for an unpaid cheque, which had been returned marked ‘out of date’. The cheque had been re-dated by the customer and paid into Bank again on 5th July.

Prepare a bank reconciliation statement

 

Particulars

Amounts (in Rs.)

Balance as per pass book

1,50,000

Add: Cheques deposited in bank but not yet cleared (1,12,500 + 50,000)

1,62,500

Wrong recording in Cash book

160

Debit in Pass book

100

Less: Wrong credit by bank

(1,00,000)

Balance as per Cash Book

2,12,760

 

 

 

Q-63 D’s Cash Book shows an overdrawn position of Rs. 3,630 on 31.3. though the Bank Statement shows only Rs. 3,378 overdrawn. Detailed examination of two records reviled the following:

1. A cheque for Rs. 1,560 in favour of Rath Associates has been omitted by the Bank from its statement, thus, cheque having been debited to another customer’s account.

2. The debit side of owned book has been under caste by Rs. 300.

3. A cheque for Rs. 182 drawn in payment of electricity amount had been entered in the Cash Book on Rs. 128 & was shown correctly in the Bank statement.

4. A cheque for Rs. 210 from S. Gupta having been paid into Bank, was dishonoured & shown as such on Bank statement, although no entry relating to dishonoured had been made in Cash Book.

5. The Bank had debited a cheque for Rs. 126 to D’s Account in error. It should have been debited to Sukhal’s Account.

6. A dividend of Rs. 90 on D’s holding of equity shares has been duly shown by Bank, no entry has been made in Cash Book.

7. A lodgement of Rs. 1,080 on 31.3.2013 had not been credited by Bank.

8. Interest on Rs. 228 had been directly debited by Bank not recorded in Cash Book.

You are required to prepare a Bank Reconciliation Statement after necessary amendment in Cash Book as on 31.3.2013.

Solution: In the Books of Mr. D Adjusted Cash Book (Bank Column only)

Solution: In the Books of Mr. D Adjusted Cash Book (Bank Column only)

 

Date

Particulars

Amount

Date

Particulars

Amount

31 Mar

To Dividend A/c

90

31 Mar

By Balance b/d

3,630

 

To Error

(under casting in debit side)

300

 

By Electric Charges A/c (Cheque drawn for Rs. 182 wrongly recorded as

Rs. 128 )

54

 

To Balance c/d

3,732

 

By S. Gupta’s A/c

210

 

 

 

 

By Bank Interest

228

 

 

4,122

 

 

4,122

 

Bank Reconciliation Statement of Mr. D as at 31st March

 

Particulars

Amounts (in Rs.)

Overdraft as per Adjusted Cash Book

(3,732)

Less: A cheque for Rs. 126 wrongly debited by Bank.

(126)

A lodgement not credited by Bank

(1,080)

Add: A cheque was issued in favour of Rath Associates not debited by Bank

1,560

Overdraft as per Pass Book

(3,378)

 

Q-64 A manufacturer has the following record of purchases of a condenser, which he uses while manufacturing radio sets:

Date

Quantity (units)

Price per unit

Dec. 4

900

50

Dec. 10

400

55

Dec. 11

300

55

Dec. 19

200

60

Dec. 28

800

47

 

2600

 

 

1,600 units were issued during the month of December. Calculate the value of inventory by weighted average method if company follows periodic system.

Solution: In the books of Manufacturer

Total No. of units purchased = 2,600

Less: Total No. of units sold = 1,600

Closing Stock = 1,000

Statement showing valuation of closing stock by weighted Average Method

Particulars

Rs.

The value of 1000 units at weighted average price of Rs.51.19

51,190

Value of Closing Inventory

51,190

 

Working note

Calculation of weighted average price:

Date

Quantity

Price

P x Q

Dec 4

900

50

45000

Dec 10

400

55

2200

Dec 11

300

55

16500

Dec 19

200

60

12000

Dec 28

800

47

37600

 

2,600

 

1,33,100

 

Weighted Average Price = 133100 / 2600 = 51.19

 

Q-65 M/s Hrishikesh, Jagadguru and Jagadisha are in retail business, following information is obtained from their records for the year ended 31st March:

Goods received from suppliers

(subject to trade discount and taxes) Trade discount 3% and sales tax 11%

Rs. 15,75,500

Direct expenses

Rs. 87,500

Sales during the year

Rs. 22,45,500

Sales price of closing inventories

Rs. 2,35,000

Calculate the historical cost of inventories using adjusted selling price method.

Solution: Determination of cost of purchases:

Particulars

Rs.

Goods received from suppliers

Rs.  15,75,500

Less: Trade discount 3%

(47,265)

 

15,28,235

Add: Sales Tax 11%

1,68,106

 

16,96,341

Add: Packaging and transportation charges

87,500

 

(17,83.841)

Determination of estimated gross profit margin:

 

Sales during the year

22,45,500

Closing inventory at the selling price

2,35,000

 

24,80,500

Less: Purchases

(17,83,841)

Gross profit

6,96,659

Gross profit margin (6,96,659/24,80,500 x 100)

28.09%

Inventory valuation:

 

Selling price of closing inventories

2,35,000

Less: Gross profit margin 28.09%

(66,012)

 

1,68,988

 

 

Q- 66 Bharat Indian Oil is a bulk distributor of petrol. A periodic inventory of petrol on hand is taken when the books are closed at the end of each month. The following summary of information is available for the month of June:

Sales

Rs. 15,00,000

General administration cost

Rs. 45,500

Opening Stock: 1,00,000 litres @ Rs. 3 per litre

Rs. 3,00,000

Purchases (including freight inward):

 

June 1       2,00,000 litres @ Rs. 2.85 per litre

 

June 30     1,00,000 litres @ Rs. 3.03 per litre

 

June 30      Closing stock 1,30,000 litres

 

 

Compute the value of inventory on June 30 using LIFO method of inventory costing. Also compute the amount of Gross Profit and Net Profit.

Answer: Book of Bharat Indian Oil

Statement showing inventory by LIFO, Gross Profit and Net Profit

Particulars

Amount

Closing inventory

 

1,00,000 litres @ 3 per litre

3,00,000

30,000 litres @ 2.85 per litre

85,500

 

3,85,500

Gross Profit

 

Sales (given)

15,00,000

Less: cost of goods sold (WN1)

(7,87,500)

 

7,12,500

Net Profit

 

Gross Profit

7,12,500

Less: Administration cost

(45,500)

 

6,67,000

 

Working note:

Cost of goods sold

 

1,00,000 litres @ 3.03 per litre

3,03,000

1,70,000 litres @ 3.03 per litre

4,84,500

 

7,87,500

 

Q-67 M/s Surya & Co. took lease of a quarry on 1-1-2013 for Rs. 1,00,00,000. As per technical estimate the total quantity of mineral deposit is 2,00,000 tonnes. Depreciation was charged on the basis of depletion method. Extraction pattern is given in the following table:

Year

Quantity of Mineral extracted

2013

2,000 tonnes

2014

10,000 tonnes

2015

15,000 tonnes

Show the Quarry Lease Account and Depreciation Account for each year from 2013 to 2015.

Solution: Quarry Lease Account

Date

Particulars

Rs.

Date

Particulars

Rs.

2021

 

 

2021

 

 

Jan

To Bank A/c

1,00,00,000

Dec. 31

By Depreciation A/c [(2,000/2,00,000)                          ×                          Rs.

1,00,00,000]

1,00,000

 

 

 

 

By balance c/d

99,00,000

 

 

1,00,00,000

 

 

1,00,00,000

Jan. 1,

22

To Balance b/d

99,00,000

Dec. 31

By Depreciation A/c

5,00,000

 

 

 

Dec. 31

By Balance c/d

94,00,00

 

 

99,00,000

 

 

99,00,000

Jan.1,

23

To Balance b/d

94,00,000

Dec.

31, 23

By Depreciation A/c

7,50,000

 

 

 

Dec. 31

By Balance c/d

86,50,000

 

 

94,00,000

 

 

94,00,000

 

Depreciation Account

 

Date

 

Particulars

 

Rs.

 

Date

 

Particulars

 

Rs.

 

Dec. 31

To Quarry lease A/c

1,00,000

Dec. 31

By Profit & Loss A/c

1,00,000

 

 

1,00,000

 

 

1,00,000

Dec.31

To Quarry lease A/c

5,00,000

Dec.31

By Profit & Loss A/c

5,00,000

 

 

5,00,000

 

 

5,00,000

Dec.31

To Quarry lease A/c

7,50,000

Dec.31

By Profit & Loss A/c

7,50,000

 

 

7,50,000

 

 

7,50,000

 

Q-68 A machine is purchased for Rs. 7,00,000. Expenses incurred on its cartage and installation Rs. 3,00,000.

Calculate the amount of depreciation @ 20% p.a. according to Straight Line Method for the first year ending on 31st March, 2013, if this machine is purchased on:

1. 1st April, 2012

2. 1st July, 2012

3. 1st October, 2012

4. 1st January, 2013

Solution: Total Cost of Asset = Purchased Price + Cost of Cartage and Installation

= Rs. 7,00,000 + Rs. 3,00,000 = Rs. 10,00,000

SLM Depreciation = Total Cost of Asset × Rate of Depreciation × Time period Accordingly,

(a) If the machine was purchased on 1st April, 2021:

Amount of Depreciation = Rs. 10,00,000 × 20% ×\( {12 \over12} = Rs. 2,00,000\)

(b) If the machine was purchased on 1st July, 2021

Amount of Depreciation = Rs. 10,00,000 × 20% ×\( {6\over 12} = Rs. 1,00,000\)

(d) If the machine was purchased on 1st January, 2022

Amount of Depreciation = Rs. 10,00,000 × 20% × \({3 \over12} = Rs. 50,000\)

 

 

Q-69 You are required to prepare a Trading and Profit and Loss Account for the year ending 31st March and a Balance Sheet as on that date from the Trial Balance given below:

Particulars 

Rs

Particulars 

Rs

Debit Balance 

 

 

 

Trade Receivable 

3,50,000

Salaries

2,20,000

Inventory 1 st April 2015

5,00,000

Purchases

12,50,000

Cash in hand 

5,60,000

Plant &Machinery

15,70,000

Wages

3,00,000

Credit Balance :

 

Bad debts 

50,000

Capital

25,00,000

Furniture and Fixtures 

1,50,000

Trade Payable

9,00,000

Depreciation

1,50,000

sales 

17,00,000

 

On 31st March the Inventory was valued at Rs. 10,00,000.

Solution

Particulars

Rs.

Particulars

Rs.

To Opening Inventory

5,00,000

By Sales

17,00,000

To Purchases

12,50,000

By Closing Inventory

10,00,000

To Wages

3,00,000

 

 

To Gross Profit

6,50,000

 

 

 

27,00,000

 

27,00,000

To Bad Debts

50,000

By Gross Profit

6,50,000

To Depreciation

1,50,000

 

 

To Salaries

2,20,000

 

 

To Net Profit transferred to

Capital A/c

2,30,000

 

 

 

6,50,000

 

6,50,000

 

Balance Sheet as at 31st March

Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Capital:

 

 

Cash in Hand

5,60,000

 

Previous Balance

25,00,000

 

TRade receivables

3,50,000

 

Add : Net Profit

2,30,000

27,30,000

Closing Inventory

10,00,000

19,10,000

Trade payables

 

9,00,000

Furniture                 &

Fixtures

1,50,000

 

 

 

 

Plant & Machinery

15,70,000

17,20,000

 

 

36,30,000

 

 

36,30,000

 

 

Q-70 Mr. Birla is a proprietor engaged in business of trading electronics. An excerpt from his Trading & P&L account is as follows:

 

Commission is charged at the rate of 10%.

Selling Expenses amount to 1% of total sales.

You are required to compute the missing figures.

Solution: Computation of Net Profit: (F)

Commission Manager = Rate of Commission X Net Profit before charging such commission

So, Commission to manager = 10/100 × Net Profit before charging such commission

=> Rs. 2,00,000 = 10/100 × Net Profit before charging such commission

=> Net Profit before charging such commission = Rs. 20,00,000

=> Net Profit (F) = Rs. (20,00,000 - 2,00,000) = Rs.18,00,000

Computation of Selling Expenses: (E)

Total income appearing in P&L A/c =Rs.60,00,000

Total expenses other than selling expenses = Rs. (26,00,000 + 13,00,000 + 2,00,000)

= Rs.41,00,000

So, Selling Expenses + Remaining Expenses + Net Profit = Total Income

=> Selling Expenses = Rs.60,00,000 –Rs. 41,00,000 – Rs.18,00,000

=> Selling Expenses = Rs. 1,00,000

Computation of Sales: (A)

We have been given selling expenses amount to 1% of Sales

\(So, Sales = {Selling Expense\over 1} ×100\)

\(={1,00,000\over 1} × 100\)

=Rs. 100,00,000

Computation of Gross Profit: (B): In Trading A/c

Particulars

Rs.

Particulars

Rs.

To COGS

45,00,000

By Sales (from C above)

100,00,000

To   Gross  Profit    (Balancing

Figure)

55,00,000

 

 

Total (C)

100,00,000

Total (C)

100,00,000

 

So, Gross Profit (B) = Rs. 55,00,000

Miscellaneous Income = Total Income in P&L - Gross Profit (D)

= Rs. (60,00,000 - 55,00,000)

= Rs. 5,00,000

C = Rs. 100,00,000 (As computed in B above)

G = RS. 60,00,000 (Total of both sides of P&L is equal after balancing has been done)

 

 

Q-71 Rita owed Rs. 1,00,000 to Siriman. On 1st October, 2016, Rita accepted a bill drawn by Siriman for the amount at 3 months. Siriman got the bill discounted with his bank for Rs. 99,000 on 3rd October, 2016. Before the due date, Rita approached Siriman for renewal of the bill.

Siriman agreed on the conditions that Rs. 50,000 be paid immediately together with interest on the remaining amount at 12% per annum for 3 months and for the balance, Rita should accept a new bill at three months. These arrangements were carried out. But afterwards, Rita became insolvent and 40% of the amount could be recovered from his estate. Pass journal entries (with narration) in the books of Siriman.

Solution: In the books of Siriman Journal Entries

Particulars

L.F.

Rs.

Rs.

Bills Receivable A/c

Dr.

1,00,000

 

To Rita

 

 

1,00,000

(Being a 3 month’s bill drawn on Rita for the amount due)

 

 

 

Bank A/c

Dr.

99,000

 

Discount A/c

Dr.

1,000

 

To Bills Receivable A/c

 

 

1,00,000

(Being the bill discounted)

 

 

 

Rita

Dr.

1,00,000

 

To Bank A/c

 

 

1,00,000

(Being the bill cancelled up due to Rita’s inability to pay it)

 

 

 

Rita

Dr.

1,500

 

To Interest A/c

 

 

1,500

(Being the interest due on Rs.5,000 @ 12% for 3 months)

 

 

 

Bank A/c

Dr.

51,500

 

To Rita

 

 

51,500

(Being the receipt of a portion of the amount due on the

bill together with interest)

 

 

 

Bills Receivable A/c

Dr.

50,000

 

To Rita

 

 

50,000

(Being the new bill drawn for the balance)

 

 

 

Rita

Dr.

50,000

 

To Bills Receivable A/c

 

 

50,000

(Being the dishonour of the bill due to Rita’s insolvency)

 

 

 

Bank A/c

Dr.

20,000

 

Bad Debts A/c

Dr.

30,000

 

To Rita

 

 

50,000

(Being the receipt of 40% of the amount due on the bill from rita’s estate)

 

 

 

 

 

Q-72 X supplied goods on sale or return basis to customers, the particulars of which are as under:

Date of dispatch

Party’s name

Amount in Rs.

Remarks

10.12.2016

ABC Co.

10,000

No information till 31.12.2016

12.12.2016

DEF Co.

15,000

Returned on 16.12.2016

15.12.2016

GHI Co.

12,000

Goods worth Rs. 2,000 returned

on 20.12.2016

20.12.2016

DEF Co.

16,000

Goods Retained on 24.12.2016

25.12.2016

ABC Co.

11,000

Good Retained on 28.12.2016

30.12.2016

GHI Co.

13,000

No information till 31.12.2016

 

Goods are to be returned within 15 days from the dispatch, failing which it will be treated as sales.

The books of ‘X’ are closed on the 31st December, 2016. Prepare the following accounts in the books of ‘X’.

(a) Goods on “sales or return, sold and returned day books”.

(b) Goods on sales or return total account.

Solution: In the books of ‘X’ Goods on sales or return, sold and returned day book

 

Q- 73 X of Delhi purchased 10,000 metres of cloth for Rs. 2,00,000 of which 5,000 metres were sent on consignment to Y of Agra at the selling price of Rs. 30 per metre. X paid Rs. 5,000 for freight and Rs. 500 for packing etc .Y sold 4,000 metre at Rs. 40 per metre and incurred Rs. 2,000 for selling expenses. Y is entitled to a commission of 5% on total sales proceeds plus a further 20% on any surplus price realised over Rs. 30 per metre. 3,000 metres were sold at Delhi at Rs. 30 per metre less Rs. 3,000 for expenses and commission. Owing to fall in market price, the inventories of cloth in hand is to be reduced by 10%.

Prepare the Consignment Account and Trading and Profit & Loss Account in books of X.

Solution: In the books of Mr. X Consignment Account

Particulars

Amount Rs.

Particulars

Amount Rs.

To Goods sent on

Consignment

1,50,000

By Y’s account: (Sales)

1,60,000

To Bank account: Freight and

packing etc.

5,500

By Goods sent on consignment

(Cancellation of loading)

50,000

To Y’s account: Selling expenses

Commission (W.N.1)

 

2.000

16,000

By Inventories on consignment (W.N.2)

28,990

To Inventories Reserve

[W.N.3]

10,000

 

 

To Profit and loss account (profit on consignment

transferred)

55,490

 

 

 

2,38,990

 

2,38,990

 

Trading and Profit and Loss Account for the year ended…….

Particulars

Amount Rs.

Particulars

Amount Rs.

To Purchases

2,00,000

By Sales

90,000

To Gross profit c/d

26,000

By Goods sent on

consignment

1,00,000

 

 

By Inventories in hand Cost

40,000

Less: 10%                  4,000

 

 

 

36,000

 

2,26,000

 

2,26,000

To Expenses and commission

3,000

By Gross profit b/d

26,000

To Net profit

78,490

By Consignment A/c

(profit on consignment)

55,490

 

81,490

 

81,490

 

Working Notes:

i. Calculation of commission payable to Y:

Rs.

Total sale proceeds of Y

1,60,000

Surplus proceeds realised over Rs. 30 per metre [4,000 x Rs. (40-30)]

40,000

Commission:

8,000

5% of total sale proceeds (5% of Rs. 1,60,000)

8,000

20% of surplus (20% of Rs. 40,000)

16,000

 

 

ii. Inventories on Consignment:

Rs.

Cost of consignment Inventories (1000 mtrs@ Rs. 30)

30,000

Add: Expenses of consignor (5,500X1/5)

1,100

 

31,100

Less: Reduction of 10% in cost due to fall in market price (20,000+1,100) x 10%

2,110

 

28,990

iii. Loading ( Rs.10 x 1,000 mtrs)

10,000

 

 

Q-74 Develop the accounting equation from following information available at the beginning of accounting period:

Particulars

(Rs. in 000)

Capital

51,000

Loan

11,500

Trade payables

5,700

Fixed Assets

12,800

Inventory

22,600

Trade receivables

17,500

Cash and Bank

15,300

 

At the end of the accounting period the balances appear as follows:

Particulars

Rs.

Capital

?

Loan

11,500

Trade payables

5,800

Fixed Assets

12,720

Inventory

22,900

Trade receivables

17,500

Cash and Bank

15,600

 

(a) Reset the equation and find out profit.

(b) Prepare Balance Sheet at the end of the accounting period.

(All the figures in solution are in ‘000)

(a) Accounting equation is given by

Equity + Liabilities = Assets

Let us use E0, L0 and A0 to mean equity, liabilities and assets respectively at the beginning of the accounting period.

E0 = Rs. 51,000

L0 = Loan + Trade payables

= Rs.11,500 +Rs.5,700 = Rs.17,200

A0 = Fixed Assets + Inventories + Trade receivables + Cash at Bank

= Rs.12,800 +Rs.22,600 +Rs.17,500 +Rs.15,300 = Rs.68,200

So, at the beginning of accounting period

E0 + L0 = A0

i.e.,Rs.51,000 +Rs.17,200 =Rs.68,200

Let us use E1, L1, A1 to mean equity, liabilities and assets respectively at the end of the accounting period.

L1 = Loan + Trade payables

= Rs.11,500 +Rs.5,800 = Rs.17,300

A1 = Fixed Assets + Inventories + Trade receivables + Cash at Bank

= Rs.12,720 +Rs.22,900 +Rs.17,500 +Rs.15,600 = Rs.68,720

E1 = A1 - L1 =Rs.68,720 -Rs.17,300 =Rs.51,420

Profit = E1 - E0 =Rs.51,420 -Rs.51,000 =Rs.420

 

Balance Sheet

Liabilities

Rs.

Assets

Rs.

Capital Balance

Add: Profit

51,000

420

 

51,420

Fixed Assets

12,720

Loan

11,500

Inventories

22,900

Trade payables

5,800

Trade receivables

17,500

 

 

Cash at Bank

15,600

 

68,720

 

68,720

 

Q-75 Show the effect of increase, decrease and no change on the assets of the following transactions:

Rs. Purchased office furniture, payment to be made next month.

Rs. Collected cash for repair services

Rs. Goods sold on credit.

Rs. Withdrawal of cash by the owner for personal use.

Rs. Hired an employee as sales manager of the north wing.

Rs. Returned goods worth Rs. 50,000.

Rs. One of our debtor agreed to pay his dues to Mr. C who is a creditor of the company with the same amount being due to him.

Rs. Entered into an agreement with Mehta & Co. to purchase all raw materials from their company from next year. Also give reasons for your answers.

 

S.No.

Increase (+) /

Reason

 

Decrease (-) / No Change (0)

in Assets

 

(a)

+

Furniture has been purchased making it an increase in assets and also

it being purchased on credit it increases liability and there is no outflow of assets like cash or bank.

(b)

+

Cash has flowed in for services provided making it an increase in

assets.

(c)

+

Here with goods sold there is a decrease in inventory (assets) but given there is an increase in debtors there will be a net increase in assets. Though if goods are sold at cost it will result in no change

whereas sale at below cost will result in decrease in assets.

(d)

-

Here cash has been withdrawn from business resulting in decrease in

assets and capital.

(e)

0

Only hiring of employee has been done resulting in no change in

assets.

 

(f)

-

Outflow of goods has resulted in decrease in assets while money

owed to creditors reduce on the liability side.

(g)

-

Here both assets and liabilities reduce by same amounts meaning a

decrease in assets.

(h)

0

Only a purchase agreement has been entered into with no

transaction taking place yet.

 

 

Q-76 State with reasons whether the following statements are ‘True’ or ‘False’.

1. Overhaul expenses of second-hand machinery purchased are Revenue Expenditure. CAtestseries.org (Since 2015) – CA Final Inter Foundation online Test Series Page 126

2. Money spent to reduce working expenses is Revenue Expenditure.

3. Legal fees to acquire property is Capital Expenditure.

4. Amount spent as lawyer’s fee to defend a suit claiming that the firm’s factory site belonged to the plaintiff’s land is Capital Expenditure.

5. Amount spent for replacement of worn out part of machine is Capital Expenditure.

6. Expense incurred on the repairs and white washing for the first time on purchase of an old building are Revenue Expenses.

7. Expenses in connection with obtaining a license for running the cinema is Capital Expenditure.

8. Amount spent for the construction of temporary huts, which were necessary for construction of the Cinema House and were demolished when the cinema house was ready, is Capital Expenditure.

Answer 1. False: Overhaul expenses are incurred to put second-hand machinery in working condition. So it should be capitalised.

2. 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.

3. True: Legal fee paid to acquire any property is part of the cost of that property. It is incurred to possess the ownership right of the property and hence a capital expenditure.

4. False: Legal expenses incurred to defend a suit claiming that the firm’s factory site belongs to the plaintiff are maintenance expenditure of the asset. Maintenance expenditure in relation to an asset is revenue expenditure.

5. False: Amount spent for replacement of any worn out part of a machine is revenue expense since it is part of its maintenance cost.

6. False: Repairing and white washing expenses for the first time of an old building are incurred to put the building in usable / working condition. These are the part of the cost of building. Accordingly, these are capital expenditure.

7. True: The Cinema Hall could not be started without license. Expenditure incurred to obtain the license is pre-operative expense (incurred before the working condition) which is capitalised.

8. True: Cost of temporary huts constructed which were necessary for the construction of the cinema house is part of the construction cost of the cinema house. Therefore such costs are to be capitalised.

 

 

Q-77 State with reasons, how you would classify the following items of expenditure:

1. Overhauling expenses of Rs. 25,000 for the engine of a motor car to get better fuel efficiency.

2. Inauguration expenses of Rs. 25 lacs incurred on the opening of a new manufacturing unit in an existing business.

3. Compensation of Rs. 2.5 crores paid to workers, who opted for voluntary retirement.

Answer: 1. Overhauling expenses are incurred for the engine of a motor car to derive better fuel efficiency. So this expenditure should be capitalised.

2. Inauguration expenses incurred on the opening of a new unit is in the nature of revenue expenditure, as this expenditure is not necessary to bring assets into working condition.

3. The amount paid to workers on voluntary retirement is in the nature of revenu