C.A.

IPCC
First Study
Subject: Accounting
Instructions :
(i)
All questions are compulsory.
(ii)

Date of Examination : 17.02.2010

(iii)

Total Number of Questions : 6

(iv)

Total marks :

100

(v)

Total duration :

3 Hours

(vi)

Use of two colour pens (black & blue or Black or Pink etc) is NOT allowed. Use only
single colour pen.

(vii) Begin answer of the next question in new page.

Question 1.Answer the following questions:

(i) In self balancing system, whenever a balance is transferred from an account in on e ledger to that in
another, only one entry is recorded through the respective ledger. State with reason whether the statement is
true or false.
Answer. False- Whenever a balance is transferred from one account in one ledger to that in another, the
entry is recorded through the journal. Also an additional entry is made in the control accounts for recording
the corresponding effect.
(ii) Explain Garner v/s Murray rule applicable in the case of partnership firms. State, when is this rule not
applicable.
Answer. Garner vs. Murray rule requires1.That the solvent partners should bear the loss arising due to insolvency of a partner in their capital ratio
after making adjustments for past accumulated reserves, profits or losses, drawings, interest on
drawings/capitals, remuneration to partners etc, to the date of dissolution but before making adjustment for
profit or loss on realization in case of fluctuating capital. In case of fixed capital no such adjustments
required.
2. That the solvent partners should bring in cash equal to their respective shares of the loss on realization.
This rule is not applicable when:
a) Only one partner is solvent.
b) All partners are insolvent.
c)The Partnership deed provides for a specific method to be followed in case of insolvency of a partner,
then the conditions in the deed would prevail.
(iii) Explain the Accounting for Revaluation of fixed assets with reference to AS 10.
Answer. An increase in net book value arising on revaluation of fixed assets is normally credited
directly to revaluation reserves and is not available for distribution. A decrease in net book value arising on
revaluation of fixed assets is charged to P & L statement except that, to the extent that such a decrease is
considered to be related to a previous increase on revaluation that is included in revaluation reserve, it is
sometimes charged against that earlier increase. It sometimes happens that an increase to be recorded is
a reversal of a previous decrease arising on revaluation which has been charged to profit and loss
statement in which case the increase is credited to profit and loss statement to the extent that it offsets the
previously recorded decrease.
(iv) If there appears a sports fund, the expenses incurred on sports activities will be taken to income
and expenditure account. State whether the statement is true or false.
Answer. False- If there exists a specific sports fund, the expenditure incurred in carrying out the purpose of
the fund i.e. incurred on sports activities will be deducted from that fund only.
(v) A Ltd. take over B Ltd. on April 01, 2007 and discharges consideration for the business as
follows:
(a) Issued 42,000 fully paid equity shares of Rs. 10 each at par to the equity shareholders of B Ltd.
(b) Issued fully paid up 15% preference shares of Rs. 100 each to discharge the preference shareholders
(Rs. 1,70,000) of B Ltd. at a premium of 10%.
(c) It is agreed that the debentures of B Ltd. (Rs. 50,000) will be converted into equal number and amount
of 13% debentures of A Ltd.
Calculate the amount of purchase consideration.
Answer.
Particulars
Rs.
Rs.
Equity Shares (42,000 x 10)
4,20,000
Preference Share Capital
1,70,000
Add: Premium on Redemption (10% on 1,70,000)
17,000
1,87,000
Purchase Consideration
6,07,000

(vi) What is meant by Red-Ink interest in an Account Current?

Answer. In an Account Current, interest is calculated on the amount of a bill from the date of transaction to
the closing date of the period concerned. In case the due date of the bill falls after the closing date of the
account, then no interest is allowed for that period. However, it is customarily followed that interest from the
date of closing to the due date is written in red ink in the appropriate side of the Account Current. This
interest is called Red-Ink Interest. This Red-Ink interest is treated as negative interest.
(vii) A, B and C are partners with profit sharing ratio 5:3:2. A wants to retire, B and C agreed to continue at
2:1. Find the profit gaining ratio between B and C.
Answer. B : 2/3 less 3/10 = 11/30
C: 1/3 less 2/10 = 4/30
Gaining ratio = B : C =11 : 4
(viii) What is B list contributories?
Answer. B list contributories are the shareholders who transferred partly paid shares (otherwise than
by operation of law or by death) within one year, prior to the date of winding up. They may be called upon
to pay an amount (not exceeding the amount not called up when the shares were transferred) to pay off such
creditors, as existed on the date of transfer of shares and cannot be paid out of the funds otherwise available
with the liquidator, provided also that the existing shareholders have failed to pay the amount due on the
shares.
(ix) X Ltd. purchased debentures of Rs.15 lacs of Y Ltd., which are traded in stock exchange. How will you
show this item as per AS 3 while preparing cash flow statement for the year ended on 31st March, 2009?
Answer. As per AS 3 on Cash flow Statement, cash and cash equivalents consists of cash in hand, balance
with banks and short-term, highly liquid investments
If investment, of Rs.15 lacs, made in debentures is for short-term period then it is an item of cash
equivalents.
However, if investment of Rs.15 lacs made in debentures is for long -term period then as per AS 3, it should
be shown as cash flow from investing activities.
(x) What are the conditions that are to be satisfied for Amalgamation in the nature of merger?
Answer. Amalgamation in the nature of merger is an amalgamation which satisfies all the following
conditions.
i) All the assets and liabilities of the transferor company become the assets and liabilities of the transferee
company.
ii) Shareholders of transferor company ( selling company) holding not less than 90% of the face value of
equity shares become the shareholders of transferee company ( purchasing company) by virtue of
amalgamation. For purpose of computing 90%, shares already held prior to amalgamation by transferee
company, One or more of its subsidiaries, its nominee must be excluded.
iii) The consideration paid to equity shareholders of the transferee company is wholly in the form of equity
shares in the transferor company, except that cash may be paid in respect of any fractional shares.
iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company, and
v) Assets and liabilities of transferor company are incorporated in the financial statement of the transferee
company at book values except to ensure uniform accounting policies.
(10X2=20 Marks)
Question 2.Vasant Ltd. and Vihar Ltd. are to be amalgamated into Vasant Vihar Ltd. (VVL). The new
company is to take over all the assets and liabilities of the amalgamating companies.
Assets and liabilities of Vasant Ltd. are to be taken over at book values in exchange of shares in VVL. Three
shares in the new company are to be issued at a premium of 20% for two shares of Vasant Ltd.
The scheme of Vihar Ltd. is as follows:

(a) 10% preference shareholders are to be allotted two 15% preference shares of Rs 100 each in VVL for
three preference shares held in Vihar Ltd.;
(b) The debentures of Vihar Ltd. are to be paid off by the issue of same number of debentures at 5%
discount by the VVL:
(c) The equity shareholders of Vihar Ltd. are to be allotted as many shares in VVL as will cover the
balance of their account and for this purpose, plant and machinery is to be valued less by 15% and
obsolete stock forming 10% of the overall stock value is to be treated as worthless.
The balance sheets of the two companies prior to amalgamation are as under :
Particulars
Equity Capital (Shares of Rs. 10 each)
10% Preference shares of Rs. 100 each
Secured debentures
General reserves
Sundry Creditors
Total
Plant and Machinery
Sundry debtors
Inventories
Cash and bank balances
Profit and loss account
Total

Vasant Ltd.
6,40,0000
--8,80,000
1,20,000
16,40,000
12,80,000
1,52,000
1,00,000
1,08,000
--

Vihar Ltd.
12,50,000
7,50,000
5,00,000
-2,25,000

16,40,000

27,25,000

27,25,000
20,00,000
1,25,000
1,50,000
1,00,000
3,50,000

Pass the necessary journal entries in the books of VVL and prepare the Balance Sheet immediately after
amalgamation.
Answer. (a)Computation of Purchase Consideration
(i)
Due to Vasant Ltd.
3 shares in VVL @ Rs. 12 each for every 2 shares in Vasant Ltd.

(ii)

i.e., 64,000 x 3 x Rs. 12

2
of which the premium would be = 64,000 x 3 x Rs. 2
2

= Rs. 11,52,000

Due to Vihar Ltd.

Plant and Machinery
Sundry debtors
Inventories
Cash and Bank Balance
Gross Assets
Less : Liabilities
Sundry creditors
2,25,000
Debentures @ 5% discount
4,75,000
Net assets forming the purchase price
Discharged by
Issue of Preference shares
7,500 x 2 x Rs. 100
3
Equity shares balancing figure

Rs.
17,00,000
1,25,000
1,35,000
1,00,000
20,60,000

= Rs. 1,92,000

7,00,000
13,60,000
5,00,000
8,60,000
13,60,000

(b) In the Journal of Vasant Vihar Ltd.(VVL)

Date

Particulars
Business Purchase A/c
To Liquidator of Vasant Ltd.
(Being the purchase consideration due to Vasant Ltd.
Plant and Machinery A/c
Sundry debtors A/c
Inventories A/c
Cash and bank balance
To Trade creditors
To Capital Reserve (bal. Fig)
To Business purchase A/c
(Being the assets and liabilities taken over from Vasant Ltd. and
credit to Capital reserve being the difference between net
assets and purchase price)
Liquidator of Vasant Ltd.
To Equity Share Capital A/c
To Share Premium A/c
(Being the issue of 96,000 shares at a premium of Rs. 2 per
share towards the settlement of purchase

Dr.

Business Purchase A/c

To Liquidator of Vihar Ltd.
[Being the purchase consideration due to Vihar Ltd. on purchase
of the business)
Plant and Machinery A/c
Sundry Debtors A/c
Inventories A/c
Cash and Bank Balance A/c
To Sundry Creditors A/c
To Debentures A/c
To Business Purchase A/c
(Being the assets and liabilities taken over from Vihar Ltd.)

Dr.

Debit
Rs.
11,52,000

Credit
Rs.
11,52,000

Dr.
Dr.
Dr.
Dr.

12,80,000
1,52,000
1,00,000
1,08,000
1,20,000
3,68,000
11,52,000

Dr.

11,52,000
9,60,000
1,92,000

13,60,000
13,60,000

Dr.
Dr.
Dr.
Dr.

Debentures (Vihar Ltd.)

Dr.
Discount on Issue of debentures
Dr.
To Debentures
(Being the issue of debentures to debentures holders of Vihar
Ltd.
Liquidator of Vihar Ltd.
Dr.
To Equity Share Capital A/c
To Preference Share Capital A/c
(Being the discharge of purchase consideration by issue of
equity and preference shares)

17,00,000
1,25,000
1,35,000
1,00,000
2,25,000
4,75,000
13,60,000
4,75,000
25,000
5,00,000

13,60,000
8,60,000
5,00,000

(c) Balance Sheet of Vasant Vihar Ltd. [after merger}

Liabilities
Share Capital:
Equity Share Capital
(Shares of Rs 10 each)
Preference Share Capital
(Shares of Rs 100 each)

Rs. Assets
Fixed Assets;
Plant and Machinery
18,20,000 Current Assets:
Sundry debtors
5,00,000 Inventory

Rs.
29,80,000
2,77,000
2,35,000

(All the above shares have been

issued for acquiring the business
of Vasant Ltd. and Vihar Ltd.)
Reserve and Surplus:
Share Premium
Capital Reserve
Secured Loans:
Debentures
Unsecured Loans
Current Liabilities:
Sundry Creditors

Cash and Bank

Misc. Expenditure:
Discount on issue of debentures

2,08,000

25,000

1,92,000
3,68,000
5,00,000
Nil
3,45,000
37,25,000

37,25,000
(16 Marks)

Question 3.
A, B and C are in partnership sharing profits and losses in the ratio 3:2:1 respectively. The Balance Sheet of
the partnership firm as on31.12.1997 is as underLiabilities
Capital A/cs: (A Rs 85,000; B Rs 65,000;
C Rs 35,000)
Current A/cs: [A Rs 3,714; B (- Rs 2,509);
C Rs 4,678]
LoanC
Creditors
Bank overdraft

Rs Assets
Premises
1,85,000 Plant
Vehicles
5,883 Fixtures
28,000 Stock
19,036 Debtors
4,200
Cash
2,42,119

Rs
90,000
37,000
15,000
2,000
62,379
34,980
760
2,42,119

C decides to retire from the business as on the above date and D is admitted as a partner on that date. The
following matters are agreed:
1) Assets revalued as : Premises Rs 1,20,000; Plant Rs 35,000; Stock Rs 54,179.
2) A provision of Rs 3,000 is created against debtors.
3) Goodwill is to be recorded in the books on the day C retires at Rs 42,000. The partners in the new firm
do not wish to maintain a Goodwill Account so that amount is to be written-off against the New
Partners' Capital Accounts.
4) A and B are to share profit in the same ratio as-before, and D is to have the same share of profits as B,
5) C is to take a car at its book value of Rs 3,900 in part payment, and the balance of all he is owed by the
firm in cash except Rs 20,000 which he is willing to leave as a Loan Account.
6) The partners in the new firm are to start on an equal footing so far as Capital and Current Accounts are
concerned. D is to contribute cash to bring his Capital and Current Accounts to the same amount as the
original partner from the old firm who has the lower investment in the business. The original partner in
the old firm who has the higher investment will draw out cash so that his capital and current account
balances equal those of his new partners.
7) Revaluation profit or loss is to be adjusted in the Partners' Current Account.
You are required to prepare necessary Ledger Accounts to record the above transactions and to prepare the
Balance Sheet of the new firm as at 1.1.1998.
Answer. In the books of the Firm
Dr.
Revaluation Account
Cr.
Date
Particulars
Rs Date
Particulars
Rs

31.12.97

To Plant A/c
2,000 8,200 31.12.97 By Premises A/c
To Stock A/c
To Provision for doubtful debts
3,000
A/c
To Partners' Current A/cs:
(A Rs 8,400; B Rs 5,600;
16,800
C Rs 2,800)
30,000

Dr.
Particulars
To Goodwill A/c
To C Loan A/c
To Bank A/c
To Balance c/d

Dr.
Particulars
To Balance b/d
To C Loan A/c
To Bank A/c
To Balance c/d

30,000

30,000

Partners' Capital Accounts

Cr.
A
B
C
D Particulars
A
B
C
D
18,000 12,000
-- 12,000 By Balance b/d
85,000 65,000 35,000
---- 42,000
-- By Goodwill A/c 21,000 14,000 7,000
-By
Bank
A/c
---21,000
---79,000
67,000 67,000
-- 67,000
1,06,000 79,000 42,000 79,000
1,06,000 79,000 42,000 79,000

A
--9,023
3.091
12,114

Dr.
Date

Partners' Current Accounts

B
C
D Particulars
2,509
--- By Balance b/d
-7,478
-- By Revaluation
---- A/c
3,091
-- 3,091 By Bank A/c
5,600
7,478 3,091

Particulars
31.12.97 To Vehicles A/c
To Bank A/c (balancing figure)
To Balance c/d

C Loan Account
Rs Date
3,900 31.12.97
53,578
20,000

Cr.
A
B
C
3,714
-- 4,678
8,400 5,600 2,800

--- 3,091
-12,114 5,600 7,478 3,091

Particulars
By Balance b/d
By C Capital A/c
By C Current A/c

77,478
Dr.
Date
Particulars
31.12.97 To D Capital A/c
To D Current A/c
To Balance c/d

Bank Account
Rs Date
Particulars
79,000 31.12.97 By Balance b/d
3,091
By C Loan A/c
5,710
By A Capital A/c
By A Current A/c
87,801

Balance Sheet of the New Firm as at 1.1.1998

Rs
Assets
Capital A/cs:
2,01,000 Premises
(A - Rs 67,000; B - Rs 67,000; D - Rs
Plant
67,000) Current A/cs: (A Rs 3,091; B
Vehicles
Rs 3,091; D 3,091)
9,273 Fixtures
LoanC
20,000 Stock
Creditors
19,036 Debtors
5,710
Bank overdraft
Less: Provision for Bad Debts 34,980
Liabilities

D
---

Cr.
Rs
28,000
42,000
7,478
77,478
Cr.
Rs
4,200
53,578
21,000
9,023
87,801

Rs
1,20,000
35,000
11,100
2,000
54,179
31,980
760

Cash

3,000

2,55,019

2,55,019

Tutorial Note: Revaluation profit will increase partners' permanent capital in the firm. Therefore, such
profit is credited to Fanners' Capital Accounts but in this problem, it has been agreed by the partners to
adjust it in the Current Account.
(16 Marks)
Question 4.
(a)The premises of XY Limited were partially destroyed by fire on 1st March, 1992 and as a result, the
business was practically disorganised up to 31st August, 1992. The company is insured under a loss of
profits policy for Rs. 1,65,000 having an indemnity period of 6 months.
From the following information, prepare a claim under the policy :
(i) Actual turnover during the period of dislocation (1.3.1992 to 31.8.1992)
(ii) Turnover for the corresponding period (dislocation) in
the 12 months immediately before the fire (1.3.1991 to 31.8.1991)
(iii)Turnover for the 12 months immediately preceding the fire (1.3.1991 to 28.2.92)
(iv)Net profit for the last financial year
(v) Insured standing charges for the last financial year
(vi)Uninsured standing charges
(vii)Turnover for the last financial year

80,000
2,40,000
6,00,000
90,000
60,000
5,000
5,00,000

Due to substantial increase in trade, before and up to time of the fire, it was agreed that an adjustment of l0%
should be made in respect of the upward trend in turnover. The company incurred additional expenses
amounting to Rs. 9,300 immediately after the fire and but for this expenditure, the turnover during the period
of dislocation would have been only Rs. 55,000.
There was also a saving during the indemnity period, of Rs. 2,700 in insured standing charge as a result of
the fire.
Answer. Computation of loss of profit insurance claim
(1)
Rate of gross profit:
Rs.
Net profit for the last financial year
90,000
Add : Insured standing charges
60,000
1,50,000
Turnover for the last financial year
5,00,000
Rs. 1,50,000

Rate of gross profit

100 30%
Rs. 5,00,000

(2)
Short sales:
Standard Turnover
Add : 10% increasing trend

Less: Turnover during the dislocation period (which is at par

with the indemnity period of 6 months)
(3)
Annual (Adjusted) Turnover:
Annual Turnover (1.3.91 to 28.2.92)
Add: 10% increasing trend

2,40,000
24,000
2,64,000
80,000
1,84,000

6,00,000
60,000
6,60,000
Note : Assumed that trend adjustment is required on total amount of annual turnover However, part of the
annual turnover represents trend adjusted figure. Alternatively, the students may ignore trend and take

simply annual turnover. The claim would be Rs. 55,000. So the Insurance Company would insist on trend
adjustment on annual turnover.
(4)
(i)
(ii)

Additional Expenses :
Actual Expenses
Gross profit on sales generated by additional expenses

Rs.
9,300

30
(Rs. 80,000 Rs. 55,000)
100

(iii)

7,500

Gross profit on Annual (Adjusted) Turnover x Additional Expenses

Gross profit shown in the numerator + Uninsured standing charges
30% on Rs. 6,60000
_ x Rs.9,300
(30% on Rs. 6,60,000) + Rs. 5000

Rs. 1,98,000 x Rs. 9,300 i.e.,

Rs. 2,03,000
Least of the above three figures, i.e., Rs. 7,500 is allowable.

9,071

(5)
Claim :
Loss of profit on short sales (30% on Rs. 1,84,000)
Add : Allowable additional expenses

Rs.
55,200
7,500
62,700
2,700
60,000

Less: Savings in insured standing charges

Rs. 1,65,000
Application of average clause Rs. 60,000

Rs. 1,98,000

50,000

(8 Marks)
(b) From the following, prepare an account current as sent by Arun to Bhola on 30th June, 20X1, charging
interest on debits @ 6% and on credits @ 4% p.a. :
20X1
Rs.
Jan. 1
Balance due from Bhola
600
Jan. 10
Sold goods to Bhola
520
Jan. 17
Bhola returned goods
125
Feb. 10
Bhola paid by cheque
400
Feb. 14
Bhola accepted Aruns draft for one month
300
Apr. 29
Goods sold to Bhola
615
May 15
Received cash from Bhola
700
June 5
Bhola accepted Aruns bill for 3 months
500
Answer.
Bhola in Account Current with Arun
For the year ending 30th June 20X1
Date

Particulars

20X1
Jan 1
Jan. 10
Apr 29

To Balance b/d
To Sales A/c
To Sales A/c

June
30

Amount
Rs.
600
520
615

To Interest A/c

27.21

To Balance c/d

262.79
2,025

Days

181
171
62

Product

Date

1,08,600
88,920
38,130

20X1
Jan. 17
Feb 10
Feb 14
May
15
June 5

2,35,650

Particulars

Amount
Rs.

Days

Product

By Sales Return
By Bank A/c
By B/R A/c (Due
date : March 17)
By Cash A/c

125
400
300

164
140
105

20,500
56,000
31,500

700

46

32,200

By B/ R (Due
date, 8th Sept)

500

-70

-35,000

2,025

2,35,650

Interest on Debit side Product Total = 2,35,650 x 6_ x 1 _ = 38.74

100 365
Interest on Credit side Product Total = 1,05,200 x 4_ x 1 _ = 11.53
100 365
_____
Net = 27.21
(8 Marks)
Question5.
(a)The following is the Balance sheet of Sydney Club for the year ended m 31st March, 20X2:
Liabilities
Rs Assets
Outstanding sundry expenses Capital
700 Building
Fund (Balancing figure)
3,12,050 Investments
Stock of stationery
Cash
Prepaid rates
Outstanding Subscriptions
3,12,750

Rs
1,00,000
2,00,000
500
10,250
1,500
500
3,12,750

The following is the Receipts and Payments Account of Sydney Club for the year ended m 31st March,
20X2:
Receipt
Opening Balances:
Cash
Bank
Subscription Received
Entrance Donation
Interest Received
Sale of Assets
Miscellaneous Income
Receipts at:
Coffee Room
Wines and Spirits
Swimming Pool
Tennis Court

Rs Payments
Salaries
10,000 Creditors
3,850 Printing and Stationery
2,02,750 Postage
1,00,000 Telephones and Telex
58,000 Repairs and Maintenance
8,000 Glass and Table Linen
9.000 Crockery and Cutlery
Garden Upkeep
10,70,000 Membership Fees
5,10,000 Insurance
80,000 Electricity
1,02,000 Closing Balances:
Cash
Bank
21,53,600

Rs
1,20,000
15,20,000
70,000
40,000
52,000
48,000
12,000
14,000
8,000
4,000
5,000
28,000
8,000
2,24,600
21,53,600

The Assets and Liabilities as on 1.4.20X1 were as follows:

Fixed Assets (net): Rs 5.00,000; Stock: Rs 3,80,000; Investment in 12% Tax free Government Securities: Rs
5,00,000: Outstanding Subscription: Rs 12,000: Prepaid Insurance: Rs 1,000: Sundry Creditors: Rs 1,12,000;
Subscription received in advance: Rs 15,000. Entrance Donation Received pending membership: Rs
1.00.000: Gratuity Fund: Rs 1,50,000.
The following adjustments are to be made while drawing up the Accounts:
a) Subscription received in advance as on 31st March. 20X2 was Rs 18,000.
b) Outstanding Subscription as on 31st March. 20X2 was Rs 7,000.
c) Outstanding Expenses are: Salaries: Rs 8.000 and Electricity: Rs 15.000.

d) 50% of the Entrance Donation was to be capitalised. There was no pending membership as on 31st
March, 20X2.
e) The cost of assets sold net as on 1.4.20X1 was Rs 10,000.
f) Depreciation is to be provided at the rate of 10% on assets.
g) A sum of Rs 20,000 received in October 20X1 as Entrance Donation from an applicant was to be
refunded as he had not fulfilled the requisite membership qualifications. The refund was made on
3.6.20X2.
h) Purchases made during the year amounted to Rs 15,00.000.
i) The value of closing stock was Rs 2,10,000.
j) The club as a matter of policy charges off to Income and Expenditure Account all purchases made on
Account of crockery, cutlery, glass and linen in the year of purchase.
You are required to prepare an Income and Expenditure Account for the year ended on 31st March, 20X2
and the Balance Sheet as on 31st March, 20X2 along with necessary workings
Answer.
Dr.
Income and Expenditure Account of Sydney Club
Cr.
for the year ending on 31st March, 20X2
Expenditure
Rs Income
Rs
To Salaries
1,28,000 By Subscription
1,94.750
To Printing and Stationery
70,000 By Entrance Donation
90,000
To Postage
40,000 By Interest
60,000
To Telephone and Telex
52,000 By Miscellaneous Income
9,000
To Repairs and Maintenance
48,000 By Profit from Operations
92,000
To Glass and Table Linen
12,000 By Excess of Expenditure Over
To Crockery and Cutlery
14,000 Income transferred to
To Garden Upkeep
8,000 Capital Fund
30,250
To Membership Fees
4,000
To Insurance
6,000
To Electricity Charges
43,000
To Loss on Sale of Assets
2,000
To Depreciation
49,000
4,76,000
4,76,000
Balance Sheet of Sydney Club as at 31st March, 20X2
Liabilities
Rs
Capital Fund:
Opening Balance
10,29,850
Add: Donation
90,000
Less- Deficit
30,250
10,89,600
Gratuity Fund
1,50,000
Sundry Creditors
92,000
Subscription Received in Advance
18,000
20,000
Entrance Donation refundable
8,000
Outstanding Salaries
15,000
Outstanding Electricity Charges
13,92,600

Asset
Fixed Assets:
Opening Balance
5,00,000
Less; Sale
10,000
Less; Depreciation
49,000
Stock Investments
Outstanding Subscription
Interest Accrued
Bank
Cash

Rs

4,41,000
2,10,000
5.00,000
7,000
2,000
2,24,600
8,000
13,92.600

Working Notes:
Liabilities
Sundry Creditors

(i) Balance Sheet of Sydney Club as at 1st April, 20X1

Rs Assets
1,12,000 Fixed Assets

Rs
5,00,000

Subscription Received in Advance

Entrance Donation Received
in Advance
Gratuity Fund
Capital Fund (Balancing figure)

Particulars
To Outstanding Subscription
(Beginning)
To Income and Expenditure A/c
To Advance Subscription A/c (End)

15,000 Stock
Investments
1,00,000 Outstanding Subscription
1,50,000 Prepaid Expenses
10,29,850 Cash
Bank
14,06,850
(ii) Subscription Account
Rs Particulars
A/c
12,000 By Advance Subscription A/c
(Beginning)
1,94,750 By Bank A/c
18,000 By Outstanding Subscription A/c
(End)
2,24,750

(iii)

Entrance Donation
A Entrance Donation received during the year
B Add: Received in Advance as on 1.4.20X1
C Less; Entrance Donation refundable in respect of In-eligible Member
D Less; 50% Capitalised
E Taken to Income and Expenditure Account

(iv)

3,80,000
5,00,000
12,000
1,000
10,000
3,850
14,06,850

Rs
15,000
2,02,750
7,000
2,24,750

1,00,000
1,00,000
2,00,000
20,000
1,80,000
90,000
90,000

Loss on Sale of Assets = Cost - Sale Proceeds = Rs 10,000 - Rs 8,000 = Rs 2,000.

(v)
(vi)

Depreciation = On unsold Fixed Assets = 10% of (Rs 5,00,000 - Rs 10,000) = Rs 49,000.

Interest Accrued = Rs 60,000 - Rs 58,000 = Rs 2,000
(iii) Trading Account
Particulars
Rs Particulars
Rs
To Opening Stock
3,80,000 By Receipts from Coffee Room
10,70,000
To Purchases
15,00,000 By Receipts from Wines and Spirits
5,10,000
To Profit from Operations
92,000 By Receipts from Swimming Pool
80,000
By Receipts from Tennis Court
1,02,000
By Closing Stock
2,10,000
19,72,000
19,72,000
(iv) Sundry Creditors Account
Particulars
Rs
Particulars
Rs
To Bank A/c
To Balance c/d

15,20,000 By Balance b/d

92,000 By Purchases
16,12,000

1,12,000
15,00,000
16,12,000
(10 Marks)
(b)New Ventures Ltd. was incorporated on 1st January 2000 with an authorized capital consisting of 5,000
equity shares of Rs. 10 each to take over the running business of Rundown Brothers as from 1st October,
1999.The following is the summarized profit and loss account for the year ended 30th September, 2000 :
Particulars
Rs. Particulars
Rs.
Cost of sales for the year
16,000 Sales
Administration expenses
1,768 1st Oct. 99 to 31st Dec. 99
6,000
Selling commission
875 1st Jan. 2000 to 30th Sep.2000 19,000
25,000

Goodwill written off

Interest paid to vendors (Loan repaid on
1st February )
Distribution expenses (60 per cent
variable)
Preliminary expenses written off
Debenture interest
Depreciation
Directors fees
Net profit
Total

200
373
1,250
330
320
444
100
3,340
25,000 Total

_______
25,000

The company deals in one type of product. The unit cost of sales was reduced by 10 per cent in the postincorporation period as compared to the pre-incorporation period in the year. You are required to apportion
the net profit amount between pre-incorporation and post-incorporation periods showing the basis of
apportionment.
Answer.
Statement of Pre & Post-Incorporation Profits of New Venture Ltd.
(Year ended September 30, 2000)
Basis of allocation Total amount
PrePostincorporation incorporation
(1st October99
(1st Jan. 2000
st
to 31 Dec.99) 30th Sep.2000)
Sales
Actual Rs. 25,000
Rs. 6,000
Rs. 19,000
Less costs and expenses
Cost of Sales
(see note) 16,000
4,156
11,844
Administration expenses
Time (1 : 3) 1,768
442
1,326
Selling commission
Sales (6 : 19) 875
210
665
Goodwill 200
-200
Interest to vendors
Time (3 : 1) 373
280
93
Distributive expenses :
40% fixed (time) 500
125
375
60% variable 750
180
570
(sales)
Preliminary expenses
-- 330
-330
Debenture interest
-- 320
-320
Depreciation
Time (1 : 3) 444
111
333
Directors fees
-100
-100
21,660
5,504
16,156
Profit
3,340
496
2,844
Tutorial note :
Let cost of sales in the pre-incorporation period be Rs. 100
Then cost of sales in the post-incorporation period is Rs. 90.
Sales in the pre-incorporation period = Rs. 6,000
Sales in the post-incorporation period = Rs. 19,000
The ratio of cost of sales of the two period
= (100 x 6,000) : (90 x 19,000) = 60 : 171.
Divided the total cost of sales in this ratio.
(6 Marks)
Question 6. Answer the following:
(a)What are the advantages of outsourcing the accounting functions?
Answer. Following are the advantages of outsourcing the accounting functions:
(i) Out sourcing of accounting function saves time so that an organisation is able to concentrate on the core
area of business activity.

(ii) The facility of expertise knowledge is available to the enterprise.

(iii) Storage and maintenance is in the hands of professionals.
(iv) No botheration about turnover of key accounting positions.
(v) Economies can be achieved.
(b)A Mega Ltd. manufactures fancy bedsheets valued its closing stock of inventories of finished goods at
the realisable value, inclusive of profit and the export cash incentives. Firm contracts had been received
and goods were packed for export, but the ownership in these goods had not been transferred to the foreign
buyers.
Comment on the valuation of the stocks by the company.
Answer. Accounting Standard 2 Valuation of Inventories states that inventories should be valued at
historical cost and net realisable value whichever is lower. AS 9 on Revenue Recognition says that in
some cases like agricultural crops or mineral ores, when sale is assured under forward contract or a
government guarantee or when market exists and there is a negligible risk of failure to sell, the goods
invoiced are often valued at Net-realisable value.
Bedsheets do not fall in the category of agricultural crops or mineral ores. Accordingly, taking into
account the facts stated, the closing stock of finished goods (Fancy terry towel) should have been valued at
lower of cost and net -realisable value and not at net realisable value. Further, export incentives are recorded
only in the year the export sale takes place. Therefore, the policy adopted by the company for valuing its
closing stock of inventories of finished goods is not correct.
(c)Aryaman Ltd. sold farm equipments through its dealers. Payment of consideration must be within 10
days and in the event of delay interest is chargeable @ 12.5 % per annum. The Company has not realized
interest from the dealers in the past. However, for the year ended 31.3.2009, it wants to recognise interest
due on the balances due from dealers. The amount is ascertained at Rs.7.5 lakhs. Decide whether the
income by way of interest from dealers is eligible for recognition as per AS 9.
Answer. As per AS 9 Revenue Recognition, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, the revenue recognition is postponed to the
extent of uncertainty inverted. In such cases, the revenue is recognized only when it is reasonably certain
that the ultimate collection will be made.
In this case, the company never realized interest for the delayed payments make by the dealers. Hence, it has
to recognize the interest only if the ultimate collection is certain. The interest income hence is not to be
recognized.
(d)A firm of contractors obtained a contract for construction of bridges across river Ganga. The
following details are available in the records kept for the year ended 31st March, 2009.

Total Contract Price

Work Certified
Work not Certified
Estimated further Cost to Completion
Progress Payment Received
To be Received

(Rs. in lakhs)
2,000
1,000
210
990
800
280

The firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements
of AS 7 (Revised) issued by ICAI.
Answer.
(a)Amount of foreseeable loss
(Rs in lakhs)
Total cost of construction (1000 + 210 + 990)
2,200
Less: Total contract price
2,000
Total foreseeable loss to be recognized as expense
200
According to para 35 of AS 7 (Revised 2002), when it is probable that total contract costs will exceed total

contract revenue, the expected loss should be recognized as an expense immediately.

(b)CONTRACT WORK-IN-PROGRESS i.e. cost incurred to date are Rs. 1,210 lakhs
(Rs in lakhs)
Work certified
1000
Work not certified
210
1210
This is 55% (1,210/2,200 100) of total costs of construction.
(c) Proportion of total contract value recognised as REVENUE as per para 21 of AS 7 (Revised).
55% of Rs. 2,000 lakhs = Rs. 1100 lakhs
(d) Amount due from/to customers = Contract costs + Recognised profits Recognised losses (Progress
payments received + Progress payments to be received)
= [1210 + Nil 200 (800 + 280)]
= [1210 200 1080]
Amount due to customers = Rs. 70 lakhs
The amount of Rs. 70 lakhs will be shown in the balance sheet as LIABILITY.
(e) The relevant disclosures under AS 7 (Revised) are given below:
Contract revenue
Contract expenses
Recognised profits less recognized losses
Progress billings (800 + 280)
Retentions (billed but not received from contractee)
Gross amount due to customers

Rs. in lakhs
1100
1210
(200)
1080
280
70
(4x4 = 16 Marks)