Accounting 50 Imp Questions 1642414963

FINAL
FINAL
Inter AUDIT
DT
Accounting
100 IMPORTANT
PRACTICE QUESTIONS
50 Important questions
QUESTIONS
CHAPTER 2
Accounting
50 Important Questions
Q1. (a) Under what circumstances can an enterprise change its accounting policy?
(b) Ram Co. (P) Ltd. furnishes you the following information for the year ended 31.3.2005:
Depreciation for the year ended 31.3.2005 (under straight line method) Rs 100 lakhs
Depreciation for the year ended 31.3.2005 (under written down value method) Rs 200 lakhs
Excess of depreciation for the earlier years calculated under written down Rs 500 lakhs
value method over straight line method
The Company wants to change its method of claiming depreciation from straight line method to
written down value method. Decide, how the depreciation should be disclosed in the Financial
Statement for the year ended 31.3.2005.
Answer
(a) A change in accounting policy is made only if the adoption of a different accounting policy is
required by statute or for compliance with an accounting standard or if it is considered that the
change would result in a more appropriate preparation or presentation of the financial
statements of the enterprise. A more appropriate presentation of events or transactions in the
financial statements occurs when the new accounting policy results in more relevant or reliable
information about the financial position, performance or cash flows of the enterprise.
(b) As per para 21 of AS 26 ‘Intangible Assets’, when a change in the method of depreciation is
made, depreciation should be calculated in accordance with the new method from the date of
the asset coming into use. The deficiency or surplus arising from retrospective recomputation
should be adjusted in the accounts in the year in which the method of depreciation is changed.
The deficiency should be charged to profit and loss account. Similarly, any surplus should be
credited in the statement of profit and loss. Such change is a change in the accounting policy,
and its effect should be quantified and disclosed. In the given case, the deficiency of Rs 500
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lakhs would be charged to the profit and loss account of 31.3.2005. In the notes to account, the
fact of change in method of depreciation should be elaborated along with the effect of Rs 500
lakhs. The current depreciation charge of 200 lakhs determined in accordance with the written
down value method should be debited to the profit and loss account.
Q.2 When can a company change its accounting policy?
Answer
A change in accounting policy should be made in the following conditions: (i) If the change is
required by some statute or for compliance with an Accounting Standard. (ii) Change would
result in more appropriate presentation of the financial statement. Change in accounting policy
may have a material effect on the items of financial statements. For example, if depreciation
method is changed from straight-line method to written-down value method, or if cost formula
used for inventory valuation is changed from weighted average to FIFO, or if interest is
capitalized which was earlier not in practice, or if proportionate amount of interest is changed
to inventory which was earlier not the practice, all these may increase or decrease the net
profit. Unless the effect of such change in accounting policy is quantified, the financial
statements may not help the users of accounts. Therefore, it is necessary to quantify the effect
of change on financial statement items like assets, liabilities, profit / loss.
Q.3 List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose
of compliance of Accounting Standards in India.
Answer
Non-corporate entities which fall in any one or more of the following categories, at the end of
the relevant accounting period, are classified as Level I entities: (i) Entities whose equity or debt
securities are listed or are in the process of listing on any stock exchange, whether in India or
outside India. (ii) Banks (including co-operative banks), financial institutions or entities carrying
on insurance business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees fifty crore in the immediately preceding accounting year. (iv) All
commercial, industrial and business reporting entities having borrowings (including public
deposits) in excess of rupees ten crore at any time during the immediately preceding
accounting year. (v) Holding and subsidiary entities of any one of the above
Q.4 Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor
interchangeable. At the time of closing of its accounts for the year ending 31st March 2010, the
historical cost and net realizable value of the items of the closing stock are determined as
follows.
Items Historical cost Net realizable value

P 5,70,000 4,75,000
Q 9,80,000 10,32,000
R 3,16,000 2,89,000
S 4,25,000 4,25,000
T 1,60,000 2,15,000
What will be the value of closing stock for the year ending 31st March, 2012 as per AS 2
“Valuation of Inventories”?
Answer
As per para 5 of AS 2 “Valuation of Inventories, inventories should be valued at the lower of
cost and net realizable value. Inventories should be written down to net realizable value on an
item-by-item basis.
Valuation of inventory (item wise) for the year ending 31st March 2012
Items Historical cost Net realizable value Valuation of closing stock
Rs Rs Rs
P 5,70,000 4,75,000 4,75,000
Q 9,80,000 10,32,000 9,80,000
R 3,16,000 2,89,000 2,89,000
S 4,25,000 4,25,000 4,25,000
T 1,60,000 2,15,000 1,60,000
23,29,000
The value of inventory for the year ending 31st March 2012 = Rs 23,29,000.
Q.5 The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his
remuneration, subject to a minimum of Rs 25,000 per month. The net profits, for this purpose,
are to be taken without charging income-tax and his remuneration itself. During the year, A Ltd.
made net profit of Rs 43,00,000 before charging MD’s remuneration, but after charging
provision for taxation of Rs 17,20,000. Compute remuneration payable to the Managing
Director.
Answer
Calculation of remuneration of the Managing Director Rs in Lacs
Net profit as per books 43.00
Add: Provision for taxation 17.20
Annual profit for the purpose of managerial remuneration 60.20
Managing Director’s Remuneration @ 5% of above 3.01
Minimum remuneration to be paid to the Managing Director = Rs 25,000 3.00
per month × 12
Hence, in this case, remuneration to be paid to the Managing Director of A Ltd. = Rs 3,01,000.in
the year.
Q.6 A fire broke out in the godown of a business house on 8th July, 2009. Goods costing Rs 2,03,000
in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged condition from
the main godown were valued at Rs 1,97,000. The following particulars were available from the
books of accounts: Stock on the last Balance Sheet date at 31st March, 2009 was Rs 15,72,000.
Purchases for the period from 1st April, 2009 to 8th July, 2009 were Rs 37,10,000 and sales during
the same period amounted to Rs 52,60,000. The average gross profit margin was 30% on sales. The
business house has a fire insurance policy for Rs 10,00,000 in respect of its entire stock. Assist the
Accountant of the business house in computing the amount of claim of loss by fire.
Calculation of amount of claim Rs Rs

Value of stock as on 8th July, 2009 (Refer W.N.) 2,03,000 16,00,000
Less: Value of stock remaining unaffected by fire 1,97,000 4,00,000
Agreed value of damaged goods
Loss of stock 12,00,000
Applying average clause:
Amount of claim = ×Loss of stock
10,00,000
× 12,00,000
16,00,000
= Rs 7,50,000
Working Note:
Memorandum Trading Account for the period from 1st April, 2009 to 8th July, 2009
Particulars Rs. Particulars Rs

To Opening Stock 15,72,000 By Sales 52,60,000
To Purchases 37,10,000 By Closing Stock (Bal.Fig.) 16,00,000
To Gross Profit (30% of sales) 15,78,000 68,60,000
68,60,000 68,60,000
Q.7 (a) Raj Ltd. gives you the following information for the year ended 31st March, 2006:
Sales for the year Rs 48,00,000. The Company sold goods for cash only.
Cost of goods sold was 75% of sales.
Closing inventory was higher than opening inventory by Rs 50,000.
Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by Rs 1,00,000.
Tax paid during the year amounts to Rs 1,50,000
Amounts paid to Trade creditors during the year Rs 35,50,000
Administrative and Selling expenses paid Rs 3,60,000
One new machinery was acquired in December , 2005 for Rs 6,00,000.
Dividend paid during the year Rs 1,20,000.
Cash in hand and at Bank on 31.3.2006 Rs 70,000.
Cash in hand and at Bank on 1.4.2005 Rs 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed Accounting
standard.
(b) What all are the differences between Cash Flow statement and Fund Flow statement?
Answer
(a) Cash flow statement of Raj Limited for the year ended 31.3.2006
Direct Method
Particulars Rs. Rs.
Cash flow from operating activities:
Cash receipt from customers (sales) 48,00,000
Cash paid to suppliers and expense’ 39,10,000
(Rs35,50,000 + Rs3,60,000)
Cash flow from operation 8,90,000
Less: Tax paid 1,50,000
Net cash from operating activities 7,40,000
Cash flow from investing activities:
Purchase of fixed assets (6,00,000)
Net cash used in investing activities (6,00,000)
Cash flow from financing activities:
Dividend Paid (1,20,000) (1,20,000)
Net cash from financing activities 20,000
Add: Opening balance of Cash in Hand and at Bank 50,000
Cash in Hand and at Bank on 31.3.2006 70,000
(b) The fund flow statement is no more included in the syllabus therefore the question is not
relevant.
Q.8 From the following summarised Cash account of S Ltd., prepare cash flow statement for the
year ended 31st March, 2009 in accordance with AS 3 (revised) using direct method
Summarised Cash Account
Particulars (Rs 000) Particulars (Rs 000)

Opening balance 50 Payment to suppliers 2000
Issue of share capital 300 Purchase of fixed assets 200
Received from customers 2800 Overhead expenses 200
Sale of fixed assets 100 Wages and salaries 100
Tax paid 250
Dividend paid 50
Bank loan 300
Closing balance 150
Total 3250 Total 3250
Answer: Cash Flow Statement for the year ended 31.3.2009
Particulars (Rs. In 000)

Cash flow from Operating Activities
Cash received from customers 2800
Less: Cash paid to suppliers 2000
Cash paid for overhead expenses 200
Cash paid for wages and salaries 100 2300
500
Less: Income tax paid 250
Net cash generated from Operating Activities 250
Cash flow from Investing Activities
Sale of fixed assets 100
Less: Purchase of fixed assets 200
Net cash used in Investing Activities (100)
Cash flow from Financing Activities
Received from issue of share capital 300
Less: Repayment of bank loan 300
Payment of dividend 50 350
Net cash used in Financing Activities (50)
Net increase in cash and equivalents 100
Add: Cash and equivalents at the beginning of the 50
year
Cash and equivalents at the end of the year 150
Q.9. Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running
business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total sales
were Rs. 36,00,000. The sales per month in the first half year were half of what they were in the
later half year. The net profit of the company, Rs 2,00,000 was worked out after charging the
following expenses:
(i)Depreciation Rs 1,08,000, (ii) Audit fees Rs 15,000, (iii) Directors’ fees Rs 50,000, (iv)
Preliminary expenses Rs 12,000, (v) Office expenses Rs 78,000, (vi) Selling expenses Rs 72,000
and (vii) Interest to vendors upto August 31, 2008 Rs 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March,
2009.
Answer
Statement showing pre and post incorporation profit for the year ended 31st March,
2009
Particulars Total Amount Basis of Pre - Post -
Rs Allocation incorporation Rs Incorporation Rs
Gross Profit 5,40,000 2:7 1,20,000 4,20,000
Less: Depreciation 1,08,000 1:2 36,000 72,000
Audit Fee 15,000 1:2 5,000 10,000
Director’s Fee 50,000 Post - 50,000
Preliminary 12,000 Post - 12,000
Expenses
Office Expenses 78,000 1:2 26,000 52,000
Selling Expenses 72,000 2:7 16,000 56,000
Interest to 5,000 Actual 4,000 1,000
vendors
Net Profit 2,00,000 33,000 1,67,000
(Rs 33,000 being
preincorporation
profit is
transferred to
capital reserve
Account)
Working Notes:
1.Sales ratio The sales per month in the first half year were half of what they were in the later
half year. If in the later half year, sales per month is Re.1 then it should be 50 paise per month
in the first half year. So sales for the first four months (i.e. from 1st April, 2008 to 31st July,
2008) will be 4 .50 = Rs 2 and for the last eight months (i.e. from 1st August, 2008 to 31st
March, 2009) will be (2 × .50 + 6 × 1) = Rs 7. Thus sales ratio is 2:7.
2.Time ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009 = 4 months : 8 months
= 1:2 Thus, time ratio is 1:2.
3.Gross profit
Gross profit = Net profit + All expenses = Rs 2,00,000 + Rs ( 1,08,000+15,000+50,000+12,000

+78,000+72,000+5,000) = Rs 2,00,000 +Rs 3,40,000 = Rs 5,40,000.
Q.10 Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014:
Particulars Amount
4,500 Equity Shares of Rs100 each 4,50,000
Capital Reserve (including Rs40,000 being profit on sale of Plant) 90,000
Securities Premium 40,000
Capital Redemption Reserve 30,000
General Reserve 1,05,000
Profit and Loss Account (Cr. Balance) 65,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 3 shares held. Company decided that there should be the minimum reduction in free
reserves. Pass necessary Journal Entries in the books Saral Ltd.
Answer
Journal entries
Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
Capital Reserve (Realized in cash) Dr. 40,000
General Reserve A/c Dr. 40,000
To Bonus to Shareholders 1,50,000
(Being issue of bonus shares by utilization of
various Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 1,50,000
To Equity Share Capital 1,50,000
(Being capitalization of Profit)
Q. 11.Pass journal entries for the following transactions :
(i) Conversion of 2 lakh fully paid equity shares of Rs 10 each into stock of Rs 1,00,000 and
balance as 12% fully convertible Debenture.
(ii) Consolidation of 40 lakh fully paid equity shares of Rs 2.50 each into 10 lakh fully paid
equity
(iii) Sub-division of 10 lakh fully paid 11% preference shares of Rs 50 each into 50 lakh fully paid
11% preference shares of Rs 10 each.
(iv) Conversion of 12% preference shares of Rs 5,00,000 into 14% preference shares Rs 3,00,000
and remaining balance as 12% Non-cumulative preference shares.
Answer
Journal Entries
(i) Equity share Capital A/c Dr, 20,00,000
To Equity Stock 1,00,000
To 12% Fully Convertible Debentures 19,00,000
(Being conversion of 2 lakh equity shares of Rs 10 each
into stock of Rs 1,00,000 and balance as 12% fully
convertible debentures as per resolution dated…)
(ii) Equity Share Capital A/c (Rs 2.50) Dr. 100,00,000
To Equity Share Capital A/c (Rs 10) 100,00,000
(Being consolidation of 40 lakh shares of Rs 2.50 each
into 10 lakh shares of Rs 10 each as per resolution
dated…)
(iii) 11% Preference Shares Capital A/c (Rs 50) Dr 500,00,000
To 11% Preference Share Capital A/c (Rs 10) 500,00,000
(Being subdivision of 10 lakh preference shares of Rs 50
each into 50 lakh shares of Rs 10 each as per resolution
dated…)
(iv) 12% Preference Share Capital A/c Dr 5,00,000
To 14% Preference Share Capital 3,00,000
To 12% Non-cumulative Preference Share Capita 2,00,000
(Being conversion of 12% preference shares of Rs
500,000 into 14% preference shares of Rs 300,000 and
12% non cumulative preference shares of Rs 200,000 as
per resolution dated…)
Q.12 The closing capital of Mr. A on 31.3.2007 was Rs 1,50,000. On 1.4.2006 his capital was Rs
60,000. During the year he had drawn Rs 40,000 for domestic expenses. He introduced Rs
25,000 as additional capital in February, 2007. Find out his net profit for the year.
Answer
Statement showing calculation of profit for the year 31.3.2007

Particulars Rs
Capital as on 31.3.2007 1,50,000
Add: Drawings during the year 40,000
1,90,000
Less: Additional capital introduced in February 2002 (25,000)
1,65,000
Less: Capital as on 1.4.2006 (60,000)
Net profit for the year 1,05,000
Q.13 A company sold 25% of the goods on cash basis and the balance on credit basis. Debtors
are allowed 2 months credit and their balance as on 31.3.2008 is Rs 1,40,000. Assume that the
sale is uniform throughout the year. Calculate the total sales of the company for the year ended
31.3.2008
Answer
Debtors as on 31.3.2008 = Rs 1,40,000 Credit period allowed = 2 months

i.e. Debtors as on 31.3.2008 is standing for credit sales of February and March 2008
Credit sales per month = Rs 1,40,000/2 = Rs 70,000
Credit sales for the year 2007-2008 = Rs 70,000 × 12 = Rs 8,40,000
25
Add: Cash sales 84,000× 75 = 2,80,000
Total sales of the company for the year ended 31.3.2008 Rs 11,20,000
Closing balance of Sundry Debtors = Rs 6,30,000
Closing provision for doubtful debts to be maintained @ 10% = Rs 63,000
Less: Opening Provision for doubtful debts = Rs 51,000
Additional provision to be maintained = Rs 12,000
Journal Entry
Profit and Loss A/c Dr. 12,000
To Provision for doubtful debts 12,000
(Being additional provision on doubtful debts
maintained @ 10%)
Q.14 Following information of the Final Accounts of Kumaran Ltd. are missing as shown below:
Trading and Profit & Loss A/c for the year ended 31-03-2012
Rs. (000) Particulars Rs. (000)

Particulars
To Opening Stock 7,000 By Sales ?
To Purchases ? By Closing Stock ?
To Manufacturing Expenses 1,750
To Gross Profit c/d ?
Total ? Total ?
To Office and 7,400 By Gross Profit b/d ?
Administration Expenses
To Interest on Debentures 600 By Commission Received 1,000
To Provision for Taxation ?
To Net Profit for the year ?
c/d
Total ? Total ?
To Proposed Dividends ? By Balance b/d 1,400
To Transfer to General ? By Net Profit for the year ?
Reserves b/d
To Balance Transfer to ?
Balance Sheet
Total ? Total ?
Balance Sheet as on 31-03-2012

Liabilities Rs (000) Assets Rs (000)
Paid up Capital 10,000 Fixed Assets:
General Reserves: Plant and Machinery 14,000
Balance at the ? Other Fixed Assets ?
beginning of the year
Proposed addition ? Current Assets:
Profit and Loss ? Stock in Trade ?
Appropriation A/c
10% Debenture ? Sundry Debtors ?
Current Liabilities ? Bank Balance 1250
Total ? Total ?
You are required to provide the missing figures with the help of following information:
(i) Current Ratio 2 :1.

(ii) Closing stock is 25% of sales.
(iii) Proposed dividends are 40% of the paid up capital.
(iv) Gross profit ratio is 60%.
(v) Ratio of Current Liabilities to Debentures is 2 : 1.
(vi) Transfer to General Reserves is equal to proposed dividends
(vii) Profit carried forward are 10% of the proposed dividends.
(viii) Provision for taxation is 50% of profits.
(ix) Balance to the credit of General Reserves at the beginning of the year is twice the
amount transferred to that account from the current profits.
Answer
1. Amount of debentures
Interest on debentures 600
= × 100 = × 100 = 6,000
Rate of interes 10
2. Amount of proposed dividend

= Paid up share capital x 40%= 10,000 x 40% = 4,000
3. Transfer to general reserves
= Amount of proposed dividend i.e. 4,000
4. profit carried forward
= 10% of proposed dividend = 10% of 4,000 = 400
5. Net profit for the year’
= Proposed dividend + Transfer to general reserve + Profit carried forward – Net profit
carried forward = (4,000 + 4,000 + 400) – 1,400 = 7,000
6. Provision for taxation
Provision for taxation = 50% of profit (i.e. before net profit)
It means that net profit is 50% and provision for tax is 50%.
Therefore, if net profit is 7,000 then, Provision for taxation is also 7,000
7. Gross profit
= Net profit + all expenses – Commission received
= (7,000 + 7,000 + 600 + 7,400) – 1,000 = 21,000
8. Sales
Gross profit 21,000
= Rate of profit × 100 = × 100 = 35,000
60
9. Closing stock
= 25% of sales
= 25% x 35,000 = 8,750 10.
10. Purchases
= (Sales + Closing stock) – (Opening stock + Manufacturing expenses + Gross profit)
= (35,000 + 8,750) – (7,000 + 1,750 + 21,000)
= 43,750 - 29,750 = 14,000 11.
11. Balance of General Reserve as on 1.4.2011 =
= Twice the amount transferred to general reserve during the year
= 2 x 4,000 = 8,000 12.
12. Current Liabilities
=Current liabilities is twice of amount of debentures
= 2 x 6,000 = 12,000
13. Current Assets
Current Assets = current ratio x current liabilities
= 2 x 12,000 = 24,000 14.
14. Sundry Debtors
Sundry Debtors = Current assets – Stock in trade – Bank balance
= 24,000 – 8,750 – 1,250 = 14,000 15.
15. Total of Equity and Liabilities part of the balance sheet
= Shareholders capital + Non-current liabilities + Current liabilities
= (10,000 + 12,000 + 400) + 6,000+ 12,000 = 40,400 16.
16. Other Fixed Assets
= Total of Equity and Liabilities part of the balance sheet – (Current assets + Plant and
Machinery)
= 40,400 – (24,000 + 14,000) = 2,400
Q.15 . The details of Assets and Liabilities of Mr. 'A' as on 31-3-2012 and31-3-2013 are as
follows:
Particulars 31.3.2012 31.3.2013

Rs Rs
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000
Sundry Debtors 60,000 1,10,000
cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
Liabilities :
Loans 90,000 70,000
Sundry Creditors 50,000 80,000
Mr. 'A' decided to provide depreciation on building by 2.5% and furniture by 10% for the period
ended on 31-3-2013. Mr. ‘A’ purchased jewellery for Rs 24,000 for his daughter in December
2012. He sold his car on 30-3-2013 and the amount of Rs 40,000 is retained in the business. You
are required to :
(i) Prepare statement of affairs as on 31-3-2012 and 31-3-2013.

(ii) Calculate the profit received by 'A' during the year ended 31-3-2013.
Answer : (i) Statement of Affairs
Liablilities 31.3.12 (Rs.) 31.3.13 (Rs.) Assets 31.3.12 (Rs.) 31.3.13 (Rs.)
Loans 90,000 70,000 Furniture 50,000 45,000
Creditors 50,000 80,000 Building 1,00,000 97,500
Capital A/c 2,41,200 4,40,700 Stock 1,00,000 2,50,000
Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
Total 3,81,200 5,90,700 Total 3,81,200 5,90,700

Working Note:
Dep. on Building Rs 2,500 (2.5% of Rs 1,00,000)
Dep. on Furniture Rs 5,000 (10% of Rs 50,000)
(iii) Calculation of Profit earned by A during the year ended 31st March, 2013 Capital Account
Particulars Rs Particulars Rs
To Drawings 24,000 By bal. b/d 2,41,200
To bal. c/d 4,40,700 By Additional Capital 40,000
(Car sale proceeds)
By P&L A/c. (Bal. 1,83,500
figure)
4,64,700 4,64,700
Q. 15. From the following, calculate the cash price of the asset
Particulars Rs.
Hire purchase price of the asset 50,000
Down payment 10,000
Four annual instalments at the end of each year 10,000
Rate of interest 5% p.a
Answer : Calculation of cash price of the asset
Closing Amount of Total Interest Opening

Number of
balance instalment 5/105 balance
instalments
4 0 10,000 10,000 476 9,524
3 9524 10,000 19,524 930 18,594
2 18594 10,000 28,594 1,362 27,232
1 27232 10,000 37,232 1,773 35,459
Cash price of the asset = Down payment + Rs 35,459
= Rs 10,000 + Rs 35,459 = Rs 45,459
Q.16 What are the differences between Hire Purchase and Installment System?
Answer : Statement showing differences between Hire Purchase and Installment System
Particulars Hire Purchase Installment System

Governing Act It is governed by Hire Purchase It is governed by the Sale of Goods
Act, 1972. Act, 1930.
1 Nature of It is an agreement of hiring It is an agreement of sale.
Contract
2 Passing of Title The title to goods passes on last The title to goods passes
(ownership) payment immediately as in the case of usual
sale
3 Right to The hirer may return goods Unless seller defaults, goods are not
Return goods without further payment except returnable.
for accrued installments
4 Seller’s right to The seller may take possession of The seller can sue for price if the
repossess the goods if hirer is in default buyer is in default. He cannot take
possession of the goods.
5 Right of Hirer cannot hire out sell, pledge The buyer may dispose off the
Disposal or assign entitling transferee to goods and give good title to the
retain possession as against the bona fide purchaser.
hire vendor
6 Responsibility The hirer is not responsible for The buyer is responsible for risk of
for Risk of Loss risk of loss of goods if he has loss of goods because of the
taken reasonable precaution ownership has transferred.
because the ownership has not
yet transferred
7 Name of The parties involved are called The parties involved are called
Parties Hirer and Hire vendor buyer and seller.
involved
8 Component Component other than Cash Price Component other than Cash Price
other than included in installment is called included in Installment is called
cash price Hire charges Interest
Q. 17 On 1st April, 2010, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs 15 per
share (face value Rs 10 each). He provides you the further information:
(1) On 20th June, 2010, he purchased another 10,000 shares of P Ltd. at Rs 16 per share.
(2) On 1st August, 2010, P Ltd. issued one equity bonus share for every six shares held by the
shareholders.
(3) On 31st October, 2010, the directors of P Ltd. announced a right issue which entitle the
holders to subscribe three shares for every seven shares at Rs 15 per share. Shareholders can
transfer their rights in full or in part. Rajat sold 1/3rd of entitlement to Umang for a
consideration of Rs 2 per share and subscribe the rest on 5th November, 2010.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st
March, 2011.
Answer : In the books of Rajat Investment Account (Equity shares in P Ltd. )
Date Particulars No. of Amount Date Particulars No. of Amount

Shares (Rs) Shares (Rs)
1.4.10 To Balance 50,000 7,50,000 31.3.11 By Balance 90,000 12,10,000
b/d c/d (Bal.
fig.)
20.6.10 To Bank A/c 10,000 1,60,000
1.8.10 To Bonus 10,000 -
issue
(W.N.1
5.11.10 To Bank A/c 20,000 3,00,000
(right
shares)
(W.N.4)
90,000 12,10,000 90,000 12,10,000
Working Notes:
50,000+10,000
(1) Bonus shares = = 10,000 shares
6
50,000+10,000+10,000
(2) Right shares = × 3 = 30,000 shares
7
1
(3) Sale of rights = 30,000 shares × 3 = Rs 20,000 to be credited to Profit & Loss A/c as
2
per AS 13 (4) Rights subscribed = 30,000 shares × × 15 = Rs 3,00,000
3
Q.18 On 2.6.2007 the stock of Mr. Black was destroyed by fire. However, following particulars
were furnished from the records saved:
Particulars Rs
Stock at cost on 1.4.2006 1,35,000
Stock at 90% of cost on 31.3.2007 1,62,000
Purchases for the year ended 31.3.2007 6,45,000
Sales for the year ended 31.3.2007 9,00,000
Purchases from 1.4.2007 to 2.6.2007 2,25,000
Sales from 1.4.2007 to 2.6.2007 4,80,000
Sales upto 2.6.2007 includes Rs 75,000 being the goods not dispatched to the customers. The
sales invoice price is Rs 75,000.
Purchases upto 2.6.2007 includes a machinery acquired for Rs 15,000. Purchases upto 2.6.2007
does not include goods worth Rs 30,000 received from suppliers, as invoice not received upto
the date of fire. These goods have remained in the godown at the time of fire. Value of stock
salvaged from fire Rs 22,500 and this has been handed over to the insurance company. The
insurance policy is for Rs 1,20,000 and it is subject to average clause. Ascertain the amount of
claim for loss of stock.
Answer : In the books of Mr. Black Trading Account for the year ended 31.3.2007
To Purchases 6,45,000 By Closing Stock at 1,80,000
100
cost (1,62,000 × )
90
To Gross Profit 3,00,000

10,80,000 10,80,000
Memorandum Trading A/c for the period from 1.4.2007 to 02.06.2007

To Opening Stock at cost 1,80,000 By Sales 4,80,000
Less: Goods not
75,000
dispatched 4,05,000
To Purchases 2,25,000 By Closing stock (Balancing 1,50,000
Add: Goods figure)
30,000
received but
invoice
2,55,000
not Received
15,000
2,40,000
Less: Machinery
To Gross Profit (Refer working 1,35,000
note)
5,55,000 5,55,000
Calculation of Insurance Claim Claim subject to average clause = Actual loss of stock x Amount
of Policy / Value of stock on the date of fire
1,20,000
= 1,50,000 x( ) = Rs 1,20,000
1,50,000
3,00,000
Working Note: G.P. ratio = x 100 = 33.33%
9,00,000
Amount of Gross Profit = Rs 4,05,000 x 33.33% = Rs 1,35,000
Q.19 (a) X Co. Limited purchased goods at the cost of Rs40 lakhs in October, 2005. Till March,
2006, 75% of the stocks were sold. The company wants to disclose closing stock at Rs10 lakhs.
The expected sale value is Rs11 lakhs and a commission at 10% on sale is payable to the agent.
Advise, what is the correct closing stock to be disclosed as at 31.3.2006.
(b) Explain the ‘Accounting of Revaluation of Assets’ with reference to AS 10.
(c) Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of
sale is, payment of consideration in 14 days and in the event of delay interest is chargeable @
15% per annum. The Company has not realized interest from the dealers in the past. However,
for the year ended 31.3.2006, it wants to recognise interest due on the balances due from
dealers. The amount is ascertained at Rs 9 lakhs. Decide whether the income by way of interest
from dealers is eligible for recognition as per AS 9.
Answer
(a) As per Para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of
cost and net realizable value.
In this case, the cost of inventory is Rs 10 lakhs. The net realizable value is 11,00,000 × 90% = Rs
9,90,000. So, the stock should be valued at Rs 9,90,000.
(b) As per Para 30 of AS 10 “Accounting for Fixed Assets”, an increase in net book value arising
on revaluation of fixed assets should be credited to owner’s interests under the head of
‘revaluation reserve, except that, to the extent that such increase is related to and not greater
than a decrease arising on revaluation previously recorded as a charge to the profit and loss
statement, it may be credited to the profit and loss statement. A decrease in net book value
arising on revaluation of fixed assets is charged directly to profit and loss statement except that
to the extent such a decrease is related to an increase which was previously recorded as a
credit to revaluation reserve and which has not been subsequently reversed or utilized , it may
be charged directly to that account.
(c) 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.
Q.20. X Co. Ltd. having share capital of Rs 50 lakhs divided into equity shares of Rs 10 each was
taken over by Y Co. Ltd. X Co. Ltd. has General Reserve of Rs 10,00,000 and Profit and Loss
account Cr. Rs 5,00,000. Y Co. Ltd. issued 11 equity shares of Rs 10 each for every 10 shares of X
Co. Ltd. How the Journal entry would be passed in the books of Y Co. Ltd. for the shares issued
under the ‘Pooling of interest method’ of amalgamation.
Answer : In the books of Y Co. Ltd. Journal Entries
Particulars Rs Rs
Business Purchase A/c Dr. 55,00,000
To Liquidator of X Co. Ltd. 55,00,000
Being business of X Co. Ltd. purchased)
Assets A/c (Bal. Fig.) Dr. 65,00,000
To Business Purchase A/c 55,00,000
To General Reserve A/c∗(10,00,000 – 5,00,000) 5,00,000
To Profit and Loss A/c 5,00,000
(Being assets and reserves and surplus taken over)
Liquidator of X Co. Ltd Dr. 55,00,000
To Equity share capital A/c 55,00,000
(Being purchase consideration discharged through
equity shares of Y Co. Ltd.)
Q.21 Pawan of Delhi has a branch at Jaipur. Goods are invoiced to the branch at cost plus 25%.
The branch is instructed to deposit the receipts everyday in the head office account with the
bank. All the expenses are paid through cheque by the head office except petty cash expenses
which are paid by the Branch.
From the following information, you are required to prepare Branch Account in the books of
Head office:
Particulars Rs.
Stock at invoice price on 1.4.08 1,64,000
Stock at invoice price on 31.3.09 1,92,000
Debtors as on 1.4.08 63,400
Debtors as on 31.3.09 84,300
Furniture & fixtures as on 1.4.08 46,800
Cash sales 8,02,600
Credit sales 7,44,200
Goods invoiced to branch by head office 12,56,000
Expenses paid by head office 2,64,000
Petty expenses paid by the branch 20,900
Furniture acquired by the branch on 1.10.08 (payment was 5,000

made by the branch from cash sales and collection from
debtors
Depreciation to be provided on branch furniture & fixtures @ 10% p.a. on WDV basis
Answer : In the Books of Pawan & Co., Delhi (Head Office)
Jaipur Branch Account

Particulars Rs. Particulars Rs.
To Opening balances: By Branch stock

reserve 32,800
Branch stock A/c 1,64,000 Bank A/c (W.N.4) 15,00,000
Branch debtors A/c 63,400 By Goods sent to 2,51,200

branch A/c
Branch furniture A/c 46,800 By Closing Balances
To Goods sent to 12,56,000 Branch stock A/c 1,92,000

branch
To Bank A/c (branch 2,64,000 Branch debtors A/c 84,300

expenses)
To Branch stock 38,400 Branch furniture A/c 46,870

reserve A/c (W.N.2)
To Profit and loss A/c 2,74,570

(Bal. Fig.)
21,07,170 21,07,170
Working Notes: Depreciation on furniture
Rs.
Particulars
10% p.a. on Rs.46,800 4,680
10% p.a. for 6 months on Rs.5,000 250
4,930
Closing balance of branch furniture as on 31.3.2009
Rs.
Particulars
Branch furniture as on 1.4.2008 46,800
Add: Acquired during the year 5,000
51,800
Less: Depreciation (W.N.1) 4,930
Branch furniture as on 31.3.2009 46,870
Collection from branch debtors
Branch Debtors Account

Rs. Particulars Rs.
Particulars
To Balance b/d 63,400 By Bank A/c 7,23,300
(Bal.Fig.)
To Sales 7,44,200 By Balance c/d 84,300
8,07,600 8,07,600
Cash remitted by the branch to head office
Cash sales + Collection from debtors – Petty expenses – Furniture acquired by branch
Rs.8,02,600 + Rs.7,23,300 (W.N. 3) – Rs.20,900 – Rs.5,000 = Rs.15,00,000
Q.22 The following is the Balance Sheet of Bumbum Limited as at 31st March, 2009:
Rs
Particulars
Sources of funds
Authorized capital
50,000 Equity shares of Rs. 10 each

5,00,000
10,000 Preference shares of Rs. 100 each 10,00,000
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of Rs. 10 each 3,00,000
5,000, 8% Redeemable Preference shares of Rs. 100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 1,80,000
2,500, 9% Debentures of Rs. 100 each 2,50,000
Sundry Creditors 1,70,000
26,50,000
Application of funds
Fixed Assets (net) 7,80,000
Investments (market value Rs. 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Sundry Debtors 6,20,000
Cash & Bank balance 2,80,000
Preliminary expenses 1,40,000
26,50,000
In Annual General Meeting held on 20th June, 2009 the company passed the following
resolutions:
i. To split equity share of Rs. 10 each into 5 equity shares of Rs. 2 each from 1st July, 09.
ii. To redeem 8% preference shares at a premium of 5%.
iii. To redeem 9% Debentures by making offer to debenture holders to convert their holdings
into equity shares at Rs. 10 per share or accept cash on redemption.
iv. To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on
record date.
On 10th July, 2009 investments were sold for Rs. 5,55,000 and preference shares were
redeemed.
40% of Debentureholders exercised their option to accept cash and their claims were settled
On 1st August, 2009
The company fixed 5th September, 2009 as record date and bonus issue was concluded by 12th
September, 2009.
You are requested to journalize the above transactions including cash transactions and prepare
Balance Sheet as at 30th September, 2009. All working notes should form part of your
answer.
Answer : Bumbum Limited Journal Entries
Particulars Dr. (Rs.) Cr. (Rs.)

2009
July 1 Equity Share Capital A/c (Rs. 10 each) Dr. 3,00,000
To Equity share capital A/c (Rs. 2 each) 3,00,000
(Being equity share of Rs. 10 each splitted into 5 equity

shares of Rs. 2 each) {1,50,000 X 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c To 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to

Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr 5,00,000
Premium on redemption of preference share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share holders on

redemption)
July 10 Preference shareholders A/c Dr 5,25,000
To Cash & bank A/ 5,25,000
(Being amount paid to preference shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference

shares transferred to Capital Redemption Reserve A/c on
its
redemption as per the law)
Aug 1 9% Debentures A/c Dr. 2,50,000
Interest on debentures A/c Dr. 7,500
To Debentureholders A/c 2,57,500
(Being amount payable to debenture holders along with

interest payable)
Aug. 1 Debentureholders A/c Dr 2,57,500
To Cash & bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c{15,000 X 2} 30,000
To Securities premium A/c 1,20,000
(Being claims of debenture holders satisfied)
Sept. 5 Capital Redemption Reserve A/c Dr. 1,10,000
To Equity share capital A/c 1,10,000
(Being 55,000 fully paid equity shares of Rs. 2 each issued

as bonus in ratio of 1 share for every 3 shares held)
Sept. 30 Securities Premium A/c Dr 25,000
To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from

securities premium account)
Sept. 30 Profit & Loss A/c Dr. 7,500
To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and

Loss Account)
Balance Sheet as at 30th September, 2009
Particulars Notes Rs.
Equity and Liabilities
1. Shareholders' funds 1 4,40,000
Share capital 2 13,32,500
2. Current liabilities
Trade Payables 1,70,000
Total 19,42,500
Assets
1. Non-current assets
Fixed assets
Tangible assets 7,80,000
Deferred tax asset 3,40,000
2. Current assets
Trade receivables 6,20,000
Cash and cash equivalents 2,02,500
Total 19,42,500
Notes to accounts
Share
1 Capital Rs. Rs.
1
Authorized share capital
2,50,000 Equity shares of Rs. 2 each 5,00,000
10,000 Preference shares of Rs.100 each 10,00,000 15,00,000
Issued, subscribed and paid up 2,20,000 Equity shares of 4,40,000
Rs. 2 each
Reserves
2 and Surplus
.
Securities Premium A/c Balance as per balance sheet 6,00,000
Add: Premium on equity shares issued on 1,20,000

conversion of debentures (15,000 x 8)
7,20,000
Less: Adjustment for premium on preference Shares (25,000)
Balance 6,95,000
Capital Redemption Reserve(5,00,000-1,10,000 3,90,000
General Reserve (6,50,000 – 5,00,000) 1,50,000
Profit & Loss A/c 1,80,000
Less: Preliminary expenses written off (1,40,000)
Add: Profit on sale of investment 65,000
Less: Interest on debentures (7,500) 97,500
Total 13,32,500
Q. 23 A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets Itself
incorporated as a company on 1st November, 2010. The first accounts are drawn upto 31st
March 2011. The gross profit for the period is Rs 56,000. The general expenses are Rs 14,220;
Director's fee Rs 12,000 p.a.; Incorporation expenses Rs 1,500. Rent upto 31st December was Rs
1,200 p.a after which it is increased to Rs 3,000 p.a. Salary of the manager, who upon
incorporation of the company was made a director, is Rs 6,000 p.a. His remuneration thereafter
is included in the above figure of fee to the directors. Give statement showing pre and post
incorporation profit. The net sales are Rs 8,20,000, the monthly average of which for the first
four months is one-half of that of the remaining period. The company earned a uniform profit.
Interest and tax may be ignored
Answer
Statement showing pre and post-incorporation profits

Particulars Basis Pre - Post- Total
incorporation Incorporation
Rs Rs Rs Rs Rs Rs
Gross Profit Sales ratio 16,000 40,000 56,000
Less: General Time ratio 6,320 7,900 14,220

expenses
Directors’ fee Actual - 5,000 5,000
Formation Actual - 1,500 1,500

expenses
Rent (600 + 750 W.N. 2 400 950 1,350
Manager’s salary Actual 2,000 - 2,000
Capital Reserve 7,280 - -
P & L A/c - 24,650 31,930
Working Notes:
1.Calculation of sales ratio
Let the average monthly sales of first four months = 100
and next five months = 200
Total sales of first four months = 100 x 4 = 400 and
Total sales of next five months = 200 x 5 = 1,000
The ratio of sales = 400 : 1,000 =2 : 5
2.Rent
Till 31st December, 2011, rent was Rs 1,200 p.a. i.e. Rs 100 p.m.
So, Pre-incorporation rent = Rs 100 x 4 months = Rs 400
Post-incorporation rent = (Rs 100 x 2 months) + (Rs 250 x 3 months) = Rs 950
Q.24 A trader purchased goods for Rs 1,70,000. The opening stock of inventory prior to the said
purchase was Rs 30,000. His sales was Rs 2,10,000. Find out the closing stock of inventory if the
Gross profit margin is 25% on cost.
Answer
Calculation of closing stock:
Cost of goods sold = Sales – Gross Profit
25
Rs 2,10,000 – ( 2,10,000 × )
125
= Rs 1,68,000 Closing stock = Opening Stock + Purchases – Cost of goods sold
= Rs 30,000 + Rs 1,70,000 – Rs 1,68,000
= Rs 32,000
Q.25 Ram & Co. acquired a motor lorry on hire-purchase basis. It has to make cash down
payment of Rs 1,00,000 at the beginning. The payments to be made subsequently are Rs
2,63,000; Rs 1,85,000 and Rs 1,14,000 at the end of first year, second year and third year
respectively Interest charged is @ 14% per annum. Calculate the cost price of motor lorry and
interest paid in each installment.
Answer : Calculation of cost price and total interest to be paid on motor lorry
No. of instalment Amount due at the Interest on cumulative Cash Price in
time of instalment instalment each instalment
14
III 1,14,000 1,14,000 ×114 =14,000 1,00,000
14
II 1,85,000 1,85,000 × 114 =35,000 1,50,000
14
I 2,63,000 2,63,000 × 114 =63,000 2,00,000
Cash down 1,00,000

payment
Total 1,12,000 5,50,000
* 1,00,000 + 1,85,000 = 2,85,000.
**2,63,000 + 1,50,000 + 1,00,000 = 5,13,000.
Q.26 On 1st April, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash
price was Rs 9,00,000 to M/s. Singh & Singh, a transport firm. The terms of the contract were
that the transporters were to pay Rs 3,00,000 down and six four-monthly instalments of Rs
1,00,000 plus interest on outstanding amount of cash price for the intervening four months.
The instalments were payable on 31st July, 30th November and 31st March in each one of the
two accounting years. Interest was calculated @ 12% per annum. M/s. Singh & Singh duly paid
the instalment on 31st July, 2012 but failed to pay the instalment on 30th November, 2012.
M/s. Power Motors, after legal formalities, repossessed the truck valuing it at Rs 7,00,000. M/s.
Power Motors spent Rs 80,000 on repairs and repainting of the truck and on 7th January, 2013
sold it for Rs 7,50,000 cash.
You are required to prepare M/s. Singh & Singh’s A/c and Goods Repossessed Account in the
books of M/s. Power Motors.
Answer: In the books of M/s. Power Motors M/s. Singh & Singh’s Account
Date Particulars Rs Date Particulars Rs
1.04.2012 To Hire Purchase 9,00,000 1.04.2012 By Bank (Down 3,00,000

Sales A/c (Cash payment)
Price)
31.07.2012 To Interest A/c 24,000 31.07.2012 By Bank (1,00,000 1,24,000

(6,00,000 × .12 × +24,000)
412)
30.11.2012 To Interest A/c 20,000 30.11.2012 By Goods 7,00,000
(5,00,000 × .12 × Repossessed A/c
412)
30.11.2012 To Profit & Loss 1,80,000
Account (Bal. fig.)
11,24,000 11,24,000
Goods Repossessed Account

Date Particulars Rs Date Particulars Rs
30.11.2012 To Singh & Singh’s 7,00,000 7.1.2013 By Bank A/c 7,50,000

A/c
7.1.2013 To Bank A/c 80,000 7.1.2013 By Profit & Loss A/c 30,000
(Repairs) -loss
7,80,000 7,80,000
Q.27 1st April, 2008, Mr. Neel purchased 5,000 equity shares of Rs 100 each in X Ltd. @ Rs 120
each from a Broker, who charged 2% brokerage. He incurred ½% as cost of shares transfer
stamps. On 31st January, 2009, Bonus was declared in the ratio of 1:2. Before and after the
record date of bonus shares, the shares were quoted at Rs 175 per share and Rs 90 per share
respectively. On 31st March, 2009, Mr. Neel sold bonus shares to a broker, who charged 2%
brokerage. Show the Investment Account in the books of Mr. Neel, who held the shares as
current assets and closing value of investments shall be made at cost or Market value,
whichever is lower.
Answer
Investment Account in the books of Mr. Neel For the year ended 31st March, 2009
(Scrip: Equity Shares of X Ltd.)
Date Particulars Nominal Cost (Rs) Date Particulars Nominal Cost (Rs)
Value Value
(Rs) (Rs)
1.4.08 To Bank 5,00,000 6,15,000 31.3.09 By Bank 2,50,000 2,20,500

A/c A/c
(W.N.1) (W.N.2)
31.01.09 To Bonus 2,50,000 - 31.03.09 By Balance 5,00,000 4,10,000

Shares c/d
(W.N.4)
31.03.09 To Profit - 15,500
and Loss
A/c
(W.N.3)
7,50,000 6,30,500 7,50,000 6,30,500
Working Notes:
1.Calculation of cost of equity shares purchased on 1.4.08
= 5,000 × Rs 120 + 2% of Rs 6,00,000 + 0.5% of Rs 6,00,000 = Rs 6,15,000
2.Calculation of profit proceeds of equity shares sold on 31.3.09
= 2,500 × Rs 90 – 2% of Rs 2,25,000 = Rs 2,20,500
3. Calculation of profit on sale of bonus shares on 31.3.09
= Sale proceeds – Average cost
2,50,000
= 2,20,500 – 2,05,000 i.e. ( 6,15,000 ×7,50,000 ) = 15,500
4. Valuation of equity shares on 31.3.09
5,00,000
Cost = 6,15,000 × = Rs 4,10,000
7,50,000
Market value = 5,000 shares × Rs 90 = Rs 4,50,000
Closing Balance has been valued at Rs 4,10,000 i.e. at cost which is lower than the market value.
Q. 28. (i) A machinery costing Rs 10 lakhs has useful life of 5 years. After the end of 5 years, its scrap
value would be Rs 1 lakh. How much depreciation is to be charged in the books of the company as
per Accounting Standard-6?
(ii) Garden Ltd. acquired fixed assets viz. plant and machinery for Rs20 lakhs. During the same year
it sold its furniture and fixtures for Rs5 lakhs. Can the company disclose, net cash outflow towards
purchase of fixed assets in the cash flow statement as per AS-3?
(iii)ABC Ltd. gave 50,000 equity shares of Rs 10 each (fully paid up) in consideration for supply of
certain machinery by X & Co. The shares exchanged for machinery are quoted on Bombay Stock
Exchange (BSE) at Rs 15 per share, at the time of transaction. In the absence of fair market value of
the machinery acquired, how the value of machinery would be recorded in the books of the
company?
(iv)A company took a construction contract for Rs 100 lakhs in January, 2006. It was found that 80%
of the contract was completed at a cost of Rs 92 lakhs on the closing date i.e. on 31.3.2007. The
company estimates further expenditure of Rs 23 lakhs for completing the contract. The expected
loss would be Rs 15 lakhs. Can the company recognise the loss in the financial statements prepared
for the year ended 31.3.2007?
Answer
(i) As per paragraph 20 of AS 6 ‘Depreciation Accounting’, the depreciable amount of a

depreciable asset should be allocated on a systematic basis to each accounting period during
the useful life of the asset. In the given case, the depreciation amount can be calculated as
follows:
Rs
Particulars
Cost of machinery 10,00,000
Less: Scrap value at the end of useful life 1,00,000
Amount to be written off during useful life of machinery 9,00,000
Useful life of the asset 5 Years
Depreciation to be provided each year (Rs9,00,000 / 5 years) Rs 1,80,000
(ii) According to Para 21 of AS 3 (Revised) ‘Cash Flow Statements’, an enterprise should report
separately major classes of gross cash receipts and gross cash payments arising from investing and
financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are
reported on a net basis. Acquisition and disposal of fixed assets is not prescribed in para 22 and 24
of the standard. Hence, the company cannot disclose net cash flow in respect of acquisition of plant
and machinery and disposal of furnitures and fixtures.
(iii) As per paragraph 22 of AS 10 ‘Accounting for Fixed Assets’ , fixed asset acquired in exchange for
shares or other securities in the enterprise should be recorded at its fair market value, or the fair
market value of the securities issued, whichever is more clearly evident. Since, the market value of
the shares exchanged for the asset is more clearly evident, the company should record the value of
machinery at Rs 7,50,000. (i.e., 50,000 shares Rs15 per share being the market price)
(iv) As per paragraphs 31 and 35 of AS 7 on Construction Contracts, an expected loss on the

construction contract should be recognized as an expense immediately irrespective of (i)
whether or not the work has commenced on the contract; or (ii) the stage of completion of the
contract; or (iii) the amount of profits expected to arise in other contracts. Hence, the company
must recognize the loss immediately.
Q.29 What are the three fundamental accounting assumptions recognised by Accounting Standard
(AS) 1? Briefly describe each one of them.
Answer Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are
as follows:
(i) Going Concern: The financial statements are normally prepared on the assumption that an
enterprise will continue its operations in the foreseeable future and neither there is intention,
nor there is need to materially curtail the scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same accounting policies
for similar transactions in all accounting periods unless the change is required (i) by a statute,
(ii) by an accounting standard or (iii) for more appropriate presentation of financial
statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are recognised as soon
as they occur, whether or not cash or cash equivalent is actually received or paid.
Q.30 What are the maximum limits of managerial remuneration for companies having adequate
profits?
Answer For companies having adequate profits, maximum limits of managerial remuneration in
different circumstances are as under:
(i) Overall (excluding fee for attending meetings) -11% of net profit
(ii) If there is one managing director or whole time director or manager - 5% of net profit
(iii) If there is more than one managing director, whole time director or manager - 10% of net profit
(iv) Remuneration of directors who are neither managing directors nor whole time directors:
(a) If there is no managing or whole-time director - 3% of net profit
(b) If there is a managing or whole-time director - 1% of net profit
However, the above limits can be exceeded by the company approval at general meetings with the
Central Govt. approval.
Q.31 What is meant by ‘Cash’ and ‘Cash equivalents’ as per AS 3?
Answer As per AS 3 ‘Cash Flow Statements’, the term ‘Cash’ and ‘Cash equivalents’ mean the
following:
Cash: It includes cash on hand and demand deposits with banks.
Cash Equivalents: It means short-term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to insignificant risk of changes in value. Cash
equivalents are held for the purpose of meeting short-term cash commitments rather than for
investment or other similar purposes. For an investment to qualify as a cash equivalent, it must be
readily convertible into a determinable amount of cash and is subject to an insignificant risk of
changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a
short maturity of, say, three months or less from the date of acquisition and is virtually risk free. A
short term investment in a highly risky asset will not qualify as Cash Equivalent.
Q. 32 On the basis of the following information prepare a Cash Flow Statement for the year ended
31st March, 2013:
(i) Total sales for the year were Rs 199 crore out of which cash sales amounted to Rs 131 crore.
(ii) Cash collections from credit customers during the year, totalled Rs 67 crore.
(iv) Cash paid to suppliers of goods and services and to the employees of the enterprise amounted to
Rs 159 crore.
(iv) Fully paid preference shares of the face value of Rs 16 crore were redeemed and equity shares of
the face value of Rs 16 crore were allotted as fully paid up at a premium of 25%.
(v) Rs 13 crore were paid by way of income tax.
(vi) Machine of the book value of Rs 21 crore was sold at a loss of Rs 30 lakhs and a new machine was
installed at a total cost of Rs 40 crore.
(vii) Debenture interest amounting Rs 1 crore was paid.
(viii) Dividends totalling Rs 10 crore was paid on equity and preference shares. Corporate dividend
tax @ 17% was also paid.
(ix) On 31st March, 2012 balance with bank and cash on hand totalled Rs 9 crore.
Answer : Cash flow statement for the year ended 31st March, 2013
(Rs in crores) (Rs in crores)
Particulars
Cash flow from operating activities
Cash sales 131
Cash collected from credit customers 67
Less: Cash paid to suppliers for goods & services and to (159)
employees
Cash from operations 39
Less: Income tax paid (13)
Net cash generated from operating activities 26.00
Cash flow from investing activities
Payment for purchase of Machine (40.00)
Proceeds from sale of Machine 20.70
Net cash used in investing activities (19.30)
Cash flow from financing activities
Redemption of Preference shares (16.00)
Proceeds from issue of Equity shares 20.00
Debenture interest paid (1.00)
Dividend Paid (11.70)
Net cash used in financing activities (8.70)
Net decrease in cash and cash equivalent (2.00)
Add: Cash and cash equivalents as on 1.04.2012 9.00
Cash and cash equivalents as on 31.3.2013 7.00
Q.33. In a concern, the opening provision for doubtful debts is Rs 51,000. During the year a sum of Rs
10,000 was written off as bad debt. The closing balance of sundry debtors amounts to Rs 6,30,000. It
was decided that 10% of the debtors is to be maintained as provision. Calculate the closing balance
towards provision for doubtful debts and pass journal entry for giving effect to the provision
maintained.
Answer
Closing balance of Sundry Debtors = Rs 6,30,000
Closing provision for doubtful debts to be maintained @ 10% = Rs 63,000
Less: Opening Provision for doubtful debts = Rs 51,000
Additional provision to be maintained = Rs 12,000
Journal Entry
Particulars Rs Rs
Profit and Loss A/c Dr. 12,000
To Provision for doubtful debts 12,000
(Being additional provision on doubtful debts

maintained @ 10%)
Q.34 On 1st April, 2012 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co.
for a total hire purchase price of Rs 9,00,000 payable as to Rs 2,40,000 as down payment and the
balance in three equal annual instalments of Rs 2,20,000 each payable on 31st March, 2013, 2014 and
2015. The hire vendor charges interest @ 10% per annum. You are required to ascertain the cash
price of the truck for Teja Transport Co. Calculations may be made to the nearest rupee.
Answer
Rate of Interest 10 1
Ratio of interest and amount due = = =
100+Rate of Interest 1.10 11
There is no interest element is there in the down payment as it is paid on the date of the transaction.
Instalments paid after certain period includes interest portion also. Therefore, to ascertain cash price,
interest will be calculated from last instalment to first instalment as follows:
Calculation of Interest and Cash Price

No. of Amount due at the Interest Cumulative Cash
instalments time of instalment price
(1) (2) (3) (2-3)=(4)
3rd 2,20,000 1/11 of Rs 2,20,000 =Rs 20,000 2,00,000
2nd 4,20,000 [W.N.1] 1/11 of Rs 4,20,000= Rs 38,182 3,81,818
1st 6,01,818 [W.N.2] 1/11of Rs 6,01,818= Rs 54,711 5,47,107
Total cash price = Rs 5,47,107+ 2,40,000 (down payment) =Rs 7,87,107
Working Notes:
1. Rs 2,00,000+ 2nd instalment of Rs 2,20,000= Rs 4,20,000.
2. Rs 3,81,818+ 1st instalment of Rs 2,20,000= Rs 6,01,818
Q.35. H purchased 500 equity shares of Rs 100 each in the ABC Company Limited for Rs 62,500
inclusive of brokerage and stamp duty. Some years later the company decided to capitalise its profit
and to issue to the holders of equity shares one equity share as Bonus for every equity share held by
them. Prior to capitalization, the shares of ABC Company Limited were quoted at Rs 175 per share.
After the capitalization, the shares were quoted at Rs 92.50 per share. H sold the Bonus shares and
received Rs 90 per share. Show Investment A/c in H’s books on average cost basis as per AS 13.
Answer: In the books of H Investment Account (Equity Shares of ABC Co. Ltd.)
Particulars Face Value Cost Rs Particulars Face Value Cost Rs
Rs Rs
To Balance b/d* 50,000 62,500 By Bank A/c 50,000 45,000
To Bonus Shares A/c 50,000 - By Balance c/d 50,000 31,250

(Refer W.N.2)
To Profit & Loss A/c 13,750

(Refer W.N. 1)
(Profit on sale)
1,00,000 76,250 1,00,000 76,250
Working Note:
1. Calculation of profit on sale of bonus shares:

Sales price of bonus shares 45,000
62,500
Less: Average cost of shares sold (1,00,000 × 50,000) = 31,250
Profit 13,750
2. Value of closing investment:
50,000
Market value of shares = × 92.50 46,250
100
Cost price of shares (W.N. 1) = 31,250
Q.36 On 01-04-2011, Mr. T. Shekharan purchased 5,000 equity shares of Rs 100 each in V. Ltd.
@ Rs 120 each from a broker, who charged 2% brokerage. He incurred 50 paisa per Rs 100 as
cost of shares transfer stamps. On 31-01-2012 bonus was declared in the ratio of 1 : 2. Before
and after the record date of bonus shares, the shares were quoted at Rs 175 per share and Rs
90 per share respectively. On 31-03-2012 Mr. T. Shekharan sold bonus shares to a broker, who
charged 2% brokerage.
Show the Investment Account in the books of T. Shekharan, who held the shares as Current
Assets and closing value of investments shall be made at cost or market value whichever is
lower.
Answer
In the books of T. Shekharan Investment Account for the year ended 31st March, 2012
(Script: Equity Shares of V Ltd.)

Date Particulars Nominal Cost (Rs) Date Particulars Nominal Cost (Rs)
Value (Rs) Value (Rs)
1.4.11 To Bank 5,00,000 6,15,000 31.3.12 By Bank 2,50,000 2,20,500

A/c A/c
(W.N.1) (W.N.2)
31.1.12 To Bonus 2,50,000 - 31.3.12 By Balance 5,00,000 4,10,000

Share c/d
(W.N.4)
31.3.12 To Profit & 15,500

Loss A/C
(W. N. 3)
7,50,000 6,30,500 7,50,000 6,30,500
Working Notes:
1. Cost of equity shares purchased on 1.4.2011
= Cost + Brokerage + Shares of transfer stamps
= 5,000 Rs 120 + 2% of Rs 6,00,000 + ½% of Rs 6,00,000 = Rs 6,15,000
2. Sale proceeds of equity shares sold on 31st March, 2012
= Sales price – Brokerage = 2,500 Rs 90 – 2% of Rs 2,25,000 = Rs 2,20,500.
3. Profit on sale of bonus shares on 31st March, 2012
= Sales proceeds – Average cost
Sales proceeds = Rs 2,20,500
Average cost = Rs [6,15,000 2,50,000/7,50,000] = Rs 2,05,000
Profit = Rs 2,20,500 – Rs 2,05,000= Rs 15,500.
4. Valuation of equity shares on 31st March, 2012
Cost = Rs [6,15,000 5,00,000/7,50,000]= Rs 4,10,000 i.e Rs 82 per share
Market Value = 5,000 shares × Rs 90 = Rs 4,50,000
Closing stock of equity shares has been valued at Rs 4,10,000 i. e cost being lower than the
market value.
Q.37 On 11.11.2007 the premises of Rocky Ltd. was destroyed by fire. The following information is
made available:
Particulars Rs.
Stock as on 1.4.2006 3,75,000

Sales from 1.4.2006 to 31.3.2007 8,55,000
Stock as on 31.3.2007 2,00,000
Sales from 1.4.2007 to 11.11.2007 4,35,500
In valuing the stock on 31.3.2007, due to damage 50% of the value of the stock which originally cost
Rs 22,000 was written off. In June, 2007 about 50% of this stock was sold for Rs 5,500 and the
balance of obsolete stock is expected to realize the same price (i.e., 50% of the original cost). The
gross profit ratio is to be assumed as uniform in respect of other sales. Stock salvaged from fire
amounts to Rs 11,500. Compute the value of stock lost in fire.
Answer
In the books of Rocky Ltd. Trading Account for the year ended 31.3.2007
Particulars Rs. Particulars Rs.
To Opening stock 3,75,000 By Sales 8,55,000
To Purchases 5,20,000 By Closing stock (W.N.) 2,11,000
To Gross profit (Bal. fig.) 1,71,000
10,66,000 10,66,000
Gross Profi
Gross profit ratio of 2006-2007 = Sales
× 100
1,71,000
= 8,55,000 × 100 = 20%
Memorandum Trading Account for the period 1.4.2007 to 11.11.2007
Particulars Normal Abnormal Normal Abnormal
Rs Particulars
Rs Rs Rs
To Opening stock 1,89,000 11,000 By Sales 4,30,000 5,500
To Purchases 3,41,000 By Closing stock 1,86,000 5,500
To Gross profit @ 86,000

20%
6,16,000 11,000 6,16,000 11,000
Computation of stock lost in fire:
Closing stock = Normal stock + Abnormal stock
= Rs 1,86,000 + Rs 5500
= Rs 1,91,500
Less: Stock salvaged Rs = 11,500
Stock lost in fire Rs = 1,80,000
Working Note: Closing stock = Closing stock as given + Amount written off
= Rs 2,00,000 +Rs 11,000
= Rs 2,11,000
Q.38 What is “average clause” under insurance claim?
Answer When a businessman wants to reduce the burden of Insurance Premium and wants to
take an insurance policy which is less than the value of average stock, it is known as under
insurance. For discouraging the under-insurance, fire insurance policies contain an average
clause. In such a case, the net claim is calculated by using following formula:
𝐴𝑀𝑂𝑈𝑁𝑇 𝑂𝐹 𝑃𝑂𝐿𝐼𝐶𝑌
Amount of claim = 𝑖𝑛𝑠𝑢𝑟𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 × Actual Loss
Q.39 A trader intends to take a loss of profit policy with indemnity period of 6 months,
however, he could not decide the policy amount. From the following details, suggest the policy
amount: Rs
Turnover in last financial year 4,50,000 (amounts in Rs.)
Standing charges in last financial year 90,000 (amounts in Rs.)
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent
year. Increase in turnover expected 25%.
To achieve additional sales, trader has to incur additional expenditure of Rs 31,250
Answer
(a) Calculation of Gross Profit
Net Profit+Standing Charges

Gross Profit = × 100
Turnover
45000+90000
= × 100 = 30%
4,50,000
(b)Calculation of policy amount to cover loss of profit

Particulars Rs.
Turnover in the last financial year 4,50,000
Add: 25% increase in turnover 1,12,500
5,62,500
Gross profit on increased turnover (5,62,500 x 30%) 1,68,750
Add: Additional standing charges 31,250
Policy Amount 2,00,000
Therefore, the trader should go in for a loss of profit policy of Rs 2,00,000.
Q. 40 On 29th August, 2012 the godown of a trader caught fire and a large part of the stock of
goods was destroyed. However, goods costing Rs 1,08,000 could be salvaged incurring fire
fighting expenses amounting to Rs 4,700. The trader provides you the following additional
information:
Particulars Rs
Cost of stock on 1st, April, 2011 7,10,500
Cost of stock on 31st, March, 2012 7,90,100
Purchases during the year ended 31st March, 2012 56,79,600
Purchases from 1st April, 2012 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from1st April, 2012 to 41,000
the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2012 to 2,000
the date of fire
Sales for the year ended 31st March, 2012 80,000
Sales from 1st April, 2012 to the date of fire 45,36,000
The insurance company also admitted firefighting expenses. The trader had taken the fire
insurance policy for Rs 9,00,000 with an average clause. Calculate the amount of the claim that
will be admitted by the insurance company
Answer
Memorandum Trading Account for the period 1st April, 2012 to 29th Aug.2012
To Purchases 33,10,700 By Closing stock (Bal. fig.) 8,82,600
Less: Advertisement (41,000)
Drawings (2,000) 32,67,700
To Gross Profit [30% of Sales - 13,60,800

Refer Working Note]
54,18,600 54,18,600
Statement of Insurance Claim

Particulars Rs
Value of stock destroyed by fire 8,82,600
Less: Salvaged Stock (1,08,000)
Add: Fire Fighting Expenses 4,700
Insurance Claim 7,79,300
Note: Since policy amount is more than claim amount, average clause will not apply. Therefore,
claim amount of Rs 7,79,300 will be admitted by the Insurance Company.
Working Note:
Trading Account for the period ended 31st March, 2012

To Purchases 56,79,600 By Closing stock 7,90,100
To Gross Profit 24,00,000
87,90,100 87,90,100
Rate of Gross Profit in 2011-12
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕
× 𝟏𝟎𝟎
𝑺𝒂𝒍𝒆𝒔
24,00,000
× 100 = 30%
80,00,000
Q.41 Attempt any four of the following:
(a) X Ltd. received a grant of Rs 2 crores from the Central Government for the purpose of a
special Machinery during 1998-99. The cost of Machinery was Rs 20 crores and had a useful life
of 9 years. During 2002-03, the grant has become refundable due to nonfulfillment of certain
conditions attached to it. Assuming the entire grant was deducted from the cost of Machinery
in the year of acquisition. State with reasons, the accounting treatment to be followed in the
year 2002-03.
(b) The company deals in three products, A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2002-03. The Historical Cost
and Net Realizable Value of the items of closing stock are determined as follows:
Items Historical Cost (Rs in lakhs) Net Realisable Value (Rs in
lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of Closing Stock?
Answer (a) As per para 11.3 of AS 12 on Accounting for Government Grants, the amount
refundable in respect of a government grant related to a specific fixed asset is recorded by
increasing the book value of the asset. Depreciation on the revised book value is provided
prospectively over the residual useful life of the asset. In the given case, book value of
machinery will be increased by Rs 2 crores in the year 2002-2003. The computations for the
depreciation on machinery can be given as:
Cost of machinery 20 crores
Less: Grant received 2 crores
Cost of machinery 18 crores
Useful life of machinery 9 years
Depreciation per year as per straight line method Rs 18 crores/9
(assuming residual value to be zero) = Rs 2 crores

Total depreciation for 4 years (1998-99 to 2001-2002) 8 crores
Book value (in year 2002-2003) 10 crores
Add: Grant refunded 2 crores
Revised book value 12 crores
Remaining useful life 5 years
Revised annual depreciation 12 crores/5 = 2.4 crores
Thus, book value of machinery will be Rs 12 crores in the year 2002-2003 and the depreciation
amounting Rs 2.4 crores will be charged on machinery. Annual depreciation of Rs 2.4 crores will
be charged in the next four years
(b)As per para 5 of AS 2 on Valuation of Inventories, inventories should be valued at the lower
of cost and net realizable value. Inventories should be written down to net realizable value on
an item-by-item basis in the given case.
Items Historical Cost (Rs in Net Realisable Value Valuation of closing
lakhs) (Rs in lakhs) stock (Rs in lakhs)
A 40 28 28
B 32 32 32
C 16 24 16
88 84 76
Hence, closing stock will be valued at Rs 76 lakhs.
Q.42 (a) During the current year 20022003, X Limited made the following expenditure relating
to its plant building:.
Particulars Rs. In lakhs
Routine Repairs 4
Repairing 1
Partial replacement of roof tiles 0.5
Substantial improvements to the electrical wiring system 10

which will increase efficiency
(b)A plant was depreciated under two different methods as under:

Year SLM (Rs in lakhs) W.D.V. (Rs in lakhs)
1. 7.80 21.38
2. 7.80 15.80
3. 7.80 11.68
4. 7.80 8.64
31.20 57.50
5. 7.80 6.38
What should be the amount of resultant surplus/deficiency, if the company decides to switch
over from W.D.V. method to SLM method for first four years? Also state, how will you treat the
same in Accounts.
(c) Write a short note on Firm underwriting and Partial underwriting along with firm
underwriting
Answer
(a) As per para 12.1 of AS 10 on Accounting for Fixed Assets, expenditure that increases the future
benefits from the existing asset beyond its previously assessed standard of performance is
included in the gross book value, e.g., an increase in capacity. Hence, in the given case, Repairs
amounting Rs 5 lakhs and Partial replacement of roof tiles should be charged to profit and loss
statement. Rs 10 lakhs incurred for substantial improvement to the electrical writing system
which will increase efficiency should be capitalized.
(b) As per para 21 of AS 6 on Depreciation Accounting, when a change in the method of

depreciation is made, depreciation should be recalculated in accordance with the new method
from the date of the asset coming into use. The deficiency or surplus arising from retrospective
recomputation of depreciation in accordance with the new method should be adjusted in the
accounts in the year in which the method of depreciation is changed. In the given case, there is a
surplus of Rs 26.30 lakhs on account of change in method of depreciation, which will be credited
to Profit and Loss Account. Such a change should be treated as a change in accounting policy and
its effect should be quantified and disclosed.
(c) In firm underwriting the underwriter agrees to subscribe upto a certain number of
shares/debentures irrespective of the nature of public response to issue of securities. He gets
these securities even if the issue is fully subscribed or over-subscribed. These securities are
taken by the underwriter in addition to his liability for securities not subscribed by the public.
Under partial underwriting along with firm underwriting, unless otherwise agreed, individual
underwriter does not get the benefit of firm underwriting in determination of number of
shares/debentures to be taken up by him.
Q.43 Briefly explain the methods of accounting for amalgamation as per Accounting Standard-
14.?
Answer
As per AS 14 on ‘Accounting for Amalgamations’, there are two main methods of accounting for
amalgamations:
(i)The Pooling of Interest Method: Under this method, the assets, liabilities and reserves of the
transferor company are recorded by the transferee company at their existing carrying amounts
(after making the necessary adjustments). If at the time of amalgamation, the transferor and the
transferee companies have conflicting accounting policies, a uniform set of accounting policies is
adopted following the amalgamation. The effects on the financial statements of any changes in
accounting policies are reported in accordance with AS 5 on ‘Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies’.
(ii) The Purchase Method: Under the purchase method, the transferee company accounts for
the amalgamation either by incorporating the assets and liabilities at their existing carrying
amounts or by allocating the consideration to individual identifiable assets and liabilities of the
transferor company on the basis of their fair values at the date of amalgamation. The
identifiable assets and liabilities may include assets and liabilities not recorded in the financial
statements of the transferor company.
Where assets and liabilities are restated on the basis of their fair values, the determination of
fair values may be influenced by the intentions of the transferee company.
Q. 44 Mention six areas in which different accounting policies are followed by companies.
Answer
Following are the examples of the areas in which different accounting policies may be adopted
by different enterprises:
(i) Methods of depreciation, depletion and amortisation.
(ii) Valuation of inventories.
(iii) Methods of valuing goodwill.
(iv) Valuation of investments
Q.45 (i) Mention four assets, in respect of which AS 6 (revised) is not applicable.
(ii) Y Ltd. used certain resources of X Ltd. In return X Ltd. receives Rs 10 lakhs and Rs 15 lakhs as
interest and royalties respectively, from Y Ltd. during the year 2007 –2008. State on what basis
X Ltd. should recognize their revenue, as per AS 9.
(iii)Mention two categories of investments defined by AS 13 and also state their valuation
principles.
Answer
(i) AS 6 on ‘Depreciation Accounting’, is not applicable in respect of following assets:
(1) Forest, plantations and similar regenerative natural resources.
(2) Goodwill.
(3) Livestock.
(4) Wasting assets or land (if it has unlimited useful life for the enterprise).
(ii) As per AS 9 on ‘Revenue Recognition’, interest of Rs10 lakhs received in the year 2007-2008
should be recognized on the time basis, whereas royalty of Rs 15 lakhs received in the same year
should be recognized on accrual basis as per the terms of relevant agreement.
(iii)As per para 7 and 8 of AS 13 on ‘Accounting for Investments’, there are two categories of
investments, viz., Current Investments and Long Term Investments. According to para 14 of the
standard, the carrying amount for current investments is the lower of cost and fair value whereas
para 17 states that Long Term Investments are valued at cost less permanent diminutions in
value of investment. For current investments, para 16 of the standard states that, any reduction
to fair value and any reversals of such reductions are included in the profit and loss statement.
Q. 46 (a) As per Accounting Standard-14, what are the conditions which must be satisfied for an
amalgamation in the nature of merger?
(b) Rose Ltd. had made an investment of Rs 500 lakhs in the equity shares of Nose Ltd. On
10.01.2009. The realisable value of such investment on 31.03.2009 became Rs 200 lakhs as
Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting year. How
will you recognize this reduction in financial statements for the year 2008-09.
Answer
(a) According to AS 14 “Accounting for Amalgamations”, 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, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
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.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
(b) Recognition of reduction in value of investment would depend upon the nature of
investment and nature of decline as per Accounting Standard 13 “Accounting for Investments”.
As per provisions of the standard, if the investments were acquired for long term and decline is
temporary in nature, reduction in value will not be recognized and investments would be
carried at cost. If the decline is of permanent nature, it will be charged to profit and loss
account. If the investments are current investments, then the reduction should be recognized
and charged to Profit and Loss Account as the current investments are carried at cost or fair
value, whichever is less.
Q. 47 (a) During the current year 2011-12, M/s L & C Ltd. made the following expenditure
relating to its plant and machinery:
Rs.
Particulars
General repairs 4,00,000
Repairing of electric motors 1,00,000
Partial replacement of parts of machinery 50,000
Substantial improvements to the electrical wiring system which will 10,00,000

increase efficiency of the plant and machinery
What amount should be capitalised according to AS 10?
(b) Raw materials inventory of a company includes certain material purchased at Rs 100 per kg.
The price of the material is on decline and replacement cost of the inventory at the year end is
Rs 75 per kg. It is possible to convert the material into finished product at conversion cost of Rs
125.
Decide whether to make the product or not to make the product, if selling price is
(i) Rs 175 and
(ii) Rs 225. ∗Also find out the value of inventory in each case
Answer
(a)As per para 12.1 of AS 10 ‘Accounting for Fixed Assets’, expenditure that increases the future
benefits from the existing asset beyond its previously assessed standard of performance is
included in the gross book value, e.g., an increase in capacity. Hence, in the given case, repairs
amounting Rs 5 lakhs and partial replacement of parts of machinery worth Rs50,000 should be
charged to profit & loss account. Rs10 lakhs incurred for substantial improvement to the
electrical wiring system which will increase efficiency should be capitalized.
(b) As per para 24 of AS 2 ‘Valuation of Inventories’, materials and other supplies held for use in
the production of inventories are not written down below cost if the finished products in which
they will be incorporated are expected to be sold at or above cost. However, when there has
been a decline in the price of materials and it is estimated that the cost of the finished products
will exceed net realizable value, the materials are written down to net realisable value. In such
circumstances, the replacement cost of the materials may be the best available measure of
their net realisable value.
(i) When selling price is Rs 175
Incremental Profit = Rs 175 – Rs 125 = Rs 50
Current price of the material = Rs 75
Therefore, it is better not to make the product. Raw material inventory would be valued at net
realisable value i.e. Rs 75 because the selling price of the finished product is less than Rs225
(100+125) per kg.
(ii) When selling price is Rs225
Incremental Profit = Rs 225 – Rs 125 = Rs 100
Current price of the raw material = Rs 75.
Therefore, it is better to make the product.
Raw material inventory would be valued at Rs100 per kg because the selling price of the
finished product is not less than Rs 225.
Q.48 (a) A company installed a plant at a cost of Rs 20 lacs with estimated useful life of 10 years
and decided to depreciate on straight line method. In the fifth year, company decided to switch
over from straight line method to written down value method. Compute the resultant
surplus/deficiency if any, and state how will you treat the same in the accounts.
(b) An amount of Rs 9,90,000 was incurred on a contract work upto 31-03-2010. Certificates
have been received to date to the value of Rs 12,00,000 against which Rs 10,80,000 has been
received in cash. The cost of work done but not certified amounted to Rs 22,500. It is estimated
that by spending an additional amount of Rs 60,000 (including provision for contingencies) the
work can be completed in all respects in another two months. The agreed contract price of
work is Rs 12,50,000. Compute a conservative estimate of the profit to be taken to the Profit
and Loss Account as per AS 7.
Answer (a) Table showing depreciation under Straight Line Method (SLM) and depreciation
under Written Down Value Method (WDV)
Particulars Depreciation Rs in Lakhs
Year SLM WDV
I 2.00
1
2.00
II 1.80
2.00
III 1.62
2.00
IV 1.46*
2.00
Total 8.00 6.88
Resultant surplus on change in method of depreciation from SLM to WDV = (8.00 – 6.88) Rs
1.12 lakhs.
As per para 21 of AS 6 ‘Depreciation Accounting’, when a change in the method of depreciation

is made, depreciation should be re-calculated in accordance with the new method from the
date of the asset put to use. The deficiency or surplus arising from retrospective re-
computation of depreciation in accordance with the new method should be adjusted in the
accounts in the year in which the method of depreciation is changed. In the given case, surplus
amounting Rs 1.12 lakhs (8.00 – 6.88) should be credited to profit and loss statement in the
fifth year. Such a change should be treated as a change in accounting policy and its effect
should be quantified and disclosed as per AS 5 “Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies”.
1 Depreciation as per SLM Rs 20 lakhs/10years = Rs 2 lakhs.

2 Depreciation rate under SLM is 10% [(2,00,000/20,00,000) × 100].
It is assumed that depreciation rate will remain same under WDV method also.
∗ Rounded off up to two decimals
(b) Computation of estimate of profit as per AS 7
Particulars Rs.
Expenditure incurred upto 31.3.2010 9,90,000
Estimated additional expenses (including provision for contingency) 60,000
Estimated cost (A) 10,50,000
Contract price (B) 12,50,000
Total estimated profit [(B-A)] 2,00,000
Percentage of completion (9,90,000 / 10,50,000) x 100 94.29%
Computation of estimate of the profit to be taken to Profit and Loss Account:
Expenses incurred till 31.3.2010
Total Estimated Profit× Total Estimated Cost
9,90,000
2,00,000 × 10,50,000 = Rs 1,88,571
According to para 21 of AS 7 ‘Construction Contracts’, when the outcome of a construction

contract can be estimated reliably, contract revenue and contract costs associated with the
construction contract should be recognised as revenue and expenses respectively by reference
to stage of completion of the contract activity at the reporting date. Thus estimated profit
amounting Rs 1,88,571 should be recognised as revenue in the statement of profit and loss.
Q.49 (a) M/s. Tiger Ltd. allotted 7,500 equity shares of Rs 100 each fully paid up to Lion Ltd. in
consideration for supply of a special machinery. The shares exchanged for machinery are
quoted at National Stock Exchange (NSE) at Rs 95 per share, at the time of transaction. In the
absence of fair market value of the machinery acquired, show how the value of the machinery
would be recorded in the books of Tiger Ltd.?
(b) M/s. Sea Ltd. recognized Rs 5.00 lakhs, on accrual basis, income from dividend during the
year 2010-11, on shares of the face value of Rs 25.00 lakhs held by it in Rock Ltd. as at 31st
March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011. However, dividend was
declared on 30th June, 2011. Please state with reference to relevant Accounting Standard,
whether the treatment accorded by Sea Ltd. is in order
(c) What disclosures should be made in the first financial statements following the
amalgamation? (d) From the following data, show Profit and Loss A/c (Extract) as would appear
in the books of a contractor following Accounting Standard-7:.
(Rs in lakhs)
Particulars
Contract price (fixed) 480.00
Cost incurred to date 300.00
Estimated cost to complete 200.00
(e) M/s. Son Ltd. charged depreciation on its assets on SLM basis. In the year ended 31st March,
2012, it changed to WDV basis. The impact of the change when computed from the date of the
assets putting into use amounts to Rs 18 lakhs being additional depreciation. Discuss, when
should an enterprise change method of charging depreciation and how it should be dealt with
in the Profit and Loss Alc.
Answer
(a) As per para 11 of AS 10 “Accounting for Fixed Assets”, fixed asset acquired in exchange
for shares or other securities in the enterprise should be recorded at its fair market value, or
the fair market value of the securities issued, whichever is more clearly evident. Since, in the
given situation, the market value of the shares exchanged for the asset is more clearly evident,
the company should record the value of machinery at Rs 7,12,500 (i.e., 7,500 shares x Rs 95 per
share) being the market price of the shares issued in exchange.
(b) Para 8.4 of AS 9 “Revenue Recognition” states that dividend from investments in shares are
not recognized in the statement of Profit and Loss until the right to receive dividend is
established.
In the given case, the dividend is proposed on 10th April, 2011, while it was declared on 30th
June, 2011. Hence, the right to receive dividend is established on 30th June, 2011 only.
Therefore, on applying the provisions stated in the standard, income from dividend on shares
should be recognized by Sea Ltd. in the financial year 2011-2012 only. Therefore, the
recognition of income from dividend of Rs 5 lakhs, on accrual basis, in the financial year 2010-
11 is not in accordance with AS 9.
(c) Para 24 of AS 14 ‘Accounting for Amalgamations’ states that for all amalgamations (whether
for amalgamations accounted for under the pooling of interests method or amalgamations
accounted for under the purchase method), the following disclosures are considered
appropriate in the first financial statements following the amalgamation:
(a) Names and general nature of business of the amalgamating companies;
(b) Effective date of amalgamation for accounting purposes;
(c) The method of accounting used to reflect the amalgamation; and
(d) Particulars of the scheme sanctioned under a statute.
(d) Calculation of Estimated Total Cost

(Rs in lakhs)
Particulars
Cost incurred to date 300.00
Estimate of cost to completion 200.00
Estimated total cost in completing the contract 500.00
Percentage of completion (300/500) x 100 = 60%
Revenue recognised as a percentage to contract price
= 60% of Rs 480 lakhs = Rs 288 lakhs As per para 35 of AS 7 ‘Construction Contracts’, when it is
probable that total contract costs will exceed total contract revenue, the expected loss should
be recognised as an expense immediately. Accordingly, expenses to be recognized in the Profit
and Loss Account will be
(Rs in lakhs)
Particulars
Total foreseeable loss (500-480) 20
Less: Loss for the current year (300-288) 12
Expected loss to be recognized immediately as per para 35 of AS 7 8
Profit and Loss A/c (An Extract)

(Rs in lakhs) (Rs in lakhs)
To Construction cost 300 By Contract price 308
To Estimated loss on 8
completion of contract
(e) As per para 21 of AS 6 ‘Depreciation Accounting’, an enterprise can change one method of
charging depreciation to another method only if the adoption of the new method is required by
statute or for compliance with an accounting standard or if it is considered that the change
would result in a more appropriate preparation or presentation of the financial statements of
the enterprise. When such a change in the method of depreciation is made, depreciation
should be recalculated in accordance with the new method from the date of the asset coming
into use. The deficiency or surplus arising from retrospective recomputation of depreciation in
accordance with the new method should be adjusted in the accounts through statement of
profit and loss in the year in which the method of depreciation is changed. In case the change in
the method results in deficiency in depreciation in respect of past years, the deficiency should
be charged in the statement of profit and loss.
Q.50 (i) What are the basic characteristics of a Private Ltd. Company?
(ii) Sumo Ltd. has a profit of Rs 25 lakhs before charging depreciation for financial year 2008-09.
Depreciation in the books was Rs 11 lakhs and depreciation chargeable under Section 205*
comes to Rs 17 lakhs. Compute divisible profit for the year.
(iii) The Companies Act, 1956∗ limits the payment of managerial remuneration. What is the
maximum managerial remuneration, which can be paid in case of a company consistently
earning profits and has more than one managerial person?
Answer
(i) According to Section 2 (68) of the Companies Act 2013, a private company means a company
which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may
be prescribed, and which by its articles:
(a) Restricts the rights of members to transfer its shares.
(b) Except in the case of a one man company, limits the number of its member to 200
excluding: (i) persons who are in employment of the company; and (ii) persons who, having
been formerly in the employment of the company, were members of the company while in that
employment and have continued to be members after the employment ceased. For the
purpose of determining the number of members joint holders of shares will be counted as
single members.
(c) Prohibits any invitation to the public to subscribe to any securities of, the company.
(ii)
Computation of divisible profit (Rs in lakhs)
Profit for the year 2008-09 25.00
Less: Depreciation chargeable under Section 205 of the (17.00)

Companies Act, 1956 (Refer note)
Divisible profit for the year 8.00
Note: Under section 123 (2) of the Companies Act 2013, depreciation has to be provided in
accordance with schedule II.
(iii) Under section 197(1) of the Companies Act 2013, the managerial remuneration payable by
a public company, to its directors, including managing director or whole time director and its
manager in respect of any financial year shall not exceed eleven percent of the net profits of
that company for that financial year computed in accordance with the provisions of section 198
of the Companies Act 2013 provided that the remuneration of the directors shall not be
deducted from the gross profits.
Provided that the company may in a general meeting may, with the approval of the Central
Govt., authorize the payment of managerial remuneration exceeding eleven percent of the net
profits subject to the provisions of schedule V of the Act. Provided further that, except with the
approval of the company in a general meeting:
(a) the remuneration payable to one managing director or a whole time director or a manager
shall not exceed 5% of its net profits, and if there is more than one such director the maximum
remuneration payable to all such directors and manager taken together cannot exceed 10% of
its net profits.
(b) the remuneration payable to directors who are neither the managing director or whole time
director shall not exceed 1% of the net profits if there is a managing director or a whole time
director and 3% of the net profits in any other case.
Note: Since the question does not specify the nature of the managerial person an elaborate
answer as above is required.

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FINAL

Q.2 When can a company change its accounting policy?

Items Historical cost Net realizable value

Calculation of amount of claim Rs Rs

Applying average clause:

Amount of claim = ×Loss of stock

Particulars Rs. Particulars Rs

Summarised Cash Account

Particulars (Rs 000) Particulars (Rs 000)

Particulars (Rs. In 000)

Gross profit = Net profit + All expenses = Rs 2,00,000 + Rs ( 1,08,000+15,000+50,000+12,000

Q. 11.Pass journal entries for the following transactions :

Statement showing calculation of profit for the year 31.3.2007

Debtors as on 31.3.2008 = Rs 1,40,000 Credit period allowed = 2 months

Rs. (000) Particulars Rs. (000)

Balance Sheet as on 31-03-2012

(i) Current Ratio 2 :1.

2. Amount of proposed dividend

Particulars 31.3.2012 31.3.2013

(i) Prepare statement of affairs as on 31-3-2012 and 31-3-2013.

Answer : (i) Statement of Affairs

Total 3,81,200 5,90,700 Total 3,81,200 5,90,700

Dep. on Building Rs 2,500 (2.5% of Rs 1,00,000)

Answer : Calculation of cash price of the asset

Closing Amount of Total Interest Opening

Cash price of the asset = Down payment + Rs 35,459

= Rs 10,000 + Rs 35,459 = Rs 45,459

Particulars Hire Purchase Installment System

Answer : In the books of Rajat Investment Account (Equity shares in P Ltd. )

Date Particulars No. of Amount Date Particulars No. of Amount

To Gross Profit 3,00,000

Memorandum Trading A/c for the period from 1.4.2007 to 02.06.2007

Amount of Gross Profit = Rs 4,05,000 x 33.33% = Rs 1,35,000

Advise, what is the correct closing stock to be disclosed as at 31.3.2006.

(b) Explain the ‘Accounting of Revaluation of Assets’ with reference to AS 10.

Answer : In the books of Y Co. Ltd. Journal Entries

Stock at invoice price on 1.4.08 1,64,000

Stock at invoice price on 31.3.09 1,92,000

Debtors as on 1.4.08 63,400

Debtors as on 31.3.09 84,300

Furniture & fixtures as on 1.4.08 46,800

Cash sales 8,02,600

Goods invoiced to branch by head office 12,56,000

Expenses paid by head office 2,64,000

Petty expenses paid by the branch 20,900

Furniture acquired by the branch on 1.10.08 (payment was 5,000

Answer : In the Books of Pawan & Co., Delhi (Head Office)

Jaipur Branch Account

To Opening balances: By Branch stock

Branch stock A/c 1,64,000 Bank A/c (W.N.4) 15,00,000

Branch debtors A/c 63,400 By Goods sent to 2,51,200

Branch furniture A/c 46,800 By Closing Balances

To Goods sent to 12,56,000 Branch stock A/c 1,92,000

To Bank A/c (branch 2,64,000 Branch debtors A/c 84,300

To Branch stock 38,400 Branch furniture A/c 46,870

To Profit and loss A/c 2,74,570

Working Notes: Depreciation on furniture

10% p.a. for 6 months on Rs.5,000 250

Closing balance of branch furniture as on 31.3.2009

Add: Acquired during the year 5,000