Acc2 Vol 2

PRACTICE MANUAL
Intermediate (IPC)Course
PAPER : 5
ADVANCED ACCOUNTING
VOLUME – II
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
© The Institute of Chartered Accountants of India

This practice manual has been prepared by the faculty of the Board of Studies. The
objective of the practice manual is to provide teaching material to the students to enable
them to obtain knowledge and skills in the subject. Students should also supplement their
study by reference to the recommended text books. In case students need any
clarifications or have any suggestions to make for further improvement of the material
contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for
the students. However, the practice manual has not been specifically discussed by the
Council of the Institute or any of its Committees and the views expressed herein may not
be taken to necessarily represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.
© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
All rights reserved. No part of this book may be reproduced, stored in retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission in writing from the publisher.
Revised Edition : July, 2013
Website : www.icai.org
E-mail : bos@icai.in
Committee / : Board of Studies

Department
ISBN No. : 978-81-8441-303-8
Price :
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ii

A WORD ABOUT PRACTICE MANUAL
The Board of Studies has been instrumental in imparting theoretical education to the students
of Chartered Accountancy Course. The distinctive characteristics of the course i.e. distance
education has emphasized the need for bridging the gap between the students and the
Institute and for this purpose, the Board of Studies has been providing a variety of educational
inputs for the students. Bringing out a series of subject wise Practice Manuals is one of the
quality services provided by the Institute. These Practice Manuals are highly useful to the
students preparing for the examination, since they get answers for all important questions
relating to a subject at one place and that too grouped chapter-wise.
The Practice Manual in the subject of ‘Advanced Accounting’ is divided into nine chapters in
line with Volume I of the study material. This will help the students to correlate the Practice
Manual with the Study Material and facilitate in complete revision of each chapter. The
students are expected to cover the entire syllabus and also do practice on their own while
going through the practice manual. Exercises have been given at the end of each topic for
independent practice. Practice Manual includes questions from past examinations at PE-II,
PCC and IPCC levels which would facilitate in thorough understanding of the chapters
explained in the study material volume I. Few questions have been added in some of the
chapters to increase the practice base of the students.
New theoretical/case study based questions added in this edition of the practice manual
have been highlighted in bold and italics while practical questions are indicated in grey
background for easy identification. This Practice Manual contains a matrix showing the
analysis of the past examinations. This matrix will help the students in getting an idea about
the trend of questions being asked and relative weightage of each topic in the past
examinations. It will serve as a useful and handy reference guide while preparing for the
examination. It will guide the students to improve their performance in the examination and
also help them to work upon their grey areas and plan a strategy to tackle practical problems.
Feedback form is given at the end of this Practice Manual wherein students are encouraged to
give their feedback/suggestions. The concerned faculty members of Board of Studies have put
in their best efforts in making this practice manual lucid and student-friendly. In case you need
any clarification/guidance, you may send your queries at seema@icai.in; shilpa@icai.in and
asha.verma@icai.in.
Happy Reading and Best Wishes!
iii

Paper – 5: Advanced Accounting
Statement showing Topic-wise distribution of Examination Questions along with Marks
Term of Examination Total Average
Topics Marks
Nov. 2009 May, 2010 Nov. 2010 May, 2011 Nov. 2011 May 2012 Nov. 2012
Q M Q M Q M Q M Q M Q M Q M
1 Conceptual framework for 7(e) 4 4 0.57
presentation and
preparation of financial
statements
2 Problems based on 1(i) 2 1(ii) 2 1(iii) 5 1(a) 5 1(a) 5 1(a) 5 1(c) 5 157 22.43
Accounting Standards 1(ii) 2 1(iii) 2 1(iv) 5 6(a) 8 1(b) 5 1(b) 5 3(b) 4
1(iii) 2 1(iv) 2 7(b) 4 7(b) 4 7(a) 4 1(d) 5 7(a) 4

1(iv) 2 1(x) 2 7(c) 4 7(d) 4 7(b) 4 7(b) 4 7(b) 4
1(vi) 2 6(c) 4 7(e) 4 21 7(d) 4 7(c) 4 7(c) 4
1(vii) 2 12 22 22 7(d) 4 7(e) 4
1(ix) 2 7(e) 4 25
6(b) 5 31
6(c) 5
24
3 Advanced issues in
Partnership Accounts
Unit 1 Dissolution of firms 6(a) 6 1(v) 2 2 16 2 16 2 16 56 8
Unit 2 Amalgamation, conversion 2 16 2 16 2 16 48 6.86
and sale of partnership firm
4 Company Accounts
Unit 1 ESOP and Buy-back of 1(v) 2 3 16 1(d) 5 7(c) 4 3(a) 8 3(a) 12 63 9
shares 5(b) 8 7(a) 4 7(d) 4
10 12 16
iv
Unit 2 Underwriting of shares and 6(a) 4 1(b) 5 1(b) 5 14 2
debentures
Unit 3 Redemption of Debentures 1(x) 2 1 (i) 2 1 (i) 5 7 (a) 4 1 (c) 5 3(b) 8 6(a) 8 50 7.14
3 16
18
Unit 4 Amalgamation and 2 16 3 16 5 16 3 16 3 16 4 16 4 16 112 16
Reconstruction
Unit 5 Liquidation of Companies 5 (b) 8 7 (d) 4 4 (a) 8 6 (a) 8 28 4
5 Financial Statements of 1(vi) 2 4(b) 8 6(b) 8 6(b) 8 5(b) 8 42 6
Insurance Companies 4(b) 8
10
6 Financial Statements of 5(a) 8 1(viii) 2 1(ii) 5 5 16 5 (b) 8 1(c) 5 1(a) 5 85 12.14
Banking Companies 5(a) 8 6(a) 8 5(a) 8 5(a) 8

6(b) 4 13 13 13
14
7 Financial Statements of 6 (d) 4 6 (b) 8 4 16 5(b) 8 36 5.14
Electricity Companies
8 Departmental Accounts 1(viii) 2 4 (a) 8 1(c) 5 5(a) 8 6(b) 8 31 4.42
9 Accounting for Branches 4 16 1(vii) 2 7(a) 4 4(b) 8 1(d) 5 6 16 1(d) 5 70 10
including Foreign Branch 1(ix) 2 7(e) 4
Accounts 4(a) 8 12
12
Note: ‘Q’ represents question numbers as they appeared in the question paper of respective examination. ‘M’ represents the marks
which each question carried in that respective examination.
The question papers of all the past attempts of IPCC can be accessed from the BOS Knowledge Portal at the Students’ Page on the
Institute’s website www.icai.org.
v
CONTENTS
CHAPTER – 1 Framework for Preparation and Presentation of Financial 1.1 - 1.2

Statements
CHAPTER – 2 Accounting Standards 2.1 – 2.48
CHAPTER – 3 Advanced Issues in Partnership Accounts 3.1 – 3.36
Unit -1 Dissolution of Partnership Firms 3.1 – 3.26
Unit -2 Amalgamation, Conversion and Sale of Partnership Firm 3.27 – 3.36
CHAPTER – 4 Company Accounts 4.1 – 4.102
Unit -1 ESOPS and Buy Back of Shares 4.1 – 4.16
Unit -2 Underwriting of Shares and Debentures 4.17 -4.31
Unit 3 Redemption of Debentures 4.32 – 4.49
Unit -4 Amalgamation and Reconstruction 4.50 – 4.87
Unit -5 Liquidation of Companies 4.88 – 4.102
CHAPTER – 5 Financial Statements of Insurance Companies 5.1 – 5.26
CHAPTER – 6 Financial Statements of Banking Companies 6.1 – 6.42
CHAPTER – 7 Financial Statements of Electricity Companies 7.1 – 7.6
CHAPTER – 8 Departmental Accounts 8.1 – 8.15
CHAPTER – 9 Accounting for Branches including Foreign Branch Accounts 9.1 – 9.48
vi

1
Framework for Preparation and
Presentation of Financial Statements
BASIC CONCEPTS
The International Accounting Standards Committee (IASC) issued a Conceptual Framework
to serve as a basis for the accounting standards. The Accounting Standards Board of the
ICAI has issued a similar framework for the same purpose in July 2000. This framework
provides the fundamental basis for development of new standards as also for review of
existing standards. The framework sets out the concepts underlying the preparation and
presentation of general-purpose financial statements prepared by enterprises for external
users. This framework explains components, users, qualitative characteristics and
elements of financial statements The framework also explains concepts of capital, capital
maintenance and determination of profit.
Question 1
What are the qualitative characteristics of the financial statements which improve the
usefulness of the information furnished therein?
Answer
The qualitative characteristics are attributes that improve the usefulness of information
provided in financial statements. The framework suggests that the financial statements should
observe and maintain the following qualitative characteristics as far as possible within limits of
reasonable cost/ benefit.
1. Understandability: The financial statements should present information in a manner as to
be readily understandable by the users with reasonable knowledge of business and
economic activities. It is not right to think that more disclosures are always better. A
mass of irrelevant information creates confusion and can be even more harmful than
non-disclosure. No relevant information can be however withheld on the grounds of
complexity.
2. Relevance: The financial statements should contain relevant information only.
Information, which is likely to influence the economic decisions by the users, is said to be
relevant. Such information may help the users to evaluate past, present or future events
or may help in confirming or correcting past evaluations. The relevance of a piece of

1.2 Advanced Accounting
information should be judged by its materiality. A piece of information is said to be

material if its omission or misstatement can influence economic decisions of a user.
3. Reliability: To be useful, the information must be reliable; that is to say, they must be free
from material error and bias. The information provided are not likely to be reliable unless:
(a) Transactions and events reported are faithfully represented.
(b) Transactions and events are reported in terms of their substance and economic
reality not merely on the basis of their legal form. This principle is called the
principle of 'substance over form'.
(c) The reporting of transactions and events are neutral, i.e. free from bias.
(d) Prudence is exercised in reporting uncertain outcome of transactions or events.
4. Comparability: Comparison of financial statements is one of the most frequently used and
most effective tools of financial analysis. The financial statements should permit both
inter-firm and intra-firm comparison. One essential requirement of comparability is
disclosure of financial effect of change in accounting policies.
5. True and Fair View: Financial statements are required to show a true and fair view of the
performance, financial position and cash flows of an enterprise. The framework does not
deal directly with this concept of true and fair view, yet the application of the principal
qualitative characteristics and of appropriate accounting standards normally results in
financial statements portraying true and fair view of information about an enterprise.
Question 2
“One of the characteristics of financial statements is neutrality”- Do you agree with this
statement?
Answer
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the
information contained in financial statement must be neutral, that is free from bias. Financial
Statements are not neutral if by the selection or presentation of information, they influence the
making of a decision or judgement in order to achieve a pre-determined result or outcome.
Financial statements are said to depict the true and fair view of the business of the
organization by virtue of neutrality.

2
Accounting Standards
BASIC CONCEPTS
Accounting Standards (ASs) are written policy documents issued by expert accounting body
or by government or other regulatory body covering the aspects of recognition,
measurement, presentation and disclosure of accounting transactions in the financial
statements. Accounting Standards 4, 5, 11, 12, 16, 19, 20, 26, 29 are covered in this
paper.
AS 4 “CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE”

Question 1
You are an accountant preparing accounts of A Ltd. as on 31.3.2011. After year end the
following events have taken place in April, 2011:
(i) A fire broke out in the premises damaging, uninsured stock worth ` 10 lakhs (Salvage
value ` 2 lakhs).
(ii) A suit against the company’s advertisement was filed by a party claiming damage of ` 20
lakhs.
Describe, how above will be dealt with in the accounts of the company for the year ended on
31.3.2011.
Answer
Events occurring after the Balance Sheet date that represent material changes and
commitments affecting the financial position of the enterprise must be disclosed according to
para 15 of AS 4 on ‘Contingencies and Events Occurring after the Balance Sheet Date’.
Hence, fire accident and loss thereof must be disclosed.
Suit filed against the company being a contingent liability must be disclosed with the nature of
contingency, an estimate of the financial effect and uncertainties which may affect the future
outcome must be disclosed as per para 16 of AS 4.

Question 2
MEC Limited could not recover an amount of ` 8 lakhs from a debtor. The company is aware
that the debtor is in great financial difficulty. The accounts of the company for the year ended
31-3-2011 were finalized by making a provision @ 25% of the amount due from that debtor. In
May 2011, the debtor became bankrupt and nothing is recoverable from him. Do you advise
the company to provide for the entire loss of ` 8 lakhs in books of account for the year ended
31-3-2011?
Answer
As per para 8 of AS 4, ‘Contingencies and Events Occurring after the Balance Sheet Date’,
adjustments to assets and liabilities are required for events occurring after the balance sheet
date if such event provides/relates to additional information to the conditions existing at the
balance sheet date and is also materially affecting the valuation of assets and liabilities on the
balance sheet date.
As per the information given in the question, the debtor was already in a great financial
difficulty at the time of closing of accounts. Bankruptcy of the debtor in May 2011 is only an
additional information to the condition existing on the balance sheet date. Also the effect of a
debtor becoming bankrupt is material as total amount of ` 8 lakhs will be a loss to the
company. Therefore, the company is advised to provide for the entire amount of ` 8 lakhs in
the books of account for the year ended 31st March, 2011.
Question 3
A major fire has damaged the assets in a factory of a Limited Company on 5th April – five days
after the year end and closure of accounts. The loss is estimated at ` 10 crores out of which
` 7 crores will be recoverable from the insurers. Explain briefly how the loss should be treated
in the final accounts for the previous year.
Answer
The loss due to break out of fire is an example of event occurring after the balance sheet date.
The event does not relate to conditions existing at the balance sheet date. It has not affected
the financial position as on the date of balance sheet and therefore requires no specific
adjustments in the financial statements. However, paragraph 8.6 of AS 4 states that disclosure
is generally made of events occurring after balance sheet date i.e. in subsequent periods that
represent unusual changes affecting the existence or substratum of the enterprise after the
balance sheet date. In the given case, the amount of loss of assets in a factory is material and
may be considered as an event affecting the substratum of the enterprise. Hence, as
recommended in paragraph 15 of AS 4, disclosure of the event should be made.

Accounting Standards 2.3
Question 4
A Company entered into an agreement to sell its immovable property to another company for
` 35 lakhs. The property was shown in the Balance Sheet at ` 7 lakhs. The agreement to sell
was concluded on 15th February, 2011 and sale deed was registered on 30th April, 2011.
You are required to state, with reasons, how this event would be dealt with in the financial
statements for the year ended 31st March, 2011.
Answer
According to para 13 of AS 4 “Contingencies and Events Occurring after the Balance Sheet
Date”, assets and liabilities should be adjusted for events occurring after the balance sheet
date that provide additional evidence to assist the estimation of amounts relating to conditions
existing at the balance sheet date.
In the given case, sale of immovable property was carried out before the closure of the books
of accounts. This is clearly an event occurring after the balance sheet date but agreement to
sell was effected on 15th February 2011 i.e. before the balance sheet date. Registration of the
sale deed on 30th April, 2011, simply provides additional information relating to the conditions
existing at the balance sheet date. Therefore, adjustment to assets for sale of immovable
property is necessary in the financial statements for the year ended 31st March, 2011.
Question 5
In Raj Co. Ltd., theft of cash of ` 2 lakhs by the cashier in January, 2011 was detected in May, 2011.
The accounts of the company were not yet approved by the Board of Directors of the company.
Whether the theft of cash has to be adjusted in the accounts of the company for the year
ended 31.3.2011. Decide.
Answer
As per para 13 of AS 4 (revised), ‘Contingencies and Events Occurring After the Balance
Sheet Date’, assets and liabilities should be adjusted for events occurring after the balance
sheet date that provide additional evidence to assist the estimation of amounts relating to
conditions existing at the balance sheet date.
Though the theft, by the cashier ` 2,00,000, was detected after the balance sheet date (before
approval of financial statements) but it is an additional information materially affecting the
determination of the cash amount relating to conditions existing at the balance sheet date.
Therefore, it is necessary to make the necessary adjustments in the financial statements of the
company for the year ended 31st March, 2011 for recognition of the loss amounting ` 2,00,000.
Question 6
A Company follows April to March as its financial year. The Company recognizes cheques
dated 31st March or before, received from customers after balance sheet date, but before
approval of financial statement by debiting ‘Cheques in hand account’ and crediting ‘Debtors
account’. The ‘cheques in hand’ is shown in the Balance Sheet as an item of cash and cash

equivalents. All cheques in hand are presented to bank in the month of April and are also
realised in the same month in normal course after deposit in the bank. State with reasons,
whether the collection of cheques bearing date 31st March or before, but received after
Balance Sheet date is an adjusting event and how this fact is to be disclosed by the company?
Answer
Even if the cheques bear the date 31st March or before, the cheques received after
31st March do not represent any condition existing on the balance sheet date i.e.
31st March. Thus, the collection of cheques after balance sheet date is not an adjusting event.
Cheques that are received after the balance sheet date should be accounted for in the period in
which they are received even though the same may be dated 31st March or before as per AS 4
“Contingencies and Events Occurring after the Balance Sheet Date”. Moreover, the collection of
cheques after balance sheet date does not represent any material change affecting financial
position of the enterprise, so no disclosure is necessary.
Question 7
While preparing its final accounts for the year ended 31st March 2010, a company made a
provision for bad debts @ 4% of its total debtors (as per trend follows from the previous
years). In the first week of March 2010, a debtor for ` 3,00,000 had suffered heavy loss due
to an earthquake; the loss was not covered by any insurance policy. In April, 2010 the debtor
became a bankrupt. Can the company provide for the full loss arising out of insolvency of the
debtor in the final accounts for the year ended 31st March, 2010.
Answer
As per para 8 of AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’,
adjustment to assets and liabilities are required for events occurring after the balance sheet
date that provide additional information materially affecting the determination of the amounts
relating to conditions existing at the Balance Sheet date.
A debtor for ` 3,00,000 suffered heavy loss due to earthquake in the first week of March,
2010 and he became bankrupt in April, 2010 (after the balance sheet date). The loss was also
not covered by any insurance policy. Accordingly, full provision for bad debts amounting
` 3,00,000 should be made, to cover the loss arising due to the insolvency of a debtor, in the
final accounts for the year ended 31st March 2010.
Question 8
In preparing the financial statements of Lotus Limited for the year ended 31st March, 2010 you
come across the following information. State with reason, how you would deal with this in the
financial statements?
The company invested ` 50 lakhs in April, 2010 in the acquisition of another company doing
similar business, the negotiations for which had just started.

Answer
As per AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, events
occurring after the balance sheet date which do not affect the figures stated in the financial
statements would not normally require disclosure in the financial statements although they
may be of such significance that they may require a disclosure in the report of the approving
authority∗ to enable users of financial statements to make proper evaluations and decisions.
The investment of ` 50 lakhs in April 2010 for acquisition of another company is under
negotiation stage, and has not been finalized yet. On the other hand it is also not affecting the
figures stated in the financial statements of 2009-10, hence the details regarding such
negotiation and investment planning of ` 50 lakhs in April, 2010 in the acquisition of another
company should be disclosed in the Directors’ Report* to enable users of financial statements
to make proper evaluations and decision.
Question 9
Cashier of A-One Limited embezzled cash amounting to ` 6,00,000 during March, 2012 .
However same comes to the notice of Company management during April, 2012 only.
Financial statements of the company is not yet approved by the Board of Directors of
the company. With the help of provisions of AS 4 “Contingencies and Events Occurring
after the Balance Sheet Date” decide, whether the embezzlement of cash should be
adjusted in the books of accounts for the year ending March, 2012 ?
What will be your reply, if embezzlement of cash comes to the notice of company
management only after approval of financial statements by the Board of Directors of the
company ?
Answer
As per para 13 of AS 4, assets and liabilities should be adjusted for events occurring
after the balance sheet date that provide additional evidence to assist the estimation of
amounts relating to conditions existing at the balance sheet date.
Though the theft, by the cashier ` 6,00,000, was detected after the balance sheet date
(before approval of financial statements) but it is an additional information materially
affecting the determination of the cash amount relating to conditions existing at the
balance sheet date. Therefore, it is necessary to make the necessary adjustments in
the financial statements of the company for the year ended 31st March, 2012 for
recognition of the loss amounting ` 6,00,000.
∗
To promote transparency, Exposure Draft has recently been issued by the ICAI on Limited Revision to AS 4
“Events occurring After the Balance Sheet Date”. According to this Limited Revision, these events should be
disclosed in the financial statements instead of in the report of the approving authority. However, it is pertinent to
note that this Limited Revision has not yet been notified by the Govt.

If embezzlement of cash comes to the notice of company management only after

approval of financial statements by board of directors of the company, then the
treatment will be done as per the provisions of AS 5. This being extra ordinary item
should be disclosed in the statement of profit and loss as a part of loss for the year
ending March, 2013. The nature and the amount of prior period items should be
separately disclosed on the statement of profit and loss in a manner that its impact on
current profit or loss can be perceived.
AS 5 “NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND
CHANGES IN ACCOUNTING POLICIES”
Question 10
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.
Question 11
When can an item qualify to be a prior period item as per AS 5?
Answer
According to para 16 of AS 5 on ‘Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies’, prior period items refers to those income or expenses, which
arise in the current period as a result of errors or omissions in the preparation of financial
statements of one or more prior periods. The term does not include other adjustments
necessitated by circumstances, which though related to prior periods, are determined in the
current period e.g., arrears payable to workers in current period as a result of revision of
wages with retrospective effect.

Question 12
A limited company created a provision for bad and doubtful debts at 2.5% on debtors in
preparing the financial statements for the year 2010-2011.
Subsequently on a review of the credit period allowed and financial capacity of the customers,
the company decided to increase the provision to 8% on debtors as on 31.3.2011. The
accounts were not approved by the Board of Directors till the date of decision. While applying
the relevant accounting standard can this revision be considered as an extraordinary item or
prior period item?
Answer
As per para 21 of AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies’, the preparation of financial statements involves making estimates which
are based on the circumstances existing at the time when the financial statements are
prepared. It may be necessary to revise an estimate in a subsequent period if there is a
change in the circumstances on which the estimate was based. Revision of an estimate, by its
nature, does not bring the adjustment within the definitions of a prior period item or an
extraordinary item [para 21 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies].
In the given case, a limited company created 2.5% provision for doubtful debts for the year
2010-2011. Subsequently in 2011 the company revised the estimates based on the changed
circumstances and wants to create 8% provision. As per AS-5 (Revised), this change in
estimate is neither a prior period item nor an extraordinary item.
However, as per para 27 of AS 5 (Revised), a change in accounting estimate which has
material effect in the current period, should be disclosed and quantified. Any change in the
accounting estimate which is expected to have a material effect in later periods should also be
disclosed and quantified.
Question 13
X Co. Ltd. signed an agreement with its employees union for revision of wages in June, 2006.
The wage revision is with retrospective effect from 1.4.2008. The arrear wages upto
31.3.2012 amounts to ` 80 lakhs. Arrear wages for the period from 1.4.2012 to 30.06.2012
(being the date of agreement) amounts to ` 7 lakhs.
Decide whether a separate disclosure of arrear wages is required.
Answer
It is given that revision of wages took place in June, 2012 with retrospective effect from
1.4.2008. The arrear wages payable for the period from 1.4.2008 to 31.3.2012 cannot be
taken as an error or omission in the preparation of financial statements and hence this
expenditure cannot be taken as a prior period item.

Additional wages liability of ` 87 lakhs (from 1.4.2008 to 30.6.2012) should be included in

current year’s wages.
It may be mentioned that additional wages is an expense arising from the ordinary activities of
the company. Although abnormal in amount, such an expense does not qualify as an
extraordinary item.
However, as per para 12 of AS 5 (Revised),’ Net Profit or loss for the Period, Prior Period Items
and Changes in the Accounting Policies’, when items of income and expense within profit or loss
from ordinary activities are of such size, nature or incidence that their disclosure is relevant to
explain the performance of the enterprise for the period, the nature and amount of such items
should be disclosed separately.
However, wages payable for the current year (from 1.4.2012 to 30.6.2012) amounting
` 7 lakhs is not a prior period item hence need not be disclosed separately. This may be
shown as current year’s wages.
Question 14
Goods of ` 5,00,000 were destroyed due to flood in September, 2008. A claim was lodged
with insurance company, but no entry was passed in the books for insurance claim.
In March, 2011, the claim was passed and the company received a payment of
` 3,50,000 against the claim. Explain the treatment of such receipt in final accounts for the
year ended 31st March, 2011.
Answer
As per the provisions of AS 5 “Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies”, prior period items are income or expenses, which arise, in
the current period as a result of error or omissions in the preparation of financial statements of
one or more prior periods. Further, the nature and amount of prior period items should be
separately disclosed in the statement of profit and loss in a manner that their impact on
current profit or loss can be perceived.
In the given instance, it is clearly a case of error in preparation of financial statements for the year
2008-09. Hence, claim received in the financial year 2010-11 is a prior period item and should be
separately disclosed in the statement of Profit and Loss.
Question 15
S.T.B. Ltd. makes provision for expenses worth ` 7,00,000 for the year ending
March 31, 2009, but the actual expenses during the year ending March 31, 2010 comes to
` 9,00,000 against provision made during the last year. State with reasons whether difference
of ` 2,00,000 is to be treated as prior period item as per AS-5.
Answer
As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies’, as a result of the uncertainties inherent in business activities, many financial

statement items cannot be measured with precision but can only be estimated. The estimation
process involves judgments based on the latest information available. The use of reasonable
estimates is an essential part of the preparation of financial statements and does not
undermine their reliability.
Estimates may have to be revised, if changes occur regarding the circumstances on which the
estimate was based, or as a result of new information, more experience or subsequent
developments.
As per the standard, the effect of a change in an accounting estimate should be classified
using the same classification in the statement of profit and loss as was used previously for the
estimate. Prior period items are income or expenses which arise in the current period as a
result of errors or omissions in the preparation of the financial statements of one or more prior
periods. Thus, revision of an estimate by its nature i.e. the difference of ` 2 lakhs, is not a
prior period item.
Therefore, in the given case expenses amounting ` 2,00,000 (i.e. ` 9,00,000 – ` 7,00,000)
relating to the previous year recorded in the current year, should not be regarded as prior
period item.
Question 16
A company created a provision of ` 75,000 for staff welfare while preparing the financial
statements for the year 2007-08. On 31st March, in a meeting with staff welfare association, it
was decided to increase the amount of provision for staff welfare to
` 1,00,000. The accounts were approved by Board of Directors on 15th April, 2008.
Explain the treatment of such revision in financial statements for the year ended
31st March, 2008.
Answer
As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies”, the change in amount of staff welfare provision amounting
` 25,000 is neither a prior period item nor an extraordinary item. It is a change in estimate,
which has been occurred in the year 2007-2008.
As per the provisions of the standard, normally, all items of income and expense which are
recognised in a period are included in the determination of the net profit or loss for the period. This
includes extraordinary items and the effects of changes in accounting estimates. However, the
effect of such change in accounting estimate should be classified using the same classification in
the statement of profit and loss, as was used previously, for the estimate.
Question 17
Give two examples on each of the following items:
(i) Change in Accounting Policy

(ii) Change in Accounting Estimate

(iii) Extra Ordinary Items
(iv) Prior Period Items.
Answer
(i) Examples of Changes in Accounting Policy:
a. Change of depreciation method from WDV to SLM and vice-versa.
b. Change in cost formula in measuring the cost of inventories.
(ii) Examples of Changes in Accounting Estimates:
a. Change in estimate of provision for doubtful debts on sundry debtors.
b. Change in estimate of useful life of fixed assets.
(iii) Examples of Extraordinary items:
a. Loss due to earthquakes / fire / strike
b. Attachment of property of the enterprise by government
(iv) Examples of Prior period items:
a. Applying incorrect rate of depreciation in one or more prior periods.
b. Omission to account for income or expenditure in one or more prior periods.
AS 11 “THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES”
Question 18
A Ltd. purchased fixed assets costing ` 6,000 lakhs on 1.1.2010. This was financed by
foreign currency loan (U.S. Dollars) payable in three annual equal instalments. Exchange
rates were 1 Dollar = ` 40 and ` 45 as on 1.1.2010 and 31.12.2010 respectively. First
instalment was paid on 31.12.2010.
You are required to state, how these transactions would be accounted for?
Answer
As per para 13 of AS 11 (Revised) ‘The Effects of Changes in Foreign Exchange Rates’,
exchange differences arising on the settlement of monetary items or on reporting an
enterprise’s monetary items at rates different from those at which they were initially recorded
during the period, or reported in previous financial statements, should be recognised as
income or as an expense in the period in which they arise. Thus, exchange differences arising
on repayment of liabilities incurred for the purpose of acquiring fixed assets are recognised as
income or expenses.

Calculation of exchange difference:

6,000
Foreign Exchange Loan = = US $ 150 lakhs
40
Exchange Difference = US $ 150 lakhs x (45 – 40) = ` 750 lakhs.
Loss due to exchange difference amounting ` 750 lakhs should be charged to profit and loss
account for the year ended 31st December, 2010.
Question 19
Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 2011 payable after 4
months. The company entered into a forward contract for 4 months @ ` 48.85 per dollar. On
31st December, 2011, the exchange rate was ` 47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of Sterling Limited
for the year ended 31st March, 2012.
Answer
Calculation of profit or loss to be recognised in the books of Sterling Limited
`
Forward contract rate 48.85
Less: Spot rate (47.50)
Loss 1.35
Forward Contract Amount $20,000
Total loss on entering into forward contract = ($20,000 × ` 1.35) ` 27,000
Contract period 4 months
Loss for the period 1st January, 2012 to 31st March, 2012 i.e. 3 months
3 `
falling in the year 2011-2012 will be ` 27,000 × = 20,250
4
Balance loss of ` 6,750 (i.e. ` 27,000 – ` 20,250) for the month of April, 2012 will be
recognised in the financial year 2012-2013.
Question 20
Exchange Rate per $
Goods purchased on 1.1.2011 of US $ 10,000 ` 45
Exchange rate on 31.3.2011 ` 44
Date of actual payment 7.7.2011 ` 43

Ascertain the loss/gain for financial years 2010-11 and 2011-12, also give their treatment as
per AS 11.
Answer
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency
transactions should be recorded by applying the exchange rate on the date of transactions.
Thus, goods purchased on 1.1.2011 and corresponding creditor would be recorded at
` 4,50,000 (i.e. $10,000 × ` 45)
According to the standard, at the balance sheet date all monetary transactions should be
reported using the closing rate. Thus, creditor of US $10,000 on 31.3.2011 will be reported at
` 4,40,000 (i.e. $10,000 × ` 44) and exchange profit of ` 10,000 (i.e. 4,50,000 – 4,40,000)
should be credited to Profit and Loss account in the year 2010-11.
On 7.7.2011, creditor of $10,000 is paid at the rate of ` 43. As per AS 11, exchange
difference on settlement of the account should also be transferred to Profit and Loss account.
Therefore, ` 10,000 (i.e. 4,40,000 – 4,30,000) will be credited to Profit and Loss account in the
year 2011-12.
Question 21
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on
25th February, 2011, when the exchange rate was ` 44 per US Dollar. The transaction was
recorded in the books at the above mentioned rate. The payment for the transaction was
made on 10th April, 2011, when the exchange rate was ` 48 per US Dollar. At the year end
31st March, 2011, the rate of exchange was ` 49 per US Dollar.
The Chief Accountant of the company passed an entry on 31st March, 2011 adjusting the cost
of raw material consumed for the difference between ` 48 and ` 44 per US Dollar. Discuss
whether this treatment is justified as per the provisions of AS-11 (Revised).
Answer
As per para 9 of AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, initial
recognition of a foreign currency transaction is done in the reporting currency by applying the
exchange rate at the date of the transaction. Accordingly, on 25th February 2011, the raw
material purchased and its creditors will be recorded at US dollar 9,000 × ` 44 = ` 3,96,000.
Also, as per para 11 of the standard, on balance sheet date such transaction is reported at
closing rate of exchange, hence it will be valued at the closing rate i.e. ` 49 per US dollar
(USD 9,000 x ` 49 = ` 4,41,000) at 31st March, 2011, irrespective of the payment made for
the same subsequently at lower rate in the next financial year.
The difference of ` 5 (49 – 44) per US dollar i.e. ` 45,000 (USD 9,000 x ` 5) will be shown as
an exchange loss in the profit and loss account for the year ended 31st March, 2011 and will
not be adjusted against the cost of raw materials.

In the subsequent year on settlement date, the company would recognize or provide in the
Profit and Loss account an exchange gain of ` 1 per US dollar, i.e. the difference from
balance sheet date to the date of settlement between ` 49 and ` 48 per US dollar i.e. ` 9,000.
Hence, the accounting treatment adopted by the Chief Accountant of the company is incorrect
i.e. it is not in accordance with the provisions of AS 11.
Question 22
Mr. Y bought a forward contract for three months of US $ 2,00,000 on 1st December 2010 at 1
US $ = ` 44.10 when the exchange rate was 1 US $ = ` 43.90. On
31-12-2010, when he closed his books, exchange rate was 1 US $ = ` 44.20. On
31st January, 2011 he decided to sell the contract at ` 44.30 per Dollar. Show how the profits
from the contract will be recognized in the books of Mr. Y.
Answer
As per para 39 of AS 11 ‘Changes in Foreign Exchange Rates”, in recording a forward
exchange contract intended for trading or speculation purpose, the premium or discount on the
contract is ignored and at each balance sheet date, the value of contract is marked to its
current market value and the gain or loss on the contract is recognised. This statement also
does not apply to land unless it has a limited useful life for the enterprise.
Since the forward contract was for speculation purposes the premium on forward contract i.e.
the difference between the spot rate and the forward contract rate will not be recorded in the
books. Only when the forward contract is sold the difference between the forward contract rate
and sale rate will be recorded in the Profit & Loss Account.
`
Sale rate 44.30
Less: Contract rate (44.10)
Profit on sale of contract per US$ 00.20
Contract Amount US $ 2,00,000
Total profit (2,00,000 x 0.20) ` 40,000
Disclosure:
An enterprise should disclosure the following:
(i) The amount of exchange differences included in the net profit or loss for the period.
(ii) Net exchange differences accumulated in foreign currency translation reserve as a
separate component of shareholder’s funds, and a reconciliation of the amount of such
exchange differences at the beginning and end of the period.
Question 23
Aman Ltd. borrowed US $ 5,00,000 on 31-12-2010 which will be repaid (settled) as on
30-6-2011. Aman Ltd. prepares its financial statements ending on 31-3-2011. Rate of

exchange between reporting currency (Rupee) and foreign currency (US $) on different dates
are as under:
31-12-2010 1 US $ = ` 44.00
31-3-2011 1 US $ = ` 44.50
30-6-2011 1 US $ = ` 44.75
(i) Calculate borrowings in reporting currency to be recognised in the books on above
mentioned dates & also show journal entries for the same.
(ii) If borrowings was repaid (settled) on 28-2-2011 on which date exchange rate was 1
US$= ` 44.20 than what entry should be passed?
Answer
As per para 9 of AS 11 “Changes in Foreign Exchange Rates”, a foreign currency transaction
should be recorded, on initial recognition in the reporting currency, by applying to the foreign
currency amount the exchange rate between the reporting currency and the foreign currency at the
date of the transaction. Accordingly, on 31.12.2010, borrowings will be recorded at ` 2,20,00,000
(i.e $ 5,00,000 ×` 44.00) X
As per para 11(a) of the standard, at each balance sheet date, foreign currency monetary
items should be reported using the closing rate. Accordingly, on 31.12.2011, borrowings
(monetary items) will be recorded at ` 2,22,50,000 (i.e $ 5,00,000 × ` 44.50).
In the books of Aman Ltd.
Journal Entries
Date Particulars ` `
1. 31.12.2010 Bank A/c Dr. 2,20,00,000
To Borrowings 2,20,00,000
2. 31.03.2011 P/L A/c (Difference in exchange) (W.N.1) Dr. 2,50,000
To Borrowings 2,50,000
3. 30.06.2011 Borrowings A/c Dr. 2,22,50,000
P/L A/c (Difference in exchange) Dr. 1,25,000
(W.N.2)
To Bank A/c 2,23,75,000
(ii) In case borrowing is repaid before balance sheet date, then the entry would be as
follows:-
28-2-2011 Borrowings A/c Dr. 2,20,00,000
P/L A/c (Difference in exchange) (W.N.3) Dr. 1,00,000
To Bank A/c 2,21,00,000

Working Notes:
1. The exchange difference of ` 2,50,000 is arising because the transaction has been
reported at different rate (` 44.50 =1 US $) from the rate initially recorded (i.e. ` 44 =1 US $).
settled at an exchange rate (` 44.75 =1 US $) different from the rate at which reported in the
last financial statement (` 44.50= 1 US $).
settled at a different rate (i.e. ` 44.20 = 1 US $) than the rate at which initially recorded (1 US
$ = ` 44.00).
AS 12 “ACCOUNTING FOR GOVERNMENT GRANTS”
Question 24
Explain the treatment of refund of Government Grants as per Accounting Standard 12.
Answer
Para 11 of AS 12, “Accounting for Government Grants”, explains treatment of government
grants in following situations:
(i) When government grant is related to revenue
(a) When deferred credit account has a balance: The amount of government grant
refundable will be adjusted against unamortized deferred credit balance remaining
in respect of the grant. To the extent that the amount refundable exceeds any such
deferred credit the amount is immediately charged to profit and loss account.
(b) Where no deferred credit account balance exists: The amount of government grant
refundable will be charged to profit and Loss account.
(ii) When government grant is related to specific fixed assets
(a) Where at the time of receipt, the amount of government grant reduced the cost of
asset: The amount of government grant refundable will increase the book value of
the asset.
(b) Where at the time of receipt, the amount of government grant was credited to
“Deferred Grant Account”: The amount of government grant refundable will reduce
the capital reserve or unamortized balance of deferred grant account as
appropriate.
(iii) When government grant is in the nature of Promoter’s contribution
The amount of government grant refundable in part or in full on non-fulfilment of specific
conditions, the relevant amount recoverable by the government will be reduced from capital
reserve.
A government grant that becomes refundable is treated as an extra-ordinary item as per AS 5.

Question 25
Supriya Ltd. received a grant of ` 2,500 lakhs during the accounting year 2010-11 from
government for welfare activities to be carried on by the company for its employees. The
grant prescribed conditions for its utilization. However, during the year 2011-12, it was found
that the conditions of grants were not complied with and the grant had to be refunded to the
government in full. Elucidate the current accounting treatment, with reference to the
provisions of AS-12.
Answer
As per para 11 of AS 12 ‘Accounting for Government Grants’, Government grants sometimes
become refundable because certain conditions are not fulfilled. A government grant that
becomes refundable is treated as an extraordinary item as per AS 5.
The amount refundable in respect of a government grant related to revenue is applied first
against any unamortised deferred credit remaining in respect of the grant. To the extent that
the amount refundable exceeds any such deferred credit, or where no deferred credit exists,
the amount is charged immediately to profit and loss statement.
In the present case, the amount of refund of government grant should be shown in the profit &
loss account of the company as an extraordinary item during the year 2011-12.
Question 26
A Ltd. purchased a machinery for ` 40 lakhs. (Useful life 4 years and residual value
` 8 lakhs) Government grant received is ` 16 lakhs.
Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed
assets, if:
(1) the grant is credited to Fixed Assets A/c.
(2) the grant is credited to Deferred Grant A/c.
Answer
In the books of A Ltd.
Journal Entries (at the time of refund of grant)
If the grant is credited to Fixed Assets Account:
` `
I Fixed Assets A/c Dr. 12 lakhs
To Bank A/c 12 lakhs
(Being grant refunded)

II The balance of fixed assets after two years depreciation will be ` 16 lakhs (W.N.1) and
now it will become (` 16 lakhs + ` 12 lakhs) = ` 28 lakhs on which depreciation will be
charged for remaining two years. Depreciation = (28-8)/2 = ` 10 lakhs p.a. will be
charged for next two years.
If the grant is credited to Deferred Grant Account:
As per para 14 of AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant
Account is allocated to Profit and Loss account usually over the periods and in the proportions
in which depreciation on related assets is charged. Accordingly, in the first two years (` 16
lakhs /4 years) = ` 4 lakhs p.a. x 2 years = ` 8 lakhs were credited to Profit and Loss Account
and ` 8 lakhs was the balance of Deferred Grant Account after two years.
Therefore, on refund in the 3rd year, following entry will be passed:
` `
I Deferred Grant A/c Dr. 8 lakhs
Profit & Loss A/c Dr. 4 lakhs
To Bank A/c 12 lakhs
(Being Government grant refunded)
II Deferred grant account will become Nil. The fixed assets will continue to be shown in the
books at ` 24 lakhs (W.N.2) and depreciation will continue to be charged at
` 8 lakhs per annum.
Working Notes:
1. Balance of Fixed Assets after two years but before refund (under first alternative)
Fixed assets initially recorded in the books = ` 40 lakhs – ` 16 lakhs = ` 24 lakhs
Depreciation p.a. = (` 24 lakhs – ` 8 lakhs)/4 years = ` 4 lakhs per year
Value of fixed assets after two years but before refund of grant
= ` 24 lakhs – (` 4 lakhs x 2 years) = ` 16 lakhs
2. Balance of Fixed Assets after two years but before refund (under second
alternative)
Fixed assets initially recorded in the books = ` 40 lakhs
Depreciation p.a. = (` 40 lakhs – ` 8 lakhs)/4 years = ` 8 lakhs per year
Book value of fixed assets after two years = ` 40 lakhs – (` 8 lakhs x 2 years)
= ` 24 lakhs
Note : It is assumed that the question requires the value of fixed assets is to be given
after refund of government grant.

Question 27
Santosh Ltd. has received a grant of ` 8 crores from the Government for setting up a factory in
a backward area. Out of this grant, the company distributed ` 2 crores as dividend. Also,
Santosh Ltd. received land free of cost from the State Government but it has not recorded it at
all in the books as no money has been spent. In the light of AS 12 examine, whether the
treatment of both the grants is correct.
Answer
As per AS 12 ‘Accounting for Government Grants’, when government grant is received for a
specific purpose, it should be utilised for the same. So the grant received for setting up a
factory is not available for distribution of dividend.
In the second case, even if the company has not spent money for the acquisition of land, land
should be recorded in the books of accounts at a nominal value. The treatment of both the
grants is incorrect as per AS 12.
Question 28
Viva Ltd. received a specific grant of ` 30 lakhs for acquiring the plant of ` 150 lakhs during
2007-08 having useful life of 10 years. The grant received was credited to deferred income in
the balance sheet. During 2010-11, due to non-compliance of conditions laid down for the
grant, the company had to refund the whole grant to the Government. Balance in the deferred
income on that date was ` 21 lakhs and written down value of plant was ` 105 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of the fixed
asset and the amount of depreciation to be charged during the year 2010-11 in profit and
loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the
plant during 2007-08 assuming plant account showed the balance of ` 84 lakhs as on
1.4.2010?
Answer
As per para 21 of AS-12, ‘Accounting for Government Grants’, “the amount refundable in
respect of a grant related to specific fixed asset should be recorded by reducing the deferred
income balance. To the extent the amount refundable exceeds any such deferred credit, the
amount should be charged to profit and loss statement.
(i) In this case the grant refunded is ` 30 lakhs and balance in deferred income is ` 21
lakhs, ` 9 lakhs shall be charged to the profit and loss account for the year 2010-11.
There will be no effect on the cost of the fixed asset and depreciation charged will be on
the same basis as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2007-08 then, para 21 of
AS-12 states that the amount refundable in respect of grant which relates to specific fixed
assets should be recorded by increasing the book value of the assets, by the amount

refundable. Where the book value of the asset is increased, depreciation on the revised
book value should be provided prospectively over the residual useful life of the asset.
Therefore, in this case, the book value of the plant shall be increased by ` 30 lakhs. The
increased cost of ` 30 lakhs of the plant should be amortized over 7 years (residual life).
Depreciation charged during the year 2010-11 shall be (84 + 30)/7 years = ` 16.286
lakhs presuming the depreciation is charged on SLM.
AS16 “BORROWING COSTS”
Question 29
When capitalisation of borrowing cost should cease as per Accounting Standard 16?
Answer
Capitalisation of borrowing costs should cease when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.
An asset is normally ready for its intended use or sale when its physical construction or
production is complete even though routine administrative work might still continue. If minor
modifications such as the decoration of a property to the user’s specification, are all that are
outstanding, this indicates that substantially all the activities are complete.
When the construction of a qualifying asset is completed in parts and a completed part is
capable of being used while construction continues for the other parts, capitalisation of
borrowing costs in relation to a part should cease when substantially all the activities
necessary to prepare that part for its intended use or sale are complete.
Question 30
GHI Limited obtained a loan for ` 70 lakhs on 15th April, 2010 from JKL Bank, to be utilized as
under:
` in lakhs
Construction of Factory shed 25
Purchase of Machinery 20
Working capital 15
Advance for purchase of Truck 10
In March 2011, construction of the factory shed was completed and machinery, which was
ready for its intended use, was installed. Delivery of Truck was received in the next financial
year. Total interest of ` 9,10,000 was charged by the bank for the financial year ending 31-03-
2011.
Show the treatment of interest under AS 16 and also explain the nature of Assets.

Answer
Treatment of Interest (Borrowing cost) as per AS 16 ‘Borrowing Costs’
S. Particulars Nature Interest to be capitalized Interest to be charged to P &
No. L A/c
` `
(i) Construction of Qualifying Asset 25
Factory Shed 9,10,000 × =`
(Refer Note 1) 70
3,25,000
(ii) Purchase of Not a Qualifying 20
Machinery (Refer Asset 9,10,000 × = ` 2,60,000
Note 2) 70
(iii) Working Capital Not a Qualifying 15
Asset 9,10,000 × = ` 1,95,000
70
(iv) Advance for Not a Qualifying 10
Purchase of Truck Asset 9,10,000 × = ` 1,30,000
70
Total ` 3,25,000 ` 5,85,000
Notes:
1. It is assumed that construction of a factory shed was completed on
31st March, 2011.
2. It is assumed that the machinery was ready for its intended use at the time of its
acquisition.
As per AS 16, assets have been defined as ‘qualifying asset’ and ‘non-qualifying asset’.
(i) Qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale; whereas,
(ii) Non-qualifying asset is an asset which is ready for its intended use or sale at the time
of its acquisition.
Question 31
Axe Limited began construction of a new plant on 1st April, 2011 and obtained a special loan
of ` 4,00,000 to finance the construction of the plant. The rate of interest on loan was 10%.
The expenditure that were made on the project of plant were as follows:
`
1st April, 2011 5,00,000
1st August, 2011 12,00,000
1st January, 2012 2,00,000

The company’s other outstanding non-specific loan was ` 23,00,000 at an interest rate of
12%.
The construction of the plant completed on 31st March, 2012. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS 16
“Borrowing Cost”.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the
plant.
Answer
Total expenses to be capitalised for borrowings as per AS 16 “Borrowing Costs”:
`
Cost of Plant (5,00,000 + 12,00,000 + 2,00,000) 19,00,000
Add: Amount of interest to be capitalised (W.N.2) 1,54,000
20,54,000
Journal Entry
` `
31st March, 2012 Plant A/c Dr. 20,54,000
To Bank A/c 20,54,000
[Being amount of cost of plant
and borrowing cost thereon
capitalised]
Working Notes:
1. Computation of average accumulated expenses
`
1st April, 2011 12 5,00,000
` 5,00,000 ×
12
1 August, 2011
st
8 8,00,000
` 12,00,000 ×
12
1 January, 2012
st
3
` 2,00,000 × 50,000
12
13,50,000

2. Amount of interest capitalised

`
On specific borrowing (` 4,00,000 ×10%) 40,000
On non-specific borrowings (` 13,50,000 – ` 4,00,000) × 12% 1,14,000
Amount of interest to be capitalised 1,54,000
Question 32
Rohini Limited has obtained loan from an Institution for ` 500 lacs for modernization and
renovation of its plant and machinery. The installation of plant and machinery was completed
on 31.3.2012 amounting to ` 320 lacs and ` 50 lacs were advanced to suppliers of additional
assets and the balance of ` 130 lacs has been utilized for working capital requirements. Total
interest paid for the above loan amounted to ` 65 lacs during 2011-12. You are required to
state how the interest on institutional loan is to be accounted for in the year 2011-12.
Answer
As per AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the
acquisition, construction or production of qualifying assets∗ should be capitalised as part of the
cost of that asset. Other borrowing costs are recognized as expense in the period in which
they are incurred.
The treatment for total interest amount of ` 65 lakhs can be given as:
Purpose Nature Interest to be capitalised Interest to be charged
(` in lakhs) to Profit and Loss A/c
(` in lakhs)
Installation of Qualifying 65 41.60
Plant and asset 320 x =
500
Machinery
Advance to Qualifying 65 6.50
suppliers for asset 50 x =
500
additional assets
Working Capital Not a 65 16.90
qualifying 130 x =
500
asset
48.10 16.90
∗
A qualifying asset is an asset that necessarily takes substantial period of time to get ready for its
intended use or sale.

Question 33
On 1st April, 2011, Amazing Construction Ltd. obtained a loan of ` 32 crores to be utilized as
under:
(i) Construction of sealink across two cities:
(work was held up totally for a month during the year : ` 25 crores
due to high water levels)
(ii) Purchase of equipments and machineries : ` 3 crores
(iii) Working capital : ` 2 crores
(iv) Purchase of vehicles : ` 50,00,000
(v) Advance for tools/cranes etc. : ` 50,00,000
(vi) Purchase of technical know-how : ` 1 crores
(vii) Total interest charged by the bank for the year ending : ` 80,00,000
31st March, 2012
Show the treatment of interest by Amazing Construction Ltd.
Answer
According to para 3 of AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily
takes substantial period of time to get ready for its intended use.
As per para 6 of the standard, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalised as part of the cost of that
asset. Other borrowing costs should be recognised as an expense in the period in which they
are incurred.
The treatment of interest by Amazing Construction Ltd. can be shown as:
Qualifying Interest to Interest to
Asset be be charged
capitalized to Profit &
Loss A/c
` `
Construction of sea-link Yes 62,50,000 [80,00,000*(25/32)]
Purchase of equipments and No 7,50,000 [80,00,000*(3/32)]
machineries
Working capital No 5,00,000 [80,00,000*(2/32)]
Purchase of vehicles No 1,25,000 [80,00,000*(.5/32)]
Advance for tools, cranes etc. No. 1,25,000 [80,00,000*(.5/32)]
Purchase of technical know-how No 2,50,000 [80,00,000*(1/32)]
Total 62,50,000 17,50,000

Question 34
A company capitalizes interest cost of holding investments and adds to cost of investment every
year, thereby understating interest cost in profit and loss account. Comment on the accounting
treatment done by the company in context of the relevant AS.
Answer
The Accounting Standard Board (ASB) has opinioned that investments other than investment
properties are not qualifying assets as per AS-16 Borrowing Costs. Therefore, interest cost of
holding such investments cannot be capitalized. Further, even interest in respect of
investment properties can only be capitalized if such properties meet the definition of
qualifying asset, namely, that it necessarily takes a substantial period of time to get ready for
its intended use or sale. Also, where the investment properties meet the definition of
‘qualifying asset’, for the capitalization of borrowing costs, the other requirements of the
standard such as that borrowing costs should be directly attributable to the acquisition or
construction of the investment property and suspension of capitalization as per paragraphs 17
and 18 of AS-16 have to be complied with.
AS 19 “ LEASES”
Question 35
Write short note on Sale and Lease Back Transactions as per Accounting Standard 19.
Answer
As per AS 19 on ‘Leases’, a sale and leaseback transaction involves the sale of an asset by
the vendor and the leasing of the asset back to the vendor. The lease payments and the sale
price are usually interdependent, as they are negotiated as a package. The accounting
treatment of a sale and lease back transaction depends upon the type of lease involved.
If a sale and leaseback transaction results in a finance lease, any excess or deficiency of sale
proceeds over the carrying amount should be deferred and amortised over the lease term in
proportion to the depreciation of the leased asset.
If sale and leaseback transaction results in a operating lease, and it is clear that the
transaction is established at fair value, any profit or loss should be recognised immediately. If
the sale price is below fair value any profit or loss should be recognised immediately except
that, if the loss is compensated by future lease payments at below market price, it should be
deferred and amortised in proportion to the lease payments over the period for which the asset
is expected to be used. If the sale price is above fair value, the excess over fair value should
be deferred and amortised over the period for which the asset is expected to be used.
Question 36
Explain the types of lease as per AS 19.

Answer
For the purpose of accounting AS 19 ‘Leases’ classify the lease into two categories as follows:
(i) Finance Lease
(ii) Operating Lease
Finance Lease: It is a lease, which transfers substantially all the risks and rewards incidental
to ownership of an asset to the lessee by the lessor but not the legal ownership. As per para 8
of the standard, in following situations, the lease transactions are called Finance lease:
• The lessee will get the ownership of leased asset at the end of the lease term.
• The lessee has an option to buy the leased asset at the end of the lease term at price,
which is lower than its expected fair value at the date on which option will be exercised.
• The lease term covers the major part of the life of asset even if title is not transferred.
• At the beginning of lease term, present value of minimum lease rental covers the initial
fair value.
• The asset given on lease to lessee is of specialized nature and can only be used by the
lessee without major modification.
Operating Lease: It is lease, which does not transfer all the risks and rewards incidental to
ownership. Lease payments under an operating lease should be recognised as an expense in
the statement of profit and loss on a straight line basis over the lease term unless another
systematic basis is more representative of the time pattern of the user’s benefit.
Question 37
Define the term Finance Lease. State any three situations when a lease would be
classified as finance lease.
Answer
As per AS 19 ‘Leases’, a finance lease is a lease that transfers substantially all the risks
and rewards incident to ownership of an asset.
As per para 8 of the standard, classification of lease into a finance lease or an operating
lease depends on the substance of the transaction rather than its form. Three situations
which would normally lead to a lease being classified as a finance lease are:
(a) the lessor transfers ownership of the asset to the lessee by the end of the lease
term;
(b) the lessee has the option to purchase the asset at a price which is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable

such that, at the inception of the lease, it is reasonably certain that the option will
be exercised;
(c) the lease term is for the major part of the economic life of the asset even if title is
not transferred.
Question 38
Annual lease rent = ` 40,000 at the end of each year
Lease period = 5 years
Guaranteed residual value = ` 14,000
Fair value at the inception (beginning) of lease = ` 1,50,000
Interest rate implicit on lease is 12.6%. The present value factors at 12.6% are 0.89, 0.79, 0.7,
0.622, 0.552 at the end of first, second, third, fourth and fifth year respectively.
Show the Journal entry to record the asset taken on finance lease in the books of the lessee.
Answer
Journal entry in the books of Lessee
` `
Asset A/c Dr. 1,49,888
To Lessor 1,49,888
(Being recognition of finance lease as an asset and a
liability)
Working Note:
Year Lease Payments Discounting Factor Present Value
` (12.6%) `
1 40,000 0.89 35,600
2 40,000 0.79 31,600
3 40,000 0.70 28,000
4 40,000 0.622 24,880
5 40,000 0.552 22,080
5 14,000 (GRV) 0.552 7,728
1,49,888
Question 39
B&P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under:
(i) Lease period is 3 years, in the beginning of the year 2009, for equipment costing
` 10,00,000 and has an expected useful life of 5 years.

(ii) The Fair market value is also ` 10,00,000.

(iii) The property reverts back to the lessor on termination of the lease.
(iv) The unguaranteed residual value is estimated at ` 1,00,000 at the end of the year 2011.
(v) 3 equal annual payments are made at the end of each year.
Consider IRR = 10%.
The present value of ` 1 due at the end of 3rd year at 10% rate of interest is ` 0.7513.
The present value of annuity of ` 1 due at the end of 3rd year at 10% IRR is ` 2.4868.
State whether the lease constitute finance lease and also calculate unearned finance income.
Answer
(i) Computation of annual lease payment to the lessor
`
Cost of equipment 10,00,000
Unguaranteed residual value 1,00,000
Present value of residual value after third year @ 10%
(` 1,00,000 × 0.7513) 75,130
Fair value to be recovered from lease payments
(` 10,00,000 – ` 75,130) 9,24,870
Present value of annuity for three years is 2.4868
Annual lease payment = ` 9,24,870/ 2.4868 3,71,911.70
The present value of lease payment i.e., ` 9,24,870 equals 92.48% of the fair market
value i.e., ` 10,00,000. As the present value of minimum lease payments substantially
covers the initial fair value of the leased asset and lease term (i.e. 3 years) covers the
major part of the life of asset (i.e. 5 years). Therefore, it constitutes a finance lease.
(ii) Computation of Unearned Finance Income
`
Total lease payments (` 3,71,911.70 x 3) 11,15,735
Add: Unguaranteed residual value 1,00,000
Gross investment in the lease 1,215,735
Less:Present value of investment (lease payments and residual value)
(` 75,130 + ` 9,24,870) (10,00,000)
Unearned finance income 2,15,735

Question 40
An equipment having expected useful life of 5 years, is leased for 3 years. Both the cost and the
fair value of the equipment are ` 6,00,000. The amount will be paid in 3 equal instalments and at
the termination of lease, lessor will get back the equipment. The unguaranteed residual value at
the end of 3rd year is ` 60,000. The IRR of the investment is 10%. The present value of annuity
factor of ` 1 due at the end of 3rd year at 10% IRR is 2.4868. The present value of ` 1 due at the
end of 3rd year at 10% rate of interest is 0.7513. State with reason whether the lease constitutes
finance lease and also compute the unearned finance income.
Answer
(i) Determination of Nature of Lease
It is assumed that the fair value of the leased equipments is equal to the present value of
minimum lease payments.
Present value of residual value at the end of 3rd year = ` 60,000 x 0.7513
= ` 45,078
Present value of lease payments = ` 6,00,000 – ` 45,078
= ` 5,54,922
The percentage of present value of lease payments to fair value of the equipment is
(` 5,54,922 / ` 6,00,000) x 100 = 92.487%.
Since, it substantially covers the major portion of the lease payments, the lease
constitutes a finance lease.
(ii) Calculation of Unearned Finance Income
Annual lease payment = ` 5,54,922 / 2.4868 =` 2,23,147 (approx)
Gross investment in the lease = Total minimum lease payment + unguaranteed residual
value
= (` 2,23,147 × 3) + ` 60,000 = ` 6,69,441 + ` 60,000 = ` 7,29,441
Unearned finance income = Gross investment - Present value of minimum lease
payments and unguaranteed residual value
= ` 7,29,441 – ` 6,00,000 = ` 1,29,441
Question 41
Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being ` 7,00,000.
The economic life of machine as well as the lease term is 3 years. At the end of each year
Lessee Ltd. pays ` 3,00,000. The Lessee has guaranteed a residual value of
` 22,000 on expiry of the lease to the Lessor. However Lessor Ltd., estimates that the
residual value of the machinery will be only ` 15,000. The implicit rate of return is 15% p.a.

and present value factors at 15% are 0.869, 0.756 and 0.657 at the end of first, second and
third years respectively.
Calculate the value of machinery to be considered by Lessee Ltd. and the finance charges in
each year.
Answer
As per para 11 of AS 19 “Leases”, the lessee should recognize the lease as an asset and a
liability at the inception of a finance lease. Such recognision should be at an amount equal to
the fair value of the leased asset at the inception of lease. However, if the fair value of the
leased asset exceeds the present value of minimum lease payment from the standpoint of the
lessee, the amount recorded as an asset and liability should be the present value of minimum
lease payments from the standpoint of the lessee.
Value of machinery
In the given case, fair value of the machinery is ` 7,00,000 and the net present value of
minimum lease payments is ` 6,99,054∗. As the present value of the machine is less than the
fair value of the machine, the machine will be recorded at value of ` 6,99,054.
Calculation of finance charges for each year
Year Finance Payment Reduction in Outstanding
charge outstanding liability
liability
` ` ` `
1st year beginning - - - 6,99,054
End of 1st year 1,04,858 3,00,000 1,95,142 5,03,912
End of 2nd year 75,587 3,00,000 2,24,413 2,79,499
End of 3rd year 41,925 3,00,000 2,58,075 21,424∗∗
Question 42
X Ltd. sold JCB Machine having WDV of ` 50 Lakhs to Y Ltd for ` 60 Lakhs and the same
JCB was leased back by Y Ltd to X Ltd. The lease is operating lease
Comment according to relevant Accounting Standard if
(i) Sale price of ` 60 Lakhs is equal to fair value
∗
Present value of minimum lease payments:
Annual lease rental x PV factor + Present value of guaranteed residual value
= ` 3,00,000 x (0.869 + 0.756 + 0.657) + ` 22,000 x (0.657)
= ` 6,84,600 + ` 14,454 = ` 6,99,054.
∗∗
The difference between this figure and guaranteed residual value (` 22,000) is due to approximation in computing the
interest rate implicit in the lease.

(ii) Fair Value is ` 50 Lakhs and sale price is `45 Lakhs.

(iii) Fair value is ` 55 Lakhs and sale price is` 62 lakhs
iv) Fair value is ` 45 Lakhs and sale price is ` 48 Lakhs.
Answer
According to AS 19, following will be the treatment in the given situations:
(i) When sales price of ` 60 lakhs is equal to fair value, X Ltd. should immediately recognize
the profit of `10 lakhs (i.e. 60 – 50) in its books.
(ii) When fair value of leased JCB machine is ` 50 lakhs & sales price is ` 45 lakhs, then
loss of ` 5 lakhs (50 – 45) to be immediately recognized by X Ltd. in its books provided
loss is not compensated by future lease payments.
(iii) When fair value is ` 55 lakhs & sales price is ` 62 lakhs, profit of ` 5 lakhs (55 - 50) to
be immediately recognized by X Ltd. in its books and balance profit of ` 7 lakhs (62-55)
is to be amortised/deferred over lease period.
(iv) When fair value is ` 45 lakhs & sales price is ` 48 lakhs, then the loss of ` 5 lakhs (50-
45) to be immediately recognized by X Ltd. in its books and profit of ` 3 lakhs (48-45)
should be amortised/deferred over lease period.
AS 20 “EARNINGS PER SHARE”

Question 43
Briefly describe, how do you calculate "Diluted Earnings per Share" as per Accounting
Standard 20.
Answer
For the purpose of calculating diluted earnings per share, the net profit or loss for the period
attributable to equity shareholders and the weighted average number of shares outstanding
during the period should be adjusted for the effects of all dilutive potential equity shares.
The amount of net profit or loss∗ for the period attributable to equity shareholders should be
adjusted, after taking into account any attributable change in tax expense for the period.
∗
An Exposure Draft on Limited Revision on AS 20 has been issued by ICAI to address the conceptual
issues in arriving at earnings for computation of EPS. According to this Exposure Draft, for purpose of
calculating basic earnings per share, net profit or loss for the period attributable to equity shareholders
should be the net profit or loss for the period after deducting (i) preference dividends and any
attributable tax thereto for the period and (ii ) adjusting the amount in respect of an item of income or
expense which is debited or credited to share premium account/ reserves, that is otherwise required to
be recognized in the statement of profit and loss in accordance with accounting standards. It is
pertinent to note that this Limited Revision is yet to be notified by the Govt.

The number of equity shares should be the aggregate of the weighted average number of
equity shares (as per paragraphs 15 and 22 of AS 20) and the weighted average number of
equity shares which would be issued on the conversion of all the dilutive potential equity
shares into equity shares. Dilutive potential equity shares should be deemed to have been
converted into equity shares at the beginning of the period or, if issued later, the date of the
issue of the potential equity shares.
An enterprise should assume the exercise of dilutive options and other dilutive potential equity
shares of the enterprise. The assumed proceeds from these issues should be considered to
have been received from the issue of shares at fair value. The difference between the number
of shares issuable and the number of shares that would have been issued at fair value should
be treated as an issue of equity shares for no consideration.
Question 44
In April, 2010, A Limited issued 18,00,000 Equity shares of ` 10 each, ` 5 per share was
called up on that date which was paid by all the shareholders. The remaining ` 5 was called
up on 1-9-2010. All the Shareholders (except one having 3,60,000 shares) paid the sum in
September 2010. The net profit for the year ended 31-3-2011 is ` 33 lakhs after dividend on
preference shares and dividend distribution tax of ` 6.60 lakhs.
Compute the basic EPS for the year ended 31st March, 2011 as per AS 20.
Answer
Basic Earnings per share (EPS) =
Net profit attributable to equity shareholders
Weighted average number of equity shares outstanding during the year
33,00,000
= = ` 2.5 per share
13,20,000 Shares (as per working note)
Working Note:
Calculation of weighted average number of equity shares
As per para 19 of AS 20 ‘Earnings Per Share’, partly paid equity shares are treated as a fraction of
equity share to the extent that they were entitled to participate in dividend relative to a fully paid equity
share during the reporting period. Assuming that the partly paid shares are entitled to participate in the
dividend to the extent of amount paid, weighted average number of shares will be calculated as follows:
Date No. of equity Amount paid Weighted average no. of equity
shares per share shares
` ` `
1.4.2010 18,00,000 5 18,00,000 х 5/10 х 5/12 = 3,75,000
1.9.2010 14,40,000 10 14,40,000 х 7/12 = 8,40,000
1.9.2010 3,60,000 5 3,60,000 х 5/10 х 7/12 = 1,05,000
Total shares 13,20,000

Question 45
“While calculating diluted earning per share, effect is given to all dilutive potential equity
shares that were outstanding during that period.” Explain. Also calculate the diluted earnings
per share from the following information:
Net profit for the current year ` 85,50,000
No. of equity shares outstanding 20,00,000
No. of 8% convertible debentures of ` 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expenses for the current year ` 6,00,000
Tax relating to interest expenses 30%
Answer
“In calculating diluted earnings per share, effect is given to all dilutive potential equity shares
that were outstanding during the period.” As per para 26 of AS 20 ‘Earnings per Share’, the
net profit or loss for the period attributable to equity shareholders and the weighted average
number of shares outstanding∗ during the period should be adjusted for the effects of all
dilutive potential equity shares for the purpose of calculation of diluted earnings per share.
Adjusted net profit for the current year

Computation of diluted earnings per share
Weighted average number of equity shares
Adjusted net profit for the current year

`
Net profit for the current year (assumed to be after tax) 85,50,000
Add: Interest expense for the current year 6,00,000
Less: Tax relating to interest expense (30% of ` 6,00,000) (1,80,000)
Adjusted net profit for the current year 89,70,000

Number of equity shares resulting from conversion of debentures
1,00,000 × 100
= = 10,00,000 Equity shares
10
Weighted average number of equity shares used to compute diluted earnings per share
∗
Weighted average number of equity shares outstanding during the period is increased by the weighted average
number of additional equity shares which would have been outstanding assuming the conversion of all dilutive
potential equity shares.

= [(20,00,000 x 12) + (10,00,000 x 9∗∗)]/12 = 27,50,000 shares

89,70,000
Diluted earnings per share = = ` 3.26 per share
27,50,000 shares
Question 46
Compute Basic Earnings per share from the following information:
Date Particulars No. of shares
1st April, 2008 Balance at the beginning of the year 1,500
1st August, 2008 Issue of shares for cash 600
31st March, 2009 Buy back of shares 500
Net profit for the year ended 31st March, 2009 was ` 2,75,000.
Answer
Computation of weighted average number of shares outstanding during the period
No. of equity Period Weights Weighted average
Date
shares outstanding (months) number of shares
(1) (2) (3) (4) (5) = (2) x (4)
1st April, 1,500
12 months 12/12 1,500
2008 (Opening)
1st August, 600 (Additional
8 months 8/12 400
2008 issue)
31st March,
500 (Buy back) 0 months 0/12 -
2009
Total 1,900
Net Profit or Loss for the period attributable to Equity Shareholders
Basic Earnings Per Share =
Weighted Average Number of Equity Shares outstanding during the period
2,75,000
= = ` 144.74
1,900 shares
Question 47
Ram Ltd. had 12,00,000 equity shares on April 1, 2009. The company earned a profit of
` 30,00,000 during the year 2009-10. The average fair value per share during 2009-10 was
∗∗
Interest on debentures for full year amounts to ` 8,00,000 (i.e. 8% of ` 1,00,00,000). However, interest expense
amounting ` 6,00,000 has been given in the question. It may be concluded that debentures have been issued during the
year and interest has been provided for 9 months.

` 25. The company has given share option to its employees of 2,00,000 equity shares at
option price of ` 15. Calculate basic E.P.S. and diluted E.P.S.
Answer
(a) Computation of Earnings Per Share
Earnings Shares Earnings per share
` `
Net Profit for the year 2009-10 30,00,000
Weighted average number of shares
outstanding during the year 2009-10 12,00,000
Basic Earning Per Share 2.50
30,00,000
=
12,00,000
Number of shares under option 2,00,000
Number of shares that would have
been issued at fair value (As
indicated in Working Note)
15 (1,20,000)
[2,00,000 x ]
25
Diluted Earnings Per Share
30,00,000
[ ] 30,00,000 12,80,000 2.34
12,80,000
Working Note:
The earnings have not been increased as the total number of shares has been increased only
by the number of shares (80,000) deemed for the purpose of the computation to have been
issued for no consideration
Question 48
From the following information relating to Y Ltd. Calculate Earnings Per Share (EPS):
` in crores
Profit before V.R.S. payments but after depreciation 75.00
Depreciation 10.00
VRS payments 32.10
Provision for taxation 10.00
Fringe benefit tax 5.00
Paid up share capital (shares of ` 10 each fully paid) 93.00

Answer
` in crores
Profit after depreciation but before VRS Payment 75.00
Less: Depreciation – No. adjustment required -
VRS payments 32.10
Provision for taxation 10.00
Fringe benefit tax 5.00 (47.10)
Net Profit 27.90
No. of shares 9.30 crores
Net profit 27.90
EPS = = = ` 3 per share.
No.of shares 9.30
Question 49
The following information is available for Raja Ltd. for the accounting year 2009-10 and
2010-11:
Net profit for `
Year 2009-10 25,00,000
Year 2010-11 40,00,000
No. of shares outstanding prior to right issue 12,00,000 shares.
Right issue : One new share for each three outstanding i.e. 4,00,000 shares
: Right issue price ` 22
: Last date to exercise rights 30-6-2010
Fair value of one equity share immediately prior to exercise of rights on 30-6-2010 = ` 28.
You are required to compute the basic earnings per share for the years 2009-10 and
2010-11.
Answer
(a) Computation of basic earnings per share (EPS)
Year Year
2009-10 2010-11
(`) (`)
EPS for the year 2009-10 as originally reported
Net profit of the year attributable to equity shareholders
=
Weighted average number of equity shares outstanding during the year

` 25,00,000 2.08
=
12,00,000 shares
EPS for the year 2009-10 restated for rights issue
` 25,00,000 1.97
∗
= (approx.)
(12,00,000 shares × 1.06)
EPS for the year 2010-11 including effects of right issue
40,00,000
=
⎛ 3⎞ ⎛ 9⎞
⎜ 12,00,000 × 1.06 × ⎟ + ⎜ 16,00,000 × ⎟ 2.64
⎝ 12 ⎠ ⎝ 12 ⎠
(approx.)
Working Notes:
1. Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediatel y prior to exercise of rights + total amount received from exercise
Number of shares outstanding prior to exercise + number of shares issued in the exercise
(` 28 × 12,00,000 shares) + (` 22 × 4,00,000 shares)

= = ` 26.50
12,00,000 shares + 4,00,000 shares
2. Computation of adjustment factor
Fair value per share prior to exercise of rights ` 28
= = = 1.06 (approx.)
Theoretical ex-right value per share ` 26.5
Question 50
XYZ Ltd. had issued 30,000, 15% convertible debentures of ` 100 each on 1st April, 2008.
The debentures are due for redemption on 1st March, 2011. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
debentureholders to convert 20% of their holding into equity shares (Nominal Value ` 10) at a
price of ` 15 per share. Debentureholders holding 2500 debentures did not exercise the
option. Calculate the number of equity shares to be allotted to the Debentureholders
exercising the option to the maximum.
∗
The number of equity shares to be used in calculating basic earnings per share for periods prior to the rights issue is
the number of equity shares outstanding prior to the issue, multiplied by the adjustment factor. The adjustment factor has
been calculated in Working Note 2.

Answer
Calculation of number of equity shares allotted to be debentureholders
No. of debenture
Total number of debentures 30,000
Less: Debentureholders not opted for conversion (2,500)
27,500
Option for conversion 20%
20 5,500
Number of debentures for conversion (27,500 x )
100
Redemption value at a premium of 5% (5,500 x ` 105) ` 5,77,500
` 5,77,500 38,500 shares
Number of equity shares to be allotted
` 15
Question 51
Explain the concept of ‘weighted average number of equity shares outstanding during the
period’. State how would you compute, based on AS-20, the weighted average number of
equity shares in the following case:
No. of shares
1st April, 2010 Balance of equity shares 7,20,000
31st August, 2010 Equity shares issued for cash 2,40,000
1st February, 2011 Equity shares bought back 1,20,000
31st March, 2011 Balance of equity shares 8,40,000
(ii) Compute adjusted earnings per share and basic EPS based on the following information:
Net profit 2009-10 ` 7,20,000
Net profit 2010-11 ` 24,00,000
No. of equity shares outstanding until 31 December, 2010
st 8,00,000
Bonus issue on 1st January, 2011, 2 equity shares for each equity share outstanding at
31st December, 2010.
Answer
(i) As per para 16 of AS 20, “Earnings Per Share”, the weighted average number of equity
shares outstanding during the period reflects the fact that the amount of shareholders’
capital may have varied during the period as a result of a larger or less number of shares
outstanding at any time. For the purpose of calculating basic earnings per share, the
number of equity shares should be the weighted average number of equity shares
outstanding during the period.


7,20,000 X 5/12 = 3,00,000 shares
9,60,000 X 5/12 = 4,00,000 shares
8,40,000 X 2/12 = 1,40,000 shares
= 8,40,000 shares
(ii) Earning per share
Basic EPS 2010-11 = ` 24,00,000/24,00,000 = ` 1
Adjusted EPS 2009-10 = ` 7,20,000/24,00,000 = ` 0.30
Since the bonus issue is an issue without consideration, the issue is treated as if it had
occurred prior to the beginning of the year 2009-10, the earliest period reported.
AS 26 “INTANGIBLE ASSETS”
Question 52
Decide when research and development cost of a project can be deferred to future periods as
per AS 26.
Answer
As per para 41 of AS 26 ‘Intangible Assets’, no intangible asset arising from research should
be recognized. The expenditure incurred on development phase can be deferred to the
subsequent years if the company can demonstrate all of the following conditions (as specified
in para 44 of AS 26 ‘Intangible Assets’):
(a) the technical feasibility of completing the intangible asset so that it will be available for
use or sale;
(b) its intention to complete the intangible asset and use or sell it;
(c) its ability to use or sell the intangible asset;
(d) how the intangible asset will generate probable future economic benefits. Among other
things, the enterprise should demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset;
(e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset; and
(f) its ability to measure the expenditure attributable to the intangible asset during its
development reliably.
Question 53
How is software acquired for internal use accounted for under AS-26?

Answer
Paragraphs 10 and 11 of Appendix A to the Accounting Standard 26 on Intangible Assets, lays
down the following procedure for accounting of software acquired for internal use:-
• The cost of a software acquired for internal use should be recognised as an asset if it
meets the recognition criteria prescribed in paragraphs 20 and 21 of this statement.
• The cost of a software purchased for internal use comprises its purchase price, including
any import duties and other taxes (other than those subsequently recoverable by the
enterprise from the taxing authorities) and any directly attributable expenditure on making
the software ready for its use.
• Any trade discounts and rebates are deducted in arriving at the cost. In the
determination of cost, matters stated in paragraphs 24 to 34 of the Statement which deal
with the method of accounting for ‘Separate Acquisitions’, ‘Acquisitions as a part of
Amalgamations’, Acquisitions by way of Government Grant’, and ‘Exchanges of Assets’,
need to be considered, as appropriate.
Recognition criteria as per paragraphs 20 and 21 of the standard are stated below:-
• An intangible asset should be recognised if, and only if:
(a) it is probable that the future economic benefits that are attributable to the asset will
flow to the enterprise; and
(b) the cost of the asset can be measured reliably.
• An enterprise should assess the probability of future economic benefits using reasonable
and supportable assumptions that represent best estimate of the set of economic
conditions that will exist over the useful life of the asset.
Question 54
What are the costs that are to be included in Research and Development costs as per AS 26.
Answer
According to paras 41 and 43 of AS 26, “No intangible asset arising from research (or from
the research phase of an internal project) should be recognized in the research phase.
Expenditure on research (or on the research phase of an internal project) should be
recognized as an expense when it is incurred.
Examples of research costs are:
¾ Costs of activities aimed at obtaining new knowledge;
¾ Costs of the search for, evaluation and final selection of, applications of research findings or
other knowledge;
¾ Costs of the search for alternatives for materials, devices, products, processes, systems or
services; and

¾ Costs of the activities involved in formulation, design, evaluation and final selection of
possible alternatives for new or improved materials, devices, products, processes
systems or services.”
According to paras 45 and 46 of AS 26, “In the development phase of a project, an enterprise
can, in some instances, identify an intangible asset and demonstrate that future economic
benefits from the asset are probable. This is because the development phase of a project is
further advanced than the research phase.
Examples of development activities/costs are:
¾ Costs of the design, construction and testing of pre-production or pre-use prototypes and
models;
¾ Costs of the design of tools, jigs, moulds and dies involving new technology;
¾ Costs of the design, construction ad operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
¾ Costs of the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.”
Question 55
A Company had deferred research and development cost of ` 150 lakhs. Sales expected in
the subsequent years are as under:
Years Sales (` in lakhs)
I 400
II 300
III 200
IV 100
You are asked to suggest how should Research and Development cost be charged to Profit and
Loss account. If at the end of the III year, it is felt that no further benefit will accrue in the IV year,
how the unamortised expenditure would be dealt with in the accounts of the Company?
Answer
(i) Based on sales, research and development cost to be allocated as follows:
Year Research and Development cost allocation
(` in lakhs)
400
I × 150 = 60
1,000
300
II × 150 = 45
1,000

200
III × 150 = 30
1,000
100
IV × 150 = 15
1,000
(ii) If at the end of the III year, the circumstances do not justify that further benefit will accrue
in IV year, then the company has to charge the unamortised amount i.e. remaining ` 45 lakhs
[150 – (60 + 45)] as an expense immediately.
Note: As per para 41 of AS 26 on Intangible Assets, expenditure on research (or on the
research phase of an internal project) should be recognized as an expense when it is incurred.
It has been assumed in the above solution that the entire cost of ` 150 lakhs is development
cost. Therefore, the expenditure has been deferred to the subsequent years on the basis of
presumption that the company can demonstrate all the conditions specified in para 44 of AS
26. An intangible asset should be derecognised when no future economic benefits are
expected from its use according to para 87 of the standard. Hence the remaining unamortised
amount of ` 45,00,000 has been written off as an expense at the end of third year.
Question 56
AB Ltd. launched a project for producing product X in October, 2009. The Company incurred
` 20 lakhs towards Research and Development expenses upto 31st March, 2011. Due to
prevailing market conditions, the Management came to conclusion that the product cannot be
manufactured and sold in the market for the next 10 years. The Management hence wants to
defer the expenditure write off to future years.
Advise the Company as per the applicable Accounting Standard.
Answer
As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognized as
an expense when it is incurred. An intangible asset arising from development (or from the
development phase of an internal project) should be recognized if, and only if, an enterprise
can demonstrate all of the conditions specified in para 44 of the standard. An intangible asset
(arising from development) should be derecognised when no future economic benefits are
expected from its use according to para 87 of the standard. Therefore, the manager cannot
defer the expenditure write off to future years.
Hence, the expenses amounting ` 20 lakhs incurred on the research and development project
has to be written off in the current year ending 31st March, 2011.
Question 57
NDA Corporation is engaged in research on a new process design for its product. It had
incurred an expenditure of à 530 lakhs on research upto 31st March, 2010.
The development of the process began on 1st April, 2010 and Development phase expenditure
was ` 360 lakhs upto 31st March, 2011 which meets assets recognition criteria.

From 1st April, 2011, the company will implement the new process design which will result in
after tax saving of ` 80 lakhs per annum for the next five years.
The cost of capital of company is 10%.
Explain:
(1) Accounting treatment for research expenses.
(2) The cost of internally generated intangible asset as per AS 26.
(3) The amount of amortization of the assets. (The present value of annuity factor of
` 1 for 5 years @ 10% = 3.7908)
Answer
(i) Research Expenditure - According to para 41 of AS 26 ‘Intangible Assets’, the
expenditure on research of new process design for its product ` 530 lakhs should be
charged to Profit and Loss Account in the year in which it is incurred. It is presumed that
the entire expenditure is incurred in the financial year 2009-10. Hence, it should be
written off as an expense in that year itself.
(ii) Cost of internally generated intangible asset - The question states that the
development phase expenditure amounting ` 360 lakhs incurred upto 31st March, 2011
meets asset recognition criteria. As per AS 26 for measurement of such internally
generated intangible asset, fair value can be estimated by discounting estimated future
net cash flows.
Savings (after tax) from implementation of new design for next 5 years 80 lakhs p.a.
Company’s cost of capital 10 %
Annuity factor @ 10% for 5 years 3.7908
Present value of net cash flows (` 80 lakhs x 3.7908) 303.26 lakhs
The cost of an internally generated intangible asset would be lower of cost value
` 360 lakhs or present value of future net cash flows `303.26 lakhs.
Hence, cost of an internally generated intangible asset will be ` 303.26 lakhs.
The difference of ` 56.74 lakhs (i.e. ` 360 lakhs – ` 303.26 lakhs) will be amortized by
the enterprise for the financial year 2010-11.
(iii) Amortisation - The company can amortise ` 303.26 lakhs over a period of five years by
charging ` 60.65 lakhs per annum from the financial year 2011-12 onwards.
Question 58
M Ltd. launched a project for producing product A in Nov. 2008. The company incurred
` 30 lakhs towards Research and Development expenses upto 31st March, 2010. Due to
unfavourable market conditions the management feels that it is not possible to manufacture
and sell the product in the market for next so many years.
The management hence wants to defer the expenditure write off to future years.
Advise the company as per the applicable Accounting Standard.

Answer
As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognised as an
expense when it is incurred. An intangible asset arising from development (or from the
development phase of an internal project) should be recognized if and only if, an enterprise can
demonstrate all of the conditions specified in para 44 of the standard. An intangible asset (arising
from development) should be derecognised when no future economic benefits are expected from
its use according to the provisions of AS 26. Therefore, the management cannot defer the
expenditure write off to future years and the company is required to expense the entire amount of
` 30 lakhs in the Profit and Loss account of the year ended 31st March, 2010.
Question 59
A company acquired for its internal use a software on 28.01.2012 from the USA for US $
1,00,000. The exchange rate on that date was ` 52 per USD. The seller allowed trade
discount @ 5 %. The other expenditure were:
(i) Import Duty : 20%
(ii) Purchase Tax : 10%
(iii) Entry Tax : 5 % (Recoverable later from tax department)
(iv) Installation expenses : ` 25,000
(v) Profession fees for Clearance from Customs : ` 20,000
Compute the cost of Software to be capitalized.
Answer
Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software $ 1,00,000
Less: Trade discount @ 5% ($ 5,000)
$ 95,000
Cost in ` (US $ 95,000 x ` 52) 49,40,000
Add: Import duty on cost @ 20% (` ) 9,88,000
59,28,000
Purchase tax @ 10% (` `) 5,92,800
Installation expenses (` ) 25,000
Profession fee for clearance from customs (`) 20,000
Cost of the software to be capitalized (`) 65,65,800
Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included
as part of the cost of the asset.
Question 60
Base Limited is showing an intangible asset at ` 85 lakhs as on 1-4-2011. This asset was
acquired for ` 112 lakhs on 1-4-2008 and the same was available for use from that date. The

company has been following the policy of amortization of the intangible asset over a period of
12 years on straight line basis. Comment on the accounting treatment of the above with
reference to the relevant accounting standard.
Answer
As per para 63 of AS 26 “Intangible Assets,” the depreciable amount of an intangible asset
should be allocated on a systematic basis over the best estimates of its useful life. There is a
rebuttable presumption that the useful life of an intangible asset will not exceed ten years from
the date when the asset is available for use. Amortization should commence when the asset
is available for use.
Base Limited has been following the policy of amortization of the intangible asset over a
period of 12 years on straight line basis. The period of 12 years is more than the maximum
period of 10 years specified as per AS 26.
Accordingly, Base Limited would be required to restate the carrying amount of intangible asset
⎛ 112 lakhs ⎞
as on 1.4.2011 at ` 112 lakhs less ` 33.6 lakhs ⎜ × 3 years ⎟ = ` 78.4 lakhs. The
⎝ 10 years ⎠
difference of ` 6.6 lakhs i.e. (` 85 lakhs – ` 78.4 lakhs) will be adjusted against the opening
balance of revenue reserve. The carrying amount of ` 78.4 lakhs would be amortized over
remaining 7 years by ` 11.2 lakhs per year.
Question 61
Hera Ltd. has got the license to manufacture particular medicines for 10 years at a license fee of `
200 lakhs. Given below is the pattern of expected production and expected operating cash inflow:
Year Production in bottles (in lakhs) Net operating cash flow (` in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
8 800 3,200
9 800 3,200
10 800 3,200
Net operating cash flow has increased for third year because of better inventory management
and handling method. Suggest the amortization method.
Answer
As per para 72 of AS 26 ‘Intangibles Assets’, the amortization method used should reflect the
pattern in which economic benefits are consumed by the enterprise. If pattern cannot be
determined reliably, then straight-line method should be used.

In the instant case, the pattern of economic benefit in the form of net operating cash flow vis-
à-vis production is determined reliably. Initially net operating cash flow per thousand bottles is
` 3 lakhs for first two years and ` 4 lakhs from fourth year onwards, the pattern is established.
Therefore Hera Ltd. should amortize the license fee of ` 200 lakhs as under:
Year Net Operating Cash Inflow Ratio Amortize amount (` in lakhs)
(NOCI)
1 900 0.03 6
2 1,800 0.06 12
3 2,300 0.08 16
4 3,200 0.12 24
5 3,200 0.12 24
6 3,200 0.12 24
7 3,200 0.12 24
8 3,200 0.12 24
9 3,200 0.12 24
10 3,200 0.11 (bal.) 22
27,400 1.00 200
AS 29 'PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS’
Question 62
X Ltd. has its financial year ended 31.3.2011, fifteen law suits outstanding, none of which has
been settled by the time the accounts are approved by the directors. The directors have
estimated that the probable outcomes as below:
Result Probability Amount of Loss
`
For first ten cases:
Win 0.6 ----
Loss-low damages 0.3 90,000
Loss-high damages 0.1 2,00,000
For remaining five cases:
Win 0.5 ----
Loss-low damages 0.3 60,000
Loss-high damages 0.2 1,00,000
The directors believe that the outcome of each case is independent of the outcome of all the
others.
Estimate the amount of contingent loss and state the accounting treatment of such contingent
loss.
Answer
According to AS 29 'Provisions, Contingent Liabilities and Contingent Assets', contingent
liability should be disclosed in the financial statements if following conditions are satisfied:

(i) There is a present obligation arising out of past events but not recognized as provision.
(ii) It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is also remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability to be
recognized as provision.
In this case, the probability of winning first 10 cases is 60% and for remaining five cases is
50%. In other words, probability of losing the cases is 40% and 50% respectively. According
to AS 29, we make a provision if the loss is probable. As the loss does not appear to be
probable and the probability or possibility of an outflow of resources embodying economic
benefits is not remote rather there is reasonable possibility of loss, therefore, disclosure by
way of note of contingent liability amount may be calculated as under:
Expected loss in first ten cases = [` 90,000 x 0.3 + ` 2,00,000 x 0.1] x 10
= [` 27,000 + ` 20,000] x 10
= ` 47,000 x 10 = ` 4,70,000
Expected loss in remaining five cases = [` 60,000 x 0.3 + ` 1,00,000 x 0.2] x 5
= [` 18,000 + ` 20,000] x 5
= ` 38,000 x 5 = ` 1,90,000
Total contingent liability = ` 4,70,000 + ` 1,90,000 = ` 6,60,000.
Question 63
Shyam Ltd. (a Public Sector Company) provides consultancy and engineering services to its
clients. In the year 2010-11, the Government has set up a commission to decide about the pay
revision. The pay will be revised with respect from 1-1-2006 based on the recommendations of the
commission. The company makes the provision of ` 680 lakhs for pay revision in the financial year
2010-11 on the estimated basis as the report of the commission is yet to come. As per the
contracts with the client on cost plus job, the billing is done on the actual payment made to the
employees and allocated to jobs based on hours booked by these employees on each job.
The company discloses through notes to accounts:
“Salaries and benefits include the provision of ` 680 lakhs in respect of pay revision. The
amount chargeable from reimbursable jobs will be billed as per the contract when the actual
payment is made”.
The accountant feels that the company should also book/recognise the income by
` 680 lakhs in Profit and Loss Account as per the terms of the contract. Otherwise, it will be
the violation of matching concept & understatement of profit.

Answer
As per para 46 of AS-29, ‘Provisions, Contingent Liabilities and Contingent Assets’, where
some or all of the expenditure required to settle a provision is expected to be reimbursed by
another party, the reimbursement should be recognised when, and only when, it is virtually
certain that reimbursement will be received if the enterprise settles the obligation. The
reimbursement should be treated as a separate asset. The amount recognised for the
reimbursement should not exceed the amount of the provision.
Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent
liability is matched by a related counter-claim or claim against a third party. In such cases, the
amount of the provision is determined after taking into account the probable recovery under
the claim if no significant uncertainty as to its measurability or collectability exists.
In this case, the provision of salary to employees of ` 680 lakhs will be ultimately collected
from the client, as per the terms of the contract. Therefore, the liability of ` 680 lakhs is
matched by the counter claim from the client. Hence, the provision for salary of employees
should be made reducing the claim to be made from the client. It appears that the whole
amount of ` 680 lakhs is recoverable from client and there is no significant uncertainty about
the collection. Hence, the net charge to profit and loss account should be nil.
The opinion of the accountant regarding non-recognition of income of ` 680 lakhs is not as per
AS-29 and AS-9. However, the concept of prudence will not be followed if ` 680 lakhs is
simultaneously recognized as income. ` 680 lakhs is not the revenue at present but only
reimbursement of claim. However the accountant is correct to the extent as that non-
recognition of ` 680 lakhs as income will result in the under statement of profit.
Question 64
A company is in a dispute involving allegation of infringement of patents by a
competitor company who is seeking damages of a huge sum of ` 900 lakhs. The
directors are of the opinion that the claim can be successfully resisted by the company.
How would you deal the same in the annual accounts of the company?
Answer
As per para 14 of AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a
provision should be recognised when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions
are not met, no provision should be recognised.
If these conditions are not met, no provision should be recognised.
In the given situation, since, the directors of the company are of the opinion that the
claim can be successfully resisted by the company, therefore there will be no outflow of

the resources. The company will disclose the same as contingent liability by way of the
following note:
“Litigation is in process against the company relating to a dispute with a competitor who alleges
that the company has infringed patents and is seeking damages of ` 900 lakhs. However, the
directors are of the opinion that the claim can be successfully resisted by the company.”
Question 65
An airline is required by law to overhaul its aircraft once in every five years. The pacific
Airlines which operate aircrafts does not provide any provision as required by law in its
final accounts. Discuss with reference to relevant Accounting Standard 29.
Answer
A provision should be recognised only when an enterprise has a present obligation as a
result of a past event. In the given case, there is no present obligation, therefore no
provision is recognized as per AS 29.
The cost of overhauling aircraft is not recognized as a provision because it is a future
obligation and the incurring of the expenditure depends on the company’s decision to
continue operating the aircrafts. Even a legal requirement to overhaul does not require
the company to make a provision for the cost of overhaul because there is no present
obligation to overhaul the aircrafts.
Further, the enterprise can avoid the future expenditure by its future action, for example by
selling the aircraft. However, an obligation might arise to pay fines or penalties under the
legislation after completion of five years. Assessment of probability of incurring fines and
penalties depends upon the provisions of the legislation and the stringency of the
enforcement regime. A provision should be recognized for the best estimate of any fines
and penalties if airline continues to operate aircrafts for more than five years.
EXERCISES
1. The difference between actual expense or income and the estimated expense or income as accounted for in
earlier years’ accounts, does not necessarily constitute the item to be a prior period item comment.
(Hints: The statement given in the question is correct)
2. (i) A major fire has damaged the assets in a factory of a limited company on 2nd April-two days after the
year end closure of account. The loss is estimated at ` 20 crores out of which ` 12 crores will be
recoverable from the insurers. Explain briefly how the loss should be treated in the final accounts for
the previous year.
(ii) There is a sales tax demand of ` 2.50 crores against a company relating to prior years against which
the company has gone on appeal to the appellate authority in the department. The grounds of appeal
deal with points covering ` 2 crores of the demand. State how the matter will have to be dealt with in
the final accounts for the year.
(Hints: (i) The loss due to break out of fire is an example of event occurring after the balance sheet
date that does not relate to conditions existing at the balance sheet date. (ii) Company should
disclose the disputed part of sales tax liability of ` 2 crore as contingent liability in their financial
statements of the year.)

3
Advanced Issues in Partnership
Accounts
UNIT 1 : DISSOLUTION OF PARTNERSHIP FIRMS
BASIC CONCEPTS
¾ On the dissolution of a partnership, firstly, the assets of the firm, including goodwill,
are realized. Then the amount realized, is applied first towards repayment of
liabilities to outsiders and loans taken from partners; afterwards the capital
contributed by partners is repaid and, if there is still surplus, it is distributed among
the partners in their profit-sharing ratio.
Conversely, after payment of liabilities of the firm and repayment of loans from partners,
if the assets of the firm left over are insufficient to repay in full the capital contributed by
each partner, the deficiency is borne by the partners in their profit-sharing ratio.
On dissolution of partnership, the mutual rights of the partners, unless otherwise
agreed upon, are settled in the following manner:
(a) Losses including deficiencies of capital are paid, first out of profits, next out of
capital and, lastly, if necessary, by the partners individually in the proportion in
which they are entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make
up deficiencies of capital have to be applied in the following manner and order :
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm in
respect of advances as distinguished from capital;
(iii) in paying to each partner what is due to him on account of capital; and
(iv) the residue, if any, to be divided among the partners in the proportion in
which they are entitled to share profits.
The death or retirement of a partner would not result in the dissolution of the
partnership, if the partnership agreement so provides (Section 42).

¾ According to this decision, solvent partners have to bear the loss due to insolvency of a
partner and have to categorically put that the normal loss on realisation of assets to be
borne by all partners (including insolvent partner) in the profit sharing ratio but a loss due
to insolvency of a partner has to be borne by the solvent partners in the capital ratio.
The determination of capital ratio for this has been explained below. The provisions of
the Indian Partnership Act are not contrary to Garner vs. Murray rule. However, if
the partnership deed provides for a specific method to be followed in case of
insolvency of a partner, the provisions as per deed should be applied.
Capital Ratio on Insolvency
¾ The partners are free to have either fixed or fluctuating capitals in the firm.
¾ If they are maintaining capitals at fixed amounts then all adjustments regarding their
share of profits, interest on capitals, drawings, interest on drawings, salary etc. are
done through Current Accounts, which may have debit or credit balances and
insolvency loss is distributed in the ratio of fixed capitals.
¾ But if capitals are not fixed and all transactions relating to drawings, profits, interest,
etc., are passed through Capital Accounts then Balance Sheet of the business shall
not exhibit Current Accounts of the partners and capital ratio will be determined
after adjusting all the reserves and accumulated profits to the date of dissolution, all
drawings to the date of dissolution, all interest on capitals and on drawings to the
date of dissolution but before adjusting profit or loss on Realisation Account.
¾ If some partner is having a debit balance in his Capital Account and is not insolvent then
he cannot be called upon to bear loss on account of the insolvency of other partner.
Insolvency of all Partners
¾ When the liabilities of the firm cannot be paid in full out of the firm's assets as well
as personal assets of the partners, then all the partners of the firm are said to be
insolvent. Under such circumstances it is better not to transfer the amount of
creditors to Realisation Account.
¾ Creditors may be paid the amount available including the amount contributed by the
partners.
The unsatisfied portion of creditor account is transferred to Capital Accounts of the
partners in the profit sharing ratio. Then Capital Accounts are closed. In doing so first
close the Partners’ Capital Account which is having the worst position. The last
account will be automatically closed.
¾ On dissolution
• assets are realized and all liabilities are paid off
(if any liability remains unpaid then it is to be realized from partners in their profit
sharing ratio).

Advanced Issues in Partnership Accounts 3.3
Piecemeal describes two methods

• Maximum loss method- each instalment realised is considered to be the final payment.
• Highest relative capital method.- the partner whose capital is greater in proportion to
his profit sharing ratio is first paid off.
DISSOLUTION
Question 1
X, Y and Z are partners of the firm XYZ and Co., sharing Profits and Losses in the ratio of
4 : 3 : 2. Following is the Balance Sheet of the firm as at 31st March, 2012:
Balance Sheet as at 31st March, 2012
Liabilities ` Assets `
Partners’ Capitals: Fixed Assets 5,00,000
X 4,00,000 Stock in trade 3,00,000
Y 3,00,000 Sundry debtors 5,00,000
Z 2,00,000 Cash in hand 10,000
General Reserve 90,000
Sundry Creditors 3,20,000 ________
13,10,000 13,10,000
Partners of the firm decided to dissolve the firm on the above said date. It was found that a
credit purchase of ` 20,000 in January, 2012 had not been recorded in the books of the firm.
Fixed assets realized ` 5,20,000 and book debts ` 4,40,000.
Stocks were valued at ` 2,50,000 and it was taken over by partner Y.
Creditors allowed discount of 5% and the expenses of realization amounted to ` 6,000.
You are required to prepare:
(i) Realisation account;
(ii) Partners capital account; and
(iii) Cash account.
Answer
(i) Realisation Account
` `
To Fixed assets 5,00,000 By Creditors 3,20,000
To Stock in trade 3,00,000 By Cash 9,60,000
(5,20,000+4,40,000)

To Debtors 5,00,000 By Y (Stock taken over) 2,50,000

To Cash - Expenses 6,000 By Loss transferred to
partners’ capital
accounts
To Cash -Creditors 3,23,000 X 44,000
(3,40,000x 95% ) Y 33,000
Z 22,000
16,29,000 16,29,000
(ii) Partners’ Capital Accounts
X Y Z X Y Z
` ` ` ` ` `
To Realisation 44,000 33,000 22,000 By Balance b/d 4,00,000 3,00,000 2,00,000
Account
To Realisation - 2,50,000 - By General 40,000 30,000 20,000
Account reserve
To Cash 3,96,000 47,000 1,98,000
4,40,000 3,30,000 2,20,000 4,40,000 3,30,000 2,20,000
(iii) Cash Account
` `
To Balance b/d 10,000 By Realisation A/c (Expenses) 6,000
To Realisation A/c 9,60,000 By Realisation A/c (Creditors) 3,23,000
(Fixed assets and By Creditors 20,000
book debts realized) By X 3,96,000
By Y 47,000
By Z 1,98,000
9,70,000 9,70,000
Question 2
P, Q and R are partners sharing profits and losses as to 2:2:1. Their Balance Sheet as on
31st March, 2011 is as follows:
Capital accounts Plant and Machinery 1,08,000
P 1,20,000 Fixtures 24,000
Q 48,000 Stock 60,000
R 24,000 1,92,000 Sundry debtors 48,000
Reserve Fund 60,000 Cash 60,000
Creditors 48,000
3,00,000 3,00,000

They decided to dissolve the business. The following are the amounts realized:
`
Plant and Machinery 1,02,000
Fixtures 18,000
Stock 84,000
Sundry debtors 44,400
Creditors allowed a discount of 5% and realization expenses amounted to ` 1,500. There was
an unrecorded asset of ` 6,000 which was taken over by Q at ` 4,800. A bill for ` 4,200 due
for sales tax was received during the course of realization and this was also paid.
(i) Realisation account.
(ii) Partners’ capital accounts.
(iii) Cash account.
Answer
Realisation Account
Particulars ` Particulars `
To Debtors 48,000 By Creditors 48,000
To Stock 60,000 By Cash A/c (Assets realized):
To Fixtures 24,000 Plant and Machinery 1,02,000
To Plant and machinery 1,08,000 Fixtures 18,000
To Cash A/c (Creditors) 45,600 Stock 84,000
To Cash A/c (Sales tax) 4,200 Sundry Debtors 44,400 2,48,400
∗
To Cash A/c (Realisation 1,500 By Q (Unrecorded asset) 4,800
expenses)
To Profit on Realisation
P 3,960
Q 3,960
R 1,980 9,900
3,01,200 3,01,200
∗
An unrecorded asset is in the nature of gain hence realization account is credited. Since this asset has been
taken over by Q, therefore, his account has been debited.

Partners’ Capital Accounts

Particulars P Q R Particulars P Q R
` ` ` ` ` `
To Realisation A/c 4,800 By Balance 1,20,000 48,000 24,000
(unrecorded b/d
asset)
To Cash (Bal. Fig.) 1,47,960 71,160 37,980 By Reserve 24,000 24,000 12,000
fund
By Realisation
A/c (Profit) 3,960 3,960 1,980
1,47,960 75,960 37,980 1,47,960 75,960 37,980
Cash Account
To Balance b/d 60,000 By Realisation A/c (Creditors) 45,600
To Realisation A/c (Assets) 2,48,400 By Realisation A/c (Expenses) 1,500
By Realisation A/c (Sales Tax) 4,200
By P’s Capital A/c 1,47,960
By Q’s Capital A/c 71,160
By R’s Capital A/c 37,980
3,08,400 3,08,400
Question 3
Read, Write and Add give you the following Balance Sheet as on 31st March, 2011.
Read’s Loan 15,000 Plant and Machinery at cost 30,000
Capital Accounts: Fixtures and Fittings 2,000
Read 30,000 Stock 10,400
Write 10,000 Debtors 18,400
Add 2,000 42,000 Less: Provision (400) 18,000
Sundry Creditors 17,800 Joint Life Policy 15,000
Loan on Hypothecation of Patents and Trademarks 10,000
Stock 6,200 Cash at Bank 8,000
Joint Life Policy Reserve 12,400
93,400 93,400
The partners shared profits and losses in the ratio of Read 4/9, Write 2/9 and Add 1/3. Firm
was dissolved on 31st March, 2011 and you are given the following information:
(a) Add had taken a loan from insurers for ` 5,000 on the security of Joint Life Policy.
The policy was surrendered and Insurers paid a sum of ` 10,200 after deducting ` 5,000
for. Add’s loan and ` 300 as interest thereon.

(b) One of the creditors took some of the patents whose book value was ` 6,000 at a
valuation of ` 4,500. The balance to that creditor was paid in cash.
(c) The firm had previously purchased some shares in a joint stock company and had written
them off on finding them useless. The shares were now found to be worth ` 3,000 and
the loan creditor agreed to accept the shares at this value.
(d) The remaining assets realized the following amount: `
Plant and Machinery 17,000
Fixtures and Fittings 1,000
Stock 9,000
Debtors 16,500
Patents 50% of their book value
(e) The liabilities were paid and a total discount of ` 500 was allowed by the creditors.
(f) The expenses of realization amounted to ` 2,300.
Prepare the Realisation Account, Bank Account and Partners Capital Accounts in columnar form.
Answer
Realisation Account
` `
To Plant and machinery 30,000 By Provision for doubtful debts 400
To Fixtures and fittings 2,000 By Loan on hypothecation of stock 3,000
(W.N.3)
To Stock 10,400 By Creditors (W.N.2) 500
To Debtors 18,400 By Joint Life Policy A/c (W.N.4) 12,900
To Patents and 5,500 By Bank
Trademarks (W.N.5) Plant and machinery 17,000
To Bank 2,300 Fixtures and fittings 1,000
Stock 9,000
Debtors 16,500
Patents and Trademarks 2,000 45,500
By Partners’ Capital Accounts
Read 2,800
Write 1,400
Add 2,100 6,300
68,600 68,600

Bank Account
` `
To Balance b/d 8,000 By Add’s Capital A/c- drawings 5,300
To Joint Life Policy 15,500 By Loan on hypothecation of 3,200
To Realisation A/c 45,500 stock
To Add’s Capital A/c 5,400 By Creditors 12,800
By Realisation A/c (expenses) 2,300
By Read’s Loan A/c 15,000
By Read’s Capital A/c 27,200
By Write’s Capital A/c 8,600
74,400 74,400
Read Write Add Read Write Add
` ` ` ` ` `
To Bank 5,300 By Balance 30,000 10,000 2,000
To Realisation 2,800 1,400 2,100 b/d
A/c By Bank A/c 5,400
To Bank (Bal. (bal.fig.)
Fig.) 27,200 8,600
30,000 10,000 7,400 30,000 10,000 7,400
Working Notes:
1. Read’s Loan Account
` `
To Bank A/c 15,000 By Balance b/d 15,000
15,000 15,000
2. Sundry Creditors Account
` `
To Patents and 4,500 By Balance b/d 17,800
Trademarks A/c
To Realisation A/c 500
To Bank A/c 12,800
17,800 17,800
3. Loan on Hypothecation of Stock Account
` `
To Realisation A/c 3,000 By Balance b/d 6,200
To Bank A/c 3,200
6,200 6,200

4. Joint Life Policy Account

` `
To Balance b/d 15,000 By Joint Life Policy Reserve A/c 12,400
To Realisation A/c 12,900 By Bank A/c (10,200 + 5,300) 15,500
27,900 27,900
5. Patents and Trademarks Account
` `
To Balance b/d 10,000 By Creditors A/c 4,500
By Realisation A/c 1,500
By Realisation A/c (bal.fig.) 4,000*
10,000 10,000
DISSOLUTION DUE TO INSOLVENCY OF ONE PARTNER

Question 4
A, B, C and D are sharing profits and losses in the ratio 5 : 5 : 4 : 2. Frauds committed by C
during the year were found out and it was decided to dissolve the partnership on 31st March,
2012 when their Balance Sheet was as under :
Liabilities Amount (`) Assets Amount (`)
Capital Building 1,20,000
A 90,000 Stock 85,500
B 90,000 Investments 29,000
C - Debtors 42,000
D 35,000 Cash 14,500
General reserve 24,000 C 15,000
Trade creditors 47,000
Bills payable 20,000
3,06,000 3,06,000
Following information is given to you:
(i) A cheque for ` 4,300 received from debtor was not recorded in the books and was
misappropriated by C.
(ii) Investments costing ` 5,400 were sold by C at ` 7,900 and the funds transferred to his
personal account. This sale was omitted from the firm’s books.
(iii) A creditor agreed to take over investments of the book value of ` 5,400 at ` 8,400. The
rest of the creditors were paid off at a discount of 2%.
(iv) The other assets realized as follows:
Building 105% of book value
Stock ` 78,000

Investments The rest of investments were sold at a profit of ` 4,800

Debtors The rest of the debtors were realized at a discount of 12%
(v) The bills payable were settled at a discount of ` 400.
(vi) The expenses of dissolution amounted to ` 4,900
(vii) It was found out that realization from C’s private assets would only be ` 4,000.
Prepare the necessary Ledger Accounts.
Answer
Realisation account
To Building 1,20,000 By Trade creditors 47,000
To Stock 85,500 By Bills payable 20,000
To Investment 29,000 By Cash
To Debtors 42,000 Building 1,26,000
To Cash-creditors paid (W.N.1) 37,828 Stock 78,000
To Cash-expenses 4,900 Investments (W.N.2) 23,000
To Cash-bills payable (20,000- 19,600 Debtors (W.N. 3) 33,176 2,60,176
400)
To Partners’ Capital A/cs By Debtors-unrecorded 4,300
A 171 By Investments- 7,900
unrecorded
B 171
C 137
D 69 548
3,39,376 3,39,376
Cash account
Particulars Amount Particulars Amount
` `
To Balance b/d 14,500 By Realisation-creditors paid 37,828
To Realisation – assets realised By Realisation-bills payable 19,600
Building 1,26,000 By Realisation-expenses 4,900
Stock 78,000 By Capital account
Investments 23,000 A 90,528
Debtors 33,176 2,60,176 B 90,528
To C’s capital A/c 4,000 D 35,292
2,78,676 2,78,676

Particulars A B C D Particulars A B C D
` ` ` ` ` ` ` `
To Balance b/d 15,000 By Balance b/d 90,000 90,000 - 35,000
Advanced Issues in Partnership Accounts

To Debtors-misappropriation 4,300 By General 7,500 7,500 6,000 3,000
reserve
To Investment-misappropriation 7,900 By Realisation 171 171 137 69
profit
To C’s capital A/c (W.N. 4) 7,143 7,143 2,777 By Cash A/c 4,000
To Cash A/c 90,528 90,528 35,292 By A’s capital A/c 7,143
By B’s capital A/c 7,143
By D’s capital A/c 2,777
97,671 97,671 27,200 38,069 97,671 97,671 27,200 38,069
3.11
Working Notes:
1. Amount paid to creditors
`
Book value 47,000
Less: Creditors taking over investments ( 8,400)
38,600
Less: Discount @ 2% (772)
37,828
2. Amount received from sale of investments
`
Book value 29,000
Less: Misappropriated by C (5,400)
23,600
Less: Taken over by a creditor (5,400)
18,200
Add: Profit on sale of investments 4,800
23,000
3. Amount received from debtors
`
Book value 42,000
Less: Unrecorded receipt (4,300)
37,700
Less: Discount @ 12% (4,524)
33,176
4. Deficiency of C
`
Balance of capital as on 31st March, 2012 15,000
Debtors-misappropriation 4,300
Investment-misappropriation 7,900
27,200
Less: Realisation Profit (137)
General reserve (6,000)
Contribution from private assets (4,000)
Net deficiency of capital 17,063
This deficiency of ` 17,063 in C’s capital account will be shared by other partners A, B
and D in their capital ratio of 90 : 90 : 35.by
Accordingly,
A’s share of deficiency =[17,063 x (90/215)] = ` 7,143
B’s share of deficiency =[17,063 x (90/215)] = ` 7,143
D’s share of deficiency =[17,063 x (35/215)] = ` 2,777

Question 5
P, Q, R and S had been carrying on business in partnership sharing profits & losses in the
ratio of 4:3:2:1. They decided to dissolve the partnership on the basis of following Balance
Sheet as on 30th April, 2011:
Liabilities Amount (`) Assets Amount (`)
Capital Accounts Land & building 2,46,000
P 1,68,000 Furniture & fixtures 65,000
Q 1,08,000 2,76,000 Stock 1,00,000
General reserve 95,000 Debtors 72,500
Capital reserve 25,000 Cash in hand 15,500
Sundry creditors 36,000 Capital overdrawn:
Mortgage loan 1,10,000 R 25,000
S 18,000 43,000
5,42,000 5,42,000
(i) The assets were realized as under: `
Land & building 2,30,000
Furniture & fixtures 42,000
Stock 72,000
Debtors 65,000
(ii) Expenses of dissolution amounted to ` 7,800.
(iii) Further creditors of ` 18,000 had to be met.
(iv) R became insolvent and nothing was realized from his private estate.
Applying the principles laid down in Garner Vs. Murray, prepare the Realisation Account, Partners’
Capital Accounts and Cash Account.
Answer
Realisation Account
Particulars Amount (`) Particulars Amount
(` )
To Land and building 2,46,000 By Sundry creditors 36,000
To Furniture and fixtures 65,000 By Mortgage loan 1,10,000
To Stock 1,00,000 By Cash account -
To Debtors 72,500 Land and building 2,30,000
To Cash A/c (expenses on Furniture & fixtures 42,000
dissolution) 7,800 Stock 72,000
To Cash A/c (creditors 54,000 Debtors 65,000
` 36,000 + ` 18,000) By Partners’ capital
To Cash A/c (Mortgage loan) 1,10,000 accounts (Loss 4:3:2:1)
P = 40,120

Q = 30,090
R = 20,060 1,00,300
S = 10,030
6,55,300 6,55,300
Particulars P Q R S Particulars P Q R S
` ` ` ` ` ` ` `
To Balance b/d - - 25,000 18,000 By Balance
b/d 1,68,000 1,08,000
To Realization A/c By General
(Loss) 40,120 30,090 20,060 10,030 Reserve 38,000 28,500 19,000 9,500
To R’s Capital A/c By Capital
(Deficiency) 12,636 8,424 - - Reserve 10,000 7,500 5,000 2,500
To Cash A/c 2,03,364 1,35,576 - - By Cash A/c
(realization
loss) 40,120 30,090 - 10,030
By P’s Capital
A/c 12,636
By Q’s Capital
A/c 8,424
By Cash A/c 6,000
2,56,120 1,74,090 45,060 28,030 2,56,120 1,74,090 45,060 28,030
Note: P, Q and S brought cash to make good, their share of the loss on realization. However, in
actual practice they will not be bringing any cash, only a notional entry will be made.
Cash Account
(`) (`)
To Balance b/d 15,500 By Realization A/c:
To Realization A/c: Expenses on dissolution 7,800
Land and building 2,30,000 Creditors (36,000+18,000) 54,000
Furniture & fixtures 42,000 Mortgage loan 1,10,000
Stock 72,000 By P’s capital A/c 2,03,364
Debtors 65,000 By Q’s capital A/c 1,35,576
To P, Q, S’s capital A/cs 80,240
(40,120+30,090+10,030)
To S’s capital A/c 6,000
5,10,740 5,10,740

Working Note:
As per Garner Vs. Murray rule, solvent partners have to bear the loss due to insolvency of a
partner in their capital ratio.
Calculation of Capital Ratio of Solvent Partners
P Q S
(`) (`) (`)
Opening capital 1,68,000 1,08,000 (18,000)
Add: General reserve 38,000 28,500 9,500
Capital reserve 10,000 7,500 2,500
2,16,000 1,44,000 (6,000)
Though S is a solvent partner yet he cannot be called upon to bear loss on account of
insolvency of R because his capital account has a debit balance.
Therefore, capital ratio of P & Q = 216 : 144 = 3 : 2
Deficiency of R = ` {(25,000 + 20,060) – (19,000 + 5,000)} = ` 45,060 – ` 24,000 = ` 21,060.
Deficiency of R will be shared by P & Q in the capital ratio of 3 : 2 i.e.
P = ` 21,060 X 3/5 = ` 12,636
Q = ` 21,060 X 2/5 = ` 8,424
Question 6
Neptune, Jupiter, Venus and Pluto had been carrying on business in partnership sharing
profits and losses in the ratio of 3 : 2 : 1 : 1. They decide to dissolve the partnership on the
basis of the following Balance Sheet as on 30th April, 2003:
Liabilities ` ` Assets ` `
Capital Account: Premises 1,20,000
Neptune 1,00,000 Furniture 40,000
Jupiter 60,000 1,60,000 Stock 1,00,000
General Reserve 56,000 Debtors 40,000
Capital Reserve 14,000 Cash 8,000
Sundry Creditors 20,000 Capital Overdrawn:
Mortgage Loan 80,000 Venus 10,000
_______ Pluto 12,000 22,000
3,30,000 3,30,000
(i) The assets were realised as under:
`
Debtors 24,000
Stock 60,000
Furniture 16,000
Premises 90,000

(ii) Expenses of dissolution amounted to ` 4,000.

(iii) Further creditors of ` 12,000 had to be met.
(iv) General Reserve unlike Capital Reserve was built up by appropriation of profits.
You are required to draw up the Realisation Account, Partners’ Capital Accounts and the Cash
Account assuming that Venus became insolvent and nothing was realised from his private
estate. Apply the principles laid down in Garner vs Murray.
Answer
Realisation Account
` ` `
To Sundry assets A/c By Sundry creditors A/c 20,000
(transfer): By Cash A/c (assets
Premises 1,20,000 realised): Premises 90,000
Furniture 40,000 Furniture 16,000
Stock 1,00,000 Stock 60,000
Sundry Debtors 40,000 Debtors 24,000 1,90,000
To Cash A/c (creditors 32,000 By Loss transferred to
paid) Capital Accounts:
To Cash A/c (expenses) 4,000 Neptune 54,000
Jupiter 36,000
Venus 18,000
Pluto 18,000 1,26,000
3,36,000 3,36,000
Cash Account
` `
To Balance b/d 8,000 By Realisation A/c (creditors) 32,000
To Realisation A/c By Realisation A/c (expenses) 4,000
(assets realised) 1,90,000 By Mortgage loan 80,000
To Capital A/c By Neptune's Capital A/c 1,18,857
(realisation loss By Jupiter's Capital A/c 73,143
made good):
Neptune 54,000
Jupiter 36,000
Pluto 18,000 1,08,000
To Pluto's Capital
A/c 2,000 _______
3,08,000 3,08,000

Particulars Neptune Jupiter Venus Pluto Particulars Neptune Jupiter Venus Pluto
` ` ` ` ` ` ` `
To Balance b/d − − 10,000 12,000 By Balance b/d 1,00,000 60,000 − −
To Realisastion By General reserve 24,000 16,000 8,000 8,000
A/c (loss) 54,000 36,000 18,000 18,000 A/c
(3 : 2 : 1 :1)
To Venus's − − By Capital reserve A/c 6,000 4,000 2,000 2,000
Capital 11,143 6,857 (3 : 2 : 1 :1)
Advanced Issues in Partnership Accounts

A/c (loss)
To Cash A/c 1,18,857 73,143 − − By Cash A/c (loss on 54,000 36,000 − 18,000
realization)
By Neptune's Capital − − 11,143 −
A/c
By Jupiter's Capital − − 6,857 −
A/c
_______ _______ _____ _____ By Cash A/c − − − 2,000
1,84,000 1,16,000 28,000 30,000 1,84,000 1,16,000 28,000 30,000
3.17
Question 7
A, B and C are partners; A became insolvent on 15.4.2010. The capital account balance of
partner B is on the debit side. Partner B is solvent. Should partner B bear the loss arising on
account of the insolvency of partner A?
Answer
According to Garner vs Murray Rule, if a solvent partner is having a debit balance in his
capital account, then he cannot be called upon to bear the loss on account of the insolvency of
the other partner. Hence, ‘B’ needs not bear the loss due to insolvency of partner ‘A’.
DISSOLUTION: PIECEMEAL DISTRIBUTION
Maximum Possible Loss Method
Question 8
A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were
` 9,600, ` 6,000 and ` 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:
` `
Liability for interest on loans from : Investments 1,000
Spouses of partners 2,000 Furniture 2,000
Partners 1,000 Machinery 1,200
Stock 4,000
The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when
available, applying maximum possible loss procedure.
Answer
Statement of Distribution of Cash
Realisation Interest on Interest on Partners’ Capitals
loans from loans from
partners’ partners A B C Total
spouses
` ` ` ` ` ` `
Balances due (1) 2,000 1,000 9,600 6,000 8,400 24,000
(i) Sale of investments 1,000 (1,000) -
1,000 1,000
(ii) Sale of furniture 2,000 (1,000) (1,000)
- -
(iii) Sale of machinery 1,200

Maximum possible loss ` 22,800

(total of capitals ` 24,000 less
cash available ` 1,200) allocated
to partners in the profit sharing
ratio i.e. 5 : 3 : 2 (11,400) (6,840) (4,560) (22,800)
Amounts at credit (1,800) (840) 3,840 1,200
Deficiency of A and B written off
against C 1,800 840 (2,640) –
Amount paid (2) – – 1,200 1,200
Balances in capital accounts(1 – 2) = (3) 9,600 6,000 7,200 22,800
(iv) Sale of stock 4,000
Maximum possible loss 18,800
(` 22,800 – ` 4,000) Allocated
to partners in the ratio 5 : 3 : 2 (9,400) (5,640) (3,760) (18,800)
Amounts at credit and cash paid (4) 200 360 3,440 (4,000)
Balances in capital accounts left unpaid—Loss (3 – 4) = (5) 9,400 5,640 3,760 18,800
Question 9
Amar, Akbar and Antony are in partnership. The following is their Balance Sheet as at
March 31, 2010 on which date they dissolved their partnership. They shared profit in the ratio
of 5:3:2.
Creditors 80,000 Plant and machinery 60,000
Loan A/c – Amar 20,000 Premises 80,000
Capital A/cs - Amar 1,00,000 Stock 60,000
Akbar 30,000 Debtors 1,20,000
Antony 90,000
3,20,000 3,20,000
It was agreed to repay the amounts due to the partners as and when the assets were realised, viz.
April 15, 2010 ` 60,000
May 1, 2010 ` 1,46,000
May 31, 2010 ` 94,000
Prepare a statement showing how the distribution should be made under maximum loss
method and write up the cash account and partners’ capital accounts.

Answer
(a) Statement of Distribution of Cash by ‘Maximum Loss Method’
Creditors Amar’s Amar Akbar Antony
Loan
` ` ` ` `
Balance due 80,000 20,000 1,00,000 30,000 90,000
15th April 2010 realised ` 60,000
Paid to creditors (60,000) - - - -
Balance due 20,000 20,000 1,00,000 30,000 90,000
1st May, 2010 realised ` 1,46,000
Paid to creditors (` 20,000) 20,000 - - - -
Paid to Amar’s loan (` 20,000) - 20,000 - - -
Balance due (1) Nil Nil 1,00,000 30,000 90,000
Balance ` 1,06,000
Maximum Loss
(1,00,000+30,000+90,000-
1,06,000) =` 1,14,000 shared in
Profit & Loss ratio 5:3:2 (57,000) (34,200) (22,800)
43,000 (4,200) 67,200
Akbar’s deficiency shared by Amar
& Antony in capital ratio 100:90 (2,210) 4,200 (1,990)
Cash paid [2] 40,790 - 65,210
Balance due (3) [1-2] 59,210 30,000 24,790
31st May 2010 realised ` 94,000
Maximum Loss
[59,210+30,000+24,790-94,000]=
` 20,000 shared in 5:3:2 (10,000) (6,000) (4,000)
Cash paid (4) 49,210 24,000 20,790
Balance/Loss* on realisation (3-4) 10,000 6,000 4,000
Cash Account
` `
To Realization Account 60,000 By Creditors Account 60,000
To Realization Account 1,46,000 By Creditors Account 20,000
To Realization Account 94,000 By Amar’s Loan Account 20,000
By Amar’s Capital Account 40,790
By Antony’s Capital Account 65,210

By Amar’s Capital Account 49,210

By Akbar’s Capital Account 24,000
By Antony’s Capital Account 20,790
3,00,000 3,00,000
Amar Akbar Antony Amar Akbar Antony
` ` ` ` ` `
To Cash 40,790 - 65,210 By Balance b/d 1,00,000 30,000 90,000
To Cash 49,210 24,000 20,790
To Balance c/d
Realization loss* 10,000 6,000 4,000
1,00,000 30,000 90,000 1,00,000 30,000 90,000
∗
If no further realization takes place, then Amar, Akbar and Anthony will bear loss on realization
` 10,000, ` 6,000 and ` 4,000 respectively.
HIGHEST RELATIVE CAPITAL METHOD
Question 10
Ajay Enterprises, a Partnership firm in which A,B and C are three partners sharing profits and
losses in the ratio of 4 : 3 : 3. the balance sheet of the firm as on 31st December, 2011 is as
below:
A’ s Capital 15,000 Factory Building 24,160
B’ s Capital 7,500 Plant & Machinery 16,275
C’ s Capital 15,000 Debtors 5,400
B’ s Capital 4,500 Stock 12,390
Sundry Capital 16,500 Cash at Bank 275
58,500 58,500
On balance sheet date all the three partners have decided to dissolve their partnership. Since
the realization of assets was protracted, they decided to distribute amounts as and when
feasible and for this purpose they appoint C who was to get as his remunerations 1% of the
value of the assets realized other than cash at Bank and 10% of the amount distributed to the
partners.
Assets were realized piecemeal as under:

First installment ` 18,650

Second installment ` 17,320
Third installment ` 10,000
Last instilment ` 7,000
Dissolution expenses were provided for estimated amount of ` 3,000
The creditors were settled finally for ` 15,900
Prepare a statement showing distribution of cash amongst the partners by ‘Higher Relative
Capital Method’.
Answer
Statement showing distribution of cash amongst the partners
Creditors B’s Capitals
Loan
A(`) B(`) C(`)
Balance Due 16,500 4,500 15,000 7,500 15,000
On 1st Instalment amount with
the firm ` (275 + 18,650) 18,925
Less: Dissolution expenses
provided for (3,000)
15,925
Less: C’s remuneration of 1% on
assets realized (18,650 x 1%) (187)
15,738
Less: Payment made to creditors (15,738) (15,738)
Balance due Nil 762
2nd instalment realised 17,320
17,147
Less: Payment made to creditors (162) (162)
Transferred to P& L A/c 16,985 600
Less: Payment for B’s loan A/c (4,500) (4,500)
Amount available for distribution
to partners 12,485 nil

Less: C’s remuneration of 10%

of the amount distributed to
partners (12,485 x 10/110) (1,135)
Balance distributed to partners
on the basis of HRCM 11,350
Less: Paid to C (W.N.1) (3,750) (3,750)
7,600 11,250
Less: Paid to A and C in 4:3
(W.N.1) (7,600) (4,343) - (3,257)
Balance due nil 10,657 7,500 7,993
Amount of 3rd instalment 10,000
9,900
partners (9,900 x 10/110) (900)
9,000
Less: Paid to A and C in 4:3 for
(` 8,750 – 7,600) (W.N.1) (1,150) (657) - (493)
7,850 10,000 7,500 7,500
Less: Paid to A, B and C in 4:3:3 (7,850) (3,140) (2,355) (2,355)
Balance due nil 6,860 5,145 5,145
Amount of 4th and last
instalment 7,000
6,930
partners (6,930 x 10/110) (630)
6,300
Less: Paid to A, B and C in 4:3:3 (6,300) (2,520) (1,890) (1,890)
Loss suffered by partners 4,340 3,255 3,255

Working Note:
(i) Highest Relative Capital Basis
A B C
` ` `
Balance of Capital Accounts (A) 15,000 7,500 15,000
Profit sharing ratio 4 3 3
Capital Profit sharing ratio 3,750 2,500 5,000
Capital in profit sharing
ratio taking B’s Capital as base (B) 10,000 7,500 7,500
Excess of A’s Capital and C’s Capital 5,000 nil 7,500
(A-B) =(C)
Again repeating the process
Profit sharing ratio 4 3
Capital Profit sharing ratio 1,250 2,500
Capital in profit sharing
ratio taking A’s Capital as base (D) 5,000 3,750
Excess of C’s Capital (C-D)=(E) nil 3,750
Therefore, firstly ` 3,750 is to be paid to C then A and C to be paid in proportion of 4:3 upto
` 8,750 to bring the capital of all partners A, B and C in proportion to their profit sharing ratio.
Thereafter, balance available will be paid in their profit sharing ratio 4:3:3 to all partners viz A,
B and C.
EXERCISES
1 The firm of Kapil and Dev has four partners and as of 31st March, 2011, its Balance Sheet stood as follows:
Balance Sheet as on 31st March, 2011

Capital A/cs: Land 50,000
F. Kapil 2,00,000 Building 2,50,000
S. Kapil 2,00,000 Office equipment 1,25,000
R. Dev 1,00,000 Computers 70,000
Current A/cs Debtors 4,00,000
F. Kapil 50,000 Stocks 3,00,000
S. Kapil 1,50,000 Cash at Bank 75,000
R. Dev 1,10,000 Other Current Assets 22,600
Loan from NBFC 5,00,000 Current A/c :
Current Liabilities 70,000 B. Dev 87,400
13,80,000 13,80,000

The partners have been sharing profits and losses in the ratio of 4:4:1:1. It has been agreed to dissolve the firm on
1.4.2011 on the basis of the following understanding :
(a) The following assets are to be adjusted to the extent indicated with respect to the book values :
Land 200%
Building 120%
Computers 70%
Debtors 95%
Stocks 90%
(b) In the case of the loan, the lender’s are to be paid at their insistence a prepayment premium of 1%.
(c) B. Dev is insolvent and no amount is recoverable from him. His father, R.Dev, however, agrees to bear 50%
of his deficiency. The balance of the deficiency is agreed to be apportioned according to law.
Assuming that the realisation of the assets and discharge of liabilities is carried out immediately, show the
Cash A/c, Realisation Account and the Partners’ Accounts.
(Hints: Profit on realisation: F. Kapil ` 9,600, S. Kapil ` 9,600, R. Dev ` 2,400.,B. Dev ` 2,400)
2. The firm of LMS was dissolved on 31.3.2011, at which date its Balance Sheet stood as follows:
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Capital
L 15,00,000
M 10,00,000
S 5,00,000
47,00,000 47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realise the assets and distribute the
cash after discharge of liabilities. Their fees which are to include all expenses is fixed at ` 1,00,000. No loss is
expected on realisation since fixed assets include valuable land and building.
Realisations are:
S.No. Amount in `
1 5,00,000
2 15,00,000
3 15,00,000
4 30,00,000
5 30,00,000
The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’. You are
required to prepare a statement showing distribution of cash with necessary workings.
(Hints: Realization profit credited to partners L ` 15,66,667, M ` 15,66,667, S ` 15,66,666)

3. Ajay, Vijaya, Ram and Shyam are partners in a firm sharing profits and losses in the ratio of
4 : 1 : 2 : 3. The following is their Balance Sheet as at 31st March, 2011 :

Sundry Creditors 3,00,000 Sundry Debtors 3,50,000
Capital A/cs : Less: Doubtful Debts (50,000)
Ajay 7,00,000 3,00,000
Shyam 3,00,000 10,00,000 Cash in hand 1,40,000
Stocks 2,00,000
Other Assets 3,10,000
Capital A/cs:
Vijay 2,00,000
Ram 1,50,000
13,00,000 13,00,000
On 31st March, 2011, the firm is dissolved and the following points are agreed upon:
Ajay is to takeover sundry debtors at 80% of book value
Shyam is to takeover the stocks at 95% of the value and
Ram is to discharge sundry creditors.
Other assets realise ` 3,00,000 and the expenses of realisation come to ` 30,000.
Vijay is found insolvent and ` 21,900 is realised from his estate.
Prepare Realisation Account and Capital Accounts of the partners. Show also the Cash A/c.
The loss arising out of capital deficiency may be distributed following the decision in Garner vs Murray.
(Hints: Vijay’s deficiency will be borne by Ajay and Shyam in the ratio of 7 : 3 i.e. on opening capitals
of ` 7,00,000 and ` 3,00,000. Ram will not bear any portion of the loss since at the time of dissolution
he had a debit balance in his capital account. Loss on realization- Ajay ` 28,000, Vijay ` 7,000, Ram
` 14,000, Shyam ` 21,000)

UNIT 2: AMALGAMATION, CONVERSION AND SALE OF PARTNERSHIP FIRM
BASIC CONCEPTS
¾ Amalgamation includes
Closing the books of old firm:
(a) Each firm should prepare a Revaluation Account relating to its own assets and
liabilities and transfer the balance to the partners’ capital accounts in the profit-
sharing ratio.
(b) Entries for raising goodwill should be passed.
(c) Assets and liabilities not taken over by the new firm should be transferred to
the capital accounts of partners in the ratio of their capitals.
(d) The new firm should be debited with the difference between the value of assets
and liabilities taken over by it; the assets should be credited and liabilities
debited.
(e) Partners’ capital accounts should be transferred to the new firm’s account;
Opening the books of the new firm:
Debit assets taken out at the agreed values
Credit the liabilities taken over, and
Credit individual partner’s capital accounts with the closing balances in the erstwhile
firm.
When one firm is merged with another existing firm, entries will be in the pattern of
winding up in the books of the firm which has ceased to exist. The other firm will
record the transaction as that of a business purchase.
AMALGAMATION OF FIRMS
Question 1
P and Q are partners of P & Co. sharing Profit and Losses in the ratio of 3:1 and Q and R are
partners of R & Co., sharing profits and losses in the ratio of 2:1. On 31st March, 2009, they
decide to amalgamate and form a new firm M/s PQR & Co., wherein P, Q and R would be
partners sharing profits and losses in the ratio of 3:2:1. The Balance Sheets of two firms on
the above date are as under:
Liabilities P & Co. R & Co. Assets P & Co. R & Co.
` ` ` `
Capitals: Fixed assets:

P 2,40,000 ---- Building 50,000 60,000

Q 1,60,000 2,00,000 Plant & machinery 1,50,000 1,60,000
R ---- 1,00,000 Office equipment 20,000 6,000
Reserves 50,000 1,50,000 Current assets:
Sundry creditors 1,20,000 1,16,000 Stock-in-trade 1,20,000 1,40,000
Due to P & Co. ---- 1,00,000 Sundry debtors 1,60,000 2,00,000
Bank overdraft 80,000 ----- Bank balance 30,000 90,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 -----
6,50,000 6,66,000 6,50,000 6,66,000
The amalgamated firm took over the business on the following terms:
(a) Building of P & Co. was valued at ` 1,00,000.
(b) Plant and machinery of P & Co. was valued at ` 2,50,000 and that of R & Co. at
` 2,00,000.
(c) All stock in trade is to be appreciated by 20%.
(d) Goodwill valued of P & Co. at ` 1,20,000 and R & Co. at ` 60,000, but the same will not
appear in the books of PQR & Co.
(e) Partners of new firm will bring the necessary cash to pay other partners to adjust their
capitals according to the profit sharing ratio.
(f) Provisions for doubtful debts has to be carried forward at ` 12,000 in respect of debtors
of P & Co. and ` 26,000 in respect of debtors of R & Co.
You are required to prepare the Balance Sheet of new firm and capital accounts of the
partners in the books of old firms.
Answer
Balance Sheet of M/s PQR & Co. as at 31st March, 2009
Capitals: Building
(` 1,00,000 + ` 60,000) 1,60,000
P 5,52,000 Plant & machinery
(` 2,50,000+` 2,00,000) 4,50,000
Q 3,68,000 Office equipment
(` 20,000+` 6,000) 26,000
R 1,84,000 11,04,000 Stock-in-trade
(` 1,44,000+` 1,68,000) 3,12,000
Sundry creditors Sundry debtors
(1,20,000+1,16,000) 2,36,000 (` 1,60,000+` 2,00,000) 3,60,000

Bank overdraft 80,000 Less: Provision for doubtful debts (`

12,000+` 26,000) (38,000) 3,22,000
Bank balance (` 30,000+
` 90,000) 1,20,000
Cash in hand 30,000∗
14,20,000 14,20,000
In the books of P & Co.
Particulars P Q Particulars P Q
` ` ` `
To Capital A/cs – 4,89,000 2,43,000 By Balance b/d 2,40,000 1,60,000
M/s PQR & Co. By Reserve (3:1) 37,500 12,500
By Profit on
Realisation A/c
(W.N.4) 2,11,500 70,500
4,89,000 2,43,000 4,89,000 2,43,000
In the books of R & Co.
Particulars Q R Particulars Q R
` ` ` `
To Capital A/cs – 3,68,000 1,84,000 By Balance b/d 2,00,000 1,00,000
M/s PQR & Co. By Reserve (2:1) 1,00,000 50,000
By Profit on
Realisation 68,000 34,000
(W.N.5)
3,68,000 1,84,000 3,68,000 1,84,000
Working Notes:
1. Computation of purchase considerations
P & Co. R & Co.
` `
Assets:
Goodwill 1,20,000 60,000
Building 1,00,000 60,000
Plant & machinery 2,50,000 2,00,000
Office equipment 20,000 6,000
∗
` 20,000+` 10,000+` 1,53,000+` 30,000 –` 1,83,000 = ` 30,000.

Stock-in-trade 1,44,000 1,68,000

Sundry debtors 1,60,000 2,00,000
Bank balance 30,000 90,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 -
(A) 9,44,000 7,94,000
Liabilities:
Creditors 1,20,000 1,16,000
Provision for doubtful debts 12,000 26,000
Due to P & Co. - 1,00,000
Bank overdraft 80,000 -
(B) 2,12,000 2,42,000
Purchase consideration (A-B) 7,32,000 5,52,000
2. Computation of proportionate capital

`
M/s PQR & Co. (Purchase Consideration) (` 7,32,000+ ` 5,52,000) 12,84,000
Less: Goodwill adjustment (1,80,000)
Total capital of new firm (Distributed in ratio 3:2:1) 11,04,000
P’s proportionate capital 5,52,000
Q’s proportionate capital 3,68,000
R’s proportionate capital 1,84,000
3. Computation of Capital Adjustments

P Q R Total
` ` ` `
Balance transferred from P & Co. 4,89,000 2,43,000 7,32,000
Balance transferred from R & Co. 3,68,000 1,84,000 5,52,000
4,89,000 6,11,000 1,84,000 12,84,000
Less: Goodwill written off in the
ratio of 3:2:1 (90,000) (60,000) (30,000) (1,80,000)
Existing capital 3,99,000 5,51,000 1,54,000 11,04,000
Proportionate capital 5,52,000 3,68,000 1,84,000 11,04,000
Amount to be brought in (paid off) 1,53,000 (1,83,000) 30,000

4. In the books of P & Co.

Realisation Account
` `
To Building 50,000 By Creditors 1,20,000
To Plant & machinery 1,50,000 By Bank overdraft 80,000
To Office equipment 20,000 By M/s PQR & Co. 7,32,000
To Stock-in-trade 1,20,000 (purchase consideration)
To Sundry debtors 1,60,000 (W.N.1)
To Bank balance 30,000
To Cash in hand 20,000
To Due from R & Co. 1,00,000
To Partners’ capital A/cs
P 2,11,500
Q 70,500 2,82,000
9,32,000 9,32,000
5. In the books of R & Co.
Realisation Account
` `
To Building 60,000 By Creditors 1,16,000
To Plant & machinery 1,60,000 By Due to P & Co. 1,00,000
To Office equipment 6,000 By M/s PQR & Co. 5,52,000
To Stock-in-trade 1,40,000 (purchase consideration)
To Sundry debtors 2,00,000 (W.N.1)
To Bank balance 90,000
To Cash in hand 10,000
To Partners’ capital A/cs
Q 68,000
R 34,000 1,02,000
7,68,000 7,68,000
SALE OF PARTNERSHIP FIRM TO A COMPANY
Question 2
‘S’ and ‘T’ were carrying on business as equal partner. Their Balance Sheet as on 31st March,
2011 stood as follows:
Capital accounts: Stock 2,70,000
S 6,40,000 Debtors 3,65,000
T 6,60,000 13,00,000 Furniture 75,000
Creditors 3,27,500 Joint life policy 47,500
Bank overdraft 1,50,000 Plant 1,72,500

Bills payable 62,500 Building 9,10,000

18,40,000 18,40,000
The operations of the business were carried on till 30th September, 2011. S and T both
withdrew in equal amounts half the amount of profits made during the current period of 6
months after 10% per annum had been written off on building and plant and 5% per annum
written off on furniture. During the current period of 6 months, creditors were reduced by
` 50,000, Bills payable by ` 11,500 and Bank overdraft by ` 75,000. The Joint Life policy was
surrendered for ` 47,500 on 30th September, 2011. Stock was valued at ` 3,17,000 and
debtors at ` 3,25,000 on 30th September, 2011. The other items remained the same as on
31st March, 2011.
On 30th September, 2011 the firm sold its business to ST Ltd. The value of goodwill was
estimated at ` 5,40,000 and the remaining assets were valued on the basis of the Balance
Sheet as on 30th September, 2011. The ST Ltd. paid the purchase consideration in equity
shares of ` 10 each. You are required to prepare a Realization Account and Capital accounts
of the partners.
Answer
Realisation Account
To Sundry assets: By Creditors 2,77,500
Stock 3,17,000 By Bills payables 51,000
Debtors 3,25,000 By Bank overdraft 75,000
Plant 1,63,875 By Shares in ST Ltd. (W.N.3) 18,80,000
Building 8,64,500
Furniture 73,125
To Profit:
S 2,70,000
T 2,70,000 5,40,000
22,83,500 22,83,500
Date Particulars S T Date Particulars S T
` ` ` `
2011 2011
April 1 To Cash – 20,000 20,000 April 1 By Balance 6,40,000 6,60,000
Drawings b/d
(W.N. 2)
Sept. To Shares in 9,30,000 9,50,000 Sept. By Profit 40,000 40,000

30 ST Ltd. 30 (W.N.2)
By Realisation
A/c (Profit) 2,70,000 2,70,000
9,50,000 9,70,000 9,50,000 9,70,000
Working Notes:
(1) Ascertainment of total capital:
Balance Sheet as at 30th September, 2011
Sundry creditors 2,77,500 Building 9,10,000
Bills payable 51,000 Less: Depreciation (45,500) 8,64,500
Bank overdraft 75,000 Plant 1,72,500
Total capital (bal. fig.) 13,40,000 Less: Depreciation (8,625) 1,63,875
Furniture 75,000
Less: Depreciation (1,875) 73,125
Stock 3,17,000
Debtors 3,25,000
17,43,500 17,43,500
(2) Profit earned during six months to 30 September, 2011
`
Total capital (of S and T) on 30th September, 2011 (W.N.1) 13,40,000
Capital on 1st April, 2011
S 6,40,000
T 6,60,000 13,00,000
Net increase (after drawings) 40,000
Since drawings are half of profits therefore, actual profit earned is ` 40,000 x 2 =
` 80,000 (shared equally by partners S and T).
Half of the profits, has been withdrawn by both the partners equally i.e. drawings
` 40,000 (` 80,000 x ½) withdrawn by S and T in 1:1 (i.e. ` 20,000 each).
(3) Purchase consideration:
`
Total assets (W.N.1) 17,43,500
Add: Goodwill 5,40,000

22,83,500
Less: Liabilities (2,77,500 + 51,000 + 75,000) (4,03,500)
Purchase consideration 18,80,000
Note: The above solution is given on the basis that reduction in bank overdraft is after
surrender of Joint life policy.
CONVERSION OF PARTNERSHIP FIRM INTO A COMPANY
Question 3
Ramesh, Roshan and Rohan were partners of the firm ‘3R Enterprises’ sharing profits and
losses in the ratio of 3:2:1 respectively. On 31st March, 2011 their Balance Sheet stood as
follows:
Ramesh's Capital A/c 16,80,000 Land and Buildings 14,00,000
Roshan's Capital A/c 11,60,000 Machinery 11,00,000
Rohan's Capital A/c 6,70,000 Furniture 6,10,000
General Reserve 6,30,000 Stock 8,40,000
Creditors 6,00,000 Debtors 6,00,000
Cash at Bank 1,90,000
47,40,000 47,40,000
On the above-mentioned date, the partners decided to convert their firm into a private limited
company and named it ‘3R Enterprises (Private) Ltd.'. The company took over all the assets
including cash at bank and all the creditors for ` 42,00,000 payable in the form of fully paid
equity shares of ` 10 each. It recorded in its books, land and buildings at ` 16,40,000,
machinery at ` 9,90,000 and created a provision for bad debts @ 5% on debtors. The
expenses of the take-over came to ` 23,000 which were paid and borne by the company.
The expenses of getting the company incorporated were ` 57,000.
The partners distributed the company's shares amongst themselves in their profit sharing
ratio. They settled their accounts by paying or receiving cash.
Prepare Realization Account and all the partners' capital accounts in the firm's ledger and
pass journal entries in the books of the company for all of its transactions mentioned above.
Answer
In the books of 3R Enterprises
Realisation Account
` `
To Land and Buildings 14,00,000 By Creditors 6,00,000

To Machinery 11,00,000 By 3R Enterprises (Pvt.) Ltd. A/c 42,00,000

To Furniture 6,10,000
To Stock 8,40,000
To Debtors 6,00,000
To Cash at Bank 1,90,000
To Ramesh’s capital 30,000
To Roshan’s capital 20,000
To Rohan’s capital 10,000
48,00,000 48,00,000
Ramesh Roshan Rohan Ramesh Roshan Rohan
` ` ` ` ` `
To Shares in 3R 21,00,000 14,00,000 7,00,000 By Balance 16,80,000 11,60,000 6,70,000
Enterprises b/d
(Pvt.) Ltd. A/c By General 3,15,000 2,10,000 1,05,000
Reserve
To Bank A/c - - 85,000 By Realization 30,000 20,000 10,000
(Settlement) A/c (Profit)
By Bank A/c
(Settlement) 75,000 10,000 -
21,00,000 14,00,000 7,85,000 21,00,000 14,00,000 7,85,000
Journal Entries
` `
1. Business Purchase A/c Dr. 42,00,000
To M/s 3R Enterprises 42,00,000
(Consideration payable for business purchased)
2. Land and Buildings A/c Dr. 16,40,000
Machinery A/c Dr. 9,90,000
Furniture A/c Dr. 6,10,000
Stock A/c Dr. 8,40,000
Debtors A/c Dr. 6,00,000
Bank A/c Dr. 1,90,000
To Creditors A/c 6,00,000
To Provision for doubtful debts A/c 30,000
To Business Purchase A/c 42,00,000
To Capital Reserve A/c 40,000
(Assets and liabilities taken over for ` 42,00,000;
balance credited to capital reserve)

3. Capital reserve A/c Dr. 23,000

To Bank A/c 23,000
(Expenses for take over debited to capital reserve)
4. M/s 3R Enterprises A/c Dr. 42,00,000
To Equity share capital A/c 42,00,000
(Allotment of fully paid equity shares to discharge
consideration for business)
5. Preliminary expenses A/c∗ Dr. 57,000
To Bank A/c 57,000
(Expenses incurred to get the company
incorporated)
∗
• As per para 56 of AS 26, preliminary expense is charged to Profit and Loss account in the year it
is incurred.

4
Company Accounts
UNIT 1: ESOPS AND BUY BACK OF SHARES

BASIC CONCEPTS
• Buy back of shares can be made out of:
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of any shares or other specified securities.
• No company shall purchase its own shares or other specified securities unless—
• the buy-back is or less than twenty-five per cent of the total paid-up capital and free
reserves of the company:
• the buy-back of equity shares in any financial year shall not exceed twenty-five per cent
of its total paid-up equity capital in that financial year.
• the ratio of the debt owed by the company is not more than twice the capital and its
free reserves after such buy-back:
Explanation.—For the purposes of this clause, the expression “debt” includes all
amounts of unsecured and secured debts;
¾ ESOP is an option given to whole-time directors, officers or employees of a company
to purchase or subscribe the securities offered by the company at a future date, at a
predetermined price.
¾ There are two methods of accounting for Employee Share Based Payments viz, the
intrinsic value method or fair value method.
ESOP
Question 1
What is employee stock option plan? Explain the importance of such plans in the modern time.
Answer
Employee Stock Option Plan: It is a plan under which the enterprise grants employee stock
options. Employee stock option is a contract that gives the employees of the enterprise the

right, but not the obligation, for a specified period of time to purchase or subscribe the shares
of the company at a fixed or determinable price.
Employee stock option plans encourage employees to have higher participation in the
company. The importance of these plans is as follows:
1. Stock options provide an opportunity to employees to contribute in the growth of the
company.
2. Stock option creates long term wealth in the hands of the employees.
3. They are important means to attract, retain and motivate the best available talent for the
company.
4. It creates a common sense of ownership between the company and its employees.
Question 2
X Co. Ltd. has its share capital divided into equity shares of ` 10 each. On 1.4.2012 it granted
20,000 employees’ stock option at ` 50 per share, when the market price was ` 120 per
share. The options were to be exercised between 15th March, 2013 and
31st March, 2013. The employees exercised their options for 16,000 shares only and the
remaining options lapsed. The company closes its books on 31st March every year. Show
Journal entries (with narration) as would appear in the books of the company up to 31st March,
2013.
Answer
In the books of X Co. Ltd.
Journal Entries
` `
15.03.2013 Bank A/c Dr. 8,00,000
to 31.3.13 Employee compensation expense A/c Dr. 11,20,000
To Securities premium A/c 17,60,000
(Being shares issued to the employees
against the options vested to them in
pursuance of Employee Stock Option Plan)
31.3.13 Profit and Loss A/c Dr. 11,20,000
To Employee compensation expenses 11,20,000
A/c
(Being transfer of employee compensation
transfer to Profit and Loss Account)

Company Accounts 4.3
Question 3
S Ltd. grants 1,000 options to its employees on 1.4.2010 at ` 60. The vesting period is two
and a half years. The maximum exercise period is one year. Market price on that date is
` 90. All the options were exercised on 31.7.2013. Journalize, if the face value of equity
share is ` 10 per share.
Answer
Books of S Ltd.
Journal Entries
Date Particulars Debit Credit
` `
31.3.11 Employees Compensation Expense Account Dr. 12,000
To Employees Stock Option Outstanding Account 12,000
(Being compensation expense recognized in respect of
1,000 options granted to employees at discount of ` 30
each, amortized on straight line basis over 2½ years)
Profit and Loss Account Dr. 12,000
To Employees Compensation Expense Account 12,000
(Being employees compensation expense of the year
transferred to P&L A/c)
(Being compensation expense recognized in respect of
1,000 options granted to employees at discount of ` 30
each, amortized on straight line basis over 2½ years)
(Being balance of compensation expense amortized
` 30,000 less ` 24,000)
31.7.13 Bank Account (` 60 × 1,000) Dr. 60,000

Employees Stock Option Outstanding Account (` 30×1,000) Dr. 30,000

To Equity Share Capital Account 10,000
To Securities Premium Account 80,000
(Being exercise of 1,000 options at an exercise price of
` 60)
Working Notes:
1. Total employees compensation expense = 1,000 x (` 90 – ` 60) = ` 30,000
2. Employees compensation expense has been written off during 2½ years on straight
line basis as under:
I year = ` 12,000 (for full year)
II year = ` 12,000 (for full year)
III year = ` 6,000 (for half year)
Question 4
A company has its share capital divided into shares of ` 10 each. On 1-4-2012, it granted
5,000 employees stock option at ` 50, when the market price was ` 140. The options were to
be exercised between 1-3-2013 to 31-03-2013. The employees exercised their options for
4,800 shares only; remaining options lapsed. Pass the necessary journal entries for the year
ended 31-3-2013, with regard to employees’ stock option.
Answer
In the books of Company
Journal Entries
Date Particulars Dr. ` Cr. `
1-3-13 to Bank A/c Dr. 2,40,000
31-3-13 Employees compensation expenses A/c Dr. 4,32,000
To Equity Share Capital A/c 48,000
To Securities Premium A/c 6,24,000
(Being allotment to employees 4,800 shares of
` 10 each at a premium of ` 130 at an exercise price
of ` 50 each)
31-3-13 Profit and Loss account Dr. 4,32,000
To Employees compensation expenses A/c 4,32,000
(Being transfer of employees compensation expenses)
Question 5
On 1st April, 2012, a company offered 100 shares to each of its 500 employees at ` 50 per
share. The employees are given a year to accept the offer. The shares issued under the plan

shall be subject to lock-in on transfer for three years from the grant date. The market price of
shares of the company on the grant date is ` 60 per share. Due to post-vesting restrictions on
transfer, the fair value of shares issued under the plan is estimated at ` 56 per share.
On 31st March, 2013, 400 employees accepted the offer and paid ` 50 per share purchased.
Nominal value of each share is ` 10.
Record the issue of share in the books of the company under the aforesaid plan.
Answer
Fair value of an option = ` 56 – ` 50 = ` 6
Number of shares issued = 400 employees x 100 shares/employee = 40,000 shares
Fair value of ESPP = 40,000 shares x ` 6 = ` 2,40,000
Vesting period = 1 month
Expenses recognized in 2010-11 = ` 2,40,000
Date Particulars ` `
31.03.2013 Bank (40,000 shares x ` 50) Dr. 20,00,000
Employees compensation expense A/c Dr. 2,40,000
To Share Capital (40,000 shares x `10) 4,00,000
To Securities Premium (40,000 shares x ` 46) 18,40,000
(Being option accepted by 400 employees &
payment made @ ` 56 share)
Profit & Loss A/c Dr. 2,40,000
To Employees compensation expense A/c 2,40,000
(Being Employees compensation expense
transferred to Profit & Loss A/c)
BUY BACK
Question 6
What are the conditions to be fulfilled by a Joint Stock Company to buy-back its equity shares.
Explain in brief.
Answer
As per section 77A of the Companies Act, 1956 a joint stock company has to fulfill the following
conditions to buy-back its own equity shares:
(a) The buy-back is authorised by its articles.

(b) A special resolution∗ has been passed in general meeting of the company authorising the
buy-back.
(c) The buy-back does not exceed 25% of the total paid up capital and free reserves of the
company. Provided the buy–back must not exceed 25% of its total paid up equity capital
in that financial year.
(d) The ratio of the debt owed by the company is not more than twice the capital and its free
reserves after such buy-back.
(e) All the shares for buy-back are fully paid up.
(f) The buy-back is made out of the free reserves (which include securities premium) or out
of the proceeds of a fresh issue of any shares or other specified securities.
(g) The buy-back is completed within 12 months of the passing of the special resolution or a
resolution passed by the Board.
(h) The buy-back of the shares listed on any recognised stock exchange is in accordance
with the regulations made by the SEBI in this behalf.
(i) Before making such buy-back, a listed company has to file with the Registrar and the
SEBI a declaration of solvency in the prescribed form.
Question 7
KG Limited furnishes the following summarized Balance Sheet as at 31st March, 2012.
Liabilities (` in lakhs) Assets (` in lakhs)
Equity share capital 1,200 Machinery 1,800
(fully paid up shares of ` 10 each) Furniture 226
Securities premium 175 Investment 74
General reserve 265 Stock 600
Capital redemption reserve 200 Debtors 260
Profit & loss A/c 170 Cash at bank 740
12% Debentures 750
Sundry creditors 745
Other current liabilities 195
3,700 3,700
On 1st April, 2012, the company announced the buy back of 25% of its equity shares @ ` 15
per share. For this purpose, it sold all of its investments for ` 75 lakhs.
∗
If the buy-back by the company is or less than 10% of the total paid-up equity capital and free reserves of the company
then it can be authorised by the Board by means of resolution passed at its meeting and no special resolution will be
required.

On 5th April, 2012, the company achieved the target of buy back. On 30th April, 2012 the
company issued one fully paid up equity share of ` 10 by way of bonus for every four equity
shares held by the equity shareholders.
You are required to:
(1) Pass necessary journal entries for the above transactions.
(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares
Answer
In the books of KG Limited
Journal Entries
Date Particulars Dr. Cr.
2012 (` in lakhs)
April 1 Bank A/c Dr. 75
To Investment A/c 74
To Profit on sale of investment 1
(Being investment sold on profit)
April 5 Equity shares buy back A/c Dr. 450
To Bank A/c 450
(Being the payment made on account of buy back)
Equity share capital A/c Dr. 300
Premium payable on buy back A/c Dr. 150
To Equity shares buy back A/c 450
(Being the amount due to equity shareholders on buy back)
April 5 General reserve A/c Dr. 265
Profit and Loss A/c Dr. 35
To Capital redemption reserve A/c 300
(Being amount equal to nominal value of buy back shares from free
reserves transferred to capital redemption reserve account as per
the law)
April 30 Capital redemption reserve A/c Dr. 225
To Bonus shares A/c (W.N.1) 225
(Being the utilization of capital redemption reserve to issue bonus
shares)

Bonus shares A/c Dr. 225

To Equity share capital A/c 225
(Being issue of one bonus equity share for every four equity
shares held)
Securities premium A/c Dr. 150
To Premium payable on buy back A/c 150
(Being premium payable on buy back adjusted from securities
premium account)
Balance Sheet (After buy back and issue of bonus shares)
Particulars Note No Amount (` in Lakhs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,125
(b) Reserves and Surplus 2 436
(2) Non-Current Liabilities
(a) Long-term borrowings - 12% Debentures 750
(3) Current Liabilities
(a) Trade payables - Sundry creditors 745
(b) Other current liabilities 195
Total 3,251
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 3 2,026
(2) Current assets
(a) Current investments
(b) Stock 600
(c) Trade receivables 260
(d) Cash and cash equivalents (W.N. 2) 365
Total 3,251
Notes to Accounts
`
1. Share Capital
Equity share capital (Fully paid up shares of `10 each) 1125

2. Reserves and Surplus

General Reserve 265
Less: Transfer to CRR (265) -
Capital Redemption Reserve 200
Add: Transfer due to buy-back of shares from P/L 35
Transfer due to buy-back of shares from Gen. res. 265
Less: Utilisation for issue of bonus shares (225) 275
Securities premium 175
Less: Adjustment for premium paid on buy back (150) 25
Profit & Loss A/c 170
Add: Profit on sale of investment 1
Less: Transfer to CRR (35) 136 436
3. Tangible assets
Machinery 1800
Furniture 226 2026
Working Notes:
1. Amount of bonus shares = 25% of (1,200 – 300) lakhs = ` 225 lakhs
2. Cash at bank after issue of bonus shares
` in lakhs
Cash balance as on April, 2012
1st 740
Add: Sale of investments 75
815
Less: Payment for buy back of shares (450)
365
Note: In the given solution, it is possible to adjust transfer to capital redemption reserve
account or capitalization of bonus shares from any other free reserves also.
Question 8
Following is the Balance Sheet of M/s Competent Limited as on 31st March, 2012:
Assets ` Assets `
Equity Shares of ` 10 Fixed Assets 46,50,000
Each fully paid 12,50,000 Current Assets 30,00,000
Revenue reserve 15,00,000
Securities Premium 2,50,000

Profit & Loss Account 1,25,000

Secured Loans:
12% Debentures 18,75,000
Unsecured Loans 10,00,000
Current Liabilities 16,50,000
Total 76,50,000 Total 76,50,000
The company wants to buy back 25,000 equity shares of ` 10 each, on 1st April, 2012 at ` 20
per share. Buy back of shares is duly authorized by its articles and necessary resolution
passed by the company towards this. The payment for buy back of shares will be made by the
company out of sufficient bank balance available as part of Current Assets.
Comment with your calculations, whether buy back of shares by company is within the
provisions of the companies Act, 1956. If yes, pass necessary journal entries towards buy
back of shares and prepare the Balance Sheet after buy back of shares.
Answer
Determination of Buy back of maximum no. of shares as per the Companies Act, 1956
1. Shares Outstanding Test
Particulars (Shares)
Number of shares outstanding 1,25,000
25% of the shares outstanding 31,250
2. Resources Test
Particulars
Paid up capital ( `) 12,50,000
Free reserves ( `) (15,00,000 + 2,50,000 + 1,25,000) 18,75,000
Shareholders’ funds ( `) 31,25,000
25% of Shareholders fund ( `) 7,81,250
Buy back price per share ` 20
Number of shares that can be bought back (shares) 39,062
3. Debt Equity Ratio Test
Particulars `
(a) Loan funds ( `) (18,75,000+10,00,000+16,50,000) 45,25,000
(b) Minimum equity to be maintained after buy back in the ratio of 22,62,500
2:1 ( `) (a/2)

(c) Present equity/shareholders fund (`) 31,25,000

(d) Future equity/shareholders fund (`) (see W.N.) 28,37,500∗
(31,25,000 – 2,87,500)
(e) Maximum permitted buy back of Equity ( `) [(d) – (b)] 5,75,000
(f) Maximum number of shares that can be bought back @ 28,750
` 20 per share shares
Summary statement determining the maximum number of shares to be bought back
Particulars Number of
shares
Shares Outstanding Test 31,250
Resources Test 39,062
Debt Equity Ratio Test 28,750
Maximum number of shares that can be bought back [least of the above] 28,750
Company qualifies all tests for buy-back of shares and came to the conclusion that it can buy
maximum 28,750 shares on 1st April, 2012, as per the provisions of Section 77A of the
Companies Act, 1956.
However, company wants to buy-back only 25,000 equity shares @ ` 20. Therefore, buy-
back of 25,000 shares, as desired by the company is within the provisions of the Companies
Act, 1956.
Journal Entries for buy-back of shares
Debit(`) Credit (`)
(a) Equity shares buy-back account Dr. 5,00,000
To Bank account 5,00,000
(Being buy back of 25,000 equity shares of ` 10 each @ ` 20 per
share)
(b) Equity share capital account Dr. 2,50,000
Securities premium account Dr. 2,50,000
To Equity shares buy-back account 5,00,000
(Being cancellation of shares bought back)
(c) Revenue reserve account Dr. 2,50,000
To Capital redemption reserve account 2,50,000
(Being transfer of free reserves to capital redemption reserve to the
extent of nominal value of capital bought back through free
reserves)
∗
As per Section 77A of the Companies Act 1956, the ratio of debt owed by the company should not be more than twice
the capital and its free reserves after such buy-back. Also as per the section, on buy-back of shares out of free reserves
a sum equal to the nominal value of the share bought back shall be transferred to Capital Redemption Reserve (CRR).
As per section 80, utilization of CRR is restricted to issuance of fully paid-up bonus shares only. It means CRR is not
available for distribution as dividend. Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e.
share capital and free reserves, amount transferred to CRR on buy-back has to be excluded from the present equity.

Balance Sheet of M/s. Competent Ltd.

as on 31st March, 2012
Note
Particulars Amount
No
`
EQUITY AND LIABILITIES
1 Shareholders' funds
(a) Share capital 1 10,00,000
(b) Reserves and Surplus 2 16,25,000
2 Non-current liabilities
(a) Long-term borrowings 3 28,75,000
3 Current liabilities 16,50,000
Total 71,50,000
ASSETS
1 Non-current assets
(a) Fixed assets 46,50,000
2 Current assets(30,00,000-5,00,000) 25,00,000
Total 71,50,000
Notes to accounts
` `
1. Share Capital
Equity share capital
1,00,000 Equity shares of `10 each 10,00,000
Profit and Loss A/c 1,25,000
Revenue reserves 15,00,000
Less: Transfer to CRR (2,50,000) 12,50,000
Securities premium 2,50,000
Less: Utilisation for share buy-back (2,50,000) -
Capital Redemption Reserves 2,50,000 16,25,000
3. Long-term borrowings
Secured
Unsecured loans 10,00,000 28,75,000

Working Note
Amount transferred to CRR and maximum equity to be bought back will be calculated by
simultaneous equation method.
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity
is ‘y’.
Then
(31,25,000 – x) – 22,62,500 = y (1)
⎛ y ⎞
⎜ × 10 ⎟ = x Or 2x = y (2)
⎝ 20 ⎠
by solving the above equation we get
, x = ` 2,87,500
y = ` 5,75,000
Question 9
M Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2012 :
` in ‘000 ` in ‘000
Equity & Liabilities
Share Capital:
Authorised Capital: 5,000
Issued and Subscribed Capital :
3,00,000 Equity shares of ` 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000
(issued two months back for the purpose of buy back) 5,000
Reserve and Surplus:
Capital reserve 10
Revenue reserve 4,000
Securities premium 500
Profit and Loss account 1,800 6,310
Non-current liabilities - 10% Debentures 400
Current liabilities and provisions 40
11,750

Assets
Fixed Assets: Cost 3,000
Less: Provision for depreciation 250 2,750
Non-current investments at cost 5,000
Current assets, loans and advances (including
cash and bank balances) 4,000
11,750
(1) The company passed a resolution to buy back 20% of its equity capital @ ` 15 per share.
For this purpose, it sold its investments of ` 30 lakhs for ` 25 lakhs.
(2) The company redeemed the preference shares at a premium of 10% on 1st April, 2012.
(3) Included in its investments were 'Investments in own debentures' costing ` 3 lakhs (face
value ` 3.30 lakhs). These debentures were cancelled on 1st April, 2012.
You are required to pass necessary Journal entries and prepare the Balance Sheet on
01.04.2012.
Answer
Journal Entries in the books of M Ltd.
Dr. Cr.
` in ‘000 ` in
‘000
1 Bank A/c Dr. 2,500
Profit and Loss A/c Dr. 500
To Investment A/c 3,000
(Being investment sold for the purpose of buy-back)
2 Preference share capital A/c Dr. 2,000
Premium on redemption of Preference Shares A/c Dr. 200
To Preference shareholders A/c 2,200
(Being redemption of preference share capital at premium
of 10%)
3 Preference shareholders A/c Dr. 2,200
To Bank A/c 2,200
(Being payment made to preference shareholders)
4 Revenue Reserve A/c Dr. 2,000

To Capital redemption reserve A/c (Refer Note) 2,000

(Being creation of capital redemption reserve to the extent
of nominal value of preference shares redeemed)
5 Equity share capital A/c Dr. 600
Securities Premium A/c (Premium payable on buy-back) Dr. 300
To Equity shares buy-back A/c 900
(Being the amount due on buy-back )
6 Equity shares buy-back A/c Dr. 900
To Bank A/c 900
(Being payment made for buy-back)
7 10% Debentures A/c Dr. 330
To Own debentures A/c 300
To Capital reserve A/c (Profit on cancellation) 30
(Being own debentures cancelled at profit)
8. Securities Premium A/c Dr. 200
To Premium on redemption of preference shares A/c 200
(Being premium on redemption of preference shares
adjusted through securities premium)
Balance Sheet of the M Ltd. as on 1st April, 2012
Notes No. ` in ‘000
Equity and Liabilities
1 Shareholders funds
Share capital 1 2,400
Reserves and Surplus 2 5,340
Long term borrowings 3 70
3 Current liabilities 40
Total 7,850
Assets
(a) Fixed assets 2,750
(b) Non-current investments 4 1,700
2 Current assets 5 3,400
Total 7,850

Notes to Accounts
` in ‘000 ` in
‘000
1. Share Capital
Authorised share capital: 5,000
Issued, subscribed and fully paid up share capital:
2,40,000 Equity shares of ` 10 each, fully paid up 2,400
(60,000 equity shares had been bought back and
cancelled during the year)
Capital Reserves 10
Add: Profit on cancellation of debentures 30 40
Securities Premium 500
Less: Premium on redemption of preference (200)
shares
Premium on buy-back of equity shares (300) -
Revenue Reserve 4,000
Less: Transfer to Capital Redemption Reserve (2,000) 2,000
Capital Redemption reserve 2,000
Surplus (Profit & Loss Account) 1,800
Less: Loss on sale of investment (500) 1,300 5,340
3. Long term borrowings
10% Debentures (400 - 330) 70
4. Non-current investments
Balance as on 31.03.2012 5,000
Less: Investment sold (3,000)
Own debentures cancelled (300) 1,700
5 Current assets
Balance as on 31.03.2012 4,000
Add: Cash received on sale of investment 2,500
Less: Payment made to equity shareholders for buy
back of shares (900)
Payment made to preference shareholders (2,200) 3,400
Note: In the given solution, it is assumed that buy-back of shares has been done out of the
proceeds of issue of preference shares, therefore, no amount is transferred to capital redemption
reserve for buy-back. However, if it is assumed that buy-back is from sale of investments and not
from the proceeds of issue of preference shares, then, amount of revenue reserves transferred to
capital redemption reserve will be ` 2,600 instead of ` 2,000.

UNIT 2 : UNDERWRITING OF SHARES AND DEBENTURES

¾ Underwriting contracts are basically of two types:
• Wholly underwritten if one person is responsible to subscribe all the issue.
• Partially underwritten, when some part of the issue is considered to be underwritten
by company.
¾ Firm underwriting signifies a definite commitment to take up a specified number of shares
irrespective of the number of shares subscribed for by the public.
¾ Underwriting Commission
(1) No underwriting commission is payable on the shares taken up by the promoters,
employees, directors, business associates, etc.
(2) Commission is payable on the whole issue underwritten.
(3) In case of shares, the commission paid or agreed to be paid should not exceed 5% of
the price at which the shares are issued.
(4) In case of debentures, the commission paid or agreed to be paid should not exceed
2.5% of the price at which the shares are issued.
(5) Accounting Entries
1. For Commission due
Commission Account Dr.
To Underwriter Account
2. For payment of Commission
Underwriter Account Dr.
To Bank Account [Cheque]
To Share Capital Account [Shares]
To Debentures Account [Debentures]
¾ When the issue is Fully Underwritten [without Firm Underwriting]
Method 1
Under this method, all unmarked applications are divided between the underwriters in the
ratio of gross liability of individual underwriter. For determining the liability of individual
underwriter, the following steps are followed:
¾ Underwriting contracts are basically of two types:

• Partially underwritten, when some part of the issue is considered to be underwritten

by company.
¾ Firm underwriting signifies a definite commitment to take up a specified number of shares
irrespective of the number of shares subscribed for by the public.
¾ Underwriting Commission
(1) No underwriting commission is payable on the shares taken up by the promoters,
employees, directors, business associates, etc.
(2) Commission is payable on the whole issue underwritten.
(3) In case of shares, the commission paid or agreed to be paid should not exceed 5% of
the price at which the shares are issued.
(4) In case of debentures, the commission paid or agreed to be paid should not exceed
2.5% of the price at which the shares are issued.
(5) Accounting Entries
2. For Commission due
Commission Account Dr.
To Underwriter Account
2. For payment of Commission
Underwriter Account Dr.
To Bank Account [Cheque]
To Share Capital Account [Shares]
To Debentures Account [Debentures]
¾ When the issue is Fully Underwritten [without Firm Underwriting]
Method 1
ratio of gross liability of individual underwriter. For determining the liability of individual
underwriter, the following steps are followed:
Step 1 Compute gross liability (if it has not been given) of individual underwriter on the
basis of agreed ratio.
Step 2 Subtract marked applications from gross liability of respective underwriters.
Step 3 Determine the number of unmarked applications. (Unmarked application = Total
applications received less marked applications). Divide unmarked applications
between different underwriters in the ratio of gross liability. If the resultant
figures are all positive or zero, then stop here. Now these figures represents the
net liability of each underwriter.

If some of the resultant figures are negative, then continue to Step 4.

Step 4 Add all negative figures and divide the resultant between the underwriters having
positive figures in the ratio of gross liability.
Repeat Step 4 unless all figures are positive. Now these figures represent the net liability
of each underwriter.
Method 2
ratio of gross liability less marked applications. For determining the liability of
individual underwriter, the following steps are followed:
Step 1 Compute gross liability in the usual manner (if it has not been given).
Step 2 Subtract marked applications from gross liability of respective underwriters, If
some of the resultant figures are negative, then add all negative figures and
divide their sum in the ratio of gross liability.
Step 3 Determine the number of unmarked applications. Divide unmarked applications
between different underwriters in the ratio of gross liability less marked
applications, i.e., the resultant figures of Step 2. If the resultant figures of Step
3 are all positive or zero, then stop here. Now these figures represent the net
liability of each underwriter.
Step 4 Add all negative figures and divide their sum between the underwriters having
positive figures in the same ratio of Step 3. Repeat Step 4 unless all figures
are non-negative. Now these figures represents the net liability of each
underwriter.
¾ When the Issue is Fully Underwritten [with Firm Underwriting]
There are two alternative ways:
(i) The benefit of firm underwriting is not given to individual underwriter, or
(ii) The benefit of firm underwriting is given to individual underwriter.
(i) The benefit of firm underwriting is not given to individual Underwriter:
For determining the liability of individual underwriter, the following steps are
followed:
Step 2 Subtract marked applications (excluding firm underwriting) from gross
liability of respective underwriters. If some of the resultant figures are
found negative, then add all negative figures and divide the resultant in
the ratio of gross liability.

Step 3 Determine the number of unmarked applications as follows:

Total subscriptions (excluding firm underwriting) ******
Less: Marked applications (excluding firm underwriting) ******
Unmarked applications by public ******
Add: Applications under firm underwriting ******
Total unmarked applications ******
Divide the above calculated unmarked applications in the ratio of gross liability.
If the resultant figures of Step 3 are all positive or zero, then it represents net liability
as per agreement. After this step, go to Step 5 (skip Step 4).
Step 4 Add all the negative figures and divide the resultant between the
underwriters having positive figures in the ratio of gross liability. Repeat
Step 4 unless all figures are non-negative. Now these figures represent
the net liability as per agreement. After this step, to Step 5.
Step 5 Add firm underwriting with the net liability as per agreement. The resultant
figures represent total liability.
Here,
(1) Firm underwriting is treated as unmarked applications and divided
in the ratio of gross liability.
(2) The liability of underwriter consists of:
(a) Net liability as per agreement; and
(b) firm underwriting.
(ii) The benefit of firm underwriting is given to individual underwriter

For determining the liability of individual underwriter, the following steps are followed:
Step 2 Subtract marked applications (excluding firm underwriting) from
gross liability of respective underwriters. If some of the resultant
figures are found negative, then add all negative figures and divide
their sum in the ratio of gross liability.
Step 3 Determine the number of unmarked applications as follows:
Total subscriptions (excluding firm underwriting) ******
Less: Marked applications (excluding firm underwriting) ******
Unmarked applications by public ******

Divide the above calculated unmarked application in the ratio of gross liability.
Step 4 Subtract “firm underwriting” of individual underwriter from the
respective figures of Step 3.
If the resultant figures of Step 4 are all positive or zero, then that
represents net liability as per agreement. After this step, go to Step
6 (skip Step 5).
If some of the resultant figures are negative, then continue to
Step 5.
Step 5 Add all negative figures and divide it between the underwriters
having positive figures in the ratio of gross liability. Repeat Step 5
unless all figures are non-negative. Now these figures represent the
net liability as per agreement. After this step, go to Step 6.
Step 6 Add firm underwriting with the net liability as per agreement. The
resultant figures represent total liability.
Here,
(1) Firm underwriting is not treated as unmarked applications.
(2) Firm underwriting is credited to individual underwriters
separately.
(3) The liability of Underwriter consists of:
(a) Net liability as per agreement; and
(b) Firm underwriting.
Question 1
“Firm” underwriting. Also give the accounting entries relating to firm underwriting in the books of:
(i) the company, (ii) the underwriter
Answer
‘Firm’ underwriting signifies a definite commitment to take up a specified number of shares
irrespective of the number of shares subscribed for by the public. In such a case, unless it has
been otherwise agreed, the underwriter’s liability is determined without taking into account the
number of shares taken up ‘firm’ by him, i.e. the underwriter is obliged to take up :
1. the number of shares he has applied for ‘firm’; and
2. the number of shares he is obliged to take up on the basis of the underwriting agreement.
For example, A underwrites 60% of an issue of 10,000 shares of ` 10 each of XY Co. Ltd. and also
applies for 1,000 shares, ‘firm’. The underwriting commission is agreed to at the rate of 2.5 percent.
In case there are marked applications for 4,800 shares, he will have to take up 2,200 shares, i.e.

1,000 shares for which he applied ‘firm’ and 1,200 shares to meet his liability of underwriting
contract. If, on the other hand, the underwriting contract has provided that an abatement would be
allowed in respect of shares taken up ‘firm’, the liability of A in the above-mentioned case would
only be for 1,200 shares in total. The accounting entries in relation to firm underwriting of 1,000
shares in the above example are given below :
Entries in the books of XY Co. Ltd. (Company)
Dr. Cr.
` `
1. A’s Account Dr. 10,000
To Equity Share Capital Account 10,000
(Being allotment of underwritten equity shares in pursuance
of firm underwriting contract, vide Board’s resolution)
2. Underwriting Commission on Issue of Shares Account Dr. 250
To A’s Account 250
(Being underwriting commission due to the underwriter under
the firm underwriting contract)
3. Bank Account Dr. 9,750
To A’s Account 9,750
(Being money received in full settlement of account from
underwriter)
Entries in the books of A (Underwriter)
Dr. Cr.
` `
1. Underwriting Account Dr. 10,000
To XY Co. Ltd. Account 10,000
(Being the liability to take up necessary number of shares of the
company in pursuance of firm underwriting contract recorded)
2. XY Co. Ltd. Account Dr. 250
To Underwriting Account 250
(Being underwriting commission income credited to
underwriting account)
3. XY Co. Ltd. Account Dr. 9,750
To Bank Account 9,750
(Being balance money paid to the company in full settlement of
account

Question 2
Write a short note on Firm underwriting and Partial underwriting along with firm underwriting.
Answer
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.
Question 3
A joint stock company resolved to issue 10 lakh equity shares of ` 10 each at a premium of ` 1 per
share. One lakh of these shares were taken up by the directors of the company, their relatives,
associates and friends, the entire amount being received forthwith. The remaining shares were
offered to the public, the entire amount being asked for with applications.
The issue was underwritten by X, Y and Z for a commission @ 2% of the issue price, 65% of the
issue was underwritten by X, while Y’s and Z’s shares were 25% and 10% respectively. Their firm
underwriting was as follows :
X 30,000 shares, Y 20,000 shares and Z 10,000 shares. The underwriters were to submit
unmarked applications for shares underwritten firm with full application money along with members
of the general public.
Marked applications were as follows:
X 1,19,500 shares, Y 57,500 shares and Z 10,500 shares.
Unmarked applications totalled 7,00,000 shares.
Accounts with the underwriters were promptly settled.
(i) Prepare a statements calculating underwriters’ liability for shares other than shares
underwritten firm.
(ii) Pass journal entries for all the transactions including cash transactions.
Answer
(i) Statement showing underwriters’ liability for shares other
than shares underwritten firm
X Y Z Total
Gross liability 5,85,000 2,25,000 90,000 9,00,000
(9,00,000 shares in the ratio of 65 : 25 : 10)

Less: Marked applications (1,19,500) (57,500) (10,500) (1,87,500)

4,65,500 1,67,500 79,500 7,12,500
Less : Allocation of unmarked applications
(including firm underwriting i.e. 7,00,000) in the (4,55,000) (1,75,000) (70,000) (7,00,000)
ratio 65 : 25 : 10
10,500 (7,500) 9,500 12,500
Surplus of Y allocated to X and Z in the ratio
65 : 10 (6,500) 7,500 (1,000) –
4,000 – 8,500 12,500
` ` `
Liability amount @ ` 11 44,000 – 93,500
Underwriting commission payable
(Gross liability × ` 11 × 2%) (1,28,700) (49,500) (19,800)
Net Amount payable (84,700) (49,500) -
Net Amount receivable - - 73,700
(ii) Journal Entries

Dr. Cr.
` `
Bank A/c Dr. 11,00,000
To Equity Shares Application A/c 11,00,000
(Being application money received on 1 lakh equity
shares @ ` 11 per share)
Bank A/c Dr. 97,62,500
To Equity Share Application A/c 97,62,500
(Application money received on 8,87,500 equity shares
@ ` 11 per share from general public and underwriters
for shares underwritten firm)
Equity Share Application A/c Dr. 1,08,62,500
X’ s A/c Dr. 44,000
Z’ s A/c Dr. 93,500
To Equity Share Capital A/c 1,00,00,000
To Securities Premium A/c 10,00,000
(Allotment of 10 lakh equity shares of ` 10 each at a
premium of ` 1 per share)
Underwriting commission A/c Dr. 1,98,000

To X’s A/c 1,28,700

To Y’s A/c 49,500
To Z’s A/c 19,800
(Amount of underwriting commission payable to X,
Y and Z @ 2% on the amount of shares underwritten)
Bank A/c Dr. 73,700
To Z’s A/c 73,700
(Amount received from Z in final settlement)
X’s A/c Dr. 84,700
Y’s A/c Dr. 49,500
To Bank A/c 1,34,200
(Amount paid to X and Y in final settlement)
Question 4
Scorpio Ltd. came out with an issue of 45,00,000 equity shares of ` 10 each at a premium of
` 2 per share. The promoters took 20% of the issue and the balance was offered to the
public. The issue was equally underwritten by A & Co; B & Co. and C & Co.
Each underwriter took firm underwriting of 1,00,000 shares each. Subscriptions for 31,00,000
equity shares were received with marked forms for the underwriters as given below:
Shares
A & Co. 7,25,000
B & Co. 8,40,000
C & Co. 13,10,000
Total 28,75,000
The underwriters are eligible for a commission of 5% on face value of shares. The entire
amount towards shares subscription has to be paid alongwith application. You are required to:
(a) Compute the underwriters’ liabilities (number of shares)
(b) Compute the amounts payable or due to underwriters; and
(c) Pass necessary journal entries in the books of Scorpio Ltd. relating to underwriting.
Answer
(a) Computation of liabilities of underwriters (No. of shares):
A & Co. B & Co. C & Co.
Gross liability 12,00,000 12,00,000 12,00,000

Less: Firm underwriting (1,00,000) (1,00,000) (1,00,000)

11,00,000 11,00,000 11,00,000
Less: Marked applications (7,25,000) (8,40,000) (13,10,000)
3,75,000 2,60,000 (2,10,000)
Less: Unmarked applications distributed to
A & Co. and B & Co. in equal ratio (1,12,500) (1,12,500) Nil
2,62,500 1,47,500 (2,10,000)
Less: Surplus of C & Co. distributed to
A & Co. and B & Co. in equal ratio (1,05,000) (1,05,000) 2,10,000
Net liability (excluding firm underwriting) 1,57,500 42,500 Nil
Add: Firm underwriting 1,00,000 1,00,000 1,00,000
Total liability (No. of shares) 2,57,500 1,42,500 1,00,000
(b) Computation of amounts payable by underwriters:

` ` `
Liability towards shares to be subscribed
@ 12 per share 30,90,000 17,10,000 12,00,000
Less: Commission
(5% on 12 lakhs shares @ 10 each) (6,00,000) (6,00,000) (6,00,000)
Net amount to be paid by underwriters 24,90,000 11,10,000 6,00,000
(c) In the Books of Scorpio Ltd.
Journal Entries
Particulars Dr. Cr.
` `
Underwriting commission A/c Dr. 18,00,000
To A & Co. A/c 6,00,000
To B & Co. A/c 6,00,000
To C & Co. A/c 6,00,000
(Being underwriting commission on the shares
underwritten)
A & Co. A/c Dr. 30,90,000

B & Co. A/c Dr. 17,10,000
C & Co. A/c Dr. 12,00,000

To Share premium A/c 10,00,000

(Being shares including firm underwritten shares allotted to
underwriters)
Bank A/c Dr. 42,00,000
To A & Co. A/c 24,90,000
To B & Co. A/c 11,10,000
To C & Co. A/c 6,00,000
(Being the amount received towards shares allotted to
underwriters less underwriting commission due to them)
Question 5
Gemini Ltd. came up with public issue of 30,00,000 Equity shares of ` 10 each at ` 15 per
share. A, B and C took underwriting of the issue in 3 : 2 : 1 ratio.
Applications were received for 27,00,000 shares.
The marked applications were received as under:
A 8,00,000 shares
B 7,00,000 shares
C 6,00,000 shares
Commission payable to underwriters is at 5% on the face value of shares.
(i) Compute the liability of each underwriter as regards the number of shares to be taken up.
(ii) Pass journal entries in the books of Gemini Ltd. to record the transactions relating to
underwriters.
Answer
(i) Computation of liability of underwriters in respect of shares
(In shares)
A B C
Gross liability 15,00,000 10,00,000 5,00,000
Less:Unmarked applications (3,00,000) (2,00,000) (1,00,000)
12,00,000 8,00,000 4,00,000
Less:Marked applications (8,00,000) (7,00,000) (6,00,000)
4,00,000 1,00,000 (2,00,000)
Surplus of C distributed to A & B in 3:2 ratio (1,20,000) (80,000) 2,00,000
Net liability 2,80,000 20,000 Nil
(ii) Journal Entries in the books of Gemini Ltd.

` `
A’s Account Dr. 42,00,000

B’s Account Dr. 3,00,000

To Share Capital Account 30,00,000
To Securities Premium Account 15,00,000
(Being the shares to be taken up by the underwriters)
Underwriting Commission Account Dr. 15,00,000
To A’s Account 7,50,000
To B’s Account 5,00,000
To C’s Account 2,50,000
(Being the underwriting commission due to the
underwriters)
Bank Account Dr. 34,50,000
To A’s Account 34,50,000
(Being the amount received from underwriter A for the
shares taken up by him after adjustment of his
commission)
B’s Account Dr. 2,00,000
To Bank Account 2,00,000
(Being the amount paid to underwriter B after
adjustment of the shares taken by him against
underwriting commission due to him)
C’s Account Dr. 2,50,000
To Bank Account 2,50,000
(Being the underwriting commission paid to C)
Question 6
‘X’ Ltd., issued 1,00,000 equity shares of ` 10 each at par. The entire issue was underwritten
as follows:
A – 60,000 shares (Firm underwriting 8,000 shares)
B – 30,000 shares (Firm underwriting 10,000 shares)
C – 10,000 shares (Firm underwriting 2,000 shares)
The total applications including firm underwriting were for 80,000 shares.
The marked applications were as follows:
A- 20,000 shares; B- 14,000 shares; C- 6,000 shares.
The underwriting contract provides that credit for unmarked applications be given to the
underwriters in proportion to the shares underwritten. Determine the liability of each
underwriter.

Answer
Statement showing liability of underwriters∗
No. of shares
A B C Total
Gross Liability 60,000 30,000 10,000 1,00,000
Less: Firm underwriting (8,000) (10,000) (2,000) (20,000)
52,000 20,000 8,000 80,000
Less:Marked applications (20,000) (14,000) (6,000) (40,000)
32,000 6,000 2,000 40,000
Less:Unmarked applications (total application less firm
underwriting less marked applications) in gross
liability ratio (i.e. 80,000 – 20,000 –40,000) (12,000) (6,000) (2,000) (20,000)
Net Liability 20,000 - - 20,000
Add: Firm underwriting 8,000 10,000 2,000 20,000
Total liability of underwriters 28,000 10,000 2,000 40,000
Question 7
Delta Ltd. issued 25,00,000 equity shares of ` 10 each at par. 7,00,000 shares were issued to the
promoters and the balance offered to the public was underwritten by three underwriters P, Q & R in
the ratio of 2 : 3 : 4 with firm underwriting of 50,000, 60,000 and 70,000 shares each respectively.
Total subscription received 13,88,000 shares including marked application and excluding firm
underwriting. Marked applications were as follows:
P 3,00,000
Q 3,50,000
R 4,50,000
Unmarked and surplus applications to be distributed in gross liability ratio.
Ascertain the liability of each underwriter.
Answer
Calculation of liability of underwriters
(In shares)
P Q R Total
Gross liability 4,00,000 6,00,000 8,00,000 18,00,000
Less: Firm underwriting (50,000) (60,000) (70,000) (1,80,000)
3,50,000 5,40,000 7,30,000 16,20,000
Less: Marked applications
received (3,00,000) (3,50,000) (4,50,000) (11,00,000)
50,000 1,90,000 2,80,000 5,20,000
∗
The solution is given on the basis that ‘the benefit of firm underwriting is given to individual underwriters.’

Less: Unmarked applications

(In gross liability ratio 4:6:8)
(64,000) (96,000) (1,28,000) (2,88,000)
Balance (14,000) 94,000 1,52,000 2,32,000
Excess of P distributed to Q & R 14,000 (6,000) (8,000) -
in ratio (3:4)
Net liability (other than firm - 88,000 1,44,000 2,32,000
underwriting)
Add: Firm underwriting 50,000 60,000 70,000 1,80,000
Total liability of underwriters
including firm underwriting 50,000 1,48,000 2,14,000 4,12,000
Total liability in amount @
` 10 each ` 5,00,000 ` 14,80,000 ` 21,40,000 ` 41,20,000
Question 8
ABC Ltd. came up with public issue of 3,00,000 Equity Shares of ` 10 each at ` 15 per share.
P, Q and R took underwriting of the issue in ratio of 3 : 2: 1 with the provisions of firm
underwriting of 20,000, 14,000 and 10,000 shares respectively.
Applications were received for 2,40,000 shares excluding firm underwriting. The marked
applications from public were received as under:
P - 60,000
Q - 50,000
R - 60,000
Compute the liability of each underwriter as regards the number of shares to be taken up
assuming that the benefit of firm underwriting is not given to individual underwriters.
Answer
Calculation of liability of each underwriter (in shares) assuming that the benefit of firm
underwriting is not given to individual underwriters
(Number of shares)
P Q R Total
Gross Liability 1,50,000 1,00,000 50,000 3,00,000
Less: Marked applications (excluding
firm underwriting) (60,000) (50,000) (60,000) (1,70,000)
Balance 90,000 50,000 (10,000) 1,30,000
Less: Surplus of R allocated to P and Q
in the ratio of 3:2 (6,000) (4,000) 10,000 -
Balance 84,000 46,000 - 1,30,000
Less: Unmarked applications including

firm underwriting (Refer W.N.) (57,000) (38,000) (19,000) (1,14,000)

Net Liability 27,000 8,000 (19,000) 16,000
Less: Surplus of R allocated to P and Q
in the ratio of 3:2 (11,400) (7,600) 19,000 -
15,600 400 - 16,000
Add: Firm underwriting 20,000 14,000 10,000 44,000
Total Liability 35,600 14,400 10,000 60,000
Working Note:
Applications received from public 2,40,000 shares
Add: Shares underwritten firm (20,000 + 14,000 + 10,000) 44,000 shares
Total applications 2,84,000 shares
Less: Marked applications (60,000 + 50,000 + 60,000) (1,70,000 shares)
Unmarked applications including firm underwriting 1,14,000 shares
EXERCISES
1. Noman Ltd. issued 80,000 Equity Shares which were underwritten as follows:
Mr. A 48,000 Equity Shares
Messrs B & Co. 20,000 Equity Shares
Messrs C Corp. 12,000 Equity Shares
The above mentioned underwriters made applications for ‘firm’ underwritings as follows:
The total applications excluding ‘firm’ underwriting, but including marked applications were for 40,000 Equity Shares.
The marked Applications were as under:

(The underwriting contracts provide that underwriters be given credit for ‘firm’ applications and that credit for
unmarked applications be given in proportion to the shares underwritten)
You are required to show the allocation of liability. Workings will be considered as a part of your answer.
(Hints: Total liability of Mr. A - 27,200 shares, of M/s. B & Co. - 8,000 shares and C Corpn. - 4,800 shares)

UNIT 3 : REDEMPTION OF DEBENTURES

BASIC CONCEPTS
¾ Debenture creates a charge against some or all the assets of the company.
¾ Charge may be fixed or floating, depends upon the condition of issue.
Debentures may be redeemed after a fixed number of years or after a certain period has
elapsed. Many debentures are issued with the notice that they may be redeemed at the
option of the company within a specified period of time and at a price specified. The
debentures may be redeemed in one of the four ways:
(a) By payment in lump sum at the end of a specified period of time; or
(b) By payment in annual installments;
(c) By purchasing its own debentures in the open market.
(d) By conversion into shares.
For redemption of Debentures a company shall maintain Debenture Redemption Reserve
Fund
Question 1
State the guidelines of SEBI regarding issue of convertible debentures for issue of capital and
disclosure requirements.
Answer
An issuer making a public issue or rights issue of convertible debt instruments shall comply with
the following conditions:
(a) it has obtained credit rating from one or more credit rating agencies;
(b) it has appointed one or more debenture trustees in accordance with the provisions of
section 117B of the Companies Act, 1956 and Securities and Exchange Board of India
(Debenture Trustees) Regulations, 1993;
(c) it has created debenture redemption reserve in accordance with the provisions of
section 117C of the Companies Act, 1956;
(d) if the issuer proposes to create a charge or security on its assets in respect of
secured convertible debt instruments, it shall ensure that:
(i) such assets are sufficient to discharge the principal amount at all times;
(ii) such assets are free from any encumbrance;
(iii) where security is already created on such assets in favour of financial institutions
or banks or the issue of convertible debt instruments is proposed to be secured by
creation of security on a leasehold land, the consent of such financial institution,

bank or lessor for a second or pari passu charge has been obtained and submitted
to the debenture trustee before the opening of the issue;
(iv) the security/asset cover shall be arrived at after reduction of the liabilities having a
first/prior charge, in case the convertible debt instruments are secured by a
second or subsequent charge.
The issuer shall redeem the convertible debt instruments in terms of the offer document.
Question 2
Libra Limited recently made a public issue in respect of which the following information is
available:
(a) No. of partly convertible debentures issued 2,00,000; face value and issue price ` 100
per debenture.
(b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from
the date of closing of issue.
(c) Date of closure of subscription lists 1.5.2010, date of allotment 1.6.2010, rate of interest
on debenture 15% payable from the date of allotment, value of equity share for the
purpose of conversion ` 60 (Face Value ` 10).
(d) Underwriting Commission 2%.
(e) No. of debentures applied for 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2011 (including cash and bank entries).
Answer
In the books of Libra Ltd.
Journal Entries
Date Particulars Amount Dr. Amount Cr.
` `
1.5.2010 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on 1,50,000
debentures @ ` 100 each)

1.6.2010 Debenture Application A/c Dr. 1,50,00,000

Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to
applicants and 50,000 debentures to
underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2%
on ` 2,00,00,000)
Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000
(Amount received from underwriters in
settlement of account)
30.9.2010 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months @
15% on ` 2,00,00,000)
30.10.2010 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value of
` 10)
31.3.2011 Debenture Interest A/c Dr. 7,50,000
(Interest paid on debentures for the half year)
Working Note :
Calculation of Debenture Interest for the half year ended 31st March, 2011
On ` 80,00,000 for 6 months @ 15% = `6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000
` 7,50,000

Question 3
Progressive Ltd. issued ` 10,00,000, 6% Debenture Stock at par on 21.1.2003, Interest was
payable on 30th June and 31st December, in each year.
Under the terms of the Debentures Trust the owned stock is redeemable at par. The trust deed
obliges the Company to pay to the trustees on 31st December, 2010 and annually thereafter
the sum of ` 1,00,000 to be utilised for the redemption and cancellation of an equivalent
amount of stock, which is to be selected by drawing lots.
Alternatively, the Company is empowered as from 1st January, 2010 to purchase its own
debentures on the open market. These Debentures must be surrendered to the Trustees for
cancellation and any adjustments for accrued interest recorded in the books of account. If in
any year the nominal amount of the stock surrendered under this alternative does not amount
to ` 1,00,000 then the shortfall is to be paid by the Company to the Trustees in cash on
31st December.
The following purchases of stock were made by the Company:
Nominal value of Purchase price per `100 of stock
stock purchased
` `
(1) 30th September, 2010 1,20,000 98
(2) 31st May, 2011 75,000 95 (Ex-interest)
(3) 31st July, 2012 1,15,000 92
The Company fulfilled all its obligations under the trust deed.
Prepare the following Ledger Accounts :
(a) Debenture Stock A/c
(b) Debenture Redemption A/c
(c) Debenture Interest A/c
Note : Ignore costs and taxation
Answer
In the Books of Progressive Ltd.
Debenture Stock Account
2010 ` 2010 `
Sept. 30 To Debenture
Redemption A/c 1,20,000 Jan. 1 By Balance b/d 10,00,000
Dec. 31 To Balance c/d 8,80,000
10,00,000 10,00,000

2011 ` 2011 `
May 31 To Debenture Jan. 1 By Balance b/d 8,80,000
Redemption A/c 75,000
Dec.31 To Debenture
Redemption A/c 25,000
To Balance c/d 7,80,000
8,80,000 8,80,000
2012 ` 2012 `
July 31 To Debenture Jan. 1 By Balance b/d 7,80,000
Redemption A/c 1,15,000
Dec.31 To Balance c/d 6,65,000
7,80,000 7,80,000
Debenture Redemption Account
2010 ` 2010 `
Sept. 30 To Bank A/c 1,15,800 Sept.30 By Debenture Stock A/c 1,20,000
(`1,20,000×0.98 – `1,800)
1,20,000 1,20,000
2011 ` 2011 `
May 30 To Bank A/c 71,250 May 31 By Debenture Stock A/c 75,000
(`75,000 × 0.95) Dec. 31 By Debenture Stock A/c 25,000
(Profit on cancellation)
Dec.31 To Bank A/c 25,000
(Shortfall `1,00,000 –
`75,000)
1,00,000 1,00,000
2012 ` 2012 `
July 31 To Bank A/c 1,05,225 July 31 By Debenture Stock A/c 1,15,000
(`1,15,000 ×.92 – `575)
(Profit on cancellation)
1,15,000 1,15,000

Debenture Interest Account

2010 `2010 `
June 30 To Bank A/c 30,000 Dec. 31 By Profit and Loss A/c 58,200
Sept. 30 To Bank A/c 1,800
Dec. 31 To Bank A/c 26,400
58,200 58,200
2011 ` 2011 `
May 31 To Bank A/c 1,875 Dec. 31 By Profit and Loss A/c 50,175
June 31 To Bank A/c 24,150
50,175 50,175
2012 ` 2012 `
June 30 To Bank A/c 23,400 Dec. 31 By Profit and Loss A/c 43,925
July 31 To Bank A/c 575
43,925 43,925
Working Notes :
Interest paid on Debentures @6% per annum:
Date Amount of Debentures Period Interest
` `
2010
June 30 10,00,000 6 months 30,000
Sept. 30 1,20,000 3 months 1,800
Dec. 31 8,80,000 6 months 26,400
2011
May 31 75,000 5 months 1,875
June 30 8,05,000 6 months 24,150
Dec. 31 8,05,000 6 months 24,150
2012
June 30 7,80,000 6 months 23,400
July 31 1,15,000 1 month 575
Dec. 31 6,65,000 6 months 19,950
Notes : (1) It has been assumed that debentures are purchased for immediate cancellation.
(2) The purchases of 30th September, 2010 and 31st July, 2012 have been taken on
cum-interest basis

Question 4
Pass journal entries in year 1 when ABC Co. Ltd. issued ` 1,00,000, 11% debentures at 95%
redeemable at the end of 10th year.
(i) at 102%, and (ii) at 98%
Answer
ABC Co. Ltd.
Journal Entries
Dr. Cr.
` `
(i) Bank A/c Dr. 95,000

Discount on issue of debentures A/c Dr. 5,000
Loss on issue of debentures A/c Dr. 2,000
To 11% Debentures A/c 1,00,000
To Premium on Redemption of debentures A/c 2,000
(Issue of ` 1,00,000 11% debentures at a discount of 5%
but redeemable at a premium of 2%)
(ii) Bank A/c Dr. 95,000
Discount on issue of debentures A/c Dr. 5,000
(Issue of ` 1,00,000, 11% debentures at a discount of 5%
and redeemable at discount of 2%)
Question 5
On 1st April, 2010, in MK Ltd.’s ledger 9% debentures appeared with a opening balance of
` 50,00,000 divided into 50,000 fully paid debentures of ` 100 each issued at par.
Interest on debentures was paid half-yearly on 30th of September and 31st March every year.
On 31.5.2010, the company purchased 8,000 debentures of its own @ ` 98 (ex-interest) per
debenture.
On 31.12.2010 it cancelled 5,000 debentures out of 8,000 debentures acquired on 31.5.2010.
On 31.1.2011 it resold 2,000 of its own debentures in the market @ ` 101 (ex-interest) per
debenture.
(i) Own debentures account;

(ii) Interest on debentures account; and

(iii) Interest on own debentures account.
Answer
MK Ltd.’s Ledger
(i) Own Debentures Account
` `
31.5.10 To Bank 7,84,000 31.12.10 By 9% Debentures A/c 5,00,000
31.12.10 To Capital Reserve 10,000 31.1.11 By Bank- Resale of 2,02,000
(Profit on cancellation) 2,000 debentures
31.1.11 To Profit and Loss A/c 6,000 31.3.11 By Balance c/d 98,000
(Profit on resale)
8,00,000 8,00,000
(ii) Interest on Debentures Account

` `
31.5.10 To Bank (Interest for 2 months 12,000 31.3.11 By Profit and 4,38,750
on 8,000 debentures) Loss A/c
30.9.10 To Interest on own debentures
(Interest for 4 months on 24,000
8,000 debentures)
30.9.10 To Bank (Interest for 6 months
on 42,000 debentures) 1,89,000
(Interest for 3 months on 11,250
5,000 debentures)
(Interest for 6 months on
1,000 debentures) 4,500
31.3.11 To Bank (Interest for 6 months
on 44,000 debentures) 1,98,000
4,38,750 4,38,750
(iii) Interest on Own Debentures Account

` `
31.3.11 To Profit and 45,750 30.9.10 By Interest on 24,000
Loss A/c Debentures A/c
31.12.10 By Interest on 11,250
Debentures A/c
31.01.11 By Bank (interest for 6,000

4 months on
2,000
debentures)
31.03.11 By Interest on
Debentures 4,500
45,750 45,750
Working Note:
31.5.10 Acquired 8,000 Debentures @ 98 per debenture (ex-interest) `
Purchase price of debenture (8,000 × ` 98) = 7,84,000
Interest for 2 months [` 8,00,000 × 9% × 2 12 ] = 12,000
30.9.10 Interest on own debentures
[` 8,00,000 × 9% × ½ ] less `12,000 = 24,000
Interest on other debentures
` 42,00,000 × 9% × ½ = 1,89,000
31.12.10 Cancellation of 5,000 own debentures
Face value `100 less acquired at ` 98 = 2 × 5,000 = 10,000
31.1.11 Resale of 2,000 Debentures sold for 101 (ex-interest) acquired
for ` 98 (ex-interest)
2,000 × ` 3 per debenture = 6,000
31.12.10 Interest on cancelled 5,000 debentures
5,000 × ` 100 × 9% × 1 4 = 11,250
31.3.11 Interest on 1,000 own debentures
` 1,00,000 × 9% × ½ = 4,500
Question 6
A company had 16,000, 12% debentures of ` 100 each outstanding as on 1st April, 2011,
redeemable on 31st March, 2012. On that day, sinking fund was ` 14,98,000 represented by
2,000 own debentures purchased at the average price of ` 99 and 9% stocks face value of
` 13,20,000. The annual instalment was ` 56,800.
On 31st March, 2012 the investments were realized at ` 98 and the debentures were
redeemed. You are required to write up the following accounts for the year ending
31st March 2012:
(1) 12% Debentures account
(2) Debenture redemption sinking fund account.

Answer
12% Debentures Account
Date Particulars ` Date Particulars `
31st To Own debentures 2,00,000 1st By Balance b/d 16,00,000
March, A/c April,
2012 2011
To Bank A/c 14,00,000
16,00,000 16,00,000
Debenture Redemption Sinking Fund Account
31st To 9% Stock A/c 1st April, By Balance b/d 14,98,000
March, (loss) (W.N.5) 6,400 2012
2012
To General 31st By Profit and loss
reserve A/c 16,93,200 March, A/c 56,800
(Bal.fig.) 2012
By Interest on
sinking fund
A/c (W.N.3) 1,42,800
By Own
debentures A/c
(W.N.4) 2,000
16,99,600 16,99,600
Working Notes:
1. Amount of stock as on 1st April, 2011
`
Sinking fund balance as on 1st April, 2011 14,98,000
Less: Own debentures (1,98,000)
13,00,000
2. Sales value of 9% stock
= Face value / ` per stock
= ` 13,20,000 / ` 100 = 13,200 stock
Sales value = 13,200 stock x ` 98 per stock
= ` 12,93,600
3. Interest credited to Sinking Fund
(i) Interest on 9% stock (` 13,20,000 x 9%) ` 1,18,800

(ii) Interest on own debentures (2,000 Debentures x ` 100 x 12%) ` 24,000

` 1,42,800
4. Own Debentures Account
` `
1st April, To Balance b/d 1,98,000 31st March, By 12%
2011 2012 Debentures A/c 2,00,000
31st March, To Sinking fund
2012 A/c 2,000
2,00,000 2,00,000
5. 9% Stock Account
` `
1stApril, To Balance b/d 31stMarch, By Bank account
2011 (Face value 2012 (W.N.2) 12,93,600
` 13,20,000)
(W.N.1) 13,00,000
By Sinking fund
(loss on sales) 6,400
13,00,000 13,00,000
Question 7
Following is the extract of the Balance Sheet of S.T.B. Ltd. a listed company as at March 31, 2012:
Authorised Capital: `
40,000, 12% Preference shares of ` 10 each 4,00,000
4,00,000, Equity shares of ` 10 each 40,00,000
44,00,000
Issued and Subscribed Capital:
32,000, 12% Preference shares of ` 10 each fully paid 3,20,000
3,60,000 Equity shares of ` 10 each fully paid-up 36,00,000
Reserves and Surplus
Revaluation reserves 80,000
General reserves 5,00,000
Capital reserve 3,00,000
Profit & Loss (Cr.) 7,00,000
Secured Loan:
12% partly convertible debentures @ ` 100 each 20,00,000

On April 30, 2012, the company decided to capitalise its reserves by way of Bonus at the rate
1:4. Securities premium of ` 1,00,000 includes a premium of ` 20,000 for shares issued
pursuant to a scheme of amalgamation. Capital reserve includes ` 1,60,000, being profit on
sale of Plant and Machinery. 20% of 12% Debentures are convertible into Equity shares of
` 10 each fully paid on April 30, 2012.
State with reason on the following:
(i) Whether Revaluation Reserve be capitalised?
(ii) How much amount of Capital reserve can be capitalised?
(iii) How much amount of ‘Securities Premium A/c’ can be capitalised?
(iv) Are the convertible debentureholders entitled to Bonus shares?
(v) The minimum number of Equity shares to be issued by way of Bonus as on 30th April, 2012.
(vi) What should be the minimum amount of authorised capital, if the decision to issue Bonus
shares gets implemented?
Answer
(i) As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
“Reserves created by Revaluation of fixed assets cannot be capitalized.”
(ii) As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, ‘Capital
Reserve’ realized in cash can be utilized for issue of fully paid Bonus shares. Therefore,
` 1,60,000 being profit on sale of plant, is a capital profit which has been realized in
cash, can be utilized for issue of the bonus shares. For remaining balance in capital
reserve account no further details of its constituent have been given. Therefore, no
comment on it can be made.
(iii) As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009,
Securities Premium collected in cash only can be utilized for Bonus issue; therefore
i.e. (` 1,00,000 – ` 20,000 ) ` 80,000 can be utilized for Bonus issue.
(iv) As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, no
company can issue bonus shares to its shareholders without extending similar benefit to
convertible debentureholders. Pending such conversion, necessary number of shares should
be earmarked for convertible debentureholders. Therefore, convertible debentureholders are
also entitled to the bonus shares in the same ratio as the equity shareholders.
(v) Minimum number of Equity shares to be issued as bonus shares
Issue of Bonus Shares to Equity Shareholders 90,000 Shares
Number of bonus shares to be issued after conversion
⎛ 20,00,000 × 20% ⎞ 1
⎜ ⎟× 10,000 Shares
⎝ 10 ⎠ 4
Total bonus issue through equity shares 1,00,000 Shares

(vi) Minimum Authorised Share Capital

Shares `
Existing Equity Shares 3,60,000 36,00,000
Bonus to Equity Shareholders 90,000 9,00,000
20% conversion of 12% Debentures 40,000 4,00,000
Bonus shares to be issued to Debentureholders after 10,000 1,00,000
conversion
Authorised Equity Share Capital 5,00,000 50,00,000
Preference share capital
12% Preference Shares 40,000 4,00,000
Minimum Authorised Capital 5,40,000 54,00,000
Question 8
The following balances appeared in the books of Paradise Ltd on 1-4-2011:
(i) 12 % Debentures ` 7,50,000
(ii) Balance of Sinking Fund ` 6,00,000
(iii) Sinking Fund Investment 6,00,000 represented by 10% ` 6,50,000 secured bonds of
government of India.
Annual contribution to the Sinking Fund was ` 1,20,000 made on 31st March each year. On
31-3-2012, balance at bank was ` 3,00,000 before receipt of interest. The company sold the
investment at 90% of cost, for redemption of debentures at a premium of 10% on the above
date.
You are required to prepare the following accounts for the year ended 31st march, 2012:
(1) Debentures Account
(2) Sinking Fund Account
(3) Sinking Fund Investment Account
(4) Bank Account
(5) Debenture Holders Account
Answer
1. 12% Debentures Account
31st To Debenture 7,50,000 1st April, By Balance b/d 7,50,000
March, holders A/c 2011
2012
7,50,000 7,50,000

2. Sinking Fund Account

31st To 10% Sec. 15,000 1st April, By Balance b/d 6,00,000
March, Bond A/c (loss) 2011
2012
31st To General 31st By Profit and loss
March, reserve A/c 7,70,000 March, A/c 1,20,000
2012 (Bal.fig.) 2012 By Interest on
sinking fund
A/c (Interest
on 10% stock (`
65,000
6,50,000 x 10%)
7,85,000 7,85,000
3. 10% Secured Bonds of Govt. (Sinking Fund Investment) A/c
` `
1st To Balance b/d 6,00,000 31st By Bank A/c (6,50,000 5,85,000
April, March, x 90% = 5,85,000)
2011 2012
By Sinking Fund A/c 15,000
6,00,000 6,00,000
4. Bank A/c
` `
31st March, To Balance b/d 3,00,000 31st March, By 12% 8,25,000
2012 To Interest 65,000 2012 Debenture
To Sinking fund By Balance 1,25,000
Investment A/c 5,85,000 c/d
9,50,000 9,50,000
5. Debenture holders A/c
` `
31 st To Bank A/c 8,25,000 31 st By 12% Debentures 7,50,000
March, March, By Premium on
2012 2012 redemption of
debentures 75,000
8,25,000 8,25,000
Question 9
A Company had issued 20,000, 13% Convertible debentures of ` 100 each on 1st April, 2010. The
debentures are due for redemption on 1st July, 2012. The terms of issue of debentures provided that
they were redeemable at a premium of 5% and also conferred option to the debentureholders to
convert 20% of their holding into equity shares (Nominal value ` 10) at a price of ` 15 per share.

Debentureholders holding 2,500 debentures did not exercise the option. Calculate the number of
equity shares to be allotted to the Debentureholders exercising the option to the maximum.
Answer
Calculation of number of equity shares to be allotted
Number of
debentures
Total number of debentures 20,000
Less: Debenture holders not opted for conversion (2,500)
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500
Redemption value of 3,500 debentures at a premium of 5%
[3,500 x (100+5)] ` 3,67,500
Equity shares of ` 10 each issued on conversion
[` 3,67,500/ ` 15 ] 24,500 shares
Question 10
Rama Limited issued 8% Debentures of ` 3,00,000 in earlier year on which interest is payable half
yearly on 31st March and 30th September. The company has power to purchase its own
debentures in the open market for cancellation thereof. The following purchases were made during
the financial year 2011-12 and cancellation made on 31st March, 2012:
(a) On 1st April, ` 50,000 nominal value debentures purchased for ` 49,450, ex-interest.
(b) On 1st September, ` 30,000 nominal value debentures purchased for ` 30,250 cum interest.
Show the Journal Entries for the transactions held in the year 2011-12.
Answer
In the books of Rama Limited
Journal Entries
Dr. (`) Cr. (`)
1st
April, Own debentures A/c Dr. 49,450
2011 To Bank A/c 49,450
(Being own debentures purchased ex- interest)
1st Sept. Own debentures A/c Dr. 29,250
2011 Interest on own debentures A/c Dr. 1,000
5
[30,000 x 8% x ]
12
To Bank A/c 30,250
(Being own debentures purchased cum- interest)

30th Sept. Interest on debentures A/c Dr. 12,000

2011 To Bank A/c 8,800
To Interest on own debentures A/c 3,200
(Being interest @ 8% paid on ` 2,20,000 & adjustment of
interest on ` 50,000 & ` 30,000 own debentures)
31st March, Interest on debentures A/c Dr. 12,000
2012 To Bank A/c 8,800
To Interest on own debentures A/c 3,200
(Being interest @ 8% paid on ` 2,20,000 & adjustment of
interest on ` 80,000 own debentures for 6 month)
31st March, 8% Debentures A/c Dr. 80,000
2012 To Own debentures A/c 78,700
To Profit on cancellation of Debentures A/c 1,300
(Being cancellation of own debentures)
31st March, Interest on own debentures A/c Dr. 5,400
2012 To Profit and Loss A/c (3,200+3,200-1,000) 5,400
(Being total interest paid on own debentures credited to P/L
A/c)
31st March, Profit and Loss A/c (12,000+12,000) Dr. 24,000
2012 To Interest on debentures A/c 24,000
(Being total interest paid on debentures transferred to P/L A/c)
31st March, Profit on cancellation of debentures A/c Dr. 1,300
2012 To Capital reserve A/c 1,300
(Being profit on cancellation of debentures transferred to
Capital Reserve A/c)
Question 11
Himalayas Ltd. had ` 10,00,000, 8% Debentures of ` 100 each as on 31st March, 2011. The
company purchased in the open market following debentures for immediate cancellation:
On 01-07-2011 – 1,000 debentures @ ` 97 (cum interest)
On 29-02-2012 – 1,800 debentures @ ` 99 (ex interest)
Debenture interest due date is 30th September and 31st March.
Give Journal Entries in the books of the company for the year ended 31st March, 2012.

Answer
In the books of Himalayas Ltd.
Journal Entries
` `
1.07.2011 Own Debentures A/c Dr. 95,000
Debenture Interest Account A/c Dr. 2,000
[1,000×100×8%× (3/12)]
To Bank A/c 97,000
(Being 1,000 Debentures purchased @
` 97 cum interest for immediate
cancellation)
1.07.2011 8% Debentures A/c Dr. 1,00,000
To Own Debentures A/c 95,000
To Capital reserve A/c (Profit on 5,000
cancellation of debentures)
(Being profit on cancellation of 1,000
Debentures transferred to capital reserve
account)
30.09.2011 Debenture interest A/c Dr. 36,000
[9,000 × 100 × 8% × (1/2)]
To Debenture holders A/c 36,000
(Being interest accrued on 9,000 debentures
and credited to debenture holders account)
Debentureholders A/c Dr. 36,000
To Bank A/c 36,000
(Being interest amount paid)
29.02.2012 Own Debentures A/c Dr. 1,78,200
Debenture Interest Account A/c Dr. 6,000
[1,800 × 100 × 8% × (5/12)]
(Purchase of 1,800 Debentures @ ` 99 ex
interest for immediate cancellation)
29.02.2012 8% Debentures A/c Dr. 1,80,000
To Own Debentures A/c 1,78,200

To Capital reserve A/c (Profit on 1,800

cancellation of debentures)
(Being profit on cancellation of 1,800
Debentures transferred to capital reserve
account)
31.03.2012 Debentures Interest A/c Dr. 28,800
[7,200 × 100 × 8% × (1/2)]
To Debentureholders A/c 28,800
(Being interest accrued on 7,200 debentures
and credited to debenture holders account)
31.3.2012 Debentureholders A/c Dr. 28,800
To Bank A/c 28,800
(Being amount paid)
31.03.2012 Profit and Loss A/c Dr. 72,800
To Debentures Interest A/c 72,800
(Being interest on debentures for the year
transferred to profit and loss account at the
year end)

UNIT 4 : AMALGAMATION AND RECONSTRUCTION

BASIC CONCEPTS
INTERNAL RECONSTRUCTION
¾ Reconstruction is a process by which affairs of a company are reorganized by
revaluation of assets, reassessment of liabilities and by writing off the losses already
suffered by reducing the paid up value of shares and/or varying the rights attached to
different classes of shares.
¾ Reconstruction account is a new account opened to transfer the sacrifice made by the
shareholders for that part of capital which is not represented by lost assets.
¾ Reconstruction account is utilized for writing-off fictitious and intangible assets, writing
down over-valued fixed assets, recording new liability etc.
¾ If some credit balance remains in the reconstruction account, the same should be
transferred to the capital reserve account.
¾ Methods of Internal reconstruction :
• Alteration of share capital :
Sub-divide or consolidate shares into smaller or higher Denomination
Conversion of share into stock or vice-versa
• Variation of shareholders’ rights :
Only the specific rights are changed. There is no change in the amount of
capital.
• Reduction of share capital
• Compromise, arrangements etc.
• Surrender of Shares.
AMALGAMATION
¾ Amalgamation means joining of two or more existing companies into one company,
the joined companies lose their identity and form themselves into a new company.
¾ In absorption, an existing company takes over the business of another existing
company. Thus, there is only one liquidation and that is of the merged company.
¾ A company which is merged into another company is called a transferor company or a
vendor company.

¾ A company into which the vendor company is merged is called transferee company or
vendee company or purchasing company.
¾ In amalgamation in the nature of merger there is genuine pooling of:
• Assets and liabilities of the amalgamating companies,
• Shareholders’ interest, Also the business of the transferor company is intended to
be carried on by the transferee company.
¾ In amalgamation in the nature of purchase, one company acquires the business of
another company.
¾ Purchase Consideration can be defined as the aggregate of the shares and securities
issued and the payment made in form of cash or other assets by the transferee
company to the share holders of the transferor company.
¾ There are two main methods of accounting for amalgamation:
• The pooling of interests method, and
• The purchase method.
¾ Under pooling of interests method, the assets, liabilities and reserves of the transferor
company will be taken over by transferee company at existing carrying amounts.
¾ Under purchase method, the assets and liabilities of the transferor company should be
incorporated at their existing carrying amounts or the purchase consideration should
be allocated to individual identifiable assets and liabilities on the basis of their fair
values at the date of amalgamation.
AMALGAMATION
Question 1
Exe Limited was wound up on 31.3.2011 and its Balance Sheet as on that date was given below:
Balance Sheet of Exe Limited as on 31.3.2011
Share capital: Fixed assets 9,64,000
1,20,000 Equity shares Current assets:
of `10 each 12,00,000 Stock 7,75,000
Reserves and surplus: Sundry debtors 1,60,000
Profit prior to Less: Provision
incorporation 42,000 for bad and
doubtful debts (8,000) 1,52,000
Contingency reserve 2,70,000 Bills receivable 30,000
Profit and loss A/c 2,52,000 Cash at bank 3,29,000 12,86,000
Current liabilities:

Bills payable 40,000

Sundry creditors 2,26,000
Provisions:
Provision for income tax 2,20,000 ________
22,50,000 22,50,000
Wye Limited took over the following assets at values shown as under:
Fixed assets `12,80,000, Stock `7,70,000 and Bills Receivable `30,000.
Purchase consideration was settled by Wye Limited as under:
` 5,10,000 of the consideration was satisfied by the allotment of fully paid 10% Preference shares
of `100 each. The balance was settled by issuing equity shares of `10 each at ` 8 per share paid
up.
Sundry debtors realised ` 1,50,000. Bills payable was settled for `38,000. Income tax authorities
fixed the taxation liability at `2,22,000.
Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting
to ` 8,000.
(i) Calculate the number of equity shares and preference shares to be allotted by Wye Limited in
discharge of purchase consideration.
(ii) Prepare the Realisation account, Cash/Bank account, Equity shareholders account and Wye
Limited account in the books of Exe Limited.
(iii) Pass journal entries in the books of Wye Limited.
Answer
(i) Purchase consideration
`
Fixed assets 12,80,000
Stock 7,70,000
Bills receivable 30,000
Purchase consideration 20,80,000
Amount discharged by issue of preference shares = ` 5,10,000

5,10,000
No. of preference shares to be allotted = = 5,100 shares
100
Amount discharged by allotment of equity shares = ` 20,80,000 – ` 5,10,000
= ` 15,70,000

Paid up value of equity share =`8

15,70,000
Hence, number of equity shares to be issued = = 1,96,250 shares
8
(ii) Realisation Account
In the books of Exe Ltd.
` `
To Fixed assets 9,64,000 By Provision for bad and doubtful debts 8,000
To Stock 7,75,000 By Bills payable 40,000
To Sundry debtors 1,60,000 By Sundry creditors 2,26,000
To Bills receivable 30,000 By Provision for taxation 2,20,000
To Bank account: By Wye Ltd. account
Liquidation expenses 8,000 (Purchase consideration) 20,80,000
Bills payable 38,000 By Bank account: Sundry debtors 1,50,000
Tax liability 2,22,000
Sundry creditors 2,11,000
To Equity shareholders
(profit transferred) 3,16,000 ________
27,24,000 27,24,000
Cash/Bank Account
` `
To Balance b/d 3,29,000 By Realisation account:
To Realisation account: Liquidation expenses 8,000
Sundry debtors 1,50,000 Bills payable 38,000
Tax liability 2,22,000
_______ Sundry creditors (Bal.fig.) 2,11,000
4,79,000 4,79,000
Equity Shareholders Account
` `
To 10% Preference By Equity share capital account 12,00,000
shares in Wye Ltd. 5,10,000 By Profit prior to incorporation 42,000
To Equity shares in Wye 15,70,000 By Contingency reserve 2,70,000
Ltd.
By Profit and loss account 2,52,000
By Realisation account (Profit) 3,16,000
20,80,000 20,80,000

Wye Limited Account

` `
To Realisation account 20,80,000 By 10% Preference shares in Wye Ltd. 5,10,000

________ By Equity shares in Wye Ltd. 15,70,000
20,80,000 20,80,000
(iii) Journal Entries

in the books of Wye Ltd.
Particulars Dr. Cr.
Amount Amount
` `
Business purchase account Dr. 20,80,000
To Liquidator of Exe Ltd. account 20,80,000
(Being the amount of purchase consideration payable
to liquidator of Exe Ltd. for assets taken over)
Fixed assets account Dr. 12,80,000
Stock account Dr. 7,70,000
Bills receivable account Dr. 30,000
To Business purchase account 20,80,000
(Being assets taken over)
Liquidator of the Exe Ltd. account Dr. 20,80,000
To 10% Preference share capital account 5,10,000
To Equity share capital account 15,70,000
(Being the allotment of 10% fully paid up preference
shares and equity shares of ` 10 each, ` 8 each paid
up as per agreement for discharge of purchase
consideration)
Question 2
Following is the summarized Balance Sheet as at March 31, 2012:
(` ‘000)
Liabilities Max Ltd. Mini Ltd. Assets Max Ltd. Mini Ltd.
Share capital: Goodwill 20 −

Equity shares of ` 100 each 1,500 1,000 Other fixed assets 1,500 760
9% Preference shares of Debtors 651 440
` 100 each 500 400 Stock 393 680
General reserve 180 170 Cash at bank 26 130
Profit and loss account − 15 Own debenture
12% Debentures of ` 100 (Nominal value 192
each 600 200 ` 2,00,000)
Sundry creditors 415 225 Discount on issue of
debentures 2
_____ _____ Profit and loss account 411 _____
3,195 2,010 3,195 2,010
On 1.4.2012, Max Ltd. adopted the following scheme of reconstruction:

(i) Each equity share shall be sub-divided into 10 equity shares of ` 10 each fully paid up. 50%
of the equity share capital would be surrendered to the Company.
(ii) Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive
90% of the dividend claim and accept payment for the balance.
(iii) Own debentures of ` 80,000 were sold at ` 98 cum-interest and remaining own debentures
were cancelled.
(iv) Debentureholders of ` 2,80,000 agreed to accept one machinery of book value of
` 3,00,000 in full settlement.
(v) Creditors, debtors and stocks were valued at ` 3,50,000, ` 5,90,000 and ` 3,60,000 respectively.
The goodwill, discount on issue of debentures and Profit and Loss (Dr.) are to be written off.
(vi) The Company paid ` 15,000 as penalty to avoid capital commitments of ` 3,00,000.
On 2.4.2012 a scheme of absorption was adopted. Max Ltd. would take over Mini Ltd. The
purchase consideration was fixed as below:
(a) Equity shareholders of Mini Ltd. will be given 50 equity shares of ` 10 each fully paid up, in
exchange for every 5 shares held in Mini Ltd.
(b) Issue of 9% preference shares of ` 100 each in the ratio of 4 preference shares of Max Ltd.
for every 5 preference shares held in Mini Ltd.
(c) Issue of one 12% debenture of ` 100 each of Max Ltd. for every 12% debentures in Mini Ltd.
You are required to give Journal entries in the books of Max Ltd. and draw the resultant Balance
Sheet as at 2nd April, 2012

Answer
In the Books of Max Ltd.
Particulars Dr. Cr.
01.04.2012 Amount Amount
` `
Equity share capital A/c Dr. 15,00,000
(Being sub-division of one share of ` 100 each into 10 shares
of ` 10 each)
Equity share capital A/c Dr. 7,50,000
To Capital reduction A/c 7,50,000
(Being reduction of capital by 50%)
Capital reduction A/c Dr. 13,500
To Bank A/c 13,500
(Being payment in cash of 10% of arrear of preference
dividend)
Bank A/c Dr. 78,400
To Own debentures A/c 76,800
To Capital reduction A/c 1,600
(Being profit on sale of own debentures transferred to capital
reduction A/c)
12% Debentures A/c Dr. 1,20,000
To Own debentures A/c 1,15,200
(Being profit on cancellation of own debentures transferred to
capital reduction A/c)
12% Debentures A/c Dr. 2,80,000
To Machinery A/c 3,00,000
(Being machinery taken up by debentureholders for `
2,80,000)
Creditors A/c Dr. 65,000
To Debtors A/c 61,000
To Stock A/c 33,000
(Being assets and liabilities revalued)

Capital reduction A/c Dr. 4,33,000

To Goodwill A/c 20,000
To Discount on debentures A/c 2,000
To Profit and Loss A/c 4,11,000
(Being the balance of capital reduction transferred to capital
reserve account)
To Bank A/c 15,000
(Being penalty paid for avoidance of capital commitments)
Capital reduction A/c Dr. 2,45,900
To Capital reserve A/c 2,45,900
(Being penalty paid for avoidance of capital commitments)
02.04.2012 Business Purchase A/c Dr. 13,20,000
To Liquidators of Mini Ltd. 13,20,000
(Being the purchase consideration payable to Mini Ltd.)
Fixed Assets A/c Dr. 7,60,000
Cash at Bank A/c Dr. 1,30,000
To Sundry Creditors A/c 2,25,000
To 12% Debentures A/c of Mini Ltd. 2,00,000
To Profit and Loss A/c 15,000
∗
To General reserve A/c ` (1,70,000+80,000 ) 2,50,000
To Business purchase A/c 13,20,000
(Being the take over of all assets and liabilities of Mini Ltd. by
Max Ltd.)
Liquidators of Mini Ltd. A/c Dr. 13,20,000
To Equity Share Capital 10,00,000
To 9% Preference share capital 3,20,000
(Being the purchase consideration discharged)
12% Debentures of Mini Ltd. A/c Dr. 2,00,000
(Being Max Ltd. issued their 12% Debentures in against of
every Debentures of Mini Ltd.)
∗
` 80,000 is the balancing figure adjusted to general reserve A/c as per AS 14 “Accounting for Amalgamation”.

Balance Sheet of Max Ltd. as at 2.4.2012

Particulars Note No Amount(`)
(a) Share Capital 1 25,70,000
(a) Long-term borrowings - 12% Debentures 4,00,000
(a) Trade payables 5,75,000
Total 42,35,900
II. Assets
(a) Fixed assets
(i) Tangible assets 19,60,000
(2) Current assets
(a) Inventories 10,40,000
(b) Trade receivables 10,30,000
(c) Cash and cash equivalents 2,05,900
Total 42,35,900
Notes to Accounts
`
1 Share Capital
Equity Share Capital 17,50,000
9% Preference share capital 8,20,000
25,70,000
2 Reserves and Surplus
Profit and Loss A/c 15,000
General Reserve
Share Capital of Mini Ltd. (Equity + Preference) 14,00,000
Less: Share Capital issued by Max Ltd. 13,20,000
General reserve (resulted due to absorption) 80,000
Add: General reserve of Mini Ltd. 1,70,000
General reserve of Max Ltd. 1,80,000 4,30,000
Capital Reserve 2,45,900
6,90,900

Working Note:
Purchase Consideration
50
Equity share capital 10,000 × × ` 10 = 10,00,000
5
4
9% Preference share capital 4,000 × × 100 = 3,20,000
5
` 13,20,000
Question 3
Ram Limited and Shyam Limited carry on business of a similar nature and it is agreed that
they should amalgamate. A new company, Ram and Shyam Limited, is to be formed to which
the assets and liabilities of the existing companies, with certain exception, are to be
transferred. On 31st March 2011 the Balance Sheets of the two companies were as under:
Ram Limited
Issued and Subscribed Freehold Property, at cost 2,10,000
Share capital: Plant and Machinery, at cost less
30,000 Equity shares of ` 10 depreciation 50,000
each, fully paid 3,00,000 Motor Vehicles, at cost
General Reserve 1,60,000 less depreciation 20,000
Profit and Loss Account 40,000 Stock 1,20,000
Sundry Creditors 1,50,000 Debtors 1,64,000
Cash at Bank 86,000
6,50,000 6,50,000
Shyam Limited
Issued and Subscribed Freehold Property, at cost 1,20,000
Share Capital: Plant and Machinery, at cost less
16,000 Equity shares of ` 10 depreciation 30,000
each, fully paid 1,60,000 Stock 1,56,000

Profit and Loss Account 40,000 Debtors 42,000

6% Debentures 1,20,000 Cash at Bank 36,000
Sundry Creditors 64,000
3,84,000 3,84,000
Assets and Liabilities are to be taken at book-value, with the following exceptions:
(a) Goodwill of Ram Limited and of Shyam Limited is to be valued at ` 1,60,000 and
` 60,000 respectively.
(b) Motor Vehicles of Ram Limited are to be valued at ` 60,000.
(c) The debentures of Shyam Limited are to be discharged by the issue of 6% Debentures of
Ram and Shyam Limited at a premium of 5%.
(d) The debtors of Shyam Ltd. realized fully and bank balance of Shyam Ltd, are to be retained
by the liquidator and the sundry creditors of Shyam Ltd. are to be paid out of the proceeds
thereof.
(i) Compute the basis on which shares in Ram and Shyam Limited will be issued to the
shareholders of the existing companies assuming that the nominal value of each share in
Ram and Shyam Limited is ` 10.
(ii) Draw up a Balance Sheet of Ram and Shyam Limited as of 1st April, 2011, the date of
completion of amalgamation.
(iii) Write up journal entries, including bank entries, for closing the books of Shyam Limited.
Answer
Calculation of Purchase consideration
Ram Ltd. Shyam Ltd.
Purchase Consideration: ` `
Goodwill 1,60,000 60,000
Freehold property 2,10,000 1,20,000
Plant and Machinery 50,000 30,000
Motor vehicles 60,000 -
Stock 1,20,000 1,56,000
Debtors 1,64,000 -
Cash at Bank 86,000 -
8,50,000 3,66,000

Less: Liabilities:
6% Debentures (1,20,000 x 105%) - (1,26,000)
Sundry Creditors (1,50,000) -
Net Assets taken over 7,00,000 2,40,000
To be satisfied by issue of shares of Ram and Shyam Ltd. @ `10 each 70,000 24,000
Balance Sheet Ram & Shyam Ltd. as at 1st April,2011
Particulars Note No Amount
`
(b) Reserves and Surplus 2 6,000
3 Current liabilities
(a) Trade payables 1,50,000
Total 12,16,000
ASSETS
(a) Fixed assets
i Tangible assets 4 4,70,000
ii Intangible assets 5 2,20000
2 Current assets
(a) Inventories(1,20,000+1,56,000) 2,76,000
(b) Trade receivables 1,64,000
(c) Cash and cash equivalents 86,000
Total 12,16,000
Notes to accounts
` `
1. Share Capital
94,000 shares of `10 each 9,40,000


Securities Premium A/c (W.N.) 6,000
Secured
4. Tangible assets
Freehold property
Ram Ltd. 2,10,000
Shyam Ltd. 1,20,000 3,30,000
Plant and Machinery 80,000
Ram Ltd. 50,000
Shyam Ltd. 30,000
Motor vehicles Ram Ltd. 60,000
4,70,000
5. Intangible assets
Goodwill
Ram Ltd. 1,60,000
Shyam Ltd. 60,000 2,20,000
In the books of Shyam Ltd.

Journal Entries
` `
1. Realisation A/c Dr. 3,48,000
To Freehold Property 1,20,000
To Plant and Machinery 30,000
To Stock 1,56,000
To Debtors 42,000
(Being all assets except cash transferred to Realisation
Account)
2. 6% Debentures A/c Dr. 1,20,000
Sundry Creditors A/c Dr. 64,000
To Realisation A/c 1,84,000
(Being all liabilities transferred to Realisation Account)
3. Equity Share Capital A/c Dr. 1,60,000
Profit and Loss A/c Dr. 40,000


(Being equity transferred to equity shareholders account)
4. Ram and Shyam Ltd. Dr. 2,40,000
(Being purchase consideration due)
5. Bank A/c Dr. 42,000
To Realisation A/c 42,000
(Being cash realized from debtors in full)
6. Realisation A/c Dr. 64,000
To Bank A/c 64,000
(Being payment made to creditors)
7. Shares in Ram and Shyam Ltd. Dr. 2,40,000
To Ram and Shyam Ltd. 2,40,000
(Being purchase consideration received in the form of
shares of Ram and Shyam Ltd.)
8. Realisation A/c Dr. 54,000
To Equity shareholders A/c 54,000
(Being profit on Realisation account transferred to
shareholders account)
9. Equity shareholders A/c Dr. 2,54,000
To Shares in Ram and Shyam Ltd. 2,40,000
To Bank A/c 14,000
(Being final payment made to shareholders)
Working Note:
Calculation of Securities Premium balance
Debentures issued by Ram and Shyam Ltd. to Shyam Ltd. at 5% premium
Therefore, securities premium account will be credited with (` 1,20,000 x 5%) ` 6,000.
Question 4
Following are the summarized Balance Sheet of Companies K Ltd. and W Ltd., as at
31-12-2011 :
Liabilities (` in ‘000) Assets (` in ‘000)
K Ltd. W Ltd. K Ltd. W Ltd.
Share Capital : Goodwill 20 -
Equity shares of ` 100 each 2,000 1,500 Other Fixed Assets 2,400 1,150
10% Preference shares of 700 400 Debtors 625 615
` 100 each Stock 412 680

General Reserve 240 170 Cash at bank 38 155

Profit and Loss Account 15 Own Debenture 192
12% Debentures of ` 100 (Nominal value of
each 600 200 ` 2,00,000)
Sundry Creditors 560 315 Discount on issue of 2
debentures
Profit and Loss 411
Account
4,100 2,600 4,100 2,600
On 01-04-2012, K Ltd. adopted the following scheme of reconstruction:

(i) Each equity share shall be sub-divided into 10 equity shares of ` 10 each fully paid up.
50% of the equity share capital would be surrendered to the company.
(ii) Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive
80% of the dividend claim and accept payment for the balance.
(iii) Own debentures of ` 80,000 (nominal value) were sold at ` 98 cum interest and
remaining own debentures were cancelled.
(iv) Debenture holders of ` 3,00,000 agreed to accept one machinery of book value of
` 3,20,000 in full settlement.
(v) Creditors, Debtors and stock were valued at ` 5,00,000, ` 6,00,000 and ` 4,00,000
respectively. Goodwill, discount on issue of debentures and Profit and Loss account (Dr.)
are to be written off.
(vi) The company paid ` 20,000 as penalty to avoid capital commitments of ` 4,00,000.
On 02.04.2012, a scheme of absorption was adopted. K Ltd. would take over W Ltd. The purchase
consideration was fixed as below:
(a) Equity shareholders of W Ltd. will be given 50 equity shares of ` 10 each fully paid up, in
exchange for every 5 shares held in W Ltd.
(b) Issue of 10% preference shares of ` 100 each in the ratio of 4 preference shares of K
Ltd. for every 5 preference shares held in W Ltd.
(c) Issue of 12% debentures of ` 100 each of K Ltd. for every 12% debenture in W Ltd.
Pass necessary Journal entries in the books of K Ltd. and draw the resultant Balance Sheet as at
2nd April, 2012.

Answer
In the books of K Ltd.
Journal Entries
Particulars Dr. Cr.
Amount Amount
01.04.2012 ` `
1. Equity share capital A/c Dr. 20,00,000
(Being sub-division of one share of ` 100 each into
10 shares of ` 10 each)
2. Equity share capital A/c Dr. 10,00,000
To Capital reduction A/c 10,00,000
(Being reduction of capital by 50%)
3. Capital reduction A/c Dr. 42,000
To Bank A/c 42,000
(Being payment in cash of 20% of arrears of 3 years’
preference dividend)
4. Bank A/c Dr. 78,400
To Own debentures A/c 76,800
[(1,92,000/2,00,000) x 80,000]
(Being profit on sale of own debentures transferred
to capital reduction A/c)
To Own debentures A/c 1,15,200
[(1,92,000/2,00,000) x 1,20,000]
(Being profit on cancellation of own debentures
transferred to capital reduction A/c)
To Machinery A/c 3,20,000
(Being machinery of ` 3,20,000 taken up by the
debenture holders for ` 3,00,000)

7. Creditors A/c Dr. 60,000

(Being liabilities revalued)
8. Capital reduction A/c Dr. 10,04,400
To Debtors A/c 25,000
To Stock A/c 12,000
To Goodwill A/c 20,000
To Discount on debentures A/c 2,000
To Bank A/c 20,000
To Capital reserve A/c 5,14,400
(Being assets revalued and losses written off and
penalty paid off through capital reduction account
and the balance of capital reduction account
transferred to capital reserve account)
02.04.2012
9. Business Purchase A/c Dr. 18,20,000
To Liquidators of W Ltd. 18,20,000
(Being the purchase consideration payable to W
Ltd.)
10. Fixed assets A/c Dr. 11,50,000
Cash at bank A/c Dr. 1,55,000
To Sundry creditors A/c 3,15,000
To 12% Debentures A/c of W Ltd. 2,00,000
To Profit and Loss A/c 15,000
To General reserve A/c 1,70,000
To Capital reserve A/c (W.N.2) 80,000
To Business purchase A/c 18,20,000
(Being the takeover of all assets and liabilities of W
Ltd. by K Ltd.)
11. Liquidators of W Ltd. A/c Dr. 18,20,000

To 10% Preference share capital A/c 3,20,000

(Being the purchase consideration discharged)
12. 12% Debentures of W Ltd. A/c Dr. 2,00,000
(Being K Ltd. issued their 12% Debentures against
12% Debentures of W Ltd.)
Balance Sheet of K Ltd. as on 2nd April, 2012
Notes
Particulars Amount (`)
No.
(a) Share Capital 1 35,20,000

(a) Trade payables 4 8,15,000
Total 57,34,400
II. Assets
(a) Fixed assets
(i) Tangible assets 5 32,30,000
(2) Current assets
(a) Inventories 6 10,80,000
(b) Trade receivables 7 12,15,000
(c) Cash and cash equivalents 8 2,09,400
Total 57,34,400
Notes to Accounts
`
1 Share Capital
Equity Share Capital 20,00,000
Less: Surrender 50% equity capital (10,00,000)

Add: Equity share capital issued to W Ltd. 15,00,000 25,00,000

10% Preference share capital 7,00,000
Add: Preference share capital issued to W Ltd. 3,20,000 10,20,000
35,20,000
General Reserve (2,40,000 + 1,70,000) 4,10,000
Capital Reserve (5,14,400 + 80,000) 5,94,400 10,19,400
Less: Settled in consideration of machinery (3,00,000)
Less: Cancelled debentures (1,20,000)
Add: 12% Debentures issue to W Ltd. 2,00,000 3,80,000
4. Trade payables
of K Ltd. 5,60,000
Less: Reduction due to revaluation (60,000)
Add: Trade payables of W Ltd. 3,15,000 8,15,000
5. Tangible assets
Balance of Other fixed assets 24,00,000
Less: Machinery taken up by debenture holders (3,20,000)
Add: Other fixed assets of W Ltd. 11,50,000 32,30,000
6. Inventories 4,12,000
Add: Inventories of W Ltd. 6,80,000 10,80,000
7. Trade receivables 6,25,000
Add: Trade receivables of W Ltd. 6,15,000 12,15,000
8. Cash and cash equivalents 38,000
Less: Payment of arrear of preference dividend (42,000)
Add: Profit on sale of own debentures 78,400
Less: Penalty paid (20,000)
Add: Cash and cash equivalents of W Ltd. 1,55,000 2,09,400

Working Notes:
1. Purchase Consideration `
Equity share capital [(15,000 x 50/5) x ` 10] 15,00,000
10% Preference share capital [(4,000x 4/5) x ` 100] = 3,20,000
18,20,000
2. Capital Reserve
`
Share Capital of W Ltd. (Equity + Preference) 19,00,000
Less: Share Capital issued by K Ltd. (18,20,000)
Capital reserve 80,000
Note: In the question, summarised balance sheets of K Ltd. and W Ltd. as on 31.12.2011 are given.
However, the internal reconstruction and amalgamation took place on 1.4.2012 and 2.4.2012
respectively. Since, no information have been provided for the intervening period of 3 months (i.e.
from 1.1.2012 to 31.3.2012), the above solution is given assuming this date of summarised balance
sheets as 31.3.2012 instead of 31.12.2011. Alternatively, the solution may be given on the basis of
31.12.2011. In that case, the only difference will be that dividend on preference shares and interest
on debentures for period of 3 months (i.e. from 1.1.2012 to 31.3.2012) will be considered at the time
of internal reconstruction.
Question 5
Given below are the summarized balance sheets of Vasudha Ltd. and Vaishali Ltd as at 31st
March, 2012.
(Amount in `)
Liabilities Vasudha Vaishali Assets Vasudha Vaishali
Ltd Ltd. Ltd. Ltd
Issued Share Capital: Factory Building 2,10,000 1,60,000
Debtors 2,86,900 1,72,900
Equity Shares of ` 10 5,40,000 4,03,300 Stock 91,500 82,500
each
General Reserves 86,000 54,990 Goodwill 50,000 35,000
Profit & Loss A/c 66,000 43,500 Cash at Bank 98,000 1,09,590
Sundry Creditors 44,400 58,200
7,36,400 5,59,990 7,36,400 5,59,990
Goodwill of the Companies Vasudha Ltd. and Vaishali Ltd. is to be valued at ` 75,000 and
` 50,000 respectively. Factory Building of Vasudha Ltd is worth `1,95,000 and of Vaishali Ltd
` 1,75,000.Stock of Vaishali has been shown at 10% above of its cost.

It is decided that Vasudha Ltd will absorb Vaishali Ltd, by taking over its entire business by issue of
shares at the Intrinsic Value.
You are required to draft the balance sheet of the Vasudha Ltd after putting through the scheme
assuming that the assets & liabilities of Vaishali Ltd. were incorporated in Vasudha Ltd at fair value
and assets and liabilities of Vasudha Ltd. have been carried at carrying values only.
Answer
Balance Sheet of Vasudha Ltd. as on 31st March, 2012
(After absorption)
Note
Particulars Amount
No
`
(a) Trade payables (44,400+58,200) 1,02,600
Total 13,18,890
ASSETS
(a) Fixed assets
i Tangible assets 3 3,85,000
ii Intangible assets 4 1,00,000
2 Current assets
(a) Inventories(91,500 + 75,000) 1,66,500
(b) Trade receivables(2,86,900 + 1,72,900) 4,59,800
(c) Cash and cash equivalents(98,000 + 1,09,590) 2,07,590
Total 13,18,890
Notes to accounts
` `
1. Share Capital
(54,000 + 40,330) Equity shares of `10 each 9,43,300


General reserves 86,000
Securities Premium A/c (Refer W.N.) 1,20,990 2,72,990
3 Tangible assets
Factory building (2,10,000 + 1,75,000) 3,85,000
4. Intangible assets
Goodwill (50,000+50,000) 1,00,000
Working Note:
Computation of shares issued on the basis of intrinsic values
Vasudha Ltd. Vaishali Ltd.
` `
Goodwill 75,000 50,000
Factory building 1,95,000 1,75,000
Debtors 2,86,900 1,72,900
Stock 91,500 (82,500/110%)= 75,000
Cash at Bank 98,000 1,09,590
7,46,400 5,82,490
Less: Sundry Creditors (44,400) (58,200)
Net assets 7,02,000 5,24,290
Number of shares 54,000 40,330
Intrinsic value `13 `13
Hence, Vasudha Ltd. will give its 40,330 shares of `10 each @ `13 each to Vaishali Ltd.
Discharge of Purchase consideration
Share Capital Securities Premium
` `
40,330 Shares @ ` 10 each 4,03,300
40,330 shares @ ` 3 each 1,20,990

RECONSTRUCTION
Question 6
The following is the summarized Balance Sheet of Rocky Ltd. as at March 31, 2012:
` in lacs
Liabilities
Fully paid equity shares of ` 10 each 500
Capital Reserve 6
12% Debentures 400
Debenture Interest Outstanding 48
Trade Creditors 165
Directors’ Remuneration Outstanding 10
Other Outstanding Expenses 11
Provisions 33
1,173
Assets
Goodwill 15
Land and Building 184
Plant and Machinery 286
Furniture and Fixtures 41
Stock 142
Debtors 80
Cash at Bank 27
Discount on Issue of Debentures 8
Profits and Loss Account 390
1,173
The following scheme of internal reconstruction was framed, approved by the Court, all the
concerned parties and implemented:
(i) All the equity shares be converted into the same number of fully-paid equity shares of
` 2.50 each.
(ii) Directors agree to forego their outstanding remuneration.
(iii) The debentureholders also agree to forego outstanding interest in return of their 12%
debentures being converted into 13% debentures.

(iv) The existing shareholders agree to subscribe for cash, fully paid equity shares of ` 2.50 each
for ` 125 lacs.
(v) Trade creditors are given the option of either to accept fully-paid equity shares of ` 2.50 each
for the amount due to them or to accept 80% of the amount due in cash. Creditors for ` 65
lacs accept equity shares whereas those for ` 100 lacs accept ` 80 lacs in cash in full
settlement.
(vi) The Assets are revalued as under:
` in lacs
Land and building 230
Plant and Machinery 220
Stock 120
Debtors 76
Pass Journal Entries for all the above mentioned transactions and draft the company’s Balance
Sheet immediately after the reconstruction.
Answer
Journal Entries
` in lacs
Dr. Cr.
Equity Share Capital (` 10 each) A/c Dr. 500
To Equity Share Capital (` 2.50 each) A/c 125
To Reconstruction A/c 375
(Conversion of all the equity shares into the same number of
fully paid equity shares of ` 2.50 each as per scheme of
reconstruction)
Director’s Remuneration Outstanding A/c Dr. 10
(Outstanding remuneration foregone by the directors as per
scheme of reconstruction)
12% Debentures A/c Dr. 400
Debenture Interest Outstanding A/c Dr. 48
To 13% Debentures A/c 400
(Conversion of 12% debentures into 13% debentures,
Debentureholders forgoing outstanding debenture interest)

Bank A/c Dr. 125

To Equity Share Application A/c 125
(Application money received for equity shares)
Equity Share Application A/c Dr. 125
(Application money transferred to share capital)
Trade Creditors A/c Dr. 165
To Bank A/c 80
(Trade creditors for ` 64 lakhs accepting shares for full
amount and those for ` 100 lakhs accepting cash equal to
80% of claim in full settlement)
Capital Reserve A/c Dr. 6
(Capital Reserve being used for purpose of reconstruction)
Land and Building A/c Dr. 46
(Appreciation made in the value of land and building as per
scheme of reconstruction)
Reconstruction A/c Dr. 505
To Goodwill A/c 15
To Plant and Machinery A/c 66
To Stock A/c 22
To Debtors A/c 4
To Discount on issue of Debentures A/c 8
To Profit and Loss A/c 390
(Writing off losses and reduction in the values of assets as
per scheme of reconstruction—W.N. 1)
Balance Sheet of Rocky Ltd. (and Reduced) as on 31st March, 2012
Particulars Note No. Amount
`
(a) Share Capital 1 315


(a) Long-term borrowings - 13% Debentures 400
(a) Other current liabilities 11
(b) Short-term provisions 33
Total 759
II. Assets
(a) Fixed assets
(i) Tangible assets 2 491
(ii) Intangible assets 3 0
(2) Current assets
(a) Current investments
(b) Inventories 120
(c) Trade receivables 76
(d) Cash and cash equivalents(W.N.2) 72
Total 759
Notes to Accounts
`
1 Share Capital
Equity Share Capital (`2.50 each) 125
Add: Fresh issue 125
Add: Equity shares issued to creditors 65
1,26,000 Fully paid equity shares of ` 2.50 each 315
(26,000 shares have been issued for consideration other than cash)
2 Tangible assets
a) Land and Building 184
Add: Amount of appreciation under scheme of reconstruction 46 230
b) Plant and Machinery 286
Less: Amount written off under scheme of reconstruction dated......... (66) 220
c) Furniture and Fixtures 41
491

3 Intangible assets
Goodwill 15
Less: Amount written off under scheme of reconstruction 15 -
Working Notes :
1. (` in lacs)
Reconstruction Account
` `
To Goodwill 15 By Equity Share Capital A/c 375
To Plant and Machinery 66 By Director’s Remuneration Outstanding A/c 10
To Stock 22 By Debenture Interest Outstanding A/c 48
To Debtors 4 By Trade Creditors 20
To Discount on issue of By Capital Reserve 6
Debentures 8 By Land and Building 46
505 505
2. Cash at bank as on 31st March, 2012 (after reconstruction)
`
Cash at bank (before reconstruction) 27
Add: Proceeds from issue of equity shares 125
152
Less: Payment made to creditors (80)
72
Question 7
The draft Balance Sheet of Y Limited as on 31st March, 2011 was as follows:
Liabilities Amount Assets Amount
(` ) (` )
5,00,000 Equity shares of ` 10 Goodwill 10,00,000
each fully paid 50,00,000 Patent 5,00,000
9% 20,000 Preference shares of Land and Building 30,00,000
`100 each fully paid 20,00,000 Plant and Machinery 10,00,000
10% First debentures 6,00,000 Furniture and Fixtures 2,00,000
10% Second debentures 10,00,000 Computers 3,00,000
Debentures interest outstanding 1,60,000 Trade Investment 5,00,000

Trade creditors 5,00,000 Debtors 5,00,000

Directors’ loan 1,00,000 Stock 10,00,000
Bank Overdraft 1,00,000 Discount on issue of
Outstanding liabilities 40,000 debentures 1,00,000
Provision for tax 1,00,000 Profit and Loss Account (Loss) 15,00,000
96,00,000 96,00,000
Note: Preference dividend is in arrears for last three years.
A holds 10% first debentures for ` 4,00,000 and 10% second debentures for `6,00,000. He is also
creditors for ` 1,00,000. B holds 10% first debentures for ` 2,00,000 and 10% second debentures
for ` 4,00,000 and is also creditors for ` 50,000.
The following scheme of reconstruction has been agreed upon and duly approved by the court.
(i) All the equity shares be converted into fully paid equity shares of `5 each.
(ii) The preference shares be reduced to ` 50 each and the preference shareholders agree to
forego their arrears of preference dividends in consideration of which 9% preference shares
are to be converted into 10% preference shares.
(iii) Mr. ‘A’ is to cancel ` 6,00,000 of his total debt including interest on debentures and to pay
`1 lakh to the company and to receive new 12% debentures for the Balance amount.
(iv) Mr. ‘B’ is to cancel ` 3,00,000 of his total debt including interest on debentures and to accept
new 12% debentures for the balance amount.
(v) Trade creditors (other than A and B) agreed to forego 50% of their claim.
(vi) Directors to accept settlement of their loans as to 60% thereof by allotment of equity shares
and balance being waived.
(vii) There were capital commitments totalling ` 3,00,000. These contracts are to be cancelled
on payment of 5% of the contract price as a penalty.
(viii) The Directors refund ` 1,10,000 of the fees previously received by them.
(ix) Reconstruction expenses paid `10,000.
(x) The taxation liability of the company is settled at ` 80,000 and the same is paid immediately.
(xi) The assets are revalued as under:
`
Land and Building 28,00,000
Plant and Machinery 4,00,000

Stock 7,00,000
Debtors 3,00,000
Computers 1,80,000
Furniture and Fixtures 1,00,000
Trade Investment 4,00,000
Pass Journal entries for all the above mentioned transactions including amounts to be written off of
Goodwill, Patents, Loss in Profit & Loss Account and Discount on issue of debentures. Prepare
Bank Account and working of allocation of Interest on Debentures between A and B.
Answer
Journal Entries in the Books of Y Ltd.
Dr. Cr.
` `
(i) Equity Share Capital (` 10 each) A/c Dr. 50,00,000

To Equity Share Capital (` 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of
` 10 each fully paid into same number of fully paid
equity shares of ` 5 each as per scheme of
reconstruction.)
(ii) 9% Preference Share Capital (`100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (` 50
each) A/c 10,00,000
(Being conversion of 9% preference share of
` 100 each into same number of 10% preference
share of ` 50 each and claims of preference
dividends settled as per scheme of reconstruction.)
(iii) 10% First Debentures A/c Dr. 4,00,000
10% Second Debentures A/c Dr. 6,00,000
Trade Creditors A/c Dr. 1,00,000
Interest on Debentures Outstanding A/c Dr. 1,00,000
Bank A/c Dr. 1,00,000
To 12% New Debentures A/c 7,00,000


(Being ` 6,00,000 due to A (including creditors)
cancelled and 12% new debentures allotted for
balance amount as per scheme of reconstruction.)
(iv) 10% First Debentures A/c Dr. 2,00,000
10% Second Debentures A/c Dr. 4,00,000
Trade Creditors A/c Dr. 50,000
Interest on Debentures Outstanding A/c Dr. 60,000
To 12% New Debentures A/c 4,10,000
(Being ` 3,00,000 due to B (including creditors)
cancelled and 12% new debentures allotted for
balance amount as per scheme of reconstruction.)
(v) Trade Creditors A/c Dr. 1,75,000
(Being remaining creditors sacrificed 50% of their
claim.)
(vi) Directors' Loan A/c Dr. 1,00,000
To Equity Share Capital (` 5) A/c 60,000
To Reconstruction A/c 40,000
(Being Directors' loan claim settled by issuing
12,000 equity shares of ` 5 each as per scheme of
reconstruction.)
(vii) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made for cancellation of capital
commitments.)
(viii) Bank A/c Dr. 1,10,000
(Being refund of fees by directors credited to
reconstruction A/c.)
(ix) Reconstruction A/c Dr. 10,000
To Bank A/c 10,000
(Being payment of reconstruction expenses.)

(x) Provision for Tax A/c Dr. 1,00,000

To Bank A/c 80,000
(Being payment of tax for 80% of liability in full
settlement.)
(xi) Reconstruction A/c Dr. 47,20,000
To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Discount on issue of Debentures A/c 1,00,000
To Land and Building A/c 2,00,000
To Plant and Machinery A/c 6,00,000
To Furniture & Fixture A/c 1,00,000
To Computers A/c 1,20,000
To Trade Investment A/c 1,00,000
To Stock A/c 3,00,000
To Debtors A/c 2,00,000
(Being writing off of losses and reduction in the
value of assets as per scheme of reconstruction.)
Working Notes:
(1) Outstanding interest on debentures have been allocated between A and B as follows:
`
A's Share
10% First Debentures 4,00,000
10% Second Debentures 6,00,000 10,00,000
10% on `10,00,000 i.e. (A) 1,00,000
B's Share
10% First Debentures 2,00,000
10% Second Debentures 4,00,000 6,00,000
10% on ` 6,00,000 i.e. (B) 60,000
Total (A + B) 1,60,000

(2) Bank Account
` `
To A (reconstruction) 1,00,000 By Balance b/d 1,00,000
To Reconstruction A/c 1,10,000 By Reconstruction A/c 15,000
(paid by directors) (capital commitment penalty paid)
By Reconstruction A/c 10,000
(reconstruction expenses paid)
By Provision for tax A/c(tax paid) 80,000
By Balance c/d 5,000
2,10,000 2,10,000
Questions 8
Following is the Balance Sheet of M Ltd. as at 31st March, 2011:
15,000, 10% Preference shares of 15,00,000 Goodwill 3,50,000
` 100 each
35,000 Equity shares of ` 100 each 35,00,000 Land & Buildings 15,00,000
Securities Premium account 1,00,000 Plant & Machinery 10,00,000
7% Debentures of ` 100 each 5,00,000 Stock 6,00,000
Creditors 12,50,000 Debtors 15,00,000
Loan from Director 1,50,000 Cash at bank 1,00,000
Profit & Loss A/c 19,50,000
70,00,000 70,00,000
No dividend on Preference shares has been paid for the last 5 years.
The following scheme of reorganization was duly approved by the court:
(i) Each Equity share to be reduced to ` 25.
(ii) Each existing Preference share to be reduced to ` 75 and then exchanged for 1 new
13% Preference share of ` 50 each and 1 Equity share of ` 25 each.
(iii) Preference shareholders have forgone their right for dividend for four years. One year’s
dividend at the old rate is however, payable to them in fully paid equity Shares of ` 25.
(iv) The Debentureholders be given the option to either accept 90% of their claims in cash or
to convert their claims in full into new 13% Preference shares of ` 50 each issued at par.
One half (in value) of the debentureholders accepted Preference shares for their claims.
The rest were paid cash.

(v) Contingent liability of ` 1,50,000 is payable, which has been created by wrong action of
one Director. He has agreed to compensate this loss out of the loan given by the
Director to the company.
(vi) Goodwill does not have any value in the present. Decrease the value of Plant and
Machinery, Stock and Debtors by ` 4,00,000, ` 1,00,000 and ` 1,50,000 respectively.
Increase the value of Land and Buildings to ` 18,00,000.
(vii) 40,000 new Equity shares of ` 25 each are to be issued at par, payable in full on
application. The issue was underwritten for a commission of 4%.
Shares were fully taken up.
(viii) The total expenses incurred by the company in connection with the scheme excluding
underwriting commission amounted to ` 15,000.
Pass necessary Journal Entries to record the above transactions.
Answer
In the books of M Ltd.
Journal Entries
Particulars Dr. Cr.
Amount Amount
( `) ( `)
1. Equity Share Capital (` 100) A/c Dr. 35,00,000
To Equity Share Capital (` 25) A/c 8,75,000
To Capital Reduction A/c 26,25,000
(Being Equity shares of ` 100 each reduced to ` 25
each and balance transferred to Capital Reduction A/c)
2. 10% Preference Share Capital (` 100) A/c Dr. 15,00,000
To 10% Preference Share Capital (` 75) A/c 11,25,000
(Being Preference shares of ` 100 each reduced to
` 75 each and balance transferred to Capital
Reduction A/c)
3. 10% Preference Share Capital (` 75) A/c Dr. 11,25,000
To 13% Preference Share Capital (` 50) A/c 7,50,000
(Being one new 13% Preference share of ` 50 each
and one equity share of ` 25 each issued against
10% Preference Share of ` 75 each)

4. Capital Reduction A/c Dr. 1,50,000

To Preference share dividend payable A/c 1,50,000
(Being arrear of Preference share dividend payable
for one year)
5. Preference share dividend payable A/c Dr. 1,50,000
(Being Equity Shares of ` 25 each issued for arrears
of Preference Share dividend)
To Debenture holders A/c 5,00,000
(Being balance of 7% Debentures transferred to
Debenture holders A/c )
7. Debenture holders A/c Dr. 5,00,000
To 13% Preference Share Capital A/c 2,50,000
To Capital Reduction A/c 25,000
(Being 50% of Debenture holders opted to take 13%
Preference shares at par and remaining took 90%
cash payment for their claims)
8. Loan from Director A/c Dr. 1,50,000
To Provision for Contingent Liability A/c 1,50,000
(Being contingent liability of ` 1,50,000 is payable
and adjusted against Loan from director A/c)
9. Bank A/c Dr. 10,00,000
To Equity Share Application & Allotment A/c 10,00,000
(Being application money received on 40,000 Equity
shares @ ` 25 each)
10. Equity Share Application & Allotment A/c Dr. 10,00,000
(Being application money transferred to capital A/c,
on allotment)
11. Underwriting Commission A/c Dr. 40,000
To Bank A/c 40,000
(Being underwriting commission paid)

12. Land & Buildings A/c Dr. 3,00,000

(Being value of Land & Buildings appreciated)
13. Expenses on Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of expenses on reconstruction )
14. Capital Reduction A/c Dr. 31,75,000
To Goodwill A/c 3,50,000
To Plant & Machinery A/c 4,00,000
To Stock A/c 1,00,000
To Debtors A/c 1,50,000
To Preliminary Expenses A/c 4,00,000
To Profit & Loss A/c 19,50,000
To Expenses on Reconstruction A/c 15,000
To Underwriting Commission A/c 40,000
To Capital Reserve A/c 1,70,000
(Being various losses written off and balance of
Capital Reduction A/c transferred to Capital Reserve
A/c)
Question 9
The summarised Balance Sheet of X Limited as on 31st March 2012, was as follows:
Liabilities (`) Assets (`)
Authorised and subscribed capital: 10,00,000 Fixed Assets:
10,000 Equity shares of ` 100 each Machineries 3,50,000
fully paid Current Assets:
Unsecured loans: Stock 2,53,000
15% Debentures 3,00,000 Debtors 2,30,000
Accrued interest 45,000 Bank 20,000
Current Liabilities: Profit & loss A/c 5,80,000
Creditors 52,000
Provision for income tax 36,000
14,33,000 14,33,000

It was decided to reconstruct the company for which necessary resolution was passed and
sanctions were obtained from the appropriate authorities. Accordingly, it was decided that:
(i) Each share be sub-divided into 10 fully paid up equity share of ` 10 each.
(ii) After sub-division, each shareholder shall surrender to the company 50% of his holding
for the purpose of reissue to debentureholders and creditors as necessary.
(iii) Out of shares surrendered 10,000 shares of ` 10 each shall be converted into 10%
Preference shares of ` 10 each fully paid up.
(iv) The claims of the debentureholders shall be reduced by 50%. In consideration of the
reduction, the debentureholder shall receive Preference Shares of ` 1,00,000 which are
converted out of shares surrendered.
(v) Creditors claim shall be reduced by 25%. Remaining creditors are to be settled by the
issue of equity shares of ` 10 each of out of shares surrendered.
(vi) Balance of Profit and Loss account to be written off.
(vii) The shares surrendered and not re-issued shall be cancelled.
Pass Journal Entries giving effect to the above and the resultant Balance Sheet.
Answer
In the books of X Limited
Journal Entries
` `
(i) Equity Share Capital (` 100) A/c Dr. 10,00,000

To Share Surrender A/c 5,00,000
To Equity Share Capital (` 10) A/c 5,00,000
(Sub-division of 10,000 equity shares of ` 100 each into
1,00,000 equity shares of ` 10 each and surrender of
50,000 of such sub-divided shares as per capital
reduction scheme)
(ii) 15% Debentures A/c Dr. 1,50,000
Accrued Interest A/c Dr. 22,500
(Transferred 50% of the claims of the debentureholders
to Reconstruction A/c in consideration of which 10%
Preference shares are being issued, out of share
surrender A/c as per capital reduction scheme)

(iii) Creditors A/c Dr. 52,000

(Transferred claims of the creditors to Reconstruction
A/c, 25% of which is reduction and equity shares are
issued in consideration of the balance amount)
(iv) Share Surrender A/c Dr. 5,00,000
To 10% Preference Share Capital A/c 1,00,000
To Equity Share Capital A/c 39,000
(Issued preference and equity shares to discharge the
claims of the debentureholders and the creditors
respectively as per scheme and the balance in share
surrender account is transferred to reconstruction
account)
(v) Reconstruction A/c Dr. 5,85,500
To Profit & Loss A/c 5,80,000
(Adjusted debit balance of profit and loss account
against reconstruction account and the balance is
transferred to Capital Reserve account)
X Limited (and reduced)
Balance Sheet as on …
Particulars Notes No. ` ’000

a) Share capital 1 6,39,000
b) Reserves and Surplus 2 5,500
Long-term borrowings 3 1,50,000
a) Other current liabilities 4 22,500
b) Short-term provisions 5 36,000
Total 8,53,000

Assets
a) Fixed assets
i) Tangible assets 6 3,50,000
2 Current assets
a) Inventories 2,53,000
b) Trade receivables 2,30,000
c) Cash and cash equivalents 7 20,000
Total 8,53,000
Notes to Accounts
`
1. Share Capital
53,900 Equity shares of ` 10 each 5,39,000
10,000, 10% Preference share of ` 10 each 1,00,000
6,39,000
(all the above shares are allotted as fully paid up pursuant to
capital reduction scheme by conversion of equity shares without
payment received in cash)
Capital Reserves 5,500
Unsecured
4. Other current liabilities
Accrued Interest on 15% Debentures 22,500
5. Short-term provisions
Provision for income tax 36,000
6. Tangible assets
Machineries 3,50,000
7. Cash and cash equivalents
Balances with banks 20,000

UNIT 5 : LIQUIDATION OF COMPANIES
BASIC CONCEPTS
In case of winding up of the company, a statement called Statement of affairs is prepared.
¾ Deficiency Account is the result of capital plus liabilities exceeding the assets or deficit or
debit balance in the profit and loss account.
¾ Overriding preferential payments are the payments to be made for the workman’s dues
and debts secured to secured creditors to the extent they rank under section 529(1)(c).
¾ Creditors that have to be paid in priority to unsecured creditors or creditor having a floating
charge.
¾ In case of voluntary winding up, the statement prepared by the Liquidator showing
receipts and payment of cash is called “Liquidator’s Statement of Account”.
¾ The shareholders who transferred partly paid shares within one year, prior to the date of
winding up may be called upon to pay an amount (not exceeding the amount not called up
when the shares were transferred) to pay off such creditors as existed on the date of
transfer of shares.
Question 1
Explain Overriding preferential payments under section 529A of the Companies Act, 1956.
Answer
The Companies (Amendment) Act, 1985 introduced Section 529A which states that certain
dues are to be settled in the case of winding up of a company even before the payments to
preferential creditors under Section 530. Section 529A states that in the event of winding up of
a company, workmen’s dues and debts due to secured creditors, to the extent such debts rank
under Section 529(1)(c), shall be paid in priority to all other debts. The debts provable [Section
529(i)(a)] and the valuation of annuities and future and contingent liabilities [Section 529(1)(b)]
shall be paid in full, unless the assets are insufficient to meet them, in which case they shall
abate in equal proportions.
Workmen’s dues, in relation to a company, means the aggregate of the following sums:
1. all wages or salary including wages payable for time or piece work and salary earned
wholly or in part by way of commission of any workman, in respect of services rendered
to the company and any compensation payable to any workman under any of the
provisions of the Industrial Disputes Act, 1947;
2. all accrued holiday remuneration becoming payable to any workman, or in the case of his
death to any other person in his right, on the termination of his employment before, or by
the effect of, the winding up order or resolution;

3. all amounts due in respect of any compensation or liability for compensation under
Workmen’s Compensation Act, 1923 in respect of death or disablement of any workman
of the company;
4. all sum due to any workman from a provident fund, a pension fund, a gratuity fund or any
other fund for the welfare of the workmen, maintained by the company.
B LIST OF CONTRIBUTORIES
Question 2
B List of Contributories and the liability of contributories included in the list.
Answer
The shareholders who transferred partly paid shares (otherwise than by operation of law or by
death) within one year, prior to the date of winding up may be called upon to pay an amount (not
exceeding the amount not called up when the shares were transferred) to pay off such creditors as
existed on the date of transfer of shares.
Their liability will crystallize only (i) when the existing assets available with the liquidator are not
sufficient to cover the liabilties; (ii) when the existing shareholders fail to pay the amount due on the
shares to the liquidator.
Question 3
Pessimist Ltd. has gone into liquidation on 10th May, 2011. The details of members, who have
ceased to be members, within the year ended 31st March, 2011 are given below. The debts
that could not be paid out of realisation of assets and contribution from present members (‘A’
contributories) are also given with their date-wise break up. Shares are of ` 10 each, ` 6 per
share paid up.
You are to determine the amount realisable from each person.
Shareholders No. of shares Date of transfer Proportionate
transferred unpaid debts
P 1,000 20.04.2010 3,000
Q 1,200 15.05.2010 5,000
R 1,500 18.09.2010 9,200
S 800 24.12.2010 10,500
T 500 12.03.2011 11,000

Answer
Statement of liabilities of B List Contributories
Creditors outstanding on the date of transfer Q R S T Amount
(ceasing to be member) to be
paid to
creditor
No. of shares 1,200 1,500 800 500

Date ` ` ` ` ` `
15.5.2010 5,000 1,500 1,875 1,000 625 5,000
18.9.2010 9,200
–5,000 4,200 – 2,250 1,200 750 4,200
10,500
24.12.2010 -9,200 1,300 – – 800 500 1,300
11,000
12.3.2011 10,500 500 – – – 500 125∗
Total (a) 11,000 1,500 4,125 3,000 2,375 10,625
Maximum liability on
shares held (b) 4,800 6,000 3,200 2,000
Amount paid (a) and (b)
whichever is lower 1,500 4,125 3,000 2,000
Working Note:
P will not be liable since he transferred his shares prior to one year preceding the date of
winding up. The amount of ` 5,000 outstanding on 15th May, 2010 will have to contributed by Q,
R, S and T in the ratio of number of shares held by them, i.e. in the ratio of 12:15:8:5; thus Q will
have to contribute ` 1,500; R ` 1,875; S ` 1,000; T ` 625. Similarly, the further debts incurred
between 15th May, 2010 to 18th September, 2010, viz. ` 4,200 for which Q is not liable will be
contributed by R, S and T in the ratio of 15:8:5. R will have to contribute
` 2,250. S and T will contribute ` 1,200 and ` 750 respectively. The further increase from
` 9,200 to ` 10,500 viz. ` 1,300 occurring between 18th September and 24th December will be
shared by S and T who will be liable for ` 800 and ` 500 respectively. The increase between
24th December and 12th March, is solely the responsibility of T.
∗
Against T’s liability of ` 2,375, he can be called upon to pay ` 2,000, the loss of ` 375 will have to be
suffered by the creditors.

Question 4
Liquidation of YZ Ltd. commenced on 2nd April, 2011. Certain creditors could not receive
payments out of the realisation of assets and out of the contributions from A list contributories.
The following are the details of certain transfers which took place in 2010 and 2011:
Shareholders No. of Shares Date of Ceasing to be a Creditors remaining unpaid
transferred member and outstanding on the
date of such transfer
A 2,000 1st March, 2010 ` 5,000
P 1,500 1st May, 2010 ` 3,300
Q 1,000 1st October, 2010 ` 4,300
R 500 1st November, 2010 ` 4,600
S 300 1st February, 2011 ` 6,000
All the shares were of ` 10 each, ` 8 per share paid up. Show the amount to be realised from
the various persons listed above ignoring expenses and remuneration to liquidator etc.
Answer
Statement of liabilities of B list contributories
Share- No. of Maximum Division of Liability as on
holders shares liability (upto 1.5.2010 1.10.2010 1.11.2010 1.2.2011 Total
transferred ` 2 per
share)
` ` ` ` ` `
P 1,500 3,000 1,500 − − − 1,500
Q 1,000 2,000 1,000 555 − − 1,555
R 500 1,000 500 278 188 − 966
S 300 600 300 167 112 21 600
3,300 6,600 3,300 1,000 300 21 4,621
Working Note:
Date Cumulative liability Increase in liability Ratio of no. of shares
held by the members
1.5.2010 3,300 − 30 : 20 : 10 : 6
1.10.2010 4,300 1,000 20 : 10 : 6
1.11.2010 4,600 300 10 : 6
1.2.2011 6,000 1,400 Only S
Liability of S has been restricted to the maximum allowable limit of ` 600, therefore amount
payable by S is restricted to ` 21 only, on 1.2.2011.

Notes:
1. A will not be liable to pay to the outstanding creditors since he transferred his shares prior
to one year preceding the date of winding up.
2. P will not be responsible for further debts incurred after 1st May, 2010 (from the date when
he ceases to be member). Similarly, Q and R will not be responsible for the debts incurred
after the date of their transfer of shares.
Question 5
M/s. ABC Limited has gone into liquidation on 25th June, 2012. Certain creditors could not
receive payments out of realization of assets and contributions from A list contributories. The
following are the details of certain transfers which took place in the year ended 31st March,
2012:
Shareholders No. of shares Date of ceasing to be Creditors remaining unpaid
transferred a member and outstanding on the date
of transfer (`)
P 4,000 10-5-2011 9,000
Q 3,000 22-7-2011 12,000
R 2,400 15-9-2011 13,500
S 1,600 14-12-2011 14,000
T 1,000 09-03-2012 14,200
All the shares are of ` 10 each, ` 8 per share paid up. Show the amount to be realized from
the persons listed above. Ignore remuneration to liquidator and other expenses.
Answer
Statement of Liabilities of B List Contributories
Shareholder No. of Maximum
shares liability
Division of liability as on Total
transferred upto ` 2
per share
22.07.2011 15.09.2011 14.12.2011 09.03.2012
Q 3,000 6,000 4,500 - - - 4,500
R 2,400 4,800 3,600 720 - - 4,320
S 1,600 3,200 2,400 480 308 - 3,188
T 1,000 2,000 1,500 300 192 8 2,000
8,000 16,000 12,000 1,500 500 8 14,008
Notes:
1. ‘P’ transferred shares before one year preceding the date of winding up, therefore, he
cannot be held liable for any liability on liquidation.

2. Liability of ‘T’ has been restricted to the maximum allowable limit of ` 2,000. Therefore,
amount payable by T on 09.03.2012 is ` 8 only.
3. ‘Q’ will not be responsible for further debts incurred after 10th May, 2011 (from the date
when he ceases to be a member). Similarly, ‘R’ & ‘S’ will not be liable for the debts
incurred after the date of their transfer of shares.
Working Note
Calculation of Ratio for Discharge of Liabilities
Date Cumulative liability Increase in liabilities Ratio of no. of shares held
(` ) (` ) by Q, R, S & T
22.07.2011 12,000 - 30: 24: 16: 10
15.09.2011 13,500 1,500 24: 16: 10
14.12.2011 14,000 500 16: 10
09.03.2012 14,200 200 Only T
LIQUIDATORS STATEMENT OF ACCOUNT

Question 6
What are the contents of “Liquidators’ statement of account”? How frequently does a liquidator
have to submit such statement?
Answer
The statement prepared by the liquidator showing receipts and payments of cash in case of
voluntary winding up is called “Liquidators’ statement of account” (Form No. 156 Rule 329 of the
Companies Act, 1956). There is no double entry involved in the preparation of liquidator’s
statement of account. It is only a statement though presented in the form of an account.
While preparing the liquidator’s statement of account, receipts are shown in the following order :
(a) Amount realised from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from it, if
any, is entered as ‘surplus from securities’.
(c) In case of partly paid up shares, the equity shareholders should be called up to pay
necessary amount (not exceeding the amount of uncalled capital) if creditors’
claims/claims of preference shareholders can’t be satisfied with the available amount.
Preference shareholders would be called upon to contribute (not exceeding the amount
as yet uncalled on the shares) for paying of creditors.
(d) Amounts received from calls to contributories made at the time of winding up are shown
on the Receipts side.
(e) Receipts per Trading Account are also included on the Receipts side.

Payments made to redeem securities and cost of execution and payments per Trading
Account are deducted from total receipts.
Payments are made and shown in the following order :
(a) Legal charges;
(b) Liquidator’s expenses;
(d) Debentureholders (including interest up to the date of winding up if the company is
insolvent and to the date of payment if it is solvent);
(e) Creditors:
(i) Preferential (in actual practice, preferential creditors are paid before debenture
holders having a floating charge);
(ii) Unsecured creditors;
(f) Preferential shareholders (Arrears of dividends on cumulative preference shares should
be paid up to the date of commencement of winding up); and
(g) Equity shareholders.
Liquidator’s statement of account of the winding up is prepared for the period starting from the
commencement of winding up to the close of winding up. If winding up of company is not
concluded within one year after its commencement, Liquidator’s statement of account pursuant to
section 551 of the Companies Act, 1956 (Form No. 153) is to be filed by a Liquidator within a
period of two months of the conclusion of one year and thereafter until the winding up is concluded
at intervals of not more than one year or at such shorter intervals, if any, as may be prescribed.
Question 7
The position of Valueless Ltd. on its liquidation is as under:
Issued and paid up Capital:
3,000 11% preference shares of ` 100 each fully paid.
3,000 Equity shares of ` 100 each fully paid.
1,000 Equity shares of ` 50 each ` 30 per share paid.
Calls in Arrears are ` 10,000 and Calls received in Advance ` 5,000. Preference Dividends are
in arrears for one year. Amount left with the liquidator after discharging all liabilities is
` 4,13,000. Articles of Association of the company provide for payment of preference dividend
arrears in priority to return of equity capital. You are required to prepare the Liquidators final
statement of account.
Answer
Liquidators’ Final Statement of Account
Receipts ` Payments `
Cash 4,13,000 Return to contributors:

Realisation from: Preference dividend 33,000

Calls in arrears 10,000 Preference shareholders 3,00,000
Final call of ` 5 per Calls in advance 5,000
equity share of ` 50 each (` 5 × Equity shareholders of
1,000) 5,000 ` 100 each (3,000 × ` 30) 90,000
4,28,000 4,28,000
Working Note:
`
Cash account balance 4,13,000
Less: Payment for dividend 33,000
Preference shareholders 3,00,000
Calls in advance 5,000 (3,38,000)
75,000
Add: Calls in arrears 10,000
85,000
Add: Amount to be received from equity shareholders of ` 50 each (1,000 × 20) 20,000
Amount disposable 1,05,000
Number of equivalent equity shares:
3,000 shares of ` 100 each = 6,000 shares of ` 50 each
1,000 shares of ` 50 each = 1,000 shares of ` 50 each
= 7,000 shares of ` 50 each
Amount left for distribution
Final payment to equity shareholders =
Total number of equivalent equity shares
= ` 1,05,000 / 7,000 shares = ` 15 per share to equity shareholders of ` 50 each.
⎛ 100 ⎞
Therefore for equity shareholders of ` 100 each ⎜ 15 × ⎟
⎝ 50 ⎠
= ` 30 per share to equity shareholders of ` 100 each.
Calls in advance must be paid first, so as to pay the shareholders on prorata basis. Equity
shareholders of ` 50 each have to pay ` 20 and receive ` 15 each. As a result, they are
required to pay net ` 5 per share.
Question 8
The following particulars relate to a Limited Company which has gone into voluntary liquidation.
You are required to prepare the Liquidator’s Statement of Account allowing for his remuneration
@ 2½% on all assets realized excluding call money received and 2% on the amount paid to
unsecured creditors including preferential creditors.

Share capital issued:

10,000 Preference shares of ` 100 each fully paid up.
50,000 Equity shares of ` 10 each fully paid up.
30,000 Equity shares of ` 10 each, ` 8 paid up.
Assets realized ` 20,00,000 excluding the amount realized by sale of securities held by partly
secured creditors.
`
Preferential creditors 50,000
Unsecured creditors 18,00,000
Partly secured creditors (Assets realized ` 3,20,000) 3,50,000
Debentureholders having floating charge on all assets of the company 6,00,000
Expenses of liquidation 10,000
A call of ` 2 per share on the partly paid equity shares was duly received except in case of one
shareholder owning 1,000 shares.
Also calculate the percentage of amount paid to the unsecured creditors to the total unsecured
creditors.
Answer
(a) (i) Liquidator’s Statement of Account
` `.
To Assets Realised 20,00,000 By Liquidator’s remuneration
To Receipt of call money 2.5% on 23,20,000∗ 58,000
on 29,000 equity 2% on 50,000 1,000
shares @ 2 per share 58,000 2% on 13,12,745 (W.N.3) 26,255 85,255
By Liquidation Expenses 10,000
By Debenture holders having
a floating charge on all 6,00,000
assets
By Preferential creditors 50,000
By Unsecured creditors 13,12,745
20,58,000 20,58,000
(ii) Percentage of amount paid to unsecured creditors to total unsecured creditors
13,12,745
= ×100 = 71.73%
18,30,000
Working Notes:
1. Unsecured portion in partly secured creditors=` 3,50,000-` 3,20,000 = ` 30,000
∗
Total assets realised = ` 20,00,000 + ` 3,20,000 = ` 23,20,000

2. Total unsecured creditors = 18,00,000 + 30,000 (W.N.1) = ` 18,30,000

3. Liquidator’s remuneration on payment to unsecured creditors
Cash available for unsecured creditors after all payments including payment to preferential
creditors & liquidator’s remuneration on it = ` 13,39,000
2
Liquidator’s remuneration on unsecured creditors = ×13,39,000 = ` 26,255
102
or on ` 13,12,754 x 2/100 = ` 26,255
Question 9
The summarized Balance Sheet of Full Stop Limited as on 31st March 2012, being the date of
voluntary winding up is as under:
Liabilities (`) Assets (` )
Share capital: Land & building 5,20,000
5,000, 10% Cumulative Plant & machinery 7,80,000
Preference shares of ` 100 Stock in trade 3,25,000
each fully paid up 5,00,000 Book debts 10,25,000
Equity share capital: Profit & loss account 5,50,000
5,000 Equity shares of ` 100
each ` 60 per share called
and paid up 3,00,000
5,000 Equity shares of ` 100
each ` 50 per share called up
and paid up 2,50,000
Preferential creditors 1,05,000
Bank overdraft 4,85,000
Trade creditors 6,00,000
32,00,000 32,00,000
Preference dividend is in arrears for three years. By 31-03-2012, the assets realized were as
follows:
`
Land & building 6,20,000
Stock in trade 3,10,000
Plant & machinery 7,10,000
Book debts 6,60,000

Expenses of liquidation are ` 86,000. The remuneration of the liquidator is 2% of the

realization of assets. Income tax payable on liquidation is ` 67,000. Assuming that the final
payments were made on 31-03-2012, prepare the Liquidator’s Statement of Account.
Answer
Liquidator’s Statement of Account
Receipts ` Payments `
Land & building 6,20,000 Liquidator’s remuneration 46,000
Stock in trade 3,10,000 Liquidation expenses 86,000
Plant & machinery 7,10,000 10% Debentures 2,10,000
Book debts 6,60,000 Preferential creditors 1,05,000
Income tax payable 67,000
Bank overdraft 4,85,000
Preference shareholders:
Capital 5,00,000
Arrears of preference dividend
for 3 years 1,50,000
Refund on 5,000 shares of
` 60 paid up @ ` 10.10 per
share (Refer W.N.) 50,500
Refund on 5,000 shares of
` 50 paid up @ ` 0.10 per share
(Refer W.N.) 500
23,00,000 23,00,000
Working Note:
`
Total equity capital paid up (3,00,000 + 2,50,000) 5,50,000
Less: Balance available after payment to secured, unsecured, preferential
creditors and preference shareholders (51,000)
(23,00,000 – 46,000 – 86,000 – 2,10,000 – 1,05,000 – 67,000
– 4,85,000– 6,00,000 – 5,00,000 – 1,50,000)
Loss to be borne by 10,000 equity shareholders 4,99,000
Loss per share ` 49.90
Hence, amount of refund on ` 50 per share paid up (` 50 – ` 49.90) ` 0.10
Amount of refund on ` 60 per share paid up (` 60 – ` 49.90) ` 10.10

LIQUIDATOR’S REMUNERATION
Question 10
The liquidator of a company is entitled to a remuneration of 2% on assets realized and 3% on the
amount distributed to unsecured creditors. The assets realized ` 10,00,000. Amount available for
distribution to unsecured creditors before paying liquidator’s remuneration is ` 4,12,000. Calculate
liquidator’s remuneration if the surplus is insufficient to pay off unsecured creditors, in toto.
Answer
Calculation of liquidator’s remuneration:
`
Liquidator’s remuneration on assets realised (` 10,00,000 x 2 /100) 20,000
Liquidator’s remuneration on payment to unsecured creditors
(` 4,12,000 x 3/103) 12,000
Total liquidator’s remuneration 32,000
Question 11
A Liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount
distributed to Preferential Creditors and 3% on the payment made to Unsecured Creditors. The
assets were realized for ` 25,00,000 against which payment was made as follows:
Liquidation ` 25,000
Secured Creditors ` 10,00,000
Preferential Creditors ` 75,000
The amount due to Unsecured Creditors was ` 15,00,000. You are asked to calculate the
total Remuneration payable to Liquidator. Calculation shall be made to the nearest multiple of
a rupee.
Answer
Calculation of Total Remuneration payable to Liquidator
Amount in `
2% on Assets realised 25,00,000 x 2% 50,000
3% on payment made to Preferential creditors 75,000 x 3% 2,250
3% on payment made to Unsecured creditors (Refer W.N) 39,255
Total Remuneration payable to Liquidator 91,505
Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses,
payment to secured creditors, preferential creditors & liquidator’s remuneration

= ` 25,00,000 – ` 25,000 – ` 10,00,000 – ` 75,000 – ` 50,000 – ` 2,250 = ` 13,47,750.

Liquidator’s remuneration on payment to unsecured creditors = 3/103 x ` 13,47,750= ` 39,255
STATEMENT OF AFFAIRS (ON WINDING UP BY COURT)
Question 12
‘A’ Ltd is to be liquidated. Their summarised Balance Sheet as at 30th September, 2011 appears
as under:
`
Liabilities:
5,00,000 equity shares of ` 100 each 50,00,000
Secured debentures (on Land and Buildings) 20,00,000
Unsecured loans 40,00,000
1,80,00,000
Assets:
Land and buildings 10,00,000
Other fixed assets 40,00,000
Current assets 90,00,000
Profit and loss account 40,00,000
1,80,00,000
Contingent liabilities are:
For bills discounted 2,00,000
For excise duty demands 3,00,000
On investigation, it is found that the contingent liabilities are certain to devolve and that the
assets are likely to be realised as follows:
`
Land and Building 22,00,000
Other fixed assets 36,00,000
Current assets 70,00,000
Taking the above into account, prepare the statement of affairs.
Answer
Statement of Affairs of ‘A’ Ltd. (in Liquidation)
as at 30th September, 2011
Estimated
Realisable
Value (`)
Assets not specifically pledged (as per List A):
Other Fixed Assets 36,00,000

Current Assets 70,00,000

1,06,00,000
Assets specifically pledged (as per List B):
Estimated Due to Deficiency Surplus
Realizable secured ranking as carried to the
value creditors unsecured last column
` ` ` `
Land and Building 22,00,000 20,00,000 – 2,00,000 2,00,000
Estimated total assets available for preferential creditors, debenture
holders secured by a floating charge and unsecured creditors 1,08,00,000
Summary of Gross Assets:
Gross realizable value of assets specifically pledged 22,00,000
Other Assets 1,06,00,000
Total Assets 1,28,00,000
Liabilities
Gross
Liabilities
Liabilities
20,00,000 Secured creditors (as per List B) to the extent to which claims are
estimated to be covered by assets specifically pledged –
3,00,000 Preferential creditors (as per List C) – for demand of excise duty 3,00,000
Balance of assets available for debentureholders secured by floating
charge and unsecured creditors 1,05,00,000
– Debentureholders secured by floating charge (as per List D) –
Unsecured creditors (as per List E):
40,00,000 Unsecured Loans 40,00,000
70,00,000 Trade creditors 70,00,000
2,00,000 Liability for bills discounted (Contingent) 2,00,000
1,35,00,000 Estimated deficiency as regards creditors (difference between gross 7,00,000
assets and gross liabilities)
Issued and called up capital:
5,00,000 Equity shares of ` 10 each (as per List G) 50,00,000
Estimated deficiency as regards members/ contributories 57,00,000
EXERCISES
1. The following is the Balance Sheet of Y Limited as at 31st March, 2011:
Share Capital: Fixed Assets :
2,000 Equity shares of ` 100 each ` 75 per share Land & Buildings 4,00,000
paid up 1,50,000 Plant and Machineries 3,80,000
6,000 Equity shares of ` 100 each ` 60 per share 3,60,000 Current Assets :
paid up Stock at cost 1,10,000
2,000 10% Preference Share of ` 100 each fully 2,00,000 Sundry Debtors 2,20,000
paid up Cash at Bank 60,000
10% Debentures (having a floating charge on all 2,00,000 Profit and Loss A/c 2,40,000

assets)
Interest accrued on Debentures (also secured as
above) 10,000
Sundry Creditors 4,90,000
14,10,000 14,10,000
On that date, the company went into Voluntary Liquidation. The dividends on preference shares were in arrear
for the last two years. Sundry Creditors include a loan of ` 90,000 on mortgage of Land and Buildings. The
assets realised were as under:
`
Land and Buildings 3,40,000
Plant & Machineries 3,60,000
Stock 1,20,000
Sundry Debtors 1,60,000
Interest accrued on loan on mortgage of buildings upto the date of payment amounted to ` 10,000. The
expenses of Liquidation amounted to ` 4,600. The Liquidator is entitled to a remuneration of 3% on all the
assets realised (except cash at bank) and 2% on the amounts distributed among equity shareholders.
Preferential creditors included in sundry creditors amount to ` 30,000. All payments were made on 30th June,
2011. Prepare the liquidator’s final statement of account.
(Hints: Payment to Equity shareholders ` 35,000 (` 17.50 per share on 2,000 shares) & ` 15,000 (` 2.50
per share on 6,000 shares))
2. In a winding up of a company, certain creditors remained unpaid. The following persons had transferred
their holding sometime before winding up :
Name Date of Transfer No. of Shares transferred Amount due to creditors on the
date of transfer
2010 `
P January 1 1,000 7,500
Q February 15 400 12,500
S March 15 700 18,000
T March 31 900 21,000
U April 5 1,000 30,000
The shares were of ` 100 each, ` 80 being called up and paid up on the date of transfers.
A member, R, who held 200 shares died on 28th February, 2010 when the amount due to creditors was
` 15,000. His shares were transmitted to his son X.
Z was the transferee of shares held by T. Z paid ` 20 per share as calls in advance immediately on becoming a
member.
The liquidation of the company commenced on 1st February, 2011 when the liquidator made a call on the
present and the past contributories to pay the amount.
You are asked to quantify the maximum liability of the transferors of shares mentioned in the above table, when
the transferees:
(i) pay the amount due as “present” member contributories;
(ii) do not pay the amount due as “present” member contributories.
Also quantity the liability of X to whom shares were transmitted on the demise of his father R.
(Hints: Liability of Q, R/X, S and U will be ` 2,174, ` 3,666, ` 5,830 and ` 18,330 respectively.)

5
Financial Statements of Insurance
Companies
BASIC CONCEPTS
¾ Claims: it refers to the amount payable by insurer to the insured when policy
becomes due or the mis-happening occurs.
Claim = Claim intimated + Survey fees + Medical expenses – Claims received on
insurance.
¾ Premium : it refers to the consideration received by the insurance company to
undertake the risk of the loss. It is always net of premium paid on reinsurance.
¾ Annuity (LIC): it is fixed annual payment received regularly till insured lives. This is
in consideration of lump-sum money paid by him in the beginning of the policy.
¾ Bonus: the profit of LIC is distributed among the shareholders and policy holders.
The policy holders get 95% of the profit of LIC by way of bonus. The bonus may be of
following types:
• Cash Bonus: paid on declaration of bonus in cash.
• Revisionary Bonus: it is paid with the policy maturity instead of cash amount now.
This bonus is added in the amount of claims.
• Bonus in reduction of Premium: Bonus is not paid in cash but adjusted against
the future premiums.
• Interim Bonus: it refers to bonus paid on the maturity of policy in the year for
which the profit has not yet been determined. Such a bonus is included in claims.
¾ Reinsurance : if an insurer is not willing to bear the whole of the risk, it reinsure
itself. Some risk retains with some other insurer.
¾ Commission on Reinsurance Accepted: the reinsurer generally allows commission
to reinsured on part of business ceded. This is treated as expense of the company.
¾ Commission on Reinsurance ceded: Reinsurance generally gets commission for
giving the business under reinsurance contract. It appears as an income in revenue

account.
¾ Coinsurance: when a large risk is offered to an insurance company, then that
insurance company retains certain percentage of sum insured and contracts other
insurance company to underwriter the balance of risk. In this way, all the companies
jointly bear the risk. One is called as the leader who issues the policy and acts on
behalf of others.
¾ Reserve for unexpired Risk:
For Marine Business = 100% of net premium income
For others = 40% of net premium income
(Income tax authorities allow even a provision of 50% of net premium income from
other sources)
Financial Statements
Life Insurance Business
The insurance company carrying life insurance business is required to prepare Balance
sheet form A – BS Revenue account [Policy holders’ account] Form A- RA Profit and loss
account form A-PL. These forms have been given in the IRDA Regulations, 2002.
No form has been specified for cash flow statement.
General Insurance Business
The insurance company carrying on general insurance business is required to prepare
Balance sheet form B – BS Revenue account [Policy holders’ account] Form B- RA Profit
and loss account form B-PL. These forms have been given in the IRDA Regulations,
2002.
No form has been specified for cash flow statement.
Question 1
Write short note on Unexpired Risks Reserve
Answer
In most cases policies are renewed annually except in some cases where policies are issued for a
shorter period. Since insurers close their accounts on a particular date, not all risks under policies
expire on that date. Many policies extend into the following year during which the risk continues.
Therefore on the closing date, there is unexpired liability under various policies which may occur
during the remaining term of the policy beyond the year and therefore, a provision for unexpired
risks is made at normally 50% in case of Fire Insurance and 100% of in case of Marine Insurance.

Financial Statements of Insurance Companies 5.3
This reserve is based on the net premium income earned by the insurance company during the
year
Question 2
Write short note on Re-insurance.
Answer
If an insurer does not wish to bear the whole risk of policy written by him, he may reinsure a
part of the risk with some other insurer. In such a case the insurer is said to have ceded a part
of his business to other insurer. The reinsurance transaction may thus be defined as an
agreement between a ‘ceding company’ and ‘reinsurer’ whereby the former agreed to ‘cede’
and the latter agrees to accept a certain specified share of risk or liability upon terms as set
out in the agreement.
A ‘ceding company’ is the original insurance company which has accepted the risk and has agreed
to ‘cede’ or pass on that risk to another insurance company or a reinsurance company. It may
however be emphasised that the original insured does not acquire any right under a reinsurance
contract against the reinsurer. In the event of loss, therefore, the insured’s claim for full amount is
against the original insurer. The original insurer has to claim the proportionate amount from the
reinsurer.
There are two types of reinsurance contracts, namely, facultative reinsurance and treaty
reinsurance. Under facultative reinsurance each transaction has to be negotiated individually and
each party to the transaction has a free choice, i.e., for the ceding company to offer and the
reinsurer to accept. Under treaty reinsurance a treaty agreement is entered into between ceding
company and the reinsurer whereby the volume of the reinsurance transactions remain within the
limits of the treaty.
Question 3
Give computation of “premium income,” “claims expense” and “commission expense” in the
case of an insurance company.
Answer
Premium income: The payment made by the insured as consideration for the grant of
insurance is known as premium. The amount of premium income to be credited to revenue
account for a year may be computed as:
PREMIUM EARNED [NET]
Particulars Current Year Previous
Year
(`’000) (`’000)
Premium from direct business written - -
Add: Premium on reinsurance accepted - -

Less : Premium on reinsurance ceded - -

Net Premium - -
Adjustment for change in reserve for unexpired risks - -
Total Premium Earned (Net) = =
Note: Reinsurance premiums whether on business ceded or accepted are to be brought into
account, before deducting commission, under the head of reinsurance premiums.
Claims expenses: A claim occurs when a policy falls due for payment. In the case of a life
insurance business, it will arise either on death or maturity of policy that is, on the expiry of the
specified term of years. In the case of general insurance business, a claim arises only when
the loss occurs or the liability arises.
The amount of claim to be charged to revenue account may be worked out as under :
CLAIMS INCURRED [NET]
Particulars Current Year Previous Year
(`’000) (`’000)
Claims paid - -
Direct - -
Add :Re-insurance accepted - -
Less :Re-insurance Ceded - -
Net Claims paid - -
Add : Claims Outstanding at the end of the year - -
Less : Claims Outstanding at the beginning - -
Total Claims Incurred = =
Notes:
(a) Incurred But Not Reported (IBNR), Incurred but not enough reported [IBNER] claims
should be included in the amount for outstanding claims.
(b) Claims includes specific claims settlement cost but not expenses of management
(c) The surveyor fees, legal and other expenses shall also form part of claims cost.
(d) Claims cost should be adjusted for estimated salvage value if there is a sufficient
certainty of its realisation.
Commission expenses: Insurance Regulatory and Development Authority Act, 1999 regulates
the commission payable on policies to agents. Commission expense to be charged to revenue
account is computed as follows:

COMMISSION
Particulars Current Year Previous Year
(`’000) (`’000)
Commission paid - -
Direct - -
Add: Re-insurance Accepted - -
Less: Commission on Re-insurance Ceded - -
Net Commission = =
Note: The profit/ commission, if any, are to be combined with the Re-insurance accepted or
Re-insurance ceded figures.
Question 4
From the following figures appearing in the books of Fire Insurance division of a General
Insurance Company, show the amount of claim as it would appear in the Revenue Account for
the year ended 31st March, 2011:
Direct Business Re-Insurance

` `
Claim paid during the year 46,70,000 7,00,000
Claim Payable — 1st April, 2010 7,63,000 87,000
31st March, 2011 8,12,000 53,000
Claims received – 2,30,000
Claims Receivable —1st April, 2010 – 65,000
31st March, 2011 – 1,13,000
Expenses of Management 2,30,000 –
(includes ` 35,000 Surveyor’s fee and ` 45,000
Legal expenses for settlement of claims)
Answer
General Insurance Company (Abstract showing the amount of claims)
Net Claims incurred
`
Claims paid on direct business (46,70,000 + 35,000 + 45,000) 47,50,000
Add: Re-insurance 7,00,000

Add: Outstanding as on 31.3.2011 53,000

Less: Outstanding as on 1.4.2010 (87,000) 6,66,000
54,16,000
Less : Claims received from re-insurance 2,30,000
Add: Outstanding as on 31.3.2011 1,13,000
Less: Outstanding as on 1.4.2010 (65,000) (2,78,000)
51,38,000
Add : Outstanding direct claims at the end of the year 8,12,000
59,50,000
Less : Outstanding claims at the beginning of the year (7,63,000)
Net claims incurred 51,87,000
Question 5
From the following balances extracted from the books of Perfect General Insurance Company
Limited as on 31.3.2011, you are required to prepare Revenue Accounts in respect of Fire and
marine Insurance business for the year ended 31.3.2011 to and a Profit and Loss Account for the
same period :
` `
Directors’ Fees 80,000 Interest received 19,000
Dividend received 1,00,000 Fixed Assets (1.4.2010) 90,000
Provision for Taxation Income-tax paid during
(as on 1.4. 2010) 85,000 the year 60,000
Fire Marine
` `
Outstanding Claims on 1.4.2010 28,000 7,000
Claims paid 1,00,000 80,000
Reserve for Unexpired Risk on 1.4.2010 2,00,000 1,40,000
Premiums Received 4,50,000 3,30,000
Agent’s Commission 40,000 20,000
Expenses of Management 60,000 45,000
Re-insurance Premium (Dr.) 25,000 15,000
The following additional points are also to be taken into account :
(a) Depreciation on Fixed Assets to be provided at 10% p.a.

(b) Interest accrued on investments ` 10,000.

(c) Closing provision for taxation on 31.3.2011 to be maintained at ` 1,24,138
(d) Claims outstanding on 31.3.2011 were Fire Insurance ` 10,000; Marine Insurance
` 15,000.
(e) Premium outstanding on 31.3.2011 were Fire Insurance ` 30,000; Marine Insurance
` 20,000.
(f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect
of Fire and Marine Insurance respectively.
(g) Expenses of management due on 31.3.2011 were ` 10,000 for Fire Insurance and
` 5,000 in respect of marine Insurance
Answer
Form B – RA (Prescribed by IRDA)
Perfect General Insurance Co. Ltd
Revenue Account for the year ended 31st March, 2011
Fire and Marine Insurance Businesses
Schedule Fire Marine
Current Year Current Year
` `
Premiums earned (net) 1 4,27,500 1,40,000
Interest, Dividends and Rent – Gross — —
Double Income Tax refund — —
Profit on sale of motor car — —
Total (A) 4,27,500 1,40,000
Claims incurred (net) 2 82,000 88,000

Commission 3 40,000 20,000
Operating expenses related to Insurance 4 70,000 50,000
business
Bad debts — —
Indian and Foreign taxes — —
Total (B) 1,92,000 1,58,000
Profit from Marine Insurance business ( A-B) 2,35,500 (18,000)

Schedules forming part of Revenue Account

Schedule –1
Premiums earned (net) Fire Marine
Current Current
Year Year
` `
Premiums from direct business written 4,80,000 3,50,000
Less: Premium on reinsurance ceded (25,000) (15,000)
Total Premium earned 4,55,000 3,35,000
Less: Change in provision for unexpired risk (27,500) (1,95,000)
4,27,500 1,40,000
Schedule – 2
Claims incurred (net) 82,000 88,000
Schedule – 4
Operating expenses related to insurance business
Expenses of Management 70,000 50,000
Form B-PL
Perfect General Insurance Co. Ltd.
Profit and Loss Account for the year ended 31st March, 2011
Particulars Sche Current Previous
dule Year Year
` `
Operating Profit/(Loss)
(a) Fire Insurance 2,35,500
(b) Marine Insurance (18,000)
(c) Miscellaneous Insurance —
Income From Investments
Interest, Dividend & Rent–Gross 1,29,000
Other Income (To be specified)
Total (A) 3,46,500
Provisions (Other than taxation) —
Depreciation 9,000

Other Expenses –Director’s Fee 80,000

Total (B) 89,000
Profit Before Tax 2,57,500
Provision for Taxation 99,138
Profit After Tax 1,58,362
Working Notes:
Fire Marine
` `
1. Claims under policies less reinsurance
Claims paid during the year 1,00,000 80,000
Add: Outstanding on 31st March, 2011 10,000 15,000
1,10,000 95,000
Less : Outstanding on 1st April, 2010 (28,000) (7,000)
82,000 88,000
2. Expenses of management
Expenses paid during the year 60,000 45,000
70,000 50,000
3. Premiums less reinsurance
Premiums received during the year 4,50,000 3,30,000
4,80,000 3,50,000
Less : Reinsurance premiums (25,000) (15,000)
4,55,000 3,35,000
4. Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of net
premium for marine insurance.
5. Provision for taxation account
` `
31.3.2011 To Bank A/c 1.4.2010 By Balance b/d 85,000
(taxes paid) 60,000 31.3.2011 By P & L A/c 99,138
31.3.2011 To Balance c/d 1,24,138
1,84,138 1,84,138

Question 6
From the following information as on 31st March, 2011, prepare the Revenue Accounts of
Sagar Bhima Co. Ltd. engaged in Marine Insurance Business:
Particulars Direct Business Re-insurance
(` ) (` )
I. Premium :
Received 24,00,000 3,60,000
Receivable – 1st April, 2010 1,20,000 21,000
– 31st March, 2011 1,80,000 28,000
Premium paid 2,40,000 –
Payable – 1st April, 2010 – 20,000
– 31st March, 2011 – 42,000
II. Claims :
Paid 16,50,000 1,25,000
Payable – 1st April, 2010 95,000 13,000
– 31st March, 2011 1,75,000 22,000
Received – 1,00,000
Receivable – 1st April, 2010 – 9,000
– 31st March, 2011 – 12,000
III. Commission :
On Insurance accepted 1,50,000 11,000
On Insurance ceded – 14,000
Other expenses and income:
Salaries – ` 2,60,000; Rent, Rates and Taxes – ` 18,000; Printing and Stationery – ` 23,000;
Indian Income Tax paid – ` 2,40,000; Interest, Dividend and Rent received (net) – ` 1,15,500;
Income Tax deducted at source – ` 24,500; Legal Expenses (Inclusive of ` 20,000 in
connection with the settlement of claims) – ` 60,000; Bad Debts – ` 5,000; Double Income
Tax refund – ` 12,000; Profit on Sale of Motor car ` 5,000.
Balance of Fund on 1st April, 2010 was ` 26,50,000 including Additional Reserve of
` 3,25,000. Additional Reserve has to be maintained at 5% of the net premium of the year.
Answer
In exercise of the powers conferred by Section 114A of the Insurance Act, 1938 (4 of 1938),
the Insurance Regulatory and Development Authority in consultation with the Insurance
Advisory Committee prescribed the new formats for the financial statements of Insurance
Companies i.e. preparation of Financial Statements and Auditor’s Report of Insurance
Companies Regulations, 2000. Therefore, the above revenue account can be prepared as:


Marine Insurance Business
Schedule Current Year Previous Year
` `
Premiums earned (net) 1 25,21,750
Interest, Dividends and Rent – Gross 1,15,500
Double Income Tax refund 12,000
Profit on sale of motor car 5,000
Total (A) 26,54,250
Claims incurred (net) 2 17,81,000
Commission 3 1,47,000
Operating expenses related to Insurance business 4 3,41,000
Bad debts 5,000
Indian and Foreign taxes 2,40,000
Total (B) 25,14,000
Profit from Marine Insurance business ( A-B) 1,40,250
Schedules forming part of Revenue Account
Current Year Previous Year
` `
Schedule –1
Premium earned (net)
Premiums from direct business written 28,27,000
Less: Premium on reinsurance ceded (2,62,000)
Total Premium earned (net) 25,65,000
Change in provision for unexpired risk
(` 26,93,250 – ` 26,50,000) (43,250)
Net Premium earned 25,21,750
Schedule – 2
Claims incurred (net) 17,81,000
Schedule – 3
Commission paid
Direct 1,50,000
Add: Re-insurance accepted 11,000
Less: reinsurance ceded (14,000)
1,47,000

Schedule – 4
Operating expenses related to insurance business
Employees’ remuneration and welfare benefits 2,60,000
Rent, Rates and Taxes 18,000
Printing and Stationery 23,000
Legal and Professional charges 40,000
3,41,000
Working Notes:
1. Total Premium Income Direct Re-insurance
` `
Received 24,00,000 3,60,000
Add: Receivable on 31st March, 2011 1,80,000 28,000
25,80,000 3,88,000
Less: Receivable on 1st April, 2010 (1,20,000) (21,000)
24,60,000 3,67,000
Total premium income 24,60,000 + 3,67,000 = 28,27,000
2. Premium Paid `
Paid 2,40,000
Add: Payable on 31st March, 2011 42,000
2,82,000
Less: Payable on 1st April, 2010 (20,000)
2,62,000
3. Claims Paid
Direct Business 16,50,000
Re-insurance 1,25,000
Legal Expenses 20,000
17,95,000
Less: Re-insurance claims received (1,00,000)
16,95,000
4. Claims outstanding as on 31st March, 2011
Direct 1,75,000
Re-insurance 22,000
1,97,000
Less: Recoverable from Re-insurers on 31st March, 2011 (12,000)
1,85,000

5. Claims outstanding as on 1st April, 2010

Direct 95,000
Re-insurance 13,000
1,08,000
Less: Recoverable from Re-insurers on 1st April, 2010 (9,000)
99,000
6. Expenses of Management
Salaries 2,60,000
Rent, Rates and taxes 18,000
Printing and Stationery 23,000
Legal Expenses 40,000
3,41,000
Question 7
X Fire Insurance Co. Ltd. commenced its business on 1.4.2010. It submits you the following
information for the year ended 31.3.2011:
`
Premiums received 15,00,000
Re-insurance premiums paid 1,00,000
Claims paid 7,00,000
Expenses of Management 3,00,000
Commission paid 50,000
Claims outstanding on 31.3.2011 1,00,000
Create reserve for unexpired risk @40%
Prepare Revenue account for the year ended 31.3.2011.
Answer
Name of the Insurer: X Fire Insurance Co. Ltd.
Registration No. and Date of registration with the IRDA: …………………..
Particulars Schedule Current year ended
on 31st March, 2011
`
1. Premiums earned (Net) 1 14,00,000
2. Change in provision for unexpired risk (NIL–5,60,000) 2 (5,60,000)
Total (A) 8,40,000

1. Claims incurred (Net) 3 8,00,000

2. Commission 50,000
3. Operating Expenses 4 3,00,000
Total (B) 11,50,000
Operating Profit/(Loss) from Fire Insurance Business
[C =(A – B)] (3,10,000)
Schedule 1
Premiums earned (Net)
`
Premium received 15,00,000
Less: Premium on re-insurance paid (1,00,000)
14,00,000
Schedule 2
Reserve for unexpired risk @ 40% on net premium
40
` 14,00,000 × = ` 5,60,000
100
Schedule 3
Claims
`
Add: Claims outstanding on 31.3.2011 1,00,000
8,00,000
Schedule 4
Operating expenses
`
Question 8
Prepare the Fire Insurance Revenue A/c as per IRDA regulations for the year ended 31st March,
2011 from the following details:

`
Legal expenses regarding claims 10,000
Re-insurance premium paid 1,00,000
Commission 3,00,000
Expenses of management 2,00,000
Provision against unexpired risk on 1st April, 2010 5,50,000
Claims unpaid on 1st April, 2010 50,000
Claims unpaid on 31st March, 2011 80,000
Answer
FORM B - RA
Name of the Insurer:
Registration No. and Date of Registration with the IRDA:
Fire Insurance Revenue Account for the year ended 31st March, 2011
Particulars Schedule Amount (`)
(1) Premium earned 1 11,50,000
(2) Other income -
(3) Interest, dividend and rent -
Total (A) 11,50,000
(4) Claims incurred 2 5,30,000
(5) Commission 3 3,00,000
(6) Operating expenses related to Insurance business 4 2,00,000
Total (B) 10,30,000
Operating Profit (A)- (B) 1,20,000
Schedule 1 : Premium earned (net) `

Less: Re-insurance premium (1,00,000)
Net premium 12,00,000
Adjustment for change in reserve for unexpired risks (Refer W.N.) (50,000)
11,50,000

Schedule 2 : Claims Incurred `

Claims paid including legal expenses (4,90,000 + 10,000) 5,00,000
Add : Claims outstanding at the end of the year 80,000
Less : Claims outstanding at the beginning of the year (50,000)
Total claims incurred 5,30,000
Schedule 3 : Commission `
Commission paid 3,00,000
3,00,000
Schedule 4: Operating expenses `
2,00,000
Working Note:
Change in the provision for unexpired risk `
Unexpired risk reserve on 31st March, 2011 = 50% of net premium
i.e. 50% of ` 12,00,000 (See Schedule 1) 6,00,000
Less : Unexpired risk reserve as on 1st April, 2010 (5,50,000)
Change in the provision for unexpired risk 50,000
Question 9
Sunlife General Insurance Company submits the following information for the year ended
31st March 2010:
Particulars Direct Business Reinsurance
` `
Premium received 65,75,000 9,50,000
Premium paid --- 4,75,000
Claims paid during the year 42,50,000 5,00,000
Claims payable 1st April, 2009 6,25,000 87,000
31st March, 2010 7,18,000 60,000
Claims received --- 3,25,000
Claims receivable 1st April, 2009 65,000

31st March, 2010 1,10,000

Commission
On insurance accepted 1,50,000 11,000
On insurance ceded 14,000
The following additional information is also available:
(1) Expenses of management include ` 35,000 surveyor’s fee and ` 45,000 legal expenses
for settlement of claims.
(2) Reserve for unexpired risk is to be maintained @ 40%. The balance of reserve for
unexpired risk as on 1.4.09 was ` 24,50,000.
You are required to prepare the Revenue Account for the year ended 31st March, 2010.
Answer
Form B-RA (Prescribed by IRDA)
Sunlife General Insurance Company
Premium earned (net) 1 66,80,000
Interest, dividend and rent --
Other income --
Total (A) 66,80,000
Claims incurred (Net) 2 45,26,000
Operating expenses related to insurance business 4 1,50,000
Bad debts -
Total (B) 48,23,000
Operating profit from insurance business (A-B) 18,57,000
Schedules forming part of revenue account
Schedule 1 : Premium Earned (Net)
Particulars `
Premium from direct business 65,75,000
Add: Premium on reinsurance accepted 9,50,000
Less: Premium on reinsurance ceded (4,75,000)


Adjustment for change in reserve for unexpired risks (W.N.2) (3,70,000)
Total premium earned (net) 66,80,000
Schedule 2 : Claims Incurred (Net)
Particulars `
Claims paid on direct business (W.N.1) 43,30,000
Add: Re-insurance accepted (W.N.1) 4,73,000
Less: Re-insurance ceded (W.N.1) (3,70,000)
Net claims paid 44,33,000
Add: Claims outstanding at the end of the year 7,18,000
Less: Claims outstanding at the beginning of the year (6,25,000)
Schedule 3 : Commission
Particulars `
Commission paid on direct business 1,50,000
Add: Commission on reinsurance accepted 11,000
Less: Commission on reinsurance ceded (14,000)
1,47,000
Schedule 4 : Operating Expenses related to Insurance Business
Particulars `
Expenses of management (2,30,000 – 35,000 – 45,000) 1,50,000
1,50,000
Working Notes:
1. Claims incurred
Particulars Direct Re-insurance Re-insurance
business (`) accepted (`) ceded (`)
Paid/received 42,50,000 5,00,000 3,25,000
Add: Outstanding at the end of the 60,000 1,10,000
year
Expenses in connection with
settlement of claim (35,000 +
45,000) 80,000

Less: Outstanding at the beginning of

the year (87,000) (65,000)
43,30,000 4,73,000 3,70,000
2. Change in reserve for unexpired risk
`
Opening reserve as on 31st March, 2009 24,50,000
Less: Closing reserve as on 31st March, 2010 (` 70,50,000 x 40%) (28,20,000)
(3,70,000)
Question 10
On 31st March, 2011 the books of Zee Insurance Company Limited, contained the following
particulars in respect of fire insurance:
Reserve for unexpired risks on March 31, 2010 5,00,000
Additional reserve for unexpired risks on March 31, 2010 1,00,000
Premiums 11,20,000
Estimated liability in respect of outstanding claims:
On March 31, 2010 65,000
On March 31, 2011 90,000
Expenses of management (including ` 30,000 legal expenses paid in 2,80,000
connection with the claims)
Interest and dividend 64,250
Income tax on the above 6,520
Profit on sale of investment 11,000
On 31st March, 2011 provide ` 5,60,000 as unexpired risk reserve and ` 75,000 as Additional
reserve.
You are required to prepare the Fire Insurance Revenue account as per the regulations of
IRDA, for the year ended 31st March, 2011.

Answer
FORM B– RA
Name of the Insurer: Zee Insurance Company Limited
Registration No. and Date of registration with IRDA: ……………………..
Premium earned (net) 1 10,85,000
Profit or loss on sale/redemption of investment 11,000
Others –
Interest, dividend & rent (gross) 64,250
Total (A) 11,60,250
Claims incurred (Net) 2 6,95,000
Operating expenses related to insurance 4 2,50,000
Total (B) 10,97,000
Operating profit/loss from insurance business (B) – (A) 63,250
Schedule –1 Premium earned (net)
`
Less:Adjustment for change in Reserve for Unexpired risk (as per W.N.) (35,000)
Total premium earned 10,85,000
Schedule -2 Claims incurred (net)
`
Add: Legal expenses regarding claims 30,000
6,70,000
Add: Claims outstanding as on 31st March, 2011 90,000
7,60,000
Less: Claims outstanding as on 31st March, 2010 (65,000)
6,95,000

Schedule -3 Commission
`
Schedule-4 Operating expenses related to Insurance Business
Expenses of management (` 2,80,000 – ` 30,000) 2,50,000
Working Note:
Calculation for change in Reserve for Unexpired risk:
`
Reserve for Unexpired Risk as on31st March, 2011 5,60,000
Additional Reserve as on 31 March, 2011
st 75,000 6,35,000
Less: Reserve for Unexpired Risk as on 31st March, 2010 5,00,000
Additional Reserve as on 31st March, 2010 1,00,000 (6,00,000)
35,000
Note: Interest and dividends are shown at gross value in Revenue account. Income tax on it
will not be included in the Revenue account as it is the part of Profit and Loss account of an
insurance company.
Question 11
From the following information furnished to you by Ayushman Insurance Co. Ltd., you are
required to pass Journal entries relating to unexpired risk reserve and show in columnar form
“Unexpired Risks Reserve Account” for 2011.
(a) On 31.12.2010, it had reserve for unexpired risks amounting to ` 40 crores. It comprised
of ` 15 crores in respect of marine insurance business, ` 20 crores in respect of fire
insurance business and ` 5 crores in respect of miscellaneous insurance business.
(b) Ayushman Insurance Co. Ltd. creates reserves at 100% of net premium income in
respect of marine insurance policies and at 50% of net premium income in respect of fire
and miscellaneous income policies.
(c) During 2011, the following business was conducted:
(` in crores)
Marine Fire Miscellaneous
Premium collected from:
(a) Insured in respect of policies issued 18.00 43.00 12.00
(b) Other insurance companies in respect of 7.00 5.00 4.00
risks undertaken
Premium paid/payable to other insurance 6.70 4.30 7.00
companies on business ceded

Answer
In the books of Ayushman Insurance Co. Ltd.
Journal Entries
Date Particulars (` in crores)
Dr. Cr.
1.1.2011 Unexpired Risk Reserve (Fire) A/c Dr. 20.00
Unexpired Risk Reserve (Marine) A/c Dr. 15.00
Unexpired Risk Reserve (Miscellaneous) A/c Dr. 5.00
To Fire Revenue Account 20.00
To Marine Revenue Account 15.00
To Miscellaneous Revenue Account 5.00
(Being unexpired risk reserve brought forward
from last year)
31.12.2011 Marine Revenue A/c Dr. 18.30
To Unexpired Risk Reserve A/c 18.30
(Being closing reserve for unexpired risk created
at 100% of net premium income amounting to
`18.3 crores i.e.18+7-6.70)
Fire Revenue A/c Dr. 21.85
at 50% of net premium income of ` 43.7 crores
i.e.43+5-4.30)
Miscellaneous Revenue A/c Dr. 4.50
at 50% net premium income of
` 9 crores i.e. 12+4-7)
Unexpired Risk Reserve Account
Date Particulars Marine Fire Misc. Date Particulars Marine Fire Misc.
(`) (`) (`) (`) (`) (`)
1.1.2011 To Revenue 1.1.2011 By Balance
A/c 15.00 20.00 5.00 b/d 15.00 20.00 5.00
31.12.2011 To Balance 31.12.2011 By Revenue
c/d 18.30 21.85 4.50 A/c 18.30 21.85 4.50
33.30 41.85 9.50 33.30 41.85 9.50

Question 12
From the following information of Reliable Marine Insurance Ltd. for the year ending
31st March, 2012 find out the
(i) Net premiums earned
(ii) Net claims incurred
(`) (`)
Direct Business Re-insurance
Premium:
Received 88,00,000 7,52,000
Receivable – 01.04.2011 4,39,000 36,000
Receivable – 31.03.2012 3,77,000 32,000
Paid 6,09,000
Payable – 01.04.2011 27,000
Payable – 31.03.2012 18,000
Claims:
Paid 69,00,000 5,54,000
Payable – 01.04.2011 89,000 15,000
Payable – 31.03.2012 95,000 12,000
Received 2,01,000
Receivable – 01.04.2011 40,000
Receivable – 31.03.2012 38,000
Answer
(i) Net Premium earned
`
Premium from direct business received 88,00,000
Add : Receivable as 31.03.2012 3,77,000
Less : Receivable as on 01.04.2011 (4,39,000) 87,38,000
Add : Premium on re-insurance accepted 7,52,000
Add : Receivable as on 31.03.2012 32,000
Less : Receivable as on 01.04.2011 (36,000) 7,48,000
94,86,000
Less : Premium on re-insurance ceded 6,09,000
Add : Payable as on 31.03.2012 18,000
Less : Payable as on 01.04.2011 (27,000) (6,00,000)
Net Premium earned 88,86,000

(ii) Net Claims incurred

`
Claims paid on direct business 69,00,000
Add: Re-insurance 5,54,000
Less: Outstanding as on 1.4.2011 (15,000) 5,51,000
74,51,000
Less : Claims received from re-insurance 2,01,000
Less: Outstanding as on 1.4.2011 (40,000) (1,99,000)
72,52,000
Add : Outstanding direct claims at the end of the year 95,000
73,47,000
Less : Outstanding claims at the beginning of the year (89,000)
Net claims incurred 72,58,000
Question 13
Prepare the Fire Insurance Revenue A/c of Jasmine Fire Insurance Co. Ltd. as per IRDA
regulations for the year ended 31st March, 2012 from the following details:
Claims Paid 5,00,000
Legal Expenses regarding claims 10,000
Re-insurance premium paid 50,000
Commission 3,00,000
Provision against unexpired risk as on 1st April, 2011 5,75,000
Claims unpaid on 1st April, 2011 50,000
Claims unpaid on 31st March, 2012 80,000
Provide for unexpired risk @ 50% less reinsurance.

Answer
FORM B - RA
Name of the Insurer: Jasmine Fire Insurance Co. Ltd.
Registration No. and Date of Registration with the IRDA:
(1) Premium earned 1 11,75,000
(2) Other income -
(3) Interest, dividend and rent -
Total (A) 11,75,000
(4) Claims incurred 2 5,40,000
(5) Commission 3 3,00,000
(6) Operating expenses related to Insurance business 4 2,00,000
Total (B) 10,40,000
Operating Profit (A)- (B) 1,35,000
Schedule 1 : Premium earned (net) `
Less: Re-insurance premium (50,000)
Adjustment for change in reserve for unexpired risks (Refer W.N.) (25,000)
11,75,000
Schedule 2 : Claims Incurred `
Claims paid including legal expenses (5,00,000 + 10,000) 5,10,000
Add : Claims outstanding at the end of the year 80,000
Less : Claims outstanding at the beginning of the year (50,000)
Schedule 3 : Commission `
3,00,000
Schedule 4: Operating expenses `
2,00,000

Working Note:
Change in the provision for unexpired risk `
Unexpired risk reserve on 31st March, 2012 =50% of net premium
(i.e. 50% of ` 12,00,000) 6,00,000
Less : Unexpired risk reserve as on 1st April 2011 (5,75,000)
Change in the provision for unexpired risk 25,000

6
Financial Statements of Banking
Companies
BASIC CONCEPTS
The banks have to classify their advances into four broad groups (i) standard assets, (ii)
sub-standard assets, (iii) doubtful assets and (iv) loss assets.
Rates of Provisioning for Non-Performing Assets
Category of Advances Revised Rate (%)
Standard Advances
(a) direct advances to agricultural and SME 0.25
(b) advances to Commercial Real Estate (CRE) Sector 1.00
(c) all other loans and advances not included in (a) and 0.40
(b) above
Sub- standard Advances
• Secured Exposures 15
• Unsecured Exposures 25
• Unsecured Exposures in respect of Infrastructure loan 20
accounts where certain safeguards such as escrow
accounts are available.
Doubtful Advances – Unsecured Portion 100
Doubtful Advances – Secured Portion
• For Doubtful upto 1 year 25
• For Doubtful > 1 year and upto 3 years 40
• For Doubtful > 3 years 100
Loss Advances 100
The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross advances but
shown separately as 'Contingent Provisions against Standard Assets' under 'Other
Liabilities and Provisions Others' in Schedule 5 of the balance sheet.
GENERAL
Question 1
Write short notes on Slip system of posting and double voucher system.
Answer
Slip system of posting : Under this system used in banking companies, entries in the
personal ledgers are made directly from vouchers instead of being posted from the day book.
Pay-in-slips (used by the customers at the time of making deposits) and the cheques are used
as slips which form the basis of most of the transactions directly recorded in the accounts of
customers. As the slips are mostly filled by the customers themselves, this system saves a lot
of time and labour of the bank staff. The vouchers entered into different personal ledgers are
summarised on summary sheets every day, totals of which are posted to the different control
accounts which are maintained in the general ledger.
Double voucher system : In a bank, two vouchers are prepared for every transaction not involving
cash—one debit voucher and another credit voucher. This system is called double voucher system. The
vouchers are sent to different clerks who make entries in books under their charge.
Question 2
What are the restrictions imposed by the Banking Regulations Act, 1949 on payment of
dividend in case of banking companies?
Answer
As per the Banking Regulations Act 1949, a banking company cannot pay dividend on its
shares until all its capitalized expenses including preliminary expenses, organization
expenses, share selling commission, brokerage, amount of losses incurred by tangible assets
and any other item of expenditure not represented by tangible assets are completely written
off. However, as per the Act, it is permissible for a banking company to pay dividend on its
shares without writing off:
(i) The depreciation in the value of its investments in approved securities where such
depreciation has not actually been capitalized or otherwise accounted for as a loss.
(ii) The depreciation in the value of its investments in shares, debentures or bonds (other than
approved securities) where adequate provision for such deprecation has been made to the
satisfaction of its auditors; and
(iii) The bad debts where adequate provision for such bad debts has been made to the
satisfaction of its auditors.

Financial Statements of Banking Companies 6.3
Question 3
Write short note on Classification of investments by a banking company.
Answer
The investment portfolio of a bank would normally consist of both approved securities
(predominantly government securities) and other securities (shares, debentures, bonds etc.).
Banks are required to classify their entire investment portfolio into three catogories : held-to-
maturity, available-for-sale and held-for-trading. Securities acquired by banks with the
intention to hold them upto maturity should be classified as ‘held-to-maturity’. Securities
acquired by banks with the intention to trade by taking advantage of short–term price interest
rate movements should be classifed as held-for trading. Securities which do not fall within the
above two categories should be classified as available-for-sale’.
NON-PERFORMING ASSETS AND THEIR PROVISIONING:
Question 4
Write short note on Non-Performing Assets.
Answer
An asset is classified as non-performing asset (NPA) if dues in the form of principal and
interest are not paid by the borrower for a period of 90 days. If any advance or credit facility
granted by a bank to a borrower becomes non-performing, then the bank will have to treat all
the advances/credit facilities granted to that borrower as non-performing without having any
regard to the fact that there may still exist certain advances/credit facilities having performing
status.
Income from the non-performing assets can only be accounted for as and when it is actually
received. In concept, any credit facility (assets) becomes non-performing when it eases to
generate income. The RBI has issued guidelines to commercial banks regarding the
classification of advances between performing and non-performing assets.
A term loan is treated as a non-performing assets (NPA) if interest and/or instalments of
principal remains over due for a period of more than 90 days. A cash credit/overdraft account
is treated as NPA if it remains out of order for a period of more than 90 days. An account is
treated an ‘out of order’ if any of the following conditions is satisfied:
(a) the outstanding balance remains continuously in excess of the sanctional limit/drawing
power.
(b) though the outstanding balance is less than the sanctioned limit/drawing power—
(i) there are credits continuously for more than 90 days as on the date of balance
sheet or
(ii) credits during the aforesaid periods are not enough to cover the interest debited
during the same period.

Bills purchased and discounted are treated as NPA if they remain overdue and unpaid for a
period of more than 90 days. Necessary provision should be made for non-performing assets
after classifying them as sub-standard, doubtful or loss asset as the case may be.
Question 5
Write short note on Classification of advances in the case of a Banking Company.
Answer
Banks have to classify their advances into four broad groups:
(i) Standard Assets—Standard assets is one which does not disclose any problems and
which does not carry more than normal risk attached to the business. Such an asset is
not a NPA as discussed earlier.
(ii) Sub-standard Assets—Sub-standard asset is one which has been classified as NPA for
a period not exceeding 12 months. In the case of term loans, those where instalments of
principal are overdue for period exceeding one year should be treated as sub-standard.
In other words, such an asset will have well-defined credit weaknesses that jeopardise
the liquidation of the debt and are characterised by the distinct possibility that the bank
will sustain some loss, if deficiencies are not corrected.
(iii) Doubtful Assets—A doubtful asset is one which has remained sub-standard for a period
exceeding 12 months. A loan classified as doubtful has all the weaknesses inherent in
that classified as sub-standard with added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known facts, conditions and
values, highly questionable and improbable.
(iv) Loss Assets—A loss asset is one where loss has been identified by the bank or internal
or external auditors or the RBI inspectors but the amount has not been written off, wholly
or partly.
The classification of advances should be done taking into account (i) Degree of well defined
credit worthiness and (ii) Extent of dependence on collateral security.
The above classification is meant for the purpose of computing the amount of provision to be made
in respect of advances and not for the purpose of presentation of advances in the balance sheet.
Question 6
From the following information find out the amount of provisions required to be made in the
Profit & Loss Account of a commercial bank for the year ended 31st March, 2011 :
(i) Packing credit outstanding from Food Processors ` 60 lakhs against which the bank
holds securities worth ` 15 lakhs. 40% of the above advance is covered by ECGC. The
above advance has remained doubtful for more than 3 years.
(ii) Other advances:

Assets classification ` in lakhs

Standard 3,000
Sub-standard 2,200
Doubtful :
For one year 900
For two years 600
For three years 400
For more than 3 years 300
Loss assets 600
Answer
(i)
(` in lakhs)
Amount outstanding (packing credit) 60
Less : Realisable value of securities (15)
45
Less : ECGC cover (40%) (18)
Balance 27
Required provision :
Provision for unsecured portion (100%) 27.0
Provision for secured portion (100%)* 15.0
42.0
(ii) Other advances:
(` in lakhs)
Assets Amount % of Provision
provision
Standard 3,000 0.40 12
Sub-standard 2,200 15 330
Doubtful :
For one year 900 25 225
For two years 600 40 240
For three years 400 40 160
For more than three years 300 100 300
Loss 600 100 600
Required provision 1,867

Note : Sub-standard and Doubtful advances have been assumed as fully secured.
However, in case, the students assume that no security cover is available for these
advances, provision will be made for @ 25% for sub-standard and 100% for doubtful
advances.
Question 7
Bidisha Bank Ltd. had extended the following credit lines to a Small Scale Industry which had
not paid any interest since March, 2005.
Term Loan Export Credit
Balance outstanding on 31.3.2011 ` 70 Lacs ` 60. Lacs
DICGC/ECGC Cover 50% 40%
Securities held ` 30 Lacs ` 25 Lacs
Realisable value of securities ` 20 Lacs ` 15 Lacs
Compute the necessary provisions to be made for the year ended 31st March, 2011
Answer
Term Loan Export Credit
` in Lacs ` in Lacs
Balance outstanding 70.00 60.00
Less : Realisable value of securities (20.00) (15.00)
50.00 45.00
Less : DICGC/ECGC Cover (25.00) (18.00)
Net unsecured balance 25.00 27.00
Provision in respect of secured portion (100%) 20.00 15.00
Provision for unsecured portion (100%) 25.00 27.00
Provision required 45.00 42.00
Question 8
Rajatapeeta Bank Ltd. had extended the following credit lines to a Small Scale Industry, which
had not paid any Interest since March, 2005:
Term Loan Export Loan
Balance Outstanding on 31.03.2011 ` 35 lakhs ` 30 lakhs
DICGC/ECGC cover 40% 50%
Securities held ` 15 lakhs ` 10 lakhs
Realisable value of Securities ` 10 lakhs ` 08 lakhs
Compute necessary provisions to be made for the year ended 31st March, 2011.

Answer
Term loan Export credit
` in lakhs ` in lakhs
Balance outstanding on 31.3.2011 35.0 30.0
Less: Realisable value of Securities (10.0) (8.0)
25.0 22.0
Less: DICGC cover @ 40% 10.0
ECGC cover @ 50% ___ (11.0)
Unsecured balance 15.0 11.0
Required Provision:
100% for unsecured portion 15.0 11.0
100% for secured portion 10.0 8.00
Total provision required 25.0 19.0
Question 9
From the following information find out the amount of provisions to be shown in the Profit and
Loss Account of a Commercial Bank:
Assets (` in lakhs)
Standard 4,000
Sub-standard 2,000
Doubtful upto one year 900
Doubtful upto three years 400
Doubtful more than three years 300
Loss Assets 500
Answer
Computation of provision:
Assets Amount % of Provision Provision
(` in lakhs) (` in lakhs)
Standard 4,000 0.40 16
Sub-standard* 2,000 15 300
Doubtful upto one year* 900 25 225
Doubtful upto three years* 400 40 160
Doubtful more than three 300 100 300

years*
Loss 500 100 500
1,501
* Sub-standard and doubtful assets are assumed as fully secured.
Question 10
From the following information, compute the amount of provisions to be made in the Profit and
Loss Account of a Commercial bank:
Assets ` in lakhs
(i) Standard (Value of security ` 6,000 lakhs) 7,000
(ii) Sub-standard 3,000
(iii) Doubtful
(a) Doubtful for less than one year 1,000
(Realisable value of security ` 500 lakhs)
(b) Doubtful for more than one year, but less than 3 years 500
(Realisable value of security ` 300 lakhs)
(c) Doubtful for more than 3 years (No security) 300
Answer
Statement showing Provisions on various performing and non-performing assets
Amount % of Provision
` in lakhs provision ` in lakhs
Standard 7,000 0.40 28
Doubtful (less than one year)
On secured portion 500 25 125
On unsecured portion 500 100 500
Doubtful (more than one year but less than three
years)
On secured portion 300 40 120
On unsecured portion 200 100 200
Doubtful Unsecured (more than three years) 300 100 300
Total provision 1,723
Question 11
From the following information of details of advances of X Bank Limited calculate the amount
of provisions to be made in profit and loss account for the year ended 31.3.2011:

Asset classification ` in lakhs

Standard 6,000
Sub-standard 4,400
Doubtful:
For one year 1,800
For two years 1,200
For three years 800
For more than three years 600
Loss assets 1,600
Answer
Statement showing provisions on various performing and non-performing assets
Asset Classification Amount Provision Amount of Provision
` in lakhs % ` in lakhs
Standard 6,000 0.40 24
∗∗
Doubtful**
One year 1,800 25 450
2 years 1,200 40 480
3 years 800 40 320
More than 3 years 600 100 600
Loss assets 1,600 100 1,600
4,134
Question 12
Find out the income to be recognised at Good Bank Limited for the year ended 31.3.2010 in
respect of Interest on advances (` in lakhs) as detailed below:
Performing Assets N.P.A.
Interest Interest Interest Interest
earned received earned received
Term loan 240 160 150 10
Cash credits and overdrafts 1,500 1,240 300 24
Bills purchased and discounted 300 300 100 40
∗∗
Sub standard and doubtful assets have been treated as fully secured.

Answer
Interest on performing assets to be recognized on accrual basis, but interest on Non-
performing asset should be recognized on Cash Basis.
` in lakhs
Interest on Term Loan (240 + 10) 250
Cash Credits and Over Drafts (1500 + 24) 1,524
Bills Purchases and Discounted (300 + 40) 340
Total Interest to be recognized 2,114
Question 13
Mention the condition when a cash credit overdraft account is treated as ‘out of order’.
Answer
A cash credit overdraft account is treated as NPA if it remains out of order for a period of more than
90 days. An account is treated as 'out of order' if any of the following conditions is satisfied:
(a) The outstanding balance remains continuously in excess of the sanctioned limit/drawing power.
(b) Though the outstanding balance is less than the sanctioned limit/drawing power –
(i) there are no credits continuously for more than 90 days as on the date of balance sheet; or
(ii) credits during the aforesaid period are not enough to cover the interest debited
during the same period.
(c) Further any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
on the due date fixed by the bank.
Question 14
From the following information of details of advances of Zenith Bank Ltd., calculate the
amount of provisions to be made in Profit and Loss Account for the year ended on
31-3-2010:
Assets classification (ìn lakhs)
Standard 10,000
Sub-standard 6,400
Doubtful:
for one year 3,200
for two years 1,800
for three years 900
for more than three years 1,100
Loss assets 3,000

Answer
Statement showing provisions on various performing and non performing assets of
Zenith Bank Ltd.
Assets classification Amount Provision Amount of
(` in lakhs) (%) provision
(` in lakhs)
Standard 10,000 0.40 40
Doubtful:
for one year 3,200 25 800
for two years 1,800 40 720
for three years 900 40 360
for more than 3 years 1,100 100 1,100
Loss assets 3,000 100 3,000
Total 6,980
Note: It is assumed that sub-standard assets and all doubtful assets are fully secured.
Question 15
From the following information, compute the amount of provisions to be made in the Profit and
Loss Account of a Commercial Bank for the year ending on 31-03-2012.
Assets (Category of Advances) ` in Lakhs
Standard Advances 7,000
Sub-standard Advances 3,500
(Include secured exposures ` 1,000 Lakhs and balances unsecured exposures ` 2,500
Lakhs includes ` 1,500 Lakhs in respect of infrastructure loan accounts where escrow
accounts are available)
Doubtful advances- unsecured portion 1,500
Doubtful advances- secured portion
For doubtful up to 1 year 500
For doubtful more than 1 year and up to 3 years 600
For doubtful more than 3 years 300
Loss Advances 200

Answer
Statement showing the amount of provisions on Assets:
(` in lakhs)
Assets Amount % of Provision
provision
Standard 7,000 0.40 28
Sub-standard:
Secured 1,000 15 150
Other unsecured 1,000 25 250
Unsecured infrastructure 1500 20 300
Doubtful:
up to one year 500 25 125
up to 3 years 600 40 240
For more than three years 300 100 300
Doubtful unsecured 1,500 100 1,500
Loss 200 100 200
Required provision 3,093
Question 16
A loan account remains out of order as on the date of Balance Sheet of a Bank. The account
has been classified as doubtful assets (upto 1 year).
Details of the accounts are :
Outstanding ` 6,73,000
ECGC coverage 25% (Limited to ` 1,00,000)
Value of security held ` 1,50,000
Compute the necessary provision to be made by a Bank as per applicable rates.
Answer
`
Doubtful Assets (upto 1 year) 6,73,000
Less: Value of security (excluding ECGC cover) (1,50,000)
5,23,000
Less: ECGC coverage (limited to ` 1,00,000) (1,00,000)
Unsecured portion 4,23,000
Provision:
for unsecured portion @100% on ` 4,23,000 4,23,000
for secured portion @ 25% on ` 1,50,000 37,500
Total provision to be made in the books of the bank 4,60,500

REBATE ON BILLS DISCOUNTED

Question 17
Write short note on Acceptances and endorsements
Answer
A bank has a more acceptable credit as compared to that of its customers. On this account, it is
often called upon to accept or endorse bills on behalf of its customers. In such a case, the bank
undertakes a liability towards the party which agrees to receive such a bill in payment of a debt or
agreed to discount the bill after the same has been accepted by the bank. As against this liability,
the bank has a corresponding claim against the customer on whose behalf it has undertaken to be
a party to the bill, either as an acceptor or as an endorser. Such liabilities which are outstanding at
the close of the year and the corresponding assets are disclosed as contingent liability in the
financial statements. As a safeguard against the customer not being able to meet the demand of
the bank in this respect, usually the bank requires the customer to deposit a security equivalent to
the amount of the bill accepted on his behalf. A record of the particulars of the bills accepted as
well as of the securities collected from the customers is kept in the Bills Accepted Register. A bank
may not treat this book as part of the system of its account. In such a case no further record of the
transactions is kept until the bill matures for payment. If the bill, at the end of its term, has to be
retired by the bank and the amount cannot be collected from the customer on demand, the bank
reimburses itself by disposing of the security deposited by the customer.
Question 18
The following particulars are extracted from the (Trial Balance) Books of the M/s Commercial
Bank Ltd. for the year ending 31st March, 2011:
`
(i) Interest and Discounts 1,96,62,400
(ii) Rebate on Bills Discounted (balance on 1.4.2010) 65,040
(iii) Bills Discounted and purchased 10,67,45,400
It is ascertained that proportionate discount not yet earned on the Bills Discounted which will
mature during 2011-2012 amounted to ` 92,760.
Pass the necessary Journal entries with narration adjusting the above and show:
(a) Rebate on Bill Discounted Account; and
(b) Interest and Discount Account in the ledger of the Bank.

Answer
The Commercial Bank Ltd.
Journal Entries
Date Dr. Cr.
2011 ` `
March 31 Rebate on Bills Discounted A/c Dr. 65,040
To Interest and Discount A/c 65,040
(Being the amount of provision for unexpired
discount brought forward from the previous year
credited to Interest and Discount A/c)
March 31 Interest and Discount A/c Dr. 92,760
To Rebate on Bills Discounted A/c 92,760
(Being provision for unexpired discount required at
the end of the current year)
March 31 Interest and Discount A/c Dr. 1,96,34,680
To Profit & Loss A/c 1,96,34,680
(Being transfer of balance to Profit and Loss A/c)
(a) Rebate on Bills Discounted Account
2011 ` 2010 `.
March 31 To Interest and April 1 By Balance b/d 65,040
Discount A/c 65,040 2011
2011 March 31 By Interest and Discount
March 31 To Balance c/d 92,760 A/c (rebate required) 92,760
1,57,800 1,57,800
(b) Interest and Discount Account
2011 ` 2010 `
March 31 To Rebate on Bills April 1 By Rebate on Bills
Discounted A/c 92,760 2011 Discounted A/c
(opening balance) 65,040
March 31 To Profit & Loss March 31 By Cash and
A/c (transfer) 1,96,34,680 Sundries 1,96,62,400
1,97,27,440 1,97,27,440

Question 19
From the following details, prepare bills for collection (Asset) Account and Bills for collection
(Liability) Account:
`
On 1.4.2010, Bills for Collection were 51,00,000
During the year 2010-11 Bills received for Collection amounted to 75,00,000
Bill collected during the year 2010-11 98,47,000
Bill dishonoured and returned during the year 27,10,000
Answer
Bills for collection (Asset) Account
` `
1.4.2010 To Balance b/d 51,00,000 2010-11 By Bills for collection
(Liability) A/c 98,47,000
2010-11 To Bills for 75,00,000 By Bills for collection
collection (Liability) A/c 27,10,000
31.3.2011 By Balance c/d 43,000
1,26,00,000 1,26,00,000
1.4.2011 To Balance b/d 43,000
Bills for collection (Liability) Account

2010-11 To Bills for collection 1.4.2010 By Balance b/d 51,00,000
(Asset) A/c 98,47,000 2010-11 By Bills for collection
To Bills for collection (Asset) A/c 75,00,000
(Asset) A/c 27,10,000
31.3.2011 To Balance c/d 43,000
1,26,00,000 1,26,00,000
1.4.2011 By Balance b/d 43,000
Question 20
The following is an extract from the Trial Balance of Dream Bank Ltd. as at 31st March, 2011:
Rebate on bills discounted as on 1-4-2010 68,259 (Cr.)
Discount received 1,70,156 (Cr.)

Analysis of the bills discounted reveals as follows:

Amount (`) Due date
2,80,000 June 1, 2011
8,72,000 June 8, 2011
5,64,000 June 21, 2011
8,12,000 July 1, 2011
6,00,000 July 5, 2011
You are required to find out the amount of discount to be credited to Profit and Loss account
for the year ending 31st March, 2011 and pass Journal Entries. The rate of discount may be
taken at 10% per annum.
Answer
The amount of rebate on bills discounted as on 31st March, 2011 the period which has not
been expired upto that day will be calculated as follows:
Discount on ` 2,80,000 for 62 days @ 10% 4,756
Total 70,159
The amount of discount to be credited to the profit and loss account will be:
`
Transfer from rebate on bills discounted as on 31.03.2010 68,259
Add: Discount received during the year 1,70,156
2,38,415
Less: Rebate on bills discounted as on 31.03.2011 (as above) (70,159)
1,68,256
Journal Entries
` `
Rebate on bills discounted A/c Dr. 68,259
To Discount on bills A/c 68,259
(Transfer of unexpired discount on 31.03.2010)
Discount on bills A/c Dr. 70,159

To Rebate on bills discounted 70,159

(Unexpired discount on 31.03.2011 taken into account)
Discount on Bills A/c Dr. 1,68,256
To P & L A/c 1,68,526
(Discount earned in the year, transferred to P&L A/c)
Question 21
As on 31st March 2009, Strong Bank Ltd. has a balance of ` 27 crores in “rebate on bills
discounted” account. The bank provides you the following further information:
(1) During the financial year ending 31st March 2010, Strong Bank Ltd. discounted bills of
exchange of ` 4,000 crores charging interest @ 15% p.a. and the average period of
discount being 146 days.
(2) Bills of exchange of ` 600 crores were due for realization from the acceptors/customers after
31st March 2010, the average period outstanding after 31st March 2010, being 73 days.
You are required to pass necessary journal entries in the books of Strong Bank Ltd. for the
above transactions.
Answer
In the books of Strong Bank Ltd.
Journal Entries
Particulars Debit Credit
(`) (`)
Rebate on bills discounted A/c Dr. 27
To Discount on bills A/c 27
(Being the transfer of opening balance in ‘Rebate on bills
discounted A/c’ to ‘Discount on bills A/c’)
Bills purchased and discounted A/c Dr. 4,000
To Discount on bills A/c 240
To Clients A/c 3,760
(Being the discounting of bills of exchange during the year)
Discount on bills A/c Dr. 18
To Rebate on bills discounted A/c 18
(Being the unexpired portion of discount in respect of the
discounted bills of exchange carried forward)
Discount on bills A/c Dr. 249


(Being the amount of income for the year from discounting of bills
of exchange transferred to Profit and loss A/c)
Working Notes:
1. Discount received on the bills discounted during the year
15 146
` 4,000 crores × × = ` 240 crores
100 365
2. Calculation of rebate on bill discounted
15 73
` 600 crores × × = ` 18 crores
100 365
(It is assumed that discounting rate of 15% is used for the bill of ` 600 crores also)
3. Income from bills discounted transferred to Profit and Loss A/c would be calculated by
preparing Discount on bills A/c
Discount on bills A/c
` in crores
Date Particulars Amount Date Particulars Amount
31 March To Rebate on 18 1 April, By Rebate on bills
st 27
2010 bills discounted 2009 discounted
” To Profit and Loss 2009-10 By Bills purchased
A/c (Bal.Fig.) 249 and discounted 240
267 267
Question 22
The following facts have been taken out from the records of Dee Bank Ltd. as on
31st March, 2011:
Dr. (`) Cr. (`)
Rebate on bills discounted (not due on March 31st, 2010) 45,800
Discount received 2,02,500
Bills discounted 12,25,000
An analysis of the bills discounted is as follows:
Amount Due date Rate of discount
` 2009
(i) 3,75,000 April 8 12%
(ii) 1,50,000 May 5 14%

(iii) 2,20,000 June 12 14%

(iv) 4,80,000 July 15 15%
You are required to:-
(i) Calculate rebate on bills discounted as on 31st March, 2011.
(ii) The amount of discount to be credited to the profit and loss account.
(iii) Show necessary journal entries in the books of Dee Bank Ltd. as on 31st March, 2011.
Answer
(i) Calculation of Rebate on bills discounted
Amount Due date Unexpired portion from Rate of Rebate on bills

S.No.
(`) (year 2011) 31st March, 2011 discount discounted (`)
(i) 3,75,000 April 8 8 days 12% 986
(ii) 1,50,000 May 5 35 days 14% 2,014
(iii) 2,20,000 June 12 73 days 14% 6,160
(iv) 4,80,000 July 15 106 days 15% 20,910
12,25,000 30,070
(ii) Amount of discount to be credited to the Profit and Loss Account
`
Transfer from Rebate on bills discounted A/c as on 31st March, 2010 45,800
Add: Discount received during the year ended 31st March, 2011 2,02,500
2,48,300
Less: Rebate on bills discounted as on 31st March, 2011 (30,070)
Discount credited to Profit and Loss Account 2,18,230
(iii) In the books of Dee Bank Ltd.
Journal Entries
Particulars Dr. (`) Cr. (`)
(1) Rebate on bills discounted A/c Dr. 45,800
To Discount on bills A/c 45,800
(Being the transfer of opening balance of rebate on bills
discounted account to discount on bills account)
(2) Discount on bills A/c Dr. 30,070

To Rebate on bills discounted A/c 30,070

(Being the unexpired portion of discount in respect of the
discounted bills of exchange carried forward)
(3) Discount on bills A/c Dr. 2,18,230
(Being the amount of income for the year transferred from
Discount on bills A/c to Profit and Loss A/c)
Question 23
Given below is an extract from the trial balance of T.K. Bank Limited as on
31st December, 2011:
Particulars Debit Credit

` `
Bills discounted 12,64,000 ----
Rebate on bills discounted (1.1.2011) ---- 8,340
Discount received for the year 85,912
An analysis of the bills discounted is shown below:
Amount Due date in 2012 Rate of discount
` (% p.a.)
1,40,000 March 6th 5
4,36,000 March 12th 4.5
2,82,000 March 26th 6
4,06,000 April 6th 4
Show the workings, how the relevant items will appear in the bank’s Profit and Loss account as on
31st December, 2011 and in bank’s Balance Sheet as on 31st December, 2011.
Answer
Profit & Loss Account (an extract)
for the period ending 31.12.2011
Transfer from ‘Rebate on bills discounted account’ (01.01.2011) 8,340

Add: Discount for the year 2011 85,912
94,252
Less: Rebate on bills discounted carried forward to the year 2012 13,274
80,978

Balance Sheet (an extract) as on 31.12.2011

`
Other liabilities & provisions:
Rebate on bills discounted 13,274
Working Note:
Statement of rebate on bills discounted as on 31.12.2011
Due date Amount (`) No. of days Rate of Discount of the
after 31.12.2011 discount (%) unexpired period
March 6th 1,40,000 65 5 1,247
March 12th 4,36,000 71 4.5 3,816
March 26th 2,82,000 85 6 3,940
April 6th 4,06,000 96 4 4,271
Total rebate on bills discounted to be carried forward 13,274
CAPITAL ADEQUACY RATIO
Question 24
A Commercial Bank has the following capital funds and assets. Segregate the capital funds
into Tier I and Tier II capitals. Find out the risk adjusted asset and risk weighted assets ratio.
(` in crores)
Equity share capital 500.00
Statutory reserve 270.00
Capital reserve (of which ` 16 crores were due to revaluation of assets 78.00
and the balance due to sale of capital asset)
Assets:
Cash balance with RBI 10.00
Balance with other banks 18.00
Other investments 36.00
Loans and advances:
(i) Guaranteed by the Government 16.50
(ii) Others 5,675.00
Premises, furniture and fixtures 78.00
Off-Balance Sheet items:
(i) Guarantee and other obligations 800.00
(ii) Acceptances, endorsements and letter of credit 4,800.00

Answer
` in crores ` in crores
(i) Capital funds – Tier I
Equity share capital 500
Statutory reserve 270
Capital reserve (arising out of sale of assets) (78-16) 62
832
Capital funds – Tier II
Capital reserve (arising out of revaluation of assets) 16
Less: Discount to the extent of 55% (8.8) 7.2
839.2
` in crores % of weight ` in crores

(ii) Risk Adjusted Assets
Funded Risk Assets
Cash balance with RBI 10 0 0
Balance with other banks 18 20 3.60
Other investments 36 100 36
Loans and advances:
(i) Guaranteed by the government 16.5 0 0
(ii) Others 5,675 100 5,675
Premises, furniture and fixtures 78 100 78
5,792.60
` in crores Credit
conversion
factor
Off-Balance Sheet items:
Guarantees and other obligations 800 100 800
Acceptances, endorsements and letters of
credit 4,800 100 4,800
11,392.60

Risk Weighted Assets Ratio:

Capital fund × 100
Risk adjusted assets
(839.2/11,392.60) x 100 = 7.37%
At present, capital adequacy ratio as per RBI norms is 9%.Therefore, Bank has to improve the
ratio by introducing further Tier I capital.
PROFIT & LOSS ACCOUNT
Question 25
From the following information calculate the amount of Provisions and Contingencies and
prepare Profit and Loss Account of Zed Bank Ltd. for the year ended 31.3.2011:
(` in ’000)
Interest and Discount 8,860
(Includes interest accrued on investments)
Other Income 220
Interest expended 2,720
Operating expenses 2,830
Interest accrued on Investments 10
Additional Information:
(a) Rebate on bills discounted to be provided for 30
(b) Classification of Advances:
(i) Standard assets 4,000
(ii) Sub-standard assets 2,240
(iii) Doubtful assets−(fully unsecured) 390
(iv) Doubtful assets – covered fully by security
Less than 1 year 100
More than 1 year, but less than 3 years 600
More than 3 years 600
(v) Loss assets 376
(c) Provide 35% of the profit towards provision for taxation.
(d) Transfer 25% of the profit to Statutory Reserve.

Answer
ZED Bank Ltd.
(` in ’000)
Particulars Schedule Year ended on 31st March,
No. 2011
I. Income
Interest earned (W.N. 1) 13 8,830
Other income 14 220
Total 9,050
II. Expenditure
Interest expended 15 2,720
Operating expenses 16 2,830
Provisions and contingencies (W.N. 4) 2,513.95
Total 8,063.95
III. Profit/Loss
Net profit/(loss) for the year 986.05
Profit/(loss) brought forward Nil
Total 986.05
IV. Appropriations
Transfer to statutory reserve @ 25% 246.51
Balance carried to balance sheet 739.54
Total 986.05
Working Notes:
1. Schedule 13 – Interest Earned
(` ’000s)
(i) Interest and discount 8,860
Less: Rebate on bills discounted (30)
Interest accrued on investments (10) 8,820
(ii) Interest accrued on investments 10
8,830

2. Calculation of Provisions and Contingencies

Assets Amount % of Provision Provision
(` in ’000) (` in ’000)
Standard assets 4,000 0.40 16
Sub-standard assets* 2,240 15 336
Doubtful assets (unsecured) 390 100 390
Doubtful assets – covered by security
Less than 1 year 100 25 25
More than 1 year but less than 3 years 600 40 240
More than 3 years 600 100 600
Loss assets 376 100 376
Total provision 8,306 1,983
*Note: It is assumed that sub-standard assets are fully secured.
3. Calculation of provision on tax = 35% (Total income – Total expenditure)
= 35% of ` [(9,050 – (2,720 + 2,830 + 1,983)]
= 35% of ` 1,517
= ` 530.95
4. Total provisions and contingencies = ` 1,983 + ` 530.95 = ` 2,513.95.
Question 26
The following are the figures extracted from the books of New Generation Bank Limited as on
31.3.2011:
`
Interest and discount received 37,05,738
Interest paid on deposits 20,37,452
Issued and subscribed capital 10,00,000
Salaries and allowances 2,00,000
Directors fee and allowances 30,000
Rent and taxes paid 90,000
Postage and telegrams 60,286
Statutory reserve fund 8,00,000
Commission, exchange and brokerage 1,90,000
Rent received 65,000

Profit on sale of investments 2,00,000

Depreciation on bank’s properties 30,000
Statutory expenses 40,000
Preliminary expenses 25,000
Auditor’s fee 5,000
The following further information is given:

(i) A customer to whom a sum of ` 10 lakhs has been advanced has become insolvent and
it is expected only 50% can be recovered from his estate.
(ii) There were also other debts for which a provision of ` 1,50,000 was found necessary by
the auditors.
(iii) Rebate on bills discounted on 31.3.2010 was ` 12,000 and on 31.3.2011 was ` 16,000.
(iv) Provide ` 6,50,000 for Income-tax.
(v) The directors desire to declare 10% dividend.
Prepare the Profit and Loss account of New Generation Bank Limited for the year ended
31.3.2011 and also show, how the Profit and Loss account will appear in the Balance Sheet, if
the Profit and Loss account opening balance was Nil as on 31.3.2010.
Answer
New Generation Bank Limited
Schedule Year ended
31.03.2011
(` in ‘000s)
I. Income:
Interest earned 13 3,701.74
Other income 14 455.00
Total 4,156.74
II. Expenditure
Interest expended 15 2,037.45
Operating expenses 16 480.29
Provisions and contingencies (500 + 150 + 650) 1,300.00
Total 3,817.74

IIII. Profits/Losses
Net profit for the year 339.00
Profit brought forward Nil
339.00
IV. Appropriations
Transfer to statutory reserve (25%) 84.75
Proposed dividend 100.00
Balance carried over to balance sheet 154.25
339.00
The Profit & Loss Account balance of `154.25 thousand will appear in the Balance Sheet
under the head ‘Reserves and Surplus’ in Schedule 2.
Year ended
31.3.2011
(` in ‘000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 3,701.74
3,701.74
Schedule 14 – Other Income
I. Commission, exchange and brokerage 190.00
II. Profit on sale of investments 200.00
III. Rent received 65.00
455.00
Schedule 15 – Interest Expended
I. Interests paid on deposits 2,037.45
2,037.45
Schedule 16 – Operating Expenses
I. Payment to and provisions for employees 200.00
II. Rent, taxes and lighting 90.00
III. Depreciation on bank’s properties 30.00
IV. Director’s fee, allowances and expenses 30.00
V. Auditors’ fee 5.00
VI. Law (statutory) charges 40.00
VII. Postage and telegrams 60.29
VIII. Preliminary expenses 25.00*
480.29

*It is assumed that preliminary expenses have been fully written off during the year.
Working Note:
(` in ‘000s)
Interest/discount (net of rebate on bills discounted) 3,705.74
Add: Rebate on bills discounted on 31.3.2010 12.00
Less: Rebate on bills discounted on 31.3.2011 (16.00)
3701.74
Question 27
Following information is furnished to you by Sound Bank Ltd. for the year ended 31st March, 2011:
(` in thousands)
Interest and discount - (Income) 8,860
Interest on public deposits – (Expenditure) 2,720
Operating expenses 2,662
Other incomes 250
Provisions and contingencies (it includes provision in respect of Non- 2,004
performing Assets (NPAs) and tax provisions)
Rebate on bills discounted to be provided for as on 31.3.2011 30
Classification of Advances:
Standard Assets 5,000
Sub-standard Assets 1,120
Doubtful Assets – fully unsecured 200
Doubtful assets – fully secured
Less than 1 year 50
More than 1 year but less than 3 years 300
More than 3 years 300
Loss assets 200

(i) Profit and Loss Account of the Bank for the year ended 31st March, 2011.
(ii) Provision in respect of advances.

Answer
Sound Bank Ltd.
Schedule No. (` in thousands)

Income: Interest and Discount (8,860 – 30) 13 8,830
Other income 14 250
9,080
Expenditure: Interest expenses 15 2,720
Operating expenses 16 2,662
Provision and Contingencies 2,004
7,386
Net Profit/Loss for the year 1,694
Assets Value % of provision Provision

Standard Assets 5,000 0.40 20.00
∗
Sub-standard Assets 1,120 15 168.00
Doubtful Assets
100% unsecured 200 100 200.00
Secured:
Less than 1 year 50 25 12.50
More than 1 year but less than 3 years 300 40 120.00
More than 3 years 300 100 300.00
Loss Assets 200 100 200.00
Total Provision 1,020.50
Question 28
From the following information, you are required to prepare Profit and Loss Account of Zee
Bank Ltd., for the year ending 31st March, 2012 :
` `
Interest and Discount 44,00,000 Interest Expended 13,60,000
∗
Sub-standards assets are assumed to be fully secured.

Other Income 1,25,000 Operating Expenses 13,31,000

Income on investments 5,000 Interest on balance with RBI 25,000
Additional information :
(a) Rebate on bills discounted to be provided for ` 15,000
(b) Classification of advances:
`
Standard Assets 25,00,000
Sub-standard Assets 5,60,000
Doubtful Assets not covered by security 2,55,000
Doubtful Assets covered by security
For 1 year 25,000
For 2 year 50,000
For 3 year 1,00,000
For 4 year 75,000
Loss Assets 1,00,000
(c) Make Tax Provision @ 35 %
(d) Profit and Loss A/c (Cr.) ` 40,000.
Answer
Form ‘B’
Zee Bank Ltd.
Profit & Loss Account for the year ended 31st March, 2012
Particulars Schedule Year ended
No. 31st March,
2012
I. Income:
Interest Earned 13 44,15,000
Other Income 14 1,25,000
Total 45,55,000
II. Expenditure
Interest Expended 15 13,60,000
Operating Expense 16 13,31,000

Provisions and Contingencies (W.N.3) 10,30,813

Total 37,36,813
III. Profit/Loss
Net profit for the year 8,18,187
Profit brought forward 40,000
Total 8,58,187
IV. Appropriations:
Transfer to Statutory Reserve @ 25% on ` 2,04,547
8,18,187
Balance carried forward to Balance Sheet 6,53,640
Total 8,58,187
Schedule 13: Interest Earned
Particulars `
Interest and discount 44,00,000
Income on Investments 5,000
Interest on balance with RBI 25,000
Total 44,30,000
Less: Rebate on bills discount (15,000)
44,15,000
Working Notes:
1. Provisions for NPA
Particulars Amount % of Provision
Provisions
Standard Assets 25,00,000 0.40 10,000
∗
Sub-Standard Assets 5,60,000 15 84,000
Doubtful assets not covered by security 2,55,000 100 2,55,000
For 1 year 25,000 25 6,250
For 2 years 50,000 40 20,000
For 3 years 1,00,000 40 40,000
∗
It is assumed that the all sub-standard assets are fully secured.

For 4 years 75,000 100 75,000

Loss Assets 1,00,000 100 1,00,000
5,90,250
2. Calculation of Tax
Tax = 35% of [Total income – Total expenditure (excluding tax)].
Tax = 35% of [44,15,000 + 1,25,000 – (13,60,000 + 13,31,000 + 5,90,250)]
Tax = ` 4,40,563
3. Total amount of provisions and contingencies
= Provision for NPA + Provision for Tax + Rebate on bills discounted
= 5,90,250 + 4,40,563 = ` 10,30,813
Question 29
From the following information, calculate the amount of Provisions and Contingencies and
prepare Profit and Loss Account of ‘Hamara Bank Limited’ for the year ending
31st March, 2012:
` in lakhs ` in lakhs
Interest and discount 4,430 Interest expended 1,360
Other Income 125 Operating Expenses 1,331
Interest accrued on Investments 10
` in lakhs
(i) Rebate on bills discounted to be provided for 15
(ii) Classifications of Advances:
Standard Assets 2,500
Sub-Standard Assets 560
Doubtful Assets not covered by security 255
For 1 year 25
For 2 years 50
For 3 years 100

For 4 years 75
Loss Assets 100
(iii) Make tax provisions @ 35% of the profit.
(iv) Profit and Loss Account (Cr.) brought forward from the previous year 40
Answer
(a) Calculation of Provisions and Contingencies
(i) Provision on Non-Performing Assets

ìn lakhs
Particulars Amount % of Provision
Provision
Standard Assets 2,500 0.4 10
Sub-standard Assets 560 15 84
Doubtful Assets not covered by security 255 100 255
Doubtful Assets covered by security:
For 1 Year 25 25 6.25
For 2 Years 50 40 20
For 3 Years 100 40 40
For 4 Years 75 100 75
Loss Assets 100 100 100
3,665 590.25
Note: It is assumed that all sub standards assets are fully secured.
(ii) Calculation of Provision for tax = 35% of [Total Income – Total Expenditure (excluding tax)]
= 35% of [(4,425+125) – (1,360+1,331+590.25)] = ` 444.06 lakhs
Total Provisions and contingencies = Provisions on NPAs + Provisions for tax
= 590.25 + 444.06 = ` 1,034.31 lakhs
Hamara Bank Limited
Particulars Schedule ` in
No. lakhs
I Income
Interest Earned 13 4,425
Other Income 125
4,550

II Expenditures
Interest Expended 1,360
Operating Expenses 1,331
Provisions & Contingencies 1,034.31
3,725.31
III Profit/Loss
Net Profit/Loss for the year 824.69
Profit/Loss brought forward 40
864.69
IV Appropriations
Transfer to Statutory Reserve @ 25% of 206.17
824.69
Transfer to Other Reserves -
Balance carried over to Balance Sheet 658.52
864.69
Schedule 13 – Interest earned

I Interest & Discount (4,430 – 15) 4,415
II Income on Investments 10
4,425
Question 30
From the following information prepare the Profit & Loss Account of Jawahar Bank Limited for
the year ended 31st March, 2012. Also give necessary Schedules.
Figures are in ` thousands
Interest earned on term loans 17.26
Interest earned on term loans classified as NPA 4.52
Interest received on term loans classified as NPA 2.04
Interest on cash credits and overdrafts 38.54
Interest earned but not received on cash credit and
overdraft treated as NPA 8.39
Interest on deposits 27.20
Commission 1.97
Profit on sale of investments 11.76
Profit on revaluation of investments 2.76
Income from investments 15.53
Salaries, bonus and allowances 18.75

Rent, taxes and lighting 1.70

Printing and stationary 0.75
Director’s fees, allowances expenses 1.33
Law charges 0.22
Repairs and maintenance 0.18
Insurance 0.30
Other information:
Make necessary provision on risk assets:
(i) Sub-standard 15.00
(ii) Doubtful for one year 7.00
(iii) Doubtful for two years 2.40
(iv) Loss assets 0.65
Investments 3700
Bank should not keep more than 25% of its investments as ‘held-for-maturity’ investment. The
market value of its best 75% investments is ` 9,00,000 as on 31st March, 2012.
Answer
Jawahar Bank Limited
Profit & Loss Account for the year ended 31st March, 2012
Schedule ` ’000s
I. Income
Interest earned 13 60.46
Other income 14 16.49
Total 76.95
II. Expenditure
Interest expended 15 27.20
Operating expenses 16 23.23
Provisions & contingencies (Refer W.N.) 1,880.61
Total 1,931.04
III. Profit/Loss (1,854.09)
IV. Appropriations Nil
` ’000s
Interest / discount on advances bills
Interest on term loans [17.26- (4.52-2.04)] 14.78

Interest on cash credits and overdrafts (38.54-8.39) 30.15

Income on investments 15.53
60.46
Note : Interest on non-performing assets is recognized on receipt basis.
` ’000s
Commission, exchange and brokerage 1.97
Profit on sale of investments 11.76
Profit on revaluation of investments 2.76
16.49
` ’000s
Interest on deposits 27.20

` ’000s
Payments to and provision for employees - salaries, bonus and 18.75
allowances
Rent, taxes and lighting 1.70
Printing & stationery 0.75
Director’s fee, allowances and expenses 1.33
Law charges 0.22
Repairs & maintenance 0.18
Insurance 0.30
23.23
Working Note:
Provisions & Contingencies ` ’000s
Provision for non-performing assets
Sub-standard (15 x 15%) 2.25
Doubtful for one year (7 x 25%) 1.75
Doubtful for two years (2.40 x 40%) 0.96
Loss assets (0.65 x 100%) 0.65
5.61

Diminution in the value of current Investments:

Cost 75% of ` 3,700 thousands∗∗ 27,75
Less: Market value (900) 1875.00
1,880.61
Note: 1. It is assumed that all sub-standard and doubtful assets are fully secured
2. As per RBI norms, provision of 0.40% should also be made on standard assets.
However, in the absence of value of standard assets, in the question, no provision has
been made on it.
BALANCE SHEET
Question 31
How will you disclose the following Ledger balances in the Final accounts of DVD bank:
` in lacs
Current accounts 700
Saving accounts 500
Fixed deposits 700
Cash credits 600
Term Loans 500
Bills discounted & purchased 800
Additional information:
(i) Included in the current accounts ledger are accounts overdrawn to the extent of ` 250 lacs.
(ii) One of the cash credit account of ` 10 lacs (including interest ` 1 lac) is doubtful.
(iii) 60% of term loans are secured by government guarantees, 20% of cash credits are
unsecured, other portion is secured by tangible assets.
Answer
Relevant Schedules (forming part of the Balance sheet) of DVD Bank
Schedule 3: Deposits
` in lacs
A Demand deposits (700 – 250) 450
B Saving bank deposits 500
C Term deposits 700
1,650
∗∗
25% of investments classified as ‘held for maturity’ need not be marked to market as per RBI Guidelines. However,
the remaining 75% investments have been marked to market according to RBI Guidelines.

Schedule 9: Advances
` in lacs
A (i) Bills discounted and purchased 800
(ii) Cash credits and overdrafts (600 + 250) 850
(iii) Term loans 500
2,150
B. (i) Secured by tangible assets (bal. fig.) 1,730
(ii) Secured by Bank/Government guarantees (500 x 60%) 300
(iii) Unsecured (600 x 20%) 120
2,150
Schedule 5: Other Liabilities & Provisions
` in lacs
Others (Provision for doubtful debts) 10
Profit and Loss Account (an extract)
` in lacs
Less: Provision for doubtful debts* 10
*Note: It is assumed that the cash credit has been in ‘doubtful’ category for more than three
years.
Question 32
The following figures are extracted from the books of KLM Bank Ltd. as on 31-03-2012 :
`
Interest paid on deposits 22,95,360
Issued and subscribed capital 10,00,000
Salaries and allowances 2,50,000
Directors Fees and allowances 35,000
Rent and taxes paid 1,00,000
Postage and telegrams 65,340
Statutory reserve fund 8,00,000
Commission, exchange and brokerage 1,90,000

Rent received 72,000

Profit on sale of investment 2,25,800
Depreciation on assets 40,000
Statutory expenses 38,000
Preliminary expenses 30,000
Auditor's fee 12,000
The following further information is given:

(1) A customer to whom a sum of ` 10 lakhs was advanced has become insolvent and
it is expected only 55% can be recovered from his estate.
(2) There was also other debts for which a provisions of ` 2,00,000 was found
necessary.
(3) Rebate on bill discounted on 31-03-2011 was ` 15,000 and on 31-03-2012 was
` 20,000.
(4) Income tax of ` 2,00,000 is to be provided.
The directors desire to declare 5% dividend.
Prepare the Profit and Loss account of KLM Bank Ltd. for the year ended 31-03-2012
and also show, how the Profit and Loss account will appear in the Balance Sheet if the
Profit and Loss account opening balance was NIL as on 31-03-2011.
Answer
KLM Bank Limited
Schedule Year ended
31.03.2012
`
I. Income:
Interest earned 13 37,95,160
Other income 14 4,87,800
Total 42,82,960
II. Expenditure
Interest expended 15 22,95,360
Operating expenses 16 5,70,340

Provisions and contingencies

(4,50,000+2,00,000+2,00,000) 8,50,000
Total 37,15,700
IIII. Profits/Losses
Net profit for the year 5,67,260
Profit brought forward Nil
5,67,260
IV. Appropriations
Transfer to statutory reserve (25% of 5,67,260) 1,41,815
Proposed dividend 50,000
Balance carried over to balance sheet 3,75,445
5,67,260
Profit & Loss Account balance of ` 3,75,445 will appear under the head ‘Reserves and
Surplus’ in Schedule 2 of the Balance Sheet.
Year ended
31.3.2012
`
I. Interest/discount on advances/bills (Refer W.N.) 37,95,160
37,95,160

I. Commission, exchange and brokerage 1,90,000
II. Profit on sale of investment 2,25,800
III. Rent received 72,000
4,87,800
I. Interests paid on deposits 22,95,360
22,95,360
I. Payment to and provisions for employees (salaries & allowances) 2,50,000
II. Rent, taxes paid 1,00,000
III. Depreciation on assets 40,000
IV. Director’s fee, allowances and expenses 35,000
V. Auditor’s fee 12,000

VI. Statutory (law) expenses 38,000

VII. Postage and telegrams 65,340
VIII. Preliminary expenses∗ 30,000
5,70,340
Working Note:
`
Add: Rebate on bills discounted on 31.3.2011 15,000
Less: Rebate on bills discounted on 31.3.2012 (20,000)
37,95,160
EXERCISES
1. From the following information, prepare a Balance Sheet of International Bank Ltd. as on
31st March, 2012 giving the relevant schedules and also specify at least four important Principal Accounting Policies :
` in lakhs
Dr. Cr.
Share Capital 198.00
19,80,000 Shares of ` 10 each
Statutory Reserve 231.00
Net Profit Before Appropriation 150.00
Profit and Loss Account 412.00
Fixed Deposit Account 517.00
Savings Deposit Account 450.00
Current Accounts 28.00 520.12
Bills Payable 0.10
Cash credits 812.10
Borrowings from other Banks 110.00
Cash in Hand 160.15
Cash with RBI 37.88
Cash with other Banks 155.87
Money at Call 210.12
Gold 55.23
Government Securities 110.17
Premises 155.70
Furniture 70.12
Term Loan 792.88
2,588.22 2,588.22
∗
It is assumed that preliminary expenses have been fully written off during the year.

Bills for collection 18,10,000
Acceptances and endorsements 14,12,000
Claims against the Bank not acknowledged as debt 55,000
Depreciation charges—Premises 1,10,000
Furniture 78,000
50% of the Term Loans are secured by Government guarantees. 10% of cash credit is unsecured. Also calculate
cash reserves required and statutory liquid reserves required.
Note : Cash reserves required 5.50% of demand and time liabilities; liquid reserves required 24% of demand and
time liabilities.
(Hints: Balance sheet total ` 25,88.12 lacs)
2. Following are the statements of interest on advances in respect of performing and non-performing assets of
Madura Bank Ltd. Find out the income to be recognised for the year ended 31st March. 2012:
(` in lakhs)
Performing Assets Interest Interest
earned received
Cash credit and overdrafts 1,800 1,060
Term loans 480 320
Bills purchased and discounted 700 550
Non-performing Assets
Cash credit and overdrafts 450 70
Term loan 300 40
Bills purchased and discounted 350 36
(Hints: Total income to be recognized ` 3,126 lakhs)

7
Financial Statements of Electricity
Companies
BASIC CONCEPTS
¾ The Electricity Act 2003 replaces the three existing legislations, namely, Indian
Electricity Act, 1910, the Electricity (Supply) Act, 1948 and the Electricity Regulatory
Commissions Act, 1998.
¾ Under the Electricity Act 2003, activities like generation, transmission and distribution
have been separately identified.
¾ The Central Electricity Regulation Commission (CERC) regulates the tariff of generating
companies owned or controlled by the Central Government. It also regulates and
determines the tariff for Inter-State transmission of electricity;
Question 1
From the following details of assets calculate weighted average rate of depreciation
considering the rates as per Appendix-III of Regulations, 2009.
Particulars Closing balance at cost
`
Land
(a) Freehold 3,34,900
(b) Leasehold 1,07,725
Buildings 18,42,675
Railway Sidings 5,850
Plant and Machinery
(a) Steam Station 70,82,475
(b) Others Including "Switchgears and Transformers" 51,44,725
Transmission and Distributing Systems
(a) Overhead 10,60,725

(b) Underground 42,24,025

Electrical Fittings and Apparatus 1,25,325
Furniture, Fixture and Office Equipments 1,75,900
Vehicles 53,700
Total 20,158,025
Answer
Particulars Closing Rate of Deprecation
balance at cost depreciation
` `
Land
(a) Freehold 3,34,900 0
(b) Leasehold 1,07,725 3.34% 3,598.02
Buildings 18,42,675 3.34% 61,545.35
Railway Skiing 5,850 3.34% 195.39
Plant and Machinery - -
(a) Steam Station 70,82,475 5.28% 3,73,954.68
(b) Others including "Switchgears and 51,44,725 5.28% 2,71,641.48
Transformers"
Transmission and Distributing Systems -
(a) Overhead 10,60,725 5.28% 56,006.28
(b) Underground 42,24,025 5.28% 2,23,028.52
Electrical Fittings and Apparatus 1,25,325 6.33% 7,933.07
Furniture, Fixture and Office Equipments 1,75,900 6.33% 11,134.47
Vehicles 53,700 5.28 % 2,835.36
Total (other than land ) 19,823,125 1,011,872.62
Weighted average rate of depreciation = 1,011,872.62 x 100
19,823,125
= 5.10% (approx.)
Question 2
Calculate depreciation for 2010-11, 2011-12, 2012-13 as per 2009 Regulations from the
following information of Excellent Power Generation Project
Date of commercial operation /Work completed date 11th January 1995
Beginning of current year 1st April, 2010
Useful life 35 years

Financial Statements of Electricity Companies 7.3
S.N. (` in crores)
1 Capital cost at beginning of the year 2010-11 166.27
2 Additional capitalisation during the year
2011-12 0.72
2012-13 6.11
3 Value of land 0
4 Depreciation recovered up to 2008-09 72.07
5 Depreciation recovered in 2009-10 4.77
Note : Capital cost at the beginning of the year and accumulated depreciation are as per tariff order
FY 2010-11.
Answer
Name of the Power Station Excellent Power Generation
Project
Date of commercial operation/Work completed date 11th January 1995
Beginning of current year 1st April, 2010
Useful life 35 years
Remaining useful Life 20 years
(` in crores)
S.No. 2010-11 2011-12 2012-13
Capital cost at beginning of the year (in `) 166.27 166.27 166.99

Additional capitalisation during the year (in `) - 0.72 6.11
Closing capital cost (in `) 166.27 166.99 173.10
1 Average capital cost (in `) 166.27 166.63 170.05
2 Less : Value of Land - - -
3 Capital cost for depreciation (in `) 166.27 166.63 170.05
4 Depreciable value (90% of 3) (in `) 149.64 149.97 153.05
5 Depreciation recovered up to 2008-09 (in `) 72.07 - -
6 Depreciation recovered in 2009-10 (in `) 4.77 - -
7 Depreciation recovered upto previous year (5+6) (in `) 76.84 80.48 84.14
8 Balance depreciation to be recovered (in `) 72.80 69.49 68.91
9 Balance useful life out of 35 years (in years) 20 19 18
10 Yearly depreciation from 2010-11 (8/9) (in `) 3.64 3.66 3.83
11 Depreciation recovered upto the year (7+10) (in `) 80.48 84.14 87.97
Note: Capital cost at the beginning of the year and accumulated depreciation are as per tariff
order F.Y. 2010-11.

Question 3
The trial balance of UP Electric Supply Ltd. for the year ended 31st March, 2012 is as below:
(` ‘000)
Particulars Dr. Cr.
Share Capital :
Equity Shares of ` 10 each 125,00
14% Preference Shares of ` 100 each 37,50
Patents and trademark 626
15% Debentures 61,75
16% Term Loan 38,25
Land (additions during the year ` 512.5) 31,12.5
Building (additions during the year ` 12,70) 87,83.5
Plant & Machinery 142,64.5
Mains 11,31
Meters 787.5
Electrical Instrument 382.5
Office furniture 612.5
Contingency reserves 30,07.5
Transformers 41,10
Net revenue account 13,37.5
Stock in hand 30,12.5
Sundry debtors 15,61.5
Contingency reserve investment 30,02.5
Cash & Bank 813.5
Public lamps 760
Depreciation fund 64,54
Sundry Creditors 16,31
429,60 429,60
During 2011-12, ` (’000) 25,00 of 14% preference shares were redeemed at a premium of
10% out of proceeds of fresh issue of equity shares of necessary amounts at a premium of
10%.
Prepare for the above period Balance Sheet as on 31st March, 2012 as per the revised
Schedule VI.

Financial Statements of Electricity Companies 7.5
Answer
Balance Sheet of U.P .Electric Supply Ltd. for the year ended March 31, 2012
Particulars Note No ` ('000)
a Share capital 1 16,250
b Reserves and Surplus 2 5,600
a Long-term borrowings 3 10,000
3 Current liabilities -
a Trade Payables 1,631
b Other current liabilities 4 3,025
Total 36,506
Assets -
1 Non-current assets -
a Fixed assets -
i Tangible assets 5 27,490
ii Intangible assets 626
Other non-current assets 6 3,002.5
2 Current assets -
a Inventories 3,012.5
b Trade receivables 1,561.5
c Cash and cash equivalents 813.5
Total 36,506
Notes to financial statements

` ('000)
1 Share Capital
Issued & subscribed
10,00,000 Equity shares of ` 10 each 10,000 -
Add: 2,50,000 Equity shares of ` 10 each issued during
the year (A) 2,500 12,500
Preference share capital
62,500 14% Preference shares of ` 100 each 6,250
Less: 25,000 Preference shares of ` 100 each

redeemed during the year (B) (2,500) 3,750

Total (A+B) - 16,250
2 Reserves and Surplus
Contingency Reserve 3,007.5
Balance of net return A/c 1,337.5
Total 5,600
3 Long-term borrowings
Secured
15% Debentures 6,175
16% Term Loan (considered secured) 3,825
Total 10,000
4 Other Current liabilities -
Total 3,025
5 Tangible assets
Land 2,600
Addition during the year 512.5 3,112.5
Building 7,513.5
Addition during the year 1,270 8,783.5
Plant & Machinery
Steam Power Plant 14,264.5
Transformers 4,110
Mains 1,131
Meters 787.5
Public Lamps 760 21,053
General Equipments
Electrical Instruments 382.5
Office Furniture 612.5 995
33,944
Less: Depreciation fund (6,454)
Total 27,490
6 Other non-current assets
Contingency Reserve Investment (assumed as non- 3,002.5
current item)

8
Departmental Accounts
BASIC CONCEPTS
• Basis of Allocation of Common Expenditure among different Departments
1. Expenses incurred specially for each department are charged directly thereto, e.g.,
insurance charges of stock held by a department.
2. Common expenses, the benefit of which is shared by all the departments and which are
capable of precise allocation are distributed among the departments concerned on some
equitable basis considered suitable in the circumstances of the case.
S.No. Expenses Basis
1. Rent, rates and taxes, repairs and Floor area occupied by each department (if
maintenance, insurance of building given) other wise on time basis
2. Lighting and Heating expenses Consumption of energy by each
(eg. energy expenses) department
3. Selling expenses, e.g., discount, bad Sales of each department
debts, selling commission, freight
outward, travelling sales manager’s
salary and other costs
4. Carriage inward/ Discount received Purchases of each department
5. Wages/Salaries Time devoted to each department
6. Depreciation, insurance , repairs and Value of assets of each department
maintenance of capital assets otherwise on time basis
7. Administrative and other expenses, Time basis or equally among all
e.g., salaries of managers, directors, departments
common advertisement expenses, etc.
8. Labour welfare expenses Number of employees in each department
9. PF/ESI contributions Wages and salaries of each department
• There are certain expenses and income, most being of financial nature, which cannot
be apportioned on a suitable basis; therefore they are recognised in the combined
Profit and Loss Account for example-interest on loan, profit/loss on sale of investment
etc.

Question 1
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at
10% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales,
respectively. Department Z charges 20% and 25% profit on cost to Department X and Y,
respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised
profit on departmental sales being eliminated. Departmental profits after charging Managers’
commission, but before adjustment of unrealised profit are as under :
`
Department X 36,000
Department Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under :
Dept. X Dept. Y Dept. Z
` ` `
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 —
Find out the correct departmental Profits after charging Managers’ commission
Answer
Calculation of correct Profit
Department Department Department
X Y Z
` ` `
Profit after charging managers’ commission 36,000 27,000 18,000
Add back : Managers’ commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000
Less :Unrealised profit on stock (Working Note) (4,000) (4,500) (2,000)
Profit before Manager’s commission 36,000 25,500 18,000
Less : Commission for Department
Manager @ 10% (3,600) (2,550) (1,800)
32,400 22,950 16,200

Departmental Accounts 8.3
Working Note :
Stock lying with
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealised Profit of:
Department X 1/5×15,000 =3,000 1/11×11,000 =1,000 4,000
Department Y 0.15×14,000 =2,100 0.20×12,000 =2,400 4,500
Department Z 1/6×6,000 =1,000 1/5×5,000 =1,000 2,000
Question 2
FGH Ltd. has three departments I, J and K. The following information is provided for the year
ended 31.3.2011:
I J K
` ` `
Opening stock 5,000 8,000 19,000
Opening reserve for unrealised profit ― 2,000 3,000
Materials consumed 16,000 20,000 ―
Direct labour 9,000 10,000 ―
Closing stock 5,000 20,000 5,000
Sales ― ― 80,000
Area occupied (sq. mtr.) 2,500 1,500 1,000
No. of employees 30 20 10
Stocks of each department are valued at costs to the department concerned. Stocks of I are
transferred to J at cost plus 20% and stocks of J are transferred to K at a gross profit of 20%
on sales. Other common expenses are salaries and staff welfare ` 18,000, rent ` 6,000.
Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2011.
Answer
FGH Ltd.
Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2011
I J K Total I J K Total
` ` ` ` ` ` ` `
To Opening 5,000 8,000 19,000 32,000 By Sales 80,000 80,000
stock

To Material By Inter-
consumed 16,000 20,000 36,000 departmental
To Direct labour 9,000 10,000 19,000 transfer 30,000 60,000 90,000
To Inter- By Closing
departmental stock 5,000 20,000 5,000 30,000
transfer 30,000 60,000 90,000
To Gross profit 5,000 12,000 6,000 23,000 ______ ______ ______ _______
35,000 80,000 85,000 2,00,000 35,000 80,000 85,000 2,00,000
To Salaries and By Gross profit
staff welfare 9,000 6,000 3,000 18,000 b/d 5,000 12,000 6,000 23,000
By Net loss 7,000 7,000
To Rent 3,000 1,800 1,200 6,000
To Net profit _____ 4,200 1,800 6,000 _____ _____ _____ _____
12,000 12,000 6,000 30,000 12,000 12,000 6,000 30,000
To Net loss (I) 7,000 By Stock
To Stock reserve b/d
reserve (J + K) 5,000
(J+K)
(Refer 3,000 By Net profit (J 6,000
W.N.) + K)
To Balance
transferred
to profit and
loss account 1,000 _____
11,000 11,000
Working Note:
Calculation of unrealized profit on closing stock
`
Stock reserve of J department
Cost 30,000
Transfer from I department 30,000
60,000
Stock of J department 20,000
` 30,000
Proportion of stock of I department = ` 20,000 × = ` 10,000
` 60,000

20
Stock reserve =` 10,000 × = ` 1,667 (approx.)
120
Stock reserve of K department
`
Stock transferred from J department 5,000
Less: Profit (stock reserve) 5,000 × 20% (1,000)
Cost to J department 4,000
` 30,000
Proportion of stock of I department = ` 4,000 × = ` 2,000
` 60,000
20
Stock reserve = 2,000 × = ` 333 (approx.)
120
Total stock reserve = ` 1,000 + ` 333 = ` 1,333
Question 3
Siva Ltd. has two departments X and Y. From the following particulars prepare departmental
trading accounts and general profits and loss account for the year ending 31st March, 2011:
Department X Department Y
` `
Opening stock (at cost) 80,000 48,000
Purchases 3,68,000 2,72,000
Carriage inward 8,000 8,000
Wages 48,000 32,000
Sales 5,60,000 4,48,000
Purchased goods transferred
By department Y to X 40,000 -
By department X to Y - 32,000
Finished goods transferred
By department Y to X 1,40,000 -
By department X to Y - 1,60,000
Return of finished goods
By department Y to X 40,000 -
By department X to Y - 28,000
Closing stock
Purchased goods 18,000 24,000
Finished goods 96,000 56,000

Purchased goods have been transferred mutually at their respective departmental purchase
cost and finished goods at departmental market price and that 25% of the closing finished
stock with each department represents finished goods received from the other department.
Answer
Departmental Trading Account in the books of Siva Ltd.
for the year ended 31st March 2011
Particulars Departmen Department Particulars Department Department
tX Y X Y
` ` ` `
To Opening stock 80,000 48,000 By Sales 5,60,000 4,48,000
To Purchases 3,68,000 2,72,000 By Transfers:
To Carriage inward 8,000 8,000 Purchased goods 32,000 40,000
∗
To Wages 48,000 32,000 Finished goods 1,20,000 1,12,000*
To Transfers: By Closing stock:
Purchased goods 40,000 32,000 Purchased goods 18,000 24,000
Finished goods 1,12,000 1,20,000 Finished goods 96,000 56,000
To Gross profit c/d 1,70,000 1,68,000
8,26,000 6,80,000 8,26,000 6,80,000
Profit and Loss A/c

To Provision for unrealized profit By Gross profit b/d
included in closing stock
Department X (W.N. 3) 7,200 Department X 1,70,000
Department Y (W.N. 3) 3,500 Department Y 1,68,000
To Net profit 3,27,300
3,38,000 3,38,000
∗
Net transfers of finished goods by
Department X to Y = ` 1,60,000 – ` 40,000 = ` 1,20,000
Department Y to X = ` 1,40,000 – ` 28,000= ` 1,12,000

Working Notes:
1. Calculation of rates of gross profit margin on sales
` `
Sales 5,60,000 4,48,000
Add: Transfer of finished goods 1,60,000 1,40,000
7,20,000 5,88,000
Less: Return of finished goods (40,000) (28,000)
6,80,000 5,60,000
Gross Profit 1,70,000 1,68,000
Gross profit margin = 1,70,000 1,68,000
× 100 =25% × 100 = 30%
6,80,000 5,60,000
2. Finished goods from other department included in the closing stock

` `
Stock of finished goods 96,000 56,000
Stock related to other department
(25% of finished goods) 24,000 14,000
3. Unrealized profit included in the closing stock
Department X = 30% of ` 24,000 = ` 7,200
Department Y = 25% of ` 14,000 = ` 3,500
Question 4
Z Ltd. has three departments and submits the following information for the year ending on
31st March, 2011:
A B C Total (`)
Purchases (units) 6,000 12,000 14,400
Purchases (Amount) 6,00,000
Sales (Units) 6,120 11,520 14,976
Selling Price (per unit) ` 40 45 50
Closing Stock (Units) 600 960 36
You are required to prepare departmental trading account of Z Ltd., assuming that the rate of
profit on sales is uniform in each case.

Answer
Departmental Trading Account for the year ended on 31st March, 2011
Particulars A B C Particulars A B C
` ` ` ` ` `
To Opening 11,520 8,640 12,240 By Sales 2,44,800 5,18,400 7,48,800
Stock
To Purchases 96,000 2,16,000 2,88,000 By Closing 9,600 17,280 720
Stock
To Gross
Profit 1,46,880 3,11,040 4,49,280
2,54,400 5,35,680 7,49,520 2,54,400 5,35,680 7,49,520
Working Notes:
(1) Profit Margin Ratio
Selling price of unit purchased: `
Department A 6,000 x 40 2,40,000
Department B 12,000 x 45 5,40,000
Department C 14,400 x 50 7,20,000
Total Selling Price 15,00,000
Less: Purchase (Cost) Value (6,00,000)
Gross Profit 9,00,000
9,00,000
Profit Margin Ratio = × 100 = 60%
15,00,000
(2) Statement showing department-wise per unit Cost and Purchase Cost
A B C
` ` `
Selling Price (Per unit) (`) 40 45 50
Less: Profit Margin @ 60% (`) (24) (27) (30)
Purchase price per unit (`) 16 18 20
Number of units purchased 6,000 12,000 14,400
(Purchase cost per unit x Units purchased) 96,000 2,16,000 2,88,000
(3) Statement showing calculation of department-wise Opening Stock (in Units)
A B C
Sales (Units) 6,120 11,520 14,976
Add: Closing Stock (Units) 600 960 36

6,720 12,480 15,012

Less: Purchases (units) (6,000) (12,000) (14,400)
Opening Stock (Units) 720 480 612
(4) Statement showing department-wise cost of Opening Stock and Closing Stock
A B C
Cost of Opening Stock (`) 720 x 16 480 x 18 612 x 20
` 11,520 8,640 12,240
Cost of Closing Stock 600 x 16 960 x 18 36 x 20
` 9,600 17,280 720
Question 5
Goods are transferred from Department P to Department Q at a price 50% above cost. If
closing stock of Department Q is ` 27,000, compute the amount of stock reserve.
Answer
`
Closing Stock of Department Q 27,000
Goods send by Department P to Department Q at a price 50% above
cost
27,000× 50 9,000
Hence profit of Department P included in the stock will be - =
150
Amount of the Stock Reserve will be ` 9,000.
Question 6
Department R sells goods to Department S at a profit of 25% on cost and Department T at
10% profit on cost. Department S sells goods to R and T at a profit of 15% and 20% on sales
respectively. Department T charges 20% and 25% profit on cost to Department R and S
respectively.
Department managers are entitled to 10% commission on net profit subject to unrealized profit
on departmental sales being eliminated. Departmental profits after charging manager’s
commission, but before adjustment of unrealized profit are as under:
`
Department R 54,000
Department S 40,500
Department T 27,000
Stock lying at different departments at the end of the year are as under:

Deptt. R Deptt. S Deptt. T

` ` `
Transfer from Department R - 22,500 16,500
Transfer from Department S 21,000 - 18,000
Transfer from Department T 9,000 7,500 -
Find out the correct departmental profits after charging manager’s commission.
Answer
Departments
R S T
` ` `
Profit 54,000 40,500 27,000
Add : Managerial commission (1/9) 6,000 4,500 3,000
60,000 45,000 30,000
Less: Unrealised profit on stock (Refer W.N.) (6,000) (6,750) (3,000)
54,000 38,250 27,000
Less: Managers’ commission @ 10% (5,400) (3,825) (2,700)
48,600 34,425 24,300
Working Notes:
Value of unrealised profit
`
Transfer by department R to
S department (22,500 ×25/125) = 4,500
T department (16,500 ×10/110) = 1,500 6,000
Transfer by department S to
R department (21,000 × 15/100) = 3,150
T department (18,000 × 20/100) = 3,600 6,750
Transfer by department T to
R department (9,000 × 20/120) = 1,500
S department (7,500 × 25/125) = 1,500 3,000

Question 7
X Ltd has three departments A, B and C. From the particulars given below compute:
(a) the values of stock as on 31st Dec. 2011 and
(b) the departmental results
(i)
A B C
` ` `
Stock (on 1.1.2011) 24,000 36,000 12,000
Purchases 1,46,000 1,24,000 48,000
Actual sales 1,72,500 1,59,400 74,600
Gross Profit on normal selling price 20% 25% 33 1/3%
(ii) During the year certain items were sold at discount and these discounts were reflected in
the value of sales shown above. The items sold at discount were:
A B C
` ` `
Sales at normal price 10,000 3,000 1,000
Sales at actual price 7,500 2,400 600
Answer
1. Calculation of Departmental Results (Actual Gross Profit):
A (` ) B (` ) C (` )
Actual Sales 1,72,500 1,59,400 74,600
Add back: Discount (Refer W.N.) 2,500 600 400
Normal sale 1,75,000 1,60,000 75,000
Gross profit % on normal sales 20% 25% 33.33%
Normal gross profit 35,000 40,000 25,000
Less: Discount (2,500) (600) (400)
Actual gross profit 32,500 39,400 24,600
2. Computation of value of stock as on 31st Dec. 2011
Departments A B C
` ` `
Stock (on 1.1.2011) 24,000 36,000 12,000

Add: Purchases 1,46,000 1,24,000 48,000

1,70,000 1,60,000 60,000
Add: Actual gross profit 32,500 39,400 24,600
2,02,500 1,99,400 84,600
Less: Actual Sales (1,72,500) (1,59,400) (74,600)
Closing stock as on 31.12.2011 (bal.fig.) 30,000 40,000 10,000
Working Note:
Calculation of discount on sales:
Departments A B C
` ` `
Sales at normal price 10,000 3,000 1,000
Less: Sales at actual price (7,500) (2,400) (600)
2,500 600 400
Question 8
Brahma Limited has three departments and submits the following information for the year
ending on 31st March, 2011:
Particulars A B C Total (`)
Purchases (units) 5,000 10,000 15,000
Purchases (Amount) 8,40,000
Sales (units) 5,200 9,800 15,300
Selling price (` per unit) 40 45 50
Closing Stock (Units) 400 600 700
You are required to prepare departmental trading account of Brahma Limited assuming that
the rate of profit on sales is uniform in each case.
Answer
Departmental Trading Account for the year ended 31st March, 2011
Particulars A B C Particulars A B C
` ` ` ` ` `
To Opening By Sales 2,08,000 4,41,000 7,65,000
Stock 14,400 10,800 30,000 By Closing 9,600 16,200 21,000
(W.N.4) stock

(W.N.4)
To Purchases 1,20,000 2,70,000 4,50,000
(W.N.2)
To Gross |
profit 83,200 1,76,400 3,06,000
2,17,600 4,57,200 7,86,000 2,17,600 4,57,200 7,86,000
Working Notes:
(1) Profit Margin Ratio
Selling price of units purchased: `
Department A (5,000 units х ` 40) 2,00,000
Department B (10,000 units х ` 45) 4,50,000
Department C (15,000 units х ` 50) 7,50,000
Total selling price of purchased units 14,00,000
Less: Purchases (8,40,000)
Gross profit 5,60,000
Gross profit 5,60,000
Profit margin ratio = × 100 = × 100 = 40%
Selling price 14,00,000
(2) Statement showing department-wise per unit cost and purchase cost
Particulars A B C
Selling price per unit (`) 40 45 50
Less: Profit margin @ 40% (`) (16) (18) (20)
Purchase price per unit (`) 24 27 30
No. of units purchased 5,000 10,000 15,000
Purchases (purchase cost per unit x 1,20,000 2,70,000 4,50,000
units purchased)
(3) Statement showing calculation of department-wise Opening Stock (in units)
Particulars A B C
Sales (Units) 5,200 9,800 15,300
Add: Closing Stock (Units) 400 600 700
5,600 10,400 16,000
Less: Purchases (Units) (5,000) (10,000) (15,000)
Opening Stock (Units) 600 400 1,000

(4) Statement showing department-wise cost of Opening and Closing Stock

Particulars A B C
Cost of Opening Stock (`) 600 х 24 400 х 27 1,000 х 30
14,400 10,800 30,000
Cost of Closing Stock (`) 400 х 24 600 х 27 700 х 30
9,600 16,200 21,000
Question 9
M/s. AM Enterprise had two departments, Cloth and Readymade Clothes. The readymade clothes
were made by the firm itself out of the cloth supplied by the Cloth Department at its usual selling
price. From the following figures, prepare Departmental Trading and Profit & Loss Account for the
year ended 31st March, 2011:
Cloth Readymade Clothes
Department Department
` `
Opening stock on 1st April, 2010 31,50,000 5,32,000
Purchases 2,10,00,000 1,68,000
Sales 2,31,00,000 47,25,000
Transfer to Readymade Clothes Department 31,50,000 -
Manufacturing expenses - 6,30,000
Selling expenses 2,10,000 73,500
Rent & warehousing 8,40,000 5,60,000
Stock on 31st March, 2011 21,00,000 6,72,000
In addition to the above, the following information is made available for necessary consideration:
The stock in the Readymade Clothes Department may be considered as consisting of 75% cloth
and 25% other expenses. The Cloth Department earned a gross profit at the rate of 15% in 2009-
10. General expenses of the business as a whole amount to ` 10,85,000.
Answer
Departmental Trading and Profit and Loss Account
Particulars Cloth Ready- Total Particulars Cloth Ready- Total
(`) made (`) (`) made (`)
Clothes (`) Clothes
(`)
To Opening 31,50,000 5,32,000 36,82,000 By Sales 2,31,00,000 47,25,000 2,78,25,000
stock
To Purchases 2,10,00,000 1,68,000 2,11,68,000 By Transfer to
Ready-
made
Clothes
Deptt. 31,50,000 - 31,50,000

To Transfer By Closing
from Cloth stock 21,00,000 6,72,000 27,72,000
Department - 31,50,000 31,50,000
To
Manufacturing
expenses - 6,30,000 6,30,000
To Gross
profit c/d 42,00,000 9,17,000 51,17,000
2,83,50,000 53,97,000 3,37,47,000 2,83,50,000 53,97,000 3,37,47,000
To Selling By Gross
expenses 2,10,000 73,500 2,83,500 profit b/d 42,00,000 9,17,000 51,17,000
To Rent &
warehousing 8,40,000 5,60,000 14,00,000
To Net profit 31,50,000 2,83,500 34,33,500
42,00,000 9,17,000 51,17,000 42,00,000 9,17,000 51,17,000
General Profit and Loss Account

Particulars Amount (` ) Particulars Amount (` )
To General expenses 10,85,000 By Net profit 34,33,500
To Unrealized profit (Refer W.N.) 20,790
To General net profit (Bal.fig.) 23,27,710
34,33,500 34,33,500
Working Note:
Calculation of Stock Reserve
Gross Pr ofit
Rate of Gross Profit of Cloth Department, for the year 2010-11 = x 100
Total Sales
` 42,00,000 × 100
× 100 = 16%
` ( 2,31,00,000 + 31,50,000 )
Closing Stock of cloth in Readymade Clothes Department = 75%
i.e. ` 6,72,000 x 75% = ` 5,04,000
Stock Reserve required for unrealized profit @ 16% on closing stock
` 5,04,000 x 16% = ` 80,640
Stock reserve for unrealized profit included in opening stock of readymade clothes
@ 15% i.e.
(` 5,32,000 x 75% x 15%) = ` 59,850
Additional Stock Reserve required during the year = ` 80,640 – ` 59,850 = ` 20,790.

9
Accounting for Branches Including
Foreign Branch Accounts
BASIC CONCEPTS
¾ Types of branches
• Dependent branches
• Independent branches
¾ Based on accounting point of view, branches may be classified as follows:
• Branches in respect of which the whole of the accounting records are kept at the
head office
• Branches which maintain independent accounting records, and
• Foreign Branches.
¾ System of accounting
• Debtors System: under this system head office makes a branch account.
Anything given to branch is debited and anything received from branch would be
credited.
• Branch trading and profit and loss account method/Final accounts method: Under
this system head office prepares (a) profit and loss account (b) branch account
taking each branch as a separate entity.
¾ Stock and debtors system: Under this system head office opens:
• Branch stock account
• Branch debtors account
• Branch asset account
• Branch expenses account
• Branch adjustment account

Accounting for Branches Including Foreign Branch Accounts 9.2
• Branch profit and loss account

¾ Types of Foreign branches :
• Integral Foreign Operation (IFO): It is a foreign operation, the activities of which
are an integral part of those of the reporting enterprise.
• Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an
Integral Foreign Operation. The business of a NFO is carried on in a substantially
independent way by accumulating cash and other monetary items, incurring
expenses, generating income and arranging borrowing in its local currency.
¾ Non-Integral Foreign Operation -translation
• Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary –
apply closing exchange rate.
• Items of income and expenses – At actual exchange rates on the date of
transactions
• Resulting exchange rate difference should be accumulated in a “foreign currency
translation reserve” until the disposal of “net investment in non-integral foreign
operation”.
¾ Integral Foreign Operation (IFO) - translation
• at the rate prevailing on the date of transaction
BRANCHES IN INDIA
Question 1
Why goods are marked on invoice price by the head office while sending goods to the branch?
Answer
Goods are marked on invoice price to achieve the following objectives:
(i) To keep secret from the branch manager, the cost price of the goods and profit made, so
that the branch manager may not start a rival and competitive business with the concern;
and
(ii) To have effective control on stock i.e stock at any time must be equal to opening stock
plus goods received from head office minus sales made at branch.
(iii) To dictate pricing policy to its branches, as well as save work at branch because prices
have already been decided.

Question 2
Goods worth ` 50,000 sent by head office but the branch has received till the closing date
goods for worth ` 40,000 only. Give journal entry in the books of H.O. and branch for goods
in transit.
Answer
Journal entry in the books of Head Office
No entry
Journal entry in the books of Branch
` `
Goods-in-transit account Dr. 10,000
To Head Office account 10,000
(Being goods sent by head office is still in transit)
Question 3
Alphs having head office in Mumbai has a branch in Nagpur. The branch at Nagpur is an
independent branch maintaining separate books of account. On 31.3.2011, it was found that
the goods dispatched by head office for ` 2,00,000 was received by the branch only to the
extent of ` 1,50,000. The balance goods are in transit. What is the accounting entry to be
passed by the branch for recording the goods in transit, in its books?
Answer
Nagpur branch must include the inventory in its books as goods in transit.
The following journal entry must be made by the branch:
Goods in transit A/c Dr. 50,000
To Head office A/c 50,000
[Being Goods sent by Head office is still in transit on the closing date]
Question 4
Widespread invoices goods to its branch at cost plus 20%. The branch sells goods for cash as
well as on credit. The branch meets its expenses out of cash collected from its debtors and
cash sales and remits the balance of cash to head office after withholding
` 10,000 necessary for meeting immediate requirements of cash. On 31st March, 2012 the
assets at the branch were as follows:

` (‘000)
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500
During the accounting year ended 31st March, 2013 the invoice price of goods dispatched by
the head office to the branch amounted to ` 1 crore 32 lakhs. Out of the goods received by it,
the branch sent back to head office goods invoiced at ` 72,000. Other transactions at the
branch during the year were as follows:
(` ‘000)
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842
On 1st January, 2013 the branch purchased new furniture for ` 1 lakh for which payment was
made by head office through a cheque.
On 31st March, 2013 branch expenses amounting to ` 6,000 were outstanding and cash in
hand was again ` 10,000. Furniture is subject to depreciation @ 16% per annum on
diminishing balance method.
Prepare Branch Account in the books of head office for the year ended 31st March, 2013.
Answer
In the Head Office Books
Branch Account
` ‘000 `’000
To Balance b/d By Balance b/d
Cash in hand 10 Stock reserve ` 1,080 × 1 180
Trade debtors 384 6
Stock 1,080 By Goods sent to branch A/c 72

Furniture and fittings 500 (Returns to H.O.)
To Goods sent to branch A/c 13,200 By Goods sent to branch A/c 2,188
To Bank A/c (Payment for 100 (Loading on net goods sent

furniture) ⎛ 1⎞
245 to branch – ⎜ 13,128 × ⎟
To Balance c/d Stock reserve ⎝ 6⎠
⎛ 1⎞ By Bank A/c (Remittance from
⎜ 1,470 × 6 ⎟ 11,700
⎝ ⎠ branch to H.O.)
To Outstanding expenses 6 By Balance c/d
To Profit and loss A/c (Net Profit) 1,096 Cash in hand 10
Trade debtors 485
Stock 1,470
Furniture and fittings 516
16,621 16,621
Working Notes :
1. Invoice price and cost
Let cost be 100
So, invoice price 120
Loading 20
Loading : Invoice price = 20 : 120 = 1 : 6
2. Invoice price of closing stock in branch
Branch Stock Account
` ‘000 ` ‘000
To Balance b/d 1,080 By Goods sent to branch 72
To Goods sent to branch 13,200 By Branch Cash 9,700
To Branch debtors 102 By Branch debtors 3,140
14,382 14,382
3. Closing balance of branch debtors
Branch Debtors Account
` ‘000 ` ‘000
To Balance b/d 384 By Branch cash 2,842
To Branch stock 3,140 By Branch expenses discount 58
By Branch stock (Returns) 102
By Branch expenses

(Bad debts) 37
By Balance b/d 485
3,524 3,524
4. Closing balance of furniture and fittings
Branch Furniture and Fittings Account
` ‘000 ` ‘000
To Balance b/d 500 By Depreciation (80+4) 84
To Bank 100 By Balance c/d 516
600 600
5. Remittance by branch to head office
Branch Cash Account
` ‘000 ` ‘000
To Balance b/d 10 By Branch expenses 842
To Branch stock 9,700 By Remittances to H.O. 11,700
To Branch debtors 2,842 By Balance b/d 10
12,552 12,552
Question 5
On 31st March, 2013 Kanpur Branch submits the following Trial Balance to its Head Office at
Lucknow :
Debit Balances ` in lacs
Furniture and Equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3
Sundry Office Expenses 1
Stock on 1st April, 2012 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8

Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448
Stock on 31st March, 2013 was valued at ` 62 lacs. On 29th March, 2013 the Head Office
despatched goods costing ` 10 lacs to its branch. Branch did not receive these goods before
1st April, 2013. Hence, the figure of goods received from Head Office does not include these
goods. Also the head office has charged the branch ` 1 lac for centralised services for which
the branch has not passed the entry.
(i) Pass Journal Entries in the books of the Branch to make the necessary adjustments
(ii) Prepare Final Accounts of the Branch including Balance Sheet, and
(iii) Pass Journal Entries in the books of the Head Office to incorporate the whole of the
Branch Trial Balance
Answer
(i) Books of Branch
Journal Entries
(` in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
(Goods dispatched by head office but not received by branch
before 1st April, 2013)
Expenses A/c Dr. 1
To Head Office A/c 1
(Amount charged by head office for centralised services)

(ii) Trading and Profit & Loss Account of the Branch

` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 62
Head Office 288
Less : Returns (5) 283
To Carriage Inwards 7
To Gross Profit c/d 72
422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & Stationery 3
To Sundry Office Expenses 1
To Head Office Expenses 1
To Net Profit Transferred to
Head Office A/c 24
72 72
Liabilities ` in lacs Assets ` in lacs
Head Office 80 Furniture & Equipment 20
Add : Goods in transit 10 Less : Depreciation (2) 18
Head Office Expenses 1 Stock in hand 62
Net Profit 24 Goods in Transit 10
115 Debtors 20
Outstanding Expenses 3 Cash at bank and in
hand 8
118 118

(iii) Books of Head Office

Journal Entries
` `
Dr. Dr.
Branch Trading Account Dr. 355
To Branch Account 355
(The total of the following items in branch trial
balance debited to branch trading account
` in lacs
Opening Stock 60
Goods received from Head Office 288
Carriage Inwards 7)
Branch Account Dr. 427
To Branch Trading Account 427
(Total sales, closing stock and goods returned to
Head Office credited to branch trading account,
individual amount being as follows:
` in lacs
Sales 360
Closing Stock 62
Goods returned to Head Office 5)
Branch Trading Account Dr. 72
To Branch Profit and Loss Account 72
(Gross profit earned by branch credited to Branch
Profit and Loss Account)
Branch Profit and Loss Account Dr. 48
To Branch Account 48
(Total of the following branch expenses debited
to Branch Profit & Loss Account
` in lacs
Salaries 25
Rent 10
Advertising 6

Telephone, Postage & Stationery 3

Sundry Office Expenses 1
Head Office Expenses 1
Depreciation on furniture &
Equipment 2
Branch Profit & Loss Account Dr. 24
To Profit and Loss Account 24
(Net profit at branch credited to (general) Profit &
Loss A/c)
Branch Furniture & Equipment Dr. 18
Branch Stock Dr. 62
Branch Debtors Dr. 20
Branch Cash at Bank and in Hand Dr. 8
Goods in Transit Dr. 10
To Branch 118
(Incorporation of different assets at the branch in
H.O. books)
Branch Dr. 3
To Branch Outstanding Expenses 3
(Incorporation of Branch Outstanding
Expenses in H.O. books)
Question 6
Give Journal Entries in the books of Head Office to rectify or adjust the following:
(i) Goods sent to Branch ` 12,000 stolen during transit. Branch manager refused to accept
any liability.
(ii) Branch paid ` 15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March, 2012, the H.O. dispatched goods to the Branch invoiced at ` 25,000
which was not received by Branch till 31st March, 2012.
(iv) A remittance of ` 10,000 sent by the branch on 30th March, 2012, received by the Head
Office on 1st April, 2012.
(v) Head Office made payment of ` 25,000 for purchase of goods by Branch and wrongly
debited its own purchase account.

Answer
In the books of Head Office
Journal Entries
Particulars Dr. Cr.
Amount Amount
` `
(i) Loss of goods due to theft during transit Dr. 12,000
To Purchases account 12,000
(Being goods lost on account of theft during transit)
(ii) Salaries account Dr. 15,000
To Branch account 15,000
(Being salary paid by the branch for H.O. employee)
(iii) No entry in the books of head office for goods sent to
branch not received by branch till 31st March 2012
(iv) Cash in transit account Dr. 10,000
To Branch account 10,000
(Being remittance by branch not received by
31st March, 2012)
(v) Branch account Dr. 25,000
To Purchases account 25,000
(Being rectification of entry for payment for goods
purchased by branch wrongly debited to purchase
account)
Note: In entry (i), it is assumed that refusal of branch manager (to accept liability of
stolen goods) is accepted by the Head Office. Alternatively, Branch account will be
credited on the basis of assumption that refusal of branch manager is not accepted by
the Head Office.
Question 7
Show adjustment Journal entry in the books of Head Office at the end of April, 2013 for
incorporation of inter-branch transactions assuming that only Head Office maintains different
branch accounts in its books.
A. Delhi Branch:
(1) Received goods from Mumbai – ` 35,000 and ` 15,000 from Kolkata.
(2) Sent goods to Chennai – ` 25,000, Kolkata – ` 20,000.
(3) Bill Receivable received – ` 20,000 from Chennai.

(4) Acceptances sent to Mumbai – ` 25,000, Kolkata – ` 10,000.

B. Mumbai Branch (apart from the above) :
(5) Received goods from Kolkata – ` 15,000, Delhi – ` 20,000.
(6) Cash sent to Delhi – ` 15,000, Kolkata – ` 7,000.
C. Chennai Branch (apart from the above) :
(7) Received goods from Kolkata – ` 30,000.
(8) Acceptances and Cash sent to Kolkata – ` 20,000 and `10,000 respectively.
D. Kolkata Branch (apart from the above) :
(9) Sent goods to Chennai – ` 35,000.
(10) Paid cash to Chennai – `15,000.
(11) Acceptances sent to Chennai – `15,000.
Answer
(a) Journal entry in the books of Head Office
` `
30th April, 2013 Mumbai Branch Account Dr. 3,000
Chennai Branch Account Dr. 70,000
To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000
(Being adjustment entry passed by head office
in respect of inter-branch transactions for the
month of April, 2013)
Working Note:
Inter – Branch transactions
Delhi Mumbai Chennai Kolkata
` ` ` `
A. Delhi Branch
(1) Received goods 50,000 (Dr.) 35,000 (Cr.) 15,000 (Cr.)
(2) Sent goods 45,000 (Cr.) 25,000 (Dr.) 20,000 (Dr.)
(3) Received Bills 20,000 (Dr.) 20,000 (Cr.)
receivable
(4) Sent acceptance 35,000 (Cr.) 25,000 (Dr.) 10,000 (Dr.)

B. Mumbai Branch
(5) Received goods 20,000 (Cr.) 35,000 (Dr.) 15,000 (Cr.)
(6) Sent cash 15,000 (Dr.) 22,000 (Cr.) 7,000 (Dr.)
C. Chennai Branch
(7) Received goods 30,000 (Dr.) 30,000 (Cr.)
(8) Sent cash and 30,000 (Cr.) 30,000 (Dr.)
acceptances
D. Kolkata Branch
(9) Sent goods 35,000 (Dr.) 35,000 (Cr.)
(10) Sent cash 15,000 (Dr.) 15,000 (Cr.)
(11) Sent acceptances __________ _________ 15,000 (Dr.) 15,000 (Cr.)
15,000 (Cr.) 3,000 (Dr.) 70,000 (Dr.) 58,000 (Cr.)
Question 8
Give Journal Entries in the books of Branch A to rectify or adjust the following:
(i) Head Office expenses ` 3,500 allocated to the Branch, but not recorded in the Branch
Books.
(ii) Depreciation of branch assets, whose accounts are kept by the Head Office not provided
earlier for ` 1,500.
(iii) Branch paid ` 2,000 as salary to a H.O. Inspector, but the amount paid has been debited
by the Branch to Salaries account.
(iv) H.O. collected ` 10,000 directly from a customer on behalf of the Branch, but no
intimation to this effect has been received by the Branch.
(v) A remittance of ` 15,000 sent by the Branch has not yet been received by the Head
Office.
(vi) Branch A incurred advertisement expenses of ` 3,000 on behalf of Branch B.
Answer
Books of Branch A
Journal Entries
Particulars Dr. Cr.
Amount Amount
` `
(i) Expenses account Dr. 3,500
To Head office account 3,500
(Being the allocated expenditure by the head office recorded
in branch books)

(ii) Depreciation account Dr. 1,500

To Head office account 1,500
(Being the depreciation provided)
(iii) Head office account Dr. 2,000
To Salaries account 2,000
(Being the rectification of salary paid on behalf of H.O.)
(iv) Head office account Dr. 10,000
To Debtors account 10,000
(Being the adjustment of collection from branch debtors)
(v) No entry in branch books
(vi) Head Office account Dr. 3,000
To Cash account 3,000
(Being the expenditure on account of Branch B, recorded in
books)
Question 9
M/s Shah commenced business on 1.4.2012 with Head Office at Mumbai and a Branch at
Chennai. Purchases were made exclusively by the Head Office, where the goods were
processed before sale. There was no loss or wastage in processing.
Only the processed goods received from Head Office were handled by the Branch. The goods
were sent to branch at processed cost plus 10%.
All sales, whether by Head Office or by the Branch, were at uniform gross profit of 25% on
their respective cost.
Following is the Trial Balance as on 31.3.2013.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Capital 3,10,000
Drawings 55,000
Purchases 19,69,500
Cost of processing 50,500
Sales 12,80,000 8,20,000
Goods sent to Branch 9,24,000
Administrative expenses 1,39,000 15,000

Selling expenses 50,000 6,200

Debtors 3,09,600 1,13,600
Branch Current account 3,89,800
Creditors 6,01,400 10,800
Bank Balance 1,52,000 77,500
Head Office Current account 2,61,500
Goods received from H.O. ________ ________ 8,80,000 ________
31,15,400 31,15,400 10,92,300 10,92,300
Following further information is provided:
(i) Goods sent by Head Office to the Branch in March, 2013 of ` 44,000 were not received
by the Branch till 2.4.2013.
(ii) A remittance of ` 84,300 sent by the Branch to Head Office was also similarly not
received upto 31.3.2013.
(iii) Stock taking at the Branch disclosed a shortage of ` 20,000 (at selling price to the
branch).
(iv) Cost of unprocessed goods at Head Office on 31.3.2013 was ` 1,00,000.
Prepare Trading and Profit and Loss account in columnar form and Balance Sheet of the
business as a whole as at 31.3.2013
Answer
In the Books of Shah
Trading and Profit and Loss Account for the year ended 31st March, 2013
Particulars H.O. Branch Total H.O. Branch Total
` ` ` ` ` `
To Purchases 19,69,500 − 19,69,500 By Sales 12,80,000 8,20,000 21,00,000

To Cost of processing 50,500 − 50,500 By Goods sent to Branch 9,24,000 − −
To Goods received By Stock shortage − 16,000 14,545
from H.O. − 8,80,000 − By Goods in transit 44,000
To Gross profit c/d 3,40,000 1,64,000 5,02,545 By Closing stock:
Processed goods 56,000 2,08,000 2,64,000
________ ________ ________ Unprocessed goods 1,00,000 − 1,00,000
23,60,000 10,44,000 25,22,545 23,60,000 10,44,000 25,22,545
To Admn. Expenses 1,39,000 15,000 1,54,000 By Gross profit b/d 3,40,000 1,64,000 5,02,545
To Selling Expenses 50,000 6,200 56,200
To Stock shortage − 16,000 14,545

To Stock reserve 22,909 − 22,909

To Net profit 1,28,091 1,26,800 2,54,891 _______ _______ _______
3,40,000 1,64,000 5,02,545 3,40,000 1,64,000 5,02,545

Capital 3,10,000 Debtors
Add: Net profit 2,54,891 H.O. 3,09,600
5,64,891 Branch 1,13,600
Less: Drawings (55,000) 5,09,891 Closing stock:
Creditors: Processed goods
H.O. 6,01,400 H.O. 56,000
Branch 10,800 6,12,200 Branch 2,08,000
2,64,000
Less: Stock
reserve 18,909 2,45,091
Unprocessed 1,00,000
goods
Bank Balance
H.O. 1,52,000
Branch 77,500
Goods in transit 44,000
Less: Stock
reserve 4,000 40,000
________ Cash in transit 84,300
11,22,091 11,22,091
Working Notes:
1. Calculation of closing stock:
Stock at Head Office:
`
Cost of goods processed ` (19,69,500 + 50,500 – 1,00,000) 19,20,000
Less: Cost of goods sent to Branch

100
9,24,000× 8,40,000
110
100
Cost of goods sold 12,80,000× 10,24,000 18,64,000
125
Stock of processed goods with H.O. 56,000
Stock at Branch:
`
Goods received from H.O. (at invoice price) 8,80,000
Less: Invoice value of goods sold
100
8,20,000 × 6,56,000
125
100
Invoice value of stock shortage 20,000 × 16,000 (6,72,000)
125
Stock at Branch at invoice price 2,08,000
10
Less: Stock Reserve 2,08,000× (18,909)
110
Stock of processed goods with Branch (at cost) 1,89,091
2. Stock Reserve:
`
⎛ 10 ⎞
Unrealised profit on Branch stock ⎜ 2,08,000 × ⎟
⎝ 110 ⎠ 18,909
⎛ 10 ⎞
Unrealised profit on goods in transit ⎜ 44,000 × ⎟
⎝ 110 ⎠ 4,000
22,909
Question 10
Concept, with its Head Office at Mumbai has a branch at Nagpur. Goods are invoiced to the
Branch at cost plus 33-1/3%. The following information is given in respect of the branch for
the year ended 31st March, 2013:
`
Goods sent to Branch (Invoice price) 4,80,000
Stock at Branch on 1.4.2012 (Invoice price) 24,000

Cash sales 1,80,000

Return of goods by customers to the Branch 6,000
Branch expenses (paid in cash) 53,500
Branch debtors balance on 1.4.2012 30,000
Discount allowed 1,000
Bad debts 1,500
Collection from Debtors 2,70,000
Branch debtors cheques returned dishonoured 5,000
Stock at Branch on 31.3.2013 (Invoice price) 48,000
Branch debtors balance on 31.3.2013 36,500
Prepare, under the Stock and Debtors system, the following Ledger Accounts in the books of
the Head Office:
(i) Nagpur Branch Stock Account
(ii) Nagpur Branch Debtors Account
(iii) Nagpur Branch Adjustment Account.
Also compute shortage of Stock at Branch, if any.
Answer
In the books of head office
Nagpur Branch Stock Account
` `
1.4.2012 To Balance b/d 24,000 31.3.13 By Bank A/c 1,80,000
(Cash Sales)
31.3.2013 To Goods sent By Branch Debtors 2,80,000
to Branch A/c 4,80,000 (Credit Sales)
To Branch 6,000 By Stock shortage:
Debtors Branch P&L A/c 1,500*
Branch Adjustment
A/c(Loading) 500 2,000
5,10,000 5,10,000

Nagpur Branch Debtors Account

` `
1.4.2012 To Balance b/d 30,000 31.3.2013 By Bank A/c 2,70,000
(Collection)
31.3.2013 To Bank A/c By Branch Stock A/c 6,000
(dishonour of cheques) 5,000 By Bad debts 1,500
To Branch Stock A/c 2,80,000* By Discount allowed 1,000
3,15,000 3,15,000
Nagpur Branch Adjustment Account
` `
To Branch Stock A/c (loading of loss) 500* By Stock Reserve A/c 6,000
To Stock Reserve 12,000 By Goods sent to 1,20,000
Branch A/c
To Gross Profit c/d 1,13,500
1,26,000 1,26,000
To Branch Stock A/c (Cost of loss) 1,500 By Gross Profit b/d 1,13,500
To Branch Expenses 56,000
To Net Profit
(Transferred to General P & L A/c) 56,000
1,13,500 1,13,500
*Balancing figure.
Working Notes:
1. Credit Sales have not been given in the problem. So, the balancing figure of Branch
Debtors Account is taken as credit sales
2. Loading is 33 1 3 % or Cost; i.e. 25% of invoice value
Loading on opening stock = ` 24,000 × 25% = 6,000
3. Loading on goods sent = ` 4,80,000 × 25% = `1,20,000
4. Loading on Closing Stock = `48,000 × 25% = `12,000
5. Total Branch Expenses = Cash expenses + Bad debt + Discount allowed
= ` 53,500 + ` 1,500 + ` 1,000 = ` 56,000

6. Gross Profit
33.33
Total sales (at invoice price) - Goods returned by customers (at invoice price) x
100 + 33.33
33.33
{(` 1,80,000+ ` 2,80,000)- ` 6,000} x = ` 1,13,500
133.33
Question 11
Red and White of Mumbai started a branch at Bangalore on 1.4.2012 to which goods were
sent at 20% above cost. The branch makes both cash sales and credit sales. Branch
expenses are met from branch cash and balance money remitted to H.O. The branch does
not maintain double entry books of account and necessary accounts relating to branch are
maintained in H.O. Following further details are given for the year ending on 31.3.2013:
`
Cost of goods sent to branch 1,00,000
Goods received by branch till 31.3.2013 at Invoice price 1,08,000
Credit sales for the year 1,16,000
Closing debtors on 31.3.2013 41,600
Bad debts written off during the year 400
Cash remitted to H.O. 86,000
Closing cash on hand at branch on 31.3.2013 4,000
Cash remitted by H.O. to branch during the year 6,000
Closing stock in hand at branch at invoice price 12,000
Expenses incurred at branch 24,000
Draw up the necessary Ledger Accounts like Branch Debtors Account, Branch Stock Account,
Goods sent to Branch Account, Branch Cash Account, Branch Expenses Account and Branch
Adjustment A/c for ascertaining gross profit and Branch Profit and Loss A/c for ascertaining
Branch profit.
Answer
Branch Debtors A/c
` `
To Branch Stock A/c 1,16,000 By Branch Cash A/c (balancing figure) 74,000
By Bad Debts (written off) 400
1,16,000 1,16,000

Goods Sent to Branch A/c

` `
To Branch Adjustment A/c 20,000 By Branch Stock A/c 1,20,000
20
1,00,000x
100
To Purchases/ Trading A/c
1,00,000
1,20,000 1,20,000
Branch Cash A/c
` `
To Branch Debtors A/c 74,000 By Branch Expenses A/c 24,000
To H.O. A/c (cash remittance) 6,000 By H.O. (cash remittance) 86,000
To Branch Stock A/c By Balance c/d 4,000
- Cash Sales
(balancing figure) 34,000
1,14,000 1,14,000
Branch Stock A/c
` `
To Goods sent to Branch 1,20,000 By Branch Debtors A/c 1,16,000
A/c
To Branch Adjustment A/c 54,000 By Branch Cash A/c (Sales) 34,000
(Excess profit over By Goods in Transit (1,20,000- 12,000
normal loading - 1,08,000)
balancing figure)
1,74,000 1,74,000
Branch Expenses A/c
` `
To Branch Cash A/c 24,000 By Branch P&L A/c 24,000
Branch Adjustment A/c
` `
To Stock Reserve A/c 2,000 By Goods sent to Branch A/c 20,000
To Goods in transit Reserve A/c 2,000 By Branch Stock A/c 54,000
To Branch P&L A/c (Balancing figure) 70,000
74,000 74,000

Branch P & L A/c

` `
To Branch Expenses A/c 24,000 By Branch Adjustment A/c 70,000
To Bad Debts 400
To Net Profit (transferred to General P&L A/c) 45,600
70,000 70,000
Working Notes:
1. Loading is 20% of cost i.e. 16.67% (1/6th) of invoice value.
Loading on closing stock = 1/6th of ` 12,000 =` 2,000.
2. Loading on goods sent to branch = 1/6th of ` 1,20,000 = ` 20,000.
3. Loading on goods in transit = 1/6th of ` 12,000 = ` 2,000.
Question 12
Neo with headquarters at Mumbai, maintains a branch at Goa. Goods are invoiced at cost
plus 25%. In respect of Goa branch, the following information pertaining to the year ended
31st March, 2013 are made available to you:
`
Goods sent to Branch (at Invoice price) 6,75,000
Goods returned by branch during the year (at Invoice price) 24,000
Cash sales effected by branch 1,85,000
Discount allowed to customers 2,500
Amount received from branch debtors 3,25,000
Cheques of customers which got dishonoured 8,000
Branch expenses met in cash 72,500
Sales return at Goa branch 10,000
Bad debts 5,500
On 31st March, 2013 On 31st March, 2012
Branch debtors 1,05,000 50,000
Stock at branch (at Invoice price) 2,36,000 1,50,000
Adopting the Stock and debtors system, you are required to prepare the following Ledger
accounts, as appearing in the books of the Head Office:
(i) Goa branch debtors account;

(ii) Goa branch adjustment account;

(iii) Goa branch profit and loss account.
Answer
In the books of Neo (Head Office)
Goa Branch Debtors Account
1.4.2012 To Balance b/d 50,000 31.3.2013 By Bank (Collection 3,25,000
from debtors)
31.3.2013 To Bank A/c 8,000 By Branch Stock 10,000
(Dishonour of (Goods returned
cheques) by customers)
To Branch Stock A/c 3,90,000 By Bad debts 5,500
(Credit sales) By Discount allowed 2,500
By Balance c/d 1,05,000
4,48,000 4,48,000
Goa Branch Adjustment Account
31.3.2013 To Goods sent to Goa 4,800 1.4.2012 By Balance b/d 30,000
Branch A/c (goods (Opening
returns to H.O.) stock reserve)
To Branch P & L A/c (Profit 31.3.2013 By Goods sent to 1,35,000
on sale at invoice price) Goa Branch
(Bal. Fig.) 1,13,000 A/c (Loading)
To Balance c/d (Closing
stock reserve) 47,200
1,65,000 1,65,000
Goa Branch Profit and Loss Account
for the year ending 31st March, 2013
` `
To Branch Expenses A/c 72,500 By Branch Adjustment A/c 1,13,000
To Branch Debtors - Discount 2,500
Bad debts 5,500
To Net Profit (Transferred to
General Profit & Loss A/c) 32,500
1,13,000 1,13,000

Working Note:
Goa Branch Stock Account
1.4.2012 To Balance b/d 1,50,000 31.3.2013 By Bank (Cash sales) 1,85,000
31.3.2013 To Goods sent to 6,75,000 By Branch Debtors 3,90,000
Goa Branch (Credit sales)
To Branch 10,000 By Goods sent to
Debtors Goa Branch 24,000
(Goods (Goods returned
Returned) to H.O.)
By Balance c/d 2,36,000
8,35,000 8,35,000
Question 13
Beta, having head office at Mumbai has a branch at Nagpur. The head office does wholesale trade
only at cost plus 80%. The goods are sent to branch at the wholesale price viz., cost plus 80%. The
branch at Nagpur is wholly engaged in retail trade and the goods are sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 2013:
Head Office Branch
(`) (`)
Opening stock (as on 1.4.2012) 2,25,000 -
Purchases 25,50,000 -
Goods sent to branch (Cost to H.O. plus 80%) 9,54,000 -
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office and
branch for the year ended 31st March, 2013.
Answer
Trading and Profit and Loss A/c
For the year ended 31st March 2013
Head Branch Head Branch
office office
` ` ` `
To Opening stock 2,25,000 - By Sales 27,81,000 9,50,000

To Purchases 25,50,000 - By Goods sent to

branch 9,54,000 -
To Goods received from By Closing stock 7,00,000 99,000
head office - 9,54,000 (W.N.1 & 2)
To Gross profit c/d 16,60,000 95,000
44,35,000 10,49,000 44,35,000 10,49,000
To Office expenses 90,000 8,500 By Gross profit 16,60,000 95,000
b/d
To Selling expenses 72,000 6,300
To Staff salaries 65,000 12,000
To Branch Stock
Reserve (W.N.3) 44,000 -
To Net Profit 13,89,000 68,200
16,60,000 95,000 16,60,000 95,000
Working Notes:
(1) Calculation of closing stock of head office: `
Opening Stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
∗
Less: Cost of goods sold [37,35,000 x 100/180] (20,75,000)
7,00,000
(2) Calculation of closing stock of branch: `
Goods received from head office [At invoice value] 9,54,000
Less: Invoice value of goods sold [9,50,000 x 180/200] (8,55,000)
99,000
(3) Calculation of unrealized profit in branch stock:
Branch stock ` 99,000
Profit included 80% of cost
Hence, unrealized profit would be = ` 99,000 x 80/180 = ` 44,000
Question 14
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:
`
Stock at invoice price on 1.4.2012 1,64,000
Stock at invoice price on 31.3.2013 1,92,000
Debtors as on 1.4.2012 63,400
Debtors as on 31.3.2013 84,300
Furniture & fixtures as on 1.4.2012 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 1.10.2012 (payment was made by the 5,000
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 Delhi (Head Office)
Jaipur Branch Account
` `
To Opening balances: By Branch stock reserve 32,800
Branch stock A/c 1,64,000 By Bank A/c (W.N.4) 15,00,000
Branch debtors A/c 63,400 By Goods sent to branch A/c 2,51,200
Branch furniture A/c 46,800 (Loading)
To Goods sent to branch 12,56,000 By Closing Balances:
To Bank A/c (branch expenses) 2,64,000 Branch stock A/c 1,92,000
To Branch stock reserve A/c 38,400 Branch debtors A/c 84,300
To Profit and loss A/c (Bal. Fig.) 2,74,570 Branch furniture A/c (W.N.2) 46,870
21,07,170 21,07,170

Working Notes:
1. Depreciation on furniture
`
10% p.a. on ` 46,800 4,680
10% p.a. for 6 months on ` 5,000 250
4,930
2. Closing balance of branch furniture as on 31.3.2013
`
Branch furniture as on 1.4.2012 46,800
Add: Acquired during the year 5,000
51,800
Less: Depreciation (W.N.1) (4,930)
Branch furniture as on 31.3.2013 46,870
3. Collection from branch debtors
` `
To Balance b/d 63,400 By Bank A/c (Bal.Fig.) 7,23,300
To Sales 7,44,200 By Balance c/d 84,300
8,07,600 8,07,600
4. Cash remitted by the branch to head office
Cash sales + Collection from debtors – Petty expenses – Furniture acquired by branch
` 8,02,600 + ` 7,23,300 (W.N. 3) – ` 20,900 – ` 5,000 = ` 15,00,000
Question 15
Ram of Chennai has a branch at Nagpur to which office, goods are invoiced at cost plus 25%.
The branch makes sales both for cash and on credit. Branch expenses are paid direct from
Head Office and the branch has to remit all cash received into the Head Office Bank Account
at Nagpur.
From the following details, relating to the year 2013, prepare the accounts in Head Office
Ledger and ascertain Branch Profit as per stock and debtors method. Branch does not
maintain any books of accounts, but sends weekly returns to head office:
`
Goods received from head office at invoice price 1,20,000

Returns to head office at invoice price 2,400

Stock at Nagpur branch on 1.1.2013 at invoice price 12,000
Sales during the year – Cash 40,000
Credit 72,000
Debtors at Nagpur branch as on 1.1.2013 14,400
Cash received from debtors 64,000
Discounts allowed to debtors 1,200
Bad debts during the year 800
Sales returns at Nagpur branch 1,600
Salaries and wages at branch 12,000
Rent, rates and taxes at branch 3,600
Office expenses at Nagpur branch 1,200
Stock at branch on 31.12.2013 at invoice price 24,000
Answer
Nagpur Branch Stock Account
(`) (`)
To Balance b/d 12,000 By Goods sent to branch A/c 2,400
To Goods sent to (Returns)
branch A/c 1,20,000 By Bank A/c (Cash sales) 40,000
To Branch debtors A/c 1,600 By Branch debtors A/c (credit 72,000
(Returns) sales)
To Branch adjustment A/c By Balance c/d 24,000
(Surplus over invoice
price) 4,800
1,38,400 1,38,400
Nagpur Branch Adjustment Account
(`) (`)
To Stock reserve - 20% of 4,800 By Stock reserve - 20% of 2,400
` 24,000 (closing stock) ` 12,000 (Opening stock)
To Branch profit & loss A/c 25,920 By Goods sent to branch A/c – 23,520
(Gross profit) 20% of ` 1,17,600
By Branch stock A/c 4,800
30,720 30,720

Branch Profit & Loss Account

(`) (`)
To Branch expenses A/c 16,800 By Branch adjustment A/c 25,920
To Branch debtors A/c 1,200 (Gross Profit)
(Discount)
To Branch debtors A/c 800
(Bad Debts)
To Net profit (transferred
to Profit & Loss A/c) 7,120
25,920 25,920
Branch Expenses Account
(`) (`)
To Bank A/c (Rent, rates & 3,600 By Branch profit and loss A/c 16,800
taxes) (Transfer)
To Bank A/c (Salaries & 12,000
wages)
To Bank A/c (Office
expenses) 1,200
16,800 16,800

(`) (`)
To Balance b/d 14,400 By Bank A/c 64,000
To Branch stock A/c 72,000 By Branch profit and loss A/c 2,000
(Bad debts and discount)
By Branch stock A/c (Sales 1,600
returns)
By Balance c/d (bal.fig.) 18,800
86,400 86,400
Goods sent to Branch Account
(`) (`)
To Branch stock A/c 2,400 By Branch stock A/c 1,20,000

To Branch adjustment A/c 23,520

To Purchases A/c 94,080
1,20,000 1,20,000
Question 16
Following is the information of the Jammu branch of Best New Delhi for the year ending
31st March, 2013 from the following:
(1) Goods are invoiced to the branch at cost plus 20%.
(2) The sale price is cost plus 50%.
(3) Other informations:
`
Stock as on 01.04.2012 (invoice price) 2,20,000
Goods sent during the year (invoice price) 11,00,000
Sales during the year 12,00,000
Expenses incurred at the branch 45,000
Ascertain
(i) the profit earned by the branch during the year
(ii) branch stock reserve in respect of unrealized profit.
Answer
(i) Calculation of profit earned by the branch
In the books of Jammu Branch
Trading Account
` `
To Opening stock 2,20,000 By Sales 12,00,000
To Goods received by Head office 11,00,000 By Closing stock (Refer 3,60,000
W.N.)
To Expenses 45,000
To Gross profit 1,95,000 ________
15,60,000 15,60,000
(ii) Stock reserve in respect of unrealised profit
= ` 3,60,000 x (20/120) = ` 60,000

Working Note:
Cost Price 100
Invoice Price 120
Sale Price 150
Calculation of closing stock at invoice price `
Opening stock at invoice price 2,20,000
Goods received during the year at invoice price 11,00,000
13,20,000
Less : Cost of goods sold at invoice price (9,60,000) [12,00,000 x (120/150)]
Closing stock 3,60,000
Question 17
XYZ is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on sale.
Branch has been instructed to send all cash daily to head office. All expenses are paid by
head office except petty expenses which are met by the Branch Manager. From the following
particulars prepare branch account in the books of Head Office.
(`) (`)
Stock on 1st April 2011 30,000 Discount allowed to
(invoice price) debtors 160
Sundry Debtors on 1st April, 2011 18,000 Expenses paid by head
office:
Cash in hand as on 1st April, 2011 800 Rent 1,800
Salary 3,200
Office furniture on 1st April, 2011 3,000 Stationery & Printing 800
Goods invoiced from the head office Petty expenses paid by the
(invoice price) 1,60,000 branch 600
Goods return to Head Office 2,000 Depreciation to be provided on
branch
Goods return by debtors 960 furniture at 10% p.a.
Cash received from debtors 60,000
Cash Sales 1,00,000 Stock on 31st March, 2012
Credit sales 60,000 (at invoice price) 28,000

Answer
In the books of Head Office – XYZ
Kolkata Branch Account (at invoice)
` `
To Balance b/d By Stock reserve (opening) 6,000
Stock 30,000 By Remittances:
Debtors 18,000 Cash Sales 1,00,000
Cash in hand 800 Cash from Debtors 60,000 1,60,000
Furniture 3,000 By Goods sent to branch (loading) 32,000
To Goods sent to By Goods returned by
branch 1,60,000 branch (Return to H.O.) 2,000
To Goods returned by 400 By Balance c/d
branch (loading) Stock 28,000
To Bank (expenses Debtors 16,880
paid by H.O.) Cash (800-600) 200
Rent 1,800 Furniture (3,000-300) 2,700
Salary 3,200
Stationary &
printing 800 5,800
To Stock reserve (closing) 5,600
To Profit transferred to
General Profit & Loss A/c 24,180
2,47,780 2,47,780
Working Note:
Debtors Account
` `
To Balance b/d 18,000 By Cash account 60,000
To Sales account (credit) 60,000 By Sales return account 960
By Discount allowed account 160
78,000 78,000
Note: It is assumed that goods returned by branch are at invoice price.

FOREIGN BRANCHES
Question 18
On 31st March, 2012, the following ledger balances have been extracted from the books of
Washington branch office:
Ledger Accounts $
Building 180
Stock as on 1.4.2011 26
Cash and Bank Balances 57
Purchases 96
Sales 110
Commission receipts 28
Debtors 46
Creditors 65
You are required to convert above Ledger balances into Indian Rupees.
Use the following rates of exchange:
` per $
Opening rate 46
Closing rate 50
Average rate 48
For fixed assets 42
Answer
Conversion of ledger balances (in Dollars) into Rupees
$ Rate per $ Amount in `
Building 180 42 7,560
Stock as on 01.04.2011 26 46 1,196
Cash and bank balances 57 50 2,850
Purchases 96 48 4,608
Sales 110 48 5,280
Commission receipts 28 48 1,344
Debtors 46 50 2,300
Creditors 65 50 3,250

Question 19
Omega has a branch at Washington. Its Trial Balance as at 30th September, 2012 is as
follows:
Dr. Cr.
US $ US $
Plant and machinery 1,20,000 –
Furniture and fixtures 8,000 –
Stock, Oct. 1, 2011 56,000 –
Purchases 2,40,000 –
Sales – 4,16,000
Goods from Omega (H.O.) 80,000 –
Wages 2,000 –
Carriage inward 1,000 –
Salaries 6,000 –
Rent, rates and taxes 2,000 –
Insurance 1,000 –
Trade expenses 1,000 –
Head Office A/c – 1,14,000
Trade debtors 24,000 –
Trade creditors – 17,000
Cash at bank 5,000 –
Cash in hand 1,000 –
5,47,000 5,47,000
The following further information is given :
(1) Wages outstanding – $ 1,000.
(2) Depreciate Plant and Machinery and Furniture and Fixtures @ 10 % p.a.
(3) The Head Office sent goods to Branch for ` 39,40,000.
(4) The Head Office shows an amount of ` 43,00,000 due from Branch.
(5) Stock on 30th September, 2012 – $ 52,000.
(6) There were no in transit items either at the start or at the end of the year.
(7) On September 1, 2010, when the fixed assets were purchased, the rate of exchange was
` 38 to one $.
On October 1, 2011, the rate was ` 39 to one $.
On September 30, 2012, the rate was ` 41 to one $.

Average rate during the year was ` 40 to one $.

You are asked to prepare:
(a) Trial balance incorporating adjustments given under 1 to 4 above, converting dollars into
rupees.
(b) Trading and Profit and Loss Account for the year ended 30th September, 2012 and
Balance Sheet as on that date depicting the profitability and net position of the Branch as
would appear in India for the purpose of incorporating in the main Balance Sheet .
Answer
(a) In the books of Omega
Washington Branch Trial Balance (in Rupees)
as on 30th September, 2012
Dr. Cr. Conversion Dr. Cr.
US $ US $ rate (` ‘000) (` ‘000)
Plant and Machinery 1,08,000 41 44,28,000
Depreciation on plant and 12,000 41 4,92,000
machinery
Furniture and fixtures 7,200 41 2,95,200
Depreciation on furniture
and fixtures 800 41 32,800
Stock, Oct. 1, 2011 56,000 39 21,84,000
Purchases 2,40,000 40 96,00,000
Sales 4,16,000 40 1,66,40,000
Goods from Omega (H.O.) 80,000 39,40,000
Wages 3,000 40 1,20,000
Outstanding wages 1,000 41 41,000
Carriage inward 1,000 40 40,000
Salaries 6,000 40 2,40,000
Rent, rates and taxes 2,000 40 80,000
Insurance 1,000 40 40,000
Trade expenses 1,000 40 40,000
Head Office A/c 1,14,000 43,00,000
Trade debtors 24,000 41 9,84,000
Trade creditors 17,000 41 6,97,000

Cash at bank 5,000 41 2,05,000

Cash in hand 1,000 41 41,000
Exchange gain (bal. fig.)
10,84,000
5,48,000 5,48,000 2,27,62,000 2,27,62,000
(b) Washington Branch Trading and Profit and Loss Account

for the year ended 30th September, 2012
` `
To Opening stock 21,84,000 By Sales 1,66,40,000
To Purchases 96,00,000 By Closing stock 21,32,000
To Goods from Head Office 39,40,000 (52,000 US $ × 41)
To Wages 1,20,000
To Carriage inward 40,000
To Gross profit c/d 28,88,000
1,87,72,000 1,87,72,000
To Salaries 2,40,000 By Gross profit b/d 28,88,000
To Rent, rates and taxes 80,000
To Insurance 40,000
To Trade expenses 40,000
To Depreciation on plant and
machinery 4,92,000
To Depreciation on furniture and
fixtures 32,800
To Net Profit c/d 19,63,200
28,88,000 28,88,000
Balance Sheet of Washington Branch
as on 30th September, 2012
Head Office A/c 43,00,000 Plant and machinery 49,20,000
Add : Net profit 19,63,200 62,63,200 Less : Depreciation (4,92,000) 44,28,000
Foreign currency Furniture and fixtures 3,28,000
Translation reserve 10,84,000 Less : Depreciation (32,800) 2,95,200
Trade creditors 6,97,000 Closing stock 21,32,000

Outstanding wages 41,000 Trade debtors 9,84,000

Cash in hand 41,000
Cash at bank 2,05,000
80,85,200 80,85,200
Note:(1) Depreciation has been calculated at the given depreciation rate of 10% on
WDV basis.
(2) The above solution has been given assuming that the Washington branch is a
non-integral foreign operation of the Omega.
Question 20
The Washington branch of XYZ Mumbai sent the following trial balance as on
31st December, 2012:
$ $
Head office A/c _ 22,800
Sales _ 84,000
Debtors and creditors 4,800 3,400
Machinery 24,000 _
Cash at bank 1,200 _
Stock, 1 January, 2012 11,200 _
Goods from H.O. 64,000 _
Expenses 5,000 _
1,10,200 1,10,200
In the books of head office, the Branch A/c stood as follows:
Washington Branch A/c
` `
To Balance b/d 8,10,000 By Cash 28,76,000
To Goods sent to branch 29,26,000 By Balance c/d 8,60,000
37,36,000 37,36,000
Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice price
plus 25%. Machinery was acquired on 31st January, 2007, when $ 1.00 = ` 40.
Rates of exchange were:
1st January, 2012 $ 1.00 = ` 46
31st December, 2012 $ 1.00 = ` 48
Average $ 1.00 = ` 47

Machinery is depreciated @ 10% and the branch manager is entitled to a commission of 5%

on the profits of the branch.
(i) Prepare the Branch Trading & Profit & Loss A/c in dollars.
(ii) Convert the Trial Balance of branch into Indian currency and prepare Branch Trading &
Profit and Loss A/c and the Branch A/c in the books of head office.
Answer
(i) In the Books of Head Office
Branch Trading and Profit & Loss A/c (in Dollars)
for the year ended 31st December, 2012
Particulars $ Particulars $
To Opening stock 11,200 By Sales 84,000
To Goods from H.O. 64,000 By Closing stock (W.N.2) 8,000
To Gross profit c/d 16,800
92,000 92,000
To Expenses 5,000 By Gross profit b/d 16,800
To Depreciation 2,400
To Manager’s commission
(W.N.1) 470
To Net profit c/d 8,930
16,800 16,800
(ii) (a) Converted Branch Trial Balance (into Indian Currency)
Particulars Rate per $ Dr. (`) Cr. (`)
Machinery 40 9,60,000 _
Stock January 1, 2012 46 5,15,200 _
Goods from head office Actual 29,26,000 _
Sales 47 _ 39,48,000
Expenses 47 2,35,000 _
Debtors & creditors 48 2,30,400 1,63,200
Cash at bank 48 57,600 _
Head office A/c Actual _ 8,60,000
Difference in exchange rate 47,000 _
49,71,200 49,71,200
Closing stock $ 8,000 (W.N. 2) 48 ` 3,84,000

(b) Branch Trading and Profit & Loss A/c for the year ended 31st December, 2012
` `
To Goods from head By Closing stock
office 29,26,000 (W.N.2) 3,84,000
43,32,000 43,32,000
To Expenses 2,35,000 By Gross profit b/d 8,90,800
To Depreciation @ 10%
on ` 9,60,000 96,000
To Exchange difference 47,000
To Manager’s
commission (W.N.1) 22,560
8,90,800 8,90,800
(c) Branch Account
` `
To Balance b/d 8,60,000 By Machinery 9,60,000
To Net profit 4,90,240 Less: 8,64,000
To Creditors 1,63,200 Depreciation (96,000)
To Outstanding By Closing stock 3,84,000
commission 22,560 By Debtors 2,30,400
By Cash at bank 57,600
15,36,000 15,36,000
Working Notes:
1. Calculation of manager’s commission @ 5% on profit
i.e. 5% of $[16,800 – (5,000 + 2,400)]
Or 5% × $9,400 = $ 470
Manager’s commission in Rupees = $ 470 × ` 48 = ` 22,560
2. Calculation of closing stock $
Opening stock 11,200

Add: Goods from head office 64,000

75,200
Less: Cost of goods sold (at invoice price)
100 (67,200)
i.e. × 84,000
125
Closing stock 8,000
Closing stock in Rupees = $8,000 x ` 48 = ` 3,84,000.
Question 21
DM Delhi has a branch in London which is an integral foreign operation of DM. At the end of
the year 31st March, 2011, the branch furnishes the following trial balance in U.K. Pound:
Particulars £ £
Dr. Cr.
Fixed assets (Acquired on 1st April, 2007) 24,000
Stock as on 1st April, 2010 11,200
Goods from head Office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
Head Office Account 22,800
Purchases 12,000
Sales 96,000
1,22,000 1,22,000
In head office books, the branch account stood as shown below:
London Branch A/c
` `
To Balance B/d 20,10,000 By Bank A/c 52,16,000
To Goods sent to branch 49,26,000 By Balance C/d 17,20,000
69,36,000 69,36,000
The following further information are given:
(a) Fixed assets are to be depreciated @ 10% p.a. on straight line basis.

(b) On 31st March, 2010 :

Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchange :

1st April, 2007 - ` 70 to £ 1
1st April, 2010 - ` 76 to £ 1
31st March, 2011 - ` 77 to £ 1
Average - ` 75 to £ 1
(1) Trial balance, incorporating adjustments of outstanding and prepaid expenses,
converting U.K. pound into Indian rupees.
(2) Trading and profit and loss account for the year ended 31st March, 2011 and the Balance
Sheet as on that date of London branch as would appear in the books of Delhi head
office of DM..
Answer
Trial Balance of London Branch as on 31st March, 2011
Particulars U.K. Rate Per Dr. (`) Cr. (`)
Pound U.K.
Pound
Fixed Assets 24,000 70 16,80,000
Stock (as on 1st April, 2010) 11,200 76 8,51,200
Goods from Head Office 64,000 - 49,26,000
Sales 96,000 75 72,00,000
Purchases 12,000 75 9,00,000
Expenses (4,800 + 400 – 200) 5,000 75 3,75,000
Debtors 4,800 77 3,69,600
Creditors 3,200 77 2,46,400
Outstanding Expenses 400 77 30,800
Prepaid expenses 200 77 15,400
Cash at Bank 1,200 77 92,400
Head office Account - 17,20,000
Difference in Exchange 12,400
92,09,600 92,09,600

Closing stock will be (8,000 × 77) = ` 6,16,000

Trading and Profit & Loss A/c
(`) (`)
To Opening Stock 8,51,200 By Sales 72,00,000
To Purchases 9,00,000 By Closing Stock 6,16,000
To Goods from H.O. 49,26,000
To Gross Profit 11,38,800
78,16,000 78,16,000
To Expenses 3,75,000 By Gross Profit 11,38,800
To Depreciation 1,68,000 By Profit due to Exchange
To Net Profit 6,08,200 difference 12,400
11,51,200 11,51,200
Head office Fixed Assets 16,80,000
Balance 17,20,000 Less: Depreciation (1,68,000) 15,12,000
Add: Net Profit 6,08,200 23,28,200 Debtors 3,69,600
Outstanding 30,800 Cash at bank 92,400
expenses Prepaid
Creditors 2,46,400 expenses 15,400
Closing stock 6,16,000
26,05,400 26,05,400
Working Note:
Since London Branch is an integral foreign operation. Hence,
(1) Fixed assets (cost and depreciation) are translated using the exchange rate at the date
of purchase of the assets.
(2) Exchange difference arising on translation of the financial statement is charged to Profit
and Loss Account.

Question 22
Moon Star has a branch at Verginia (USA). The Branch is a non-integral foreign operation of
the Moon Star. The trial balance of the Branch as at 31st March, 2012 is as follows:
Particulars US $
Dr. Cr.
Office equipments 48,000
Furniture and Fixtures 3,200
Stock (April 1, 2011) 22,400
Purchases 96,000
Sales --- 1,66,400
Goods sent from H.O 32,000
Salaries 3,200
Carriage inward 400
Rent, Rates & Taxes 800
Insurance 400
Trade Expenses 400
Head Office Account --- 45,600
Sundry Debtors 9,600
Sundry Creditors --- 6,800
Cash at Bank 2,000
Cash in Hand 400
2,18,800 2,18,800
The following further information’s are given:
(1) Salaries outstanding $ 400.
(2) Depreciate office equipment and furniture & fixtures @10% p.a. at written down value.
(3) The Head Office sent goods to Branch for `15,80,000
(4) The Head Office shows an amount of ` 20,50,000 due from Branch.
(5) Stock on 31st March, 2012 -$21,500.
(6) There were no transit items either at the start or at the end of the year.
(7) On April 1, 2010 when the fixed assets were purchased the rate of exchange was
` 43 to one $. On April 1, 2011, the rate was 47 per $. On March 31, 2012 the rate was
` 50 per $. Average rate during the year was ` 45 to one $.
Prepare:
(a) Trial balance incorporating adjustments given converting dollars into rupees.

(b) Trading, Profit and Loss Account for the year ended 31st March, 2012 and Balance Sheet
as on date depicting the profitability and net position of the Branch as would appear in the
books of Moon Star for the purpose of incorporating in the main Balance Sheet.
Answer
In the books of Moon Star
Trial Balance (in Rupees) of Verginia (USA) Branch
Dr. Cr. Conversion Dr. Cr.
US $ US $ rate ` `
Office Equipment 43,200 50 21,60,000
Depreciation on Office Equipment 4,800 50 2,40,000
Furniture and fixtures 2,880 50 1,44,000
Depreciation on furniture and fixtures 320 50 16,000
Stock (1 April, 2011)
st 22,400 47 10,52,800
Purchases 96,000 45 43,20,000
Sales 1,66,400 45 74,88,000
Goods sent from H.O. 32,000 15,80,000
Carriage inward 400 45 18,000
Salaries (3,200+400) 3,600 45 1,62,000
Outstanding salaries 400 50 20,000
Rent, rates and taxes 800 45 36,000
Insurance 400 45 18,000
Trade expenses 400 45 18,000
Head Office A/c 45,600 20,50,000
Trade debtors 9,600 50 4,80,000
Trade creditors 6,800 50 3,40,000
Cash at bank 2,000 50 1,00,000
Cash in hand 400 50 20,000
Exchange gain (bal. fig.) 4,66,800
2,19,200 2,19,200 1,03,64,800 1,03,64,800
(b) Trading and Profit and Loss Account of Verginia Branch
` `
To Purchases 43,20,000 By Closing stock 10,75,000
To Goods from Head Office 15,80,000 (21,500 US $ × 50)
To Carriage inward 18,000


85,63,000 85,63,000
To Salaries 1,62,000 By Gross profit b/d 15,92,200
To Rent, rates and taxes 36,000
To Insurance 18,000
To Trade expenses 18,000
To Depreciation on office 2,40,000
equipment
To Depreciation on furniture and 16,000
fixtures
15,92,200 15,92,200
Balance Sheet of Verginia Branch
Head Office A/c 20,50,000 Office Equipment 24,00,000
Add : Net profit 11,02,200 31,52,200 Less : Depreciation (2,40,000) 21,60,000
Foreign Currency Translation 4,66,800 Furniture and 1,60,000
Reserve fixtures
Trade creditors 3,40,000 Less : Depreciation (16,000) 1,44,000
Outstanding salaries 20,000 Closing stock 10,75,000
Trade debtors 4,80,000
Cash in hand 20,000
Cash at bank 1,00,000
39,79,000 39,79,000
EXERCISES
1. S & M Ltd., Bombay, have a branch in Sydney, Australia. At the end of 31st March, 2011, the following
ledger balances have been extracted from the books of the Bombay Office and the Sydney Office :
Bombay Sydney
(` thousands) (Austr dollars thousands)
Debit Credit Debit Credit
Share Capital – 2,000 – –
Reserves & Surplus – 1,000 – –
Land 500 – – –
Buildings (Cost) 1,000 – – –

Buildings Dep. Reserve – 200 – –

Plant & Machinery (Cost) 2,500 – 200 –
Plant & Machinery Dep. Reserve – 600 – 130
Debtors / Creditors 280 200 60 30
Stock (1.4.2010) 100 – 20 –
Branch Stock Reserve – 4 – –
Cash & Bank Balances 10 – 10 –
Purchases / Sales 240 520 20 123
Goods sent to Branch – 100 5 –
Managing Director’s salary 30 – – –
Wages & Salaries 75 – 45 –
Rent – – 12 –
Office Expenses 25 – 18 –
Commission Receipts – 256 – 100
Branch / H.O. Current A/c 120 – – 7
4,880 4,880 390 390
The following information is also available :
(1) Stock as at 31.3.2011 :
Bombay ` 1,50,000
Sydney A $ 3,125
(2) Head Office always sent goods to the Branch at cost plus 25%.
(3) Provision is to be made for doubtful debts at 5%.

(4) Depreciation is to be provided on buildings at 10% and on plant and machinery at 20% on written
down values.
(5) The Managing Director is entitled to 2% commission on net profits.
(6) Income–tax is to be provided at 47.5%.
You are required :
(a) To convert the Branch Trial Balance into rupees;
(use the following rates of exchange :
Opening rate A $ = ` 20
Closing rate A $ = ` 24
Average rate A $ = ` 22
For Fixed Assets A $ = ` 18).

(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March, 2011 showing to
the extent possible H.O. results and Branch results separately. (Balance Sheet not required.)
(Hints: Exchange loss (balancing figure) in Sydney Branch Trial Balance ` 2,16,000; Net profit as per
profit and loss account ` 9,88,000)
2. Head Office passes adjustment entry at the end of each month to adjust the position arising out of inter–
branch transactions during the month. From the following inter–branch transactions in January, 2011, make
the entry in the books of Head Office :
(a) Bombay Branch
(1) Received Goods : ` 6,000 from Calcutta Branch, ` 4,000 from Patna Branch.
(2) Sent Goods to ` 10,000 to Patna, ` 8,000 to Calcutta.
(3) Received B/R : ` 6,000 from Patna.
(4) Sent Acceptance : ` 4,000 to Calcutta, ` 2,000 to Patna.
(b) Madras Branch (Apart from the above)
(5) Received Goods : ` 10,000 from Calcutta, ` 4,000 from Bombay.
(6) Cash Sent : ` 2,000 to Calcutta, ` 6,000 to Bombay.
(c) Calcutta Branch (Apart from the above)
(7) Sent Goods to Patna : ` 6,000.
(8) Paid B/P : ` 4,000 to Patna, ` 4,000 cash to Patna.

(Hints: Madras Branch and Patna Branch debited by ` 6,000 and ` 16,000 respectively. Bombay branch
and Calcutta Branch credited by ` 6,000 and ` 16,000 respectively.)
3. T of Calcutta has a branch at Dibrugarh. The branch does not maintain separate books of accounts. The
branch has the following assets and liabilities on 31st August, 2010 and 30th September, 2010 :
31st August, 2010 30th September, 2010
` `
Stock of tea 1,80,000 1,50,000

Advance to suppliers 5,00,000 4,50,000
Bank Balance 75,000 1,00,000
Prepaid expenses 10,000 12,000
Outstanding expenses 13,000 11,000
Creditors for purchases 3,00,000 to be ascertained
During the month, Dibrugarh branch :

(a) received by electronic mail transfer ` 10,00,000 from Calcutta head office;

(b) purchased tea worth ` 12,00,000;

(c) sent tea costing ` 12,30,000 to Calcutta, freight of ` 80,000 being payable at the destination by the receiver;
(d) spent ` 25,000 on office expenses;
(e) paid ` 3,00,000 as advance to suppliers;
(f) paid ` 6,50,000 to suppliers in settlement of outstanding dues.
In addition, T informs you that the Calcutta office had directly paid ` 3,50,000 to Dibrugarh suppliers by
cheques drawn on bank accounts in Calcutta during the month. T informs you that for the purpose of
accounting, Dibrugarh branch is not treated as an outsider. He wants you to write the detailed accounts
relating to the transactions of the Dibrugarh branch as would appear in the books of Calcutta Head Office.
(Hints: Balances in Dibrugarh Tea Stock Account ` 1,50,000; Advance to Supplier’s Account
` 4,50,000;Supplier’s Account ` 1,50,000; bank account ` 1,00,000; Expenses Account ` 21,000;)

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PRACTICE MANUAL

© The Institute of Chartered Accountants of India

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Revised Edition : July, 2013

Committee / : Board of Studies

ISBN No. : 978-81-8441-303-8

Published by : The Publication Department on behalf of The Institute of Chartered

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003

© The Institute of Chartered Accountants of India

Happy Reading and Best Wishes!

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

CHAPTER – 1 Framework for Preparation and Presentation of Financial 1.1 - 1.2

CHAPTER – 2 Accounting Standards 2.1 – 2.48

CHAPTER – 3 Advanced Issues in Partnership Accounts 3.1 – 3.36

Unit -1 Dissolution of Partnership Firms 3.1 – 3.26

Unit -2 Amalgamation, Conversion and Sale of Partnership Firm 3.27 – 3.36

CHAPTER – 4 Company Accounts 4.1 – 4.102

Unit -1 ESOPS and Buy Back of Shares 4.1 – 4.16

Unit -2 Underwriting of Shares and Debentures 4.17 -4.31

Unit 3 Redemption of Debentures 4.32 – 4.49

Unit -4 Amalgamation and Reconstruction 4.50 – 4.87

Unit -5 Liquidation of Companies 4.88 – 4.102

CHAPTER – 5 Financial Statements of Insurance Companies 5.1 – 5.26

CHAPTER – 6 Financial Statements of Banking Companies 6.1 – 6.42

CHAPTER – 7 Financial Statements of Electricity Companies 7.1 – 7.6

CHAPTER – 8 Departmental Accounts 8.1 – 8.15

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

information should be judged by its materiality. A piece of information is said to be

© The Institute of Chartered Accountants of India

AS 4 “CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE”

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

If embezzlement of cash comes to the notice of company management only after

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Additional wages liability of ` 87 lakhs (from 1.4.2008 to 30.6.2012) should be included in

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(ii) Change in Accounting Estimate

© The Institute of Chartered Accountants of India

Calculation of exchange difference:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Total ` 3,25,000 ` 5,85,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India