ACCOUNTANCY RECKONER Accountancy.pdf · organization and its distinction from a profit making entity. state the meaning of receipts and payments account, and understanding its features

SALWAN PUBLIC SCHOOL

ACCOUNTANCY RECKONER

SESSION: 2020-21 :

NAME: _____ __________________ _________

CLASS: _____ X II _____ SECTION: __ _ _ ____ __ __

Preface

The course in Accountancy puts emphasis on developing basic understanding about the nature and purpose of the accounting information and its use in the conduct of business operations This would help to develop among students logical reasoning, careful analysis and judgment. Accounting as an information system aids in providing financial information. The emphasis in class XII is placed on Accounting for Partnership firms and Companies and also on the Analysis of Financial Statements. While making the reckoner, the focus was on helping the students understand the concepts. It can be very effectively utilized to revise concepts at the time of examination. It has been developed in conformity with the Curriculum prescribed by the CBSE and the changes in The Companies Act,2013. The reckoner has been carefully designed keeping in mind the following objectives:

• To provide an Overview of the topic

• To reinforce the content in the form of varied exercises To inculcate Higher

Order Thinking Skills.

• To Inculcate Values. Each chapter has been divided into three sections:

• Section A consists of Value points

• Section B consists of Concept based exercises divided into very- short, short and long answer questions.

• Section C consists of Enhancement Exercises based on HOTS, value based questions.

INDEX

CONTENTS

1. CURRICULUM

2. DESIGN OF THE QUESTION PAPER

3. CH-1 FUNDAMENTALS OF PARTNERSHIP

4. CH-2 GOODWILL: NATURE AND VALUATION

5. CH-3 CHANGE IN THE PROFIT SHARING RATIO

6. CH-4 ADMISSION OF A PARTNER

7. CH-5 RETIREMENT AND DEATH OF A PARTNER

8. CH-6 DISSOLUTION OF A PARTNERSHIP FIRM

9. CH-7 ACCOUNTING FOR SHARE CAPITAL

10. CH-8 ISSUE OF DEBENTURES

11. CH-9 REDEMPTION OF DEBENTURES

12. CH-10 BALANCE SHEET

13. CH-11 FINANCIAL STATEMENT ANALYSIS

14. CH-11 COMPARATIVE & COMMON SIZE STATEMENTS

15. CH-12 RATIO ANALYSIS

16. CH-13 CASH FLOW STATEMENT

17. CH ACCOUNTING FOR NOT FOR PROFIT ORGANISATION

18. STUDY TIPS

19. SAMPLE PAPER-1,2,3

20. REFERENCES/ WEBSITES

4

CURRICULUM (2020-21)

ACCOUNTANCY (055)

CLASS: XII

Units Periods Marks

Part A Accounting for Not-for-Profit Organizations, Partnership Firms and Companies

Unit 1. Financial Statements of Not-for-Profit Organizations

25 10

Unit 2. Accounting for Partnership Firms 90 35

Unit 3. Accounting for Companies 35 15

150 60

Part B Financial Statement Analysis

Unit 4. Analysis of Financial Statements 30 12

Unit 5. Cash Flow Statement 20 8

50 20

Part C Project Work 40 20

Project work will include:

Project File 4 Marks

Written Test 12 Marks (One Hour)

Viva Voce 4 Marks

OR

Part B Computerized Accounting

Unit 4. Computerized Accounting 50 20

Part C Practical Work 26 20

Practical work will include:

Practical File 4 Marks

Practical Examination 12 Marks (One Hour)

Viva Voce’ 4 Marks

5

Part A: Accounting for Not-for-Profit Organizations, Partnership

Firms and Companies

60 Marks 150Periods

Unit 1: Financial Statements of Not-for-Profit Organizations 25 Periods

Units/Topics Learning Outcomes

• Not-for-profit organizations: concept.

• Receipts and Payments Account:

features and preparation.

• Income and Expenditure Account:

features, preparation of income and

expenditure account and balance

sheet from the given receipts and

payments account with additional

information.

Scope:

(i) Adjustments in a question should not

exceed 3 or 4 in number and restricted to

subscriptions, consumption of

consumables and sale of assets/ old

material.

(ii) Entrance/admission fees and general

donations are to be treated as revenue

receipts.

(iii) Trading Account of incidental activities is

not to be

prepared.

Afterng After going through this Unit, the students will be able

state the meaning of a Not-for-profit

organization and its distinction from a

profit making entity.

state the meaning of receipts and

payments account, and understanding its

features.

develop the understanding and skill of

preparing receipts and payments account.

state the meaning of income and

expenditure account and understand its

features.

develop the understanding and skill of preparing income and expenditure account and balance sheet of a not-for-profit organisation with the help of given receipts and payments account and additional information.

6

Unit 2: Accounting for Partnership Firms 90 periods


Partnership: features, Partnership Deed.

Provisions of the Indian Partnership Act 1932 in the absence of partnership deed.

Fixed v/s fluctuating capital accounts.

Preparation of Profit and Loss

Appropriation account- division of profit

among partners, guarantee of profits.

Past adjustments (relating to interest on capital, interest on drawing, salary and profit

After going through this Unit, the students will be able to:

state the meaning of partnership,

partnership firm and partnership deed.

describe the characteristic features of

partnership and the contents of

partnership deed.

discuss the significance of provision of

Partnership Act in the absence of

partnership

sharing ratio

Goodwill: nature, factors affecting and

methods of valuation - average profit,

super profit and capitalization.

InInterest on partner's loan is to be treated as a charge against profits.

AccountAccounting for Partnership firms – Reconstitutionand Dissolution

Change in the Profit Sharing Ratio among

the existing partners - sacrificing ratio,

gaining ratio, accounting for revaluation

of assets and reassessment of liabilities

and treatment of reserves and

accumulated profits. Preparation of

revaluation account and balance sheet.

Admission of a partner - effect of

admission of a partner on change in the

profit sharing ratio, treatment of goodwill

(as per AS 26), treatment for revaluation

of assets and reassessment of liabilities,

treatment of reserves and accumulated

profits, adjustment of capital accounts

and preparation of balance sheet.

Retirement and death of a partner: effect

of retirement / death of a partner on

change in profit sharing ratio, treatment of

goodwill (as per AS 26), treatment for

revaluation of assets and reassessment of

deed.

differentiate between fixed and fluctuating capital, outline the process and develop the understanding and skill of preparation of Profit and Loss Appropriation Account.


prepration profit and loss

appropriation account involving

guarantee of profits.


making past adjustments.

state the meaning, nature and factors

affecting goodwill

develop the understanding and skill

of valuation of goodwill using

different methods.

state the meaning of sacrificing ratio, gaining ratio and the change in profit sharing ratio among existing partners.

develop the understanding of

accounting treatment of revaluation

assets and reassessment of liabilities

and treatment of reserves and

accumulated profits by preparing

revaluation account and balance

sheet.

explain the effect of change in profit

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liabilities, adjustment of accumulated

profits and reserves, adjustment of capital

accounts and preparation of balance

sheet. Preparation of loan account of the

retiring partner.

Calculation of deceased partner’s share of

profit till the date of death. Preparation of

deceased partner’s capital account and his

executor’s account.

Dissolution of a partnership firm: meaning

of dissolution of partnership and

partnership firm, types of dissolution of a

firm. Settlement of accounts - preparation

of realization account, and other related

accounts: capital accounts of partners and

cash/bank a/c (excluding piecemeal

distribution, sale to a company and

insolvency of partner(s)).

The realized value of each asset must be

given at the time of dissolution.

In c In case, the realisation expenses are borne by a parpartner, clear indication should be given regarding the payment thereof.

sharing ratio on admission of a new

partner.

develop the understanding and skill

of treatment of goodwill as per AS-

26, treatment of revaluation of assets

and re-assessment of liabilities,

treatment of reserves and

accumulated profits, adjustment of

capital accounts and preparation of

balance sheet of the new firm.

explain the effect of retirement /

death of a partner on change in profit

sharing ratio.


accounting treatment of goodwill,

revaluation of assets and re-

assessment of liabilities and

adjustment of accumulated profits

and reserves on retirement / death

of a partner and capital adjustment.

develop the skill of calculation of

deceased partner's share till the time

of his death and prepare deceased

partner's executor's account.

discuss the preparation of the capital

accounts of the remaining partners

and the balance sheet of the firm

after retirement / death of a partner.

understand the situations under

which a partnership firm can be

dissolved.


preparation of realisation account

and other related accounts

8

Unit-3 Accounting for Companies 35 Periods


Accounting for Share Capital

• Share and share capital: nature and

types.

• Accounting for share capital: issue and

allotment of equity and preferences

shares. Public subscription of shares -

over subscription and under

subscription of shares; issue at par and

at premium, calls in advance and

arrears (excluding interest), issue of

shares for consideration other than

cash.

• Concept of Private Placement and

Employee Stock Option Plan (ESOP).

• Accounting treatment of forfeiture and

re-issue of shares.

• Disclosure of share capital in the

Balance Sheet of a company. Accounting for Debentures

• Debentures: Issue of debentures at par,

at a premium and at a discount. Issue of

debentures for consideration other

than cash; Issue of debentures with

terms of redemption; debentures as

collateral security-concept, interest on

debentures. Writting off discount / loss

on issue of debentures.

• Redemption of debentures-Methods:

Lump sum, draw of lots.

• Creation of Debenture Redemption Reserve.

• Note: Related sections of the Companies Act, 2013 will apply.


• state the meaning of share and share capital

and differentiate between equity shares and

preference shares and different types of

share capital.

• understand the meaning of private

placement of shares and Employee Stock

Option Plan.

• explain the accounting treatment of share

capital transactions regarding issue of

shares.

• develop the understanding of accounting

treatment of forfeiture and re-issue of

forfeited shares.

• describe the presentation of share capital in

the balance sheet of the company as per

schedule III part I of the Companies Act

2013.

• explain the accounting treatment of different categories of transactions related to issue of debentures.

• develop the understanding and skill of

writing of discount / loss on issue of

debentures.

• understand the concept of collateral security and its presentation in balance sheet.

• develop the skill of calculating interest on debentures and its accounting treatment. state the meaning of redemption of debentures.

• develop the understanding of accounting treatment of transactions related to redemption of debentures by lump sum, draw of lots and Creation of Debenture Redemption Reserve.

9

Part B: Financial Statement Analysis 20 Marks

Unit 4: Analysis of Financial Statements 30 Periods

Financial Statement Sheet in statements of of a company:

• Profit and the Loss and Balance prescribed form with major headings and sub headings (as per Schedule III to the Companies Act, 2013). Note: Exceptional items, extraordinary

items and profit (loss) from discontinued

operations are excluded.

• Financial Statement Analysis: Objectives,

importance and limitations.

• Tools for Financial Statement Analysis:

• Comparative statements, common

size statements, cash flow analysis,

ratio analysis.

• Accounting Ratios: Meaning, Objectives,

classification and computation.

• Liquidity Ratios: Current ratio and Quick

ratio

• Solvency Ratios: Debt to Equity Ratio,

Total Asset to Debt Ratio, Proprietary

Ratio and Interest Coverage Ratio.

• Activity Ratios: Inventory Turnover

Ratio, Trade Receivables Turnover Ratio,

Trade Payables Turnover Ratio and

Working Capital Turnover Ratio.

• profitability Ratios: Gross Profit Ratio,

Operating Ratio, Operating Profit Ratio,

Net Profit Ratio and Return on

Investment.


• develop the understanding of major headings and sub-headings (as per Schedule III to the Companies Act, 2013) of balance sheet as per the prescribed norms / formats.

• state the meaning, objectives and

limitations of financial statement analysis.

• discuss the meaning of different tools of

'financial statements analysis'.

• develop the understanding and skill of

preparation of comparative and common

size financial statements.

• state the meaning, objectives and

significance of different types of ratios.

• develop the understanding of computation

of current ratio and quick ratio.

• develop the skill of computation of debt

equity ratio, total asset to debt ratio,

proprietary ratio and interest coverage

ratio.

• develop the skill of computation of inventory turnover ratio, trade receivables and trade payables ratio and working capital turnover ratio.

• develop the skill of computation of gross

profit ratio, operating ratio, operating profit

ratio, net profit ratio and return on

investment.

Note: Net Profit Ratio is to be calculated on the basis profit before and after tax.

10

Unit 5: Cash Flow Statement 20 Periods

Meaning, objectives and preparation (as per

AS 3 (Revised) (Indirect Method only) Note:

(i) Adjustments relating to depreciation and

amortization, profit or loss on sale of

assets including investments, dividend

(both final and interim) and tax.

(ii) Bank overdraft and cash credit to be

treated as short term borrowings.

(iii) Current Investments to be taken as

Marketable securities unless otherwise

specified.

After going through this Unit, the students will

be able to:

• state the meaning and objectives of cash

flow statement.

• develop the understanding of preparation

of Cash Flow Statement using indirect

method as per AS 3 with given

adjustments.

Project Work 20 Marks 40 Periods

Note: Kindly refer to the Guidelines published by the CBSE.

11

Suggested Question Paper Design

Accountancy (Code No. 055)

Class XII (2020-21)

Theory: 80 Marks 3 hrs.

Project: 20 Marks

S.N

Typology of Questions

Objective

Type/ MCQ

1 Mark

Short

Answer I

3 Marks

Short

Answer II

4 Marks

Long

Answer I

6 Marks

Long

Answer II

8 Marks

Marks

1 Remembering: Exhibit memory of previously learned material by recalling facts, terms, basic concepts, and answers.

5 1 1 1 - 18

2 Understanding: Demonstrate understanding of facts and ideas by organizing, comparing, translating, interpreting, giving descriptions, and stating main ideas

5 1 1 1 1 26

3 Applying: Solve problems to new situations by applying acquired knowledge, facts, techniques and rules in a different way.

5 - 2 1 - 19

4 Analysing and Evaluating:

Examine and break information into parts by identifying motives or causes. Make inferences and find evidence to support generalizations.

Present and defend opinions by making judgments about

5 - 1 - 1 17

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information, validity of ideas, or quality of work based on a set of criteria.

Creating: Compile information together in a different way by combining elements in a new pattern or proposing alternative solutions.

TOTAL 20x1=20 2x3=6 5x4=20 3x6=18 2x8=16 80 (32)

There will be internal choice in questions of 3 marks, 4 marks, 6 marks and 8 marks. All questions carrying 8 marks will have an internal choice.

13

CHAPTER-1

ACCOUNTING FOR NOT‐FOR‐PROFIT ORGANISATION

SYNOPSIS

Meaning Not for profit organisations are those organisations whose main object is not to earn profit but to render services to its members and to the society. It is set up as charitable institution which function without any profit motive.

Characteristics of Not‐for‐Profit Organisation. The main characteristics of such organisations are:

1. Such organisations are formed for providing service to a specific group or public at large such as education, health care, recreation, sports and so on without any consideration Of caste, creed and colour, either free of cost or at nominal cost, and not to earn profit.

2. These are organised as charitable trusts/societies and subscribers to such organisation are called members.

3. Their affairs are usually managed by a managing/executive committee elected by its members.

4. The main sources of income of such organisations are:

subscriptions from members,

donations,

legacies, grant‐in‐aid, income from investments, etc. 5. The funds raised by such organisations through various sources are credited to capital fund

or general fund. 6. The surplus generated in the form of excess of income over expenditure is not

distributed amongst the members. It is simply added in the capital fund. 7. Theseorganisations earn their reputation on the basis of their contributions to the

welfare of the society rather than on the customers’ or owners’ satisfaction. 8. The accounting information provided by such organisations is meant for the present

and potential contributors that the NPO meet the statutory requirement.

Accounting Records of Not‐for‐Profit Organisations

These institutions are required by law to keep proper accounting records and keep proper control over the utilization of their funds. This is why they usually keep a cash book in which all receipts and payments are duly recorded.

They also maintain a ledger containing the accounts of all incomes, expenses, assets and liabilities which facilitates the preparation of financial statements at the end of the accounting period.

In addition, they are required to maintain a stock register to keep complete record of all fixed assets and the consumables.

14

Final Accounts or Financial Statements:

Receipt and Payment Account

Income and Expenditure Account, and

Balance Sheet.

Receipt and Payment Account It simply is a summary of cash and bank transactions under various heads, irrespective of

whether they pertain to the current period, previous period or succeeding period or whether they are of capital or revenue nature.

It may be noted that this account does not show any non‐ cash item like depreciation.

The opening balance in Receipt and Payment Account represents cash in hand/ cash at bank which is shown on its receipts side and the closing balance of this account represents cash in hand and bank balance as at the end of the year, which appear on the credit side of the Receipt and Payment Account.

Income and Expenditure Account It is the summary of income and expenditure for the accounting year.

It is just like a profit and loss account prepared on accrual basis in case of the business organisation.

It includes only revenue items and the balance at the end represents surplus or deficit.

Theincome and Expenditure Account serves the same purpose as the profit and loss account of a business organisation does.

Following steps may be helpful in preparing an Income and Expenditure Account from a given Receipt and Payment Account:

1. Persue the Receipt and Payment Account thoroughly. 2. Exclude the capital receipts and capital payments as these are to be shown in the Balance

Sheet.

3. Exclude the opening and closing balances of cash and bank as they are not an income. 4. Consider only the revenue receipts to be shown on the income side of Income and Expendi

ture Account. Some of these need to be adjusted by excluding the amounts relating to the preceding and the succeeding periods and including the amounts relating to the current year not yet received.

5. Take the revenue expenses to the expenditure side of the Income and Expenditure Accout with due adjustments as per the additional information provided relating to the amounts.

6. received in advance and these not yet received. 7. Consider the following items not appearing in the Receipt and Payment Account that 8. need to be taken into account for determining the surplus/ deficit for the current year :

(a) Depreciation of fixed assets. (b) Provision for doubtful debts, if required. (c) Profit or loss on sale of fixed assets.

15

Distinction between Income and Expenditure Account and Receipt and Payment Account

Balance Sheet

• These Organisations prepare Balance Sheet for ascertaining the financial position of the organisation.

• Assets are shown on the right hand side and the liabilities on the left hand side.

• There will be a Capital Fund or General Fund in place of the Capital and the surplus on deficit as per Income and Expenditure Account shall be added to/deducted to this fund.

• It is a common practice to add some of the capitalised items like legacies, entrance fees and life membership fees directly in the capital fund.

Basis of distinction Account

Income and Expenditure Receipt and Payment Account

Nature It is like as profit and loss

account.

It is the summary of the cash book.

Nature of Items It records income and expenditure of revenue nature only.

It records receipts and payments of

revenue as well as capital nature.

Period Income and expenditure items

relate only to the current period.

Receipts and payments may also

relate to preceding and succeeding

periods.

Debit side Debit side of this account records

expense and losses.

Debit side of this account records the

receipts.

Credit side Credit side of this account records income and gains.

Credit side of this account records the

payments.

Depreciation Includes depreciation. Does not includes depreciation.

Opening Balance There is no opening balance. Balance in the beginning represents

cash in hand /cash at bank or overdraft at the beginning.

Closing Balance Balance at the end rep‐ resents excess of income over

expenditure or vice‐ versa.

Balance at the end represents cash in

hand at the end and bank balance

(or bank overdraft).

16

• There may be other funds created for specific purposes or to meet the requirements of the contributors/donors such as building fund, sports fund, etc. Such funds are shown separately in the liabilities side of the balance sheet.

A proforma Balance Sheet is given for the proper understanding of preparing the Balance Sheet.

Balance Sheet of as at _________

Liabilities Amount (Rs.)

Assets Amount (Rs.)

Capital fund: Opening Balance

Add: Surplus OR Less: Deficit

Add: Capitalised Income of the Current

Year on account of: Legacies Life Membership Fees Closing Balance Special Fund/Donations: Previous Balance (If any )

Add: Receipts for the item during the

period

Add: Income earned on fund/Donations’ Investments

Less: Expenses paid out of fund/Donations Net Balance

Creditors for Purchases and/or supplies

Bank Overdraft Outstanding Expenses:

Income/Subscription received in

Advance

Assets: Previous Balance

Add: Purchases in the current period

Less: Book Value of the Asset sold/disposed off(Closing Balance )

Stock of Consumable Items:

Previous Balance

Add: Purchases in the current

period

Less: Value consumed during the period

Closing Balance Cash in hand and

Cash at Bank

Outstanding Incomes/ Subscription

Prepaid Expenses

17

Some Peculiar Items Some of the common peculiar items are explained as under:

Subscriptions:

Subscription is a membership fee paid by the member on annual basis.

This is the main source of income such organizations.

Subscription paid by the members is shown as receipt in the Receipt and Payment Account and as income in the Income and Expenditure Account.

It may be noted that Receipt and Payment Account shows the total amount of subscription actually received during the year while the amount shown in Income and Expenditure Account is confined to the figure related to the current period only irrespective of the fact whether it has been received or not.

For example, a club received Rs. 20,000 as subscriptions during the year 2013-14 of which Rs.3,000 relate to year 2012-13 and Rs.2,000 to 2014‐15, and at the end of the year 2013‐14 Rs.6,000 are still receivable.

In this case, the Receipt and Payment Account will show Rs.20,000 as receipt from subscriptions But the Income and Expenditure Account will show Rs. 21,000 as income from subscriptions for the year 2013‐14, the calculation of which is given as below:

Rs.

Subscriptions received in 2013‐14 20,000

Less: Subscriptions for the year 2012‐13 3,000

Less: Subscription for the year 2014‐15 2,000

Add: Subscriptions outstanding for the year 2013‐14 6,000

Income from subscriptions for the year 2005‐06 21,000

Dr. Cr.

e above amount of subscriptions to be shown as income can also be ascertained by preparing the subscription account as follows:

Subscription Account

Date

Particulars JF

Amount (Rs.)

Date Particulars JF

Amount

(Rs.)

Balance b/d (outstanding at the beginning) Income and

Expenditure

Account (balancing figure)

Balance c/d

(received in advance)

3,000

21,000

2,000

Balance b/d

(received in advance during previous year)

Cash (subscription received) Balance c/d

(outstanding at the end)

Nil

20,000

6,000

26,000 26,000

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(i) Specific Donations:

• If donation received is to be utilised to achieve specified purpose, it is called

• Specific Donation. The specific purpose can be an extension of the existing building, construction of new computer laboratory, creation of a book bank, etc.

• Such donation is to be capitalised and shown on the liabilities side of the BalanceSheet irrespective of the fact whether the amount is big or small. The intention is to utilise the amount for the specified purpose only.

(ii) General Donations:

• Such donations are to be utilised to promote the general purpose of the organisation.

• These are treated as revenue receipts as it is a regular source of income hence, it is taken to the income side of the Income and Expenditure Account of the current year.

Legacies:

• It is the amount received as per the will of a deceased person.

• It appears on the receipts side of the Receipt and Payment Account and is directly added to capital fund/general fund in the balance sheet, because it is not of recurring nature.

• However, legacies of a small amount may be treated as income and shown on the

• income side of the Income and Expenditure Account.

Life Membership Fees:

• Some members prefer to pay lump sum amount as life membership fee instead of paying periodic subscription.

• Such amount is treated as capital receipt and credited directly to the capital/general fund.

Entrance Fees:

• Entrance fee also known as admission fee is paid by the member at the time of becoming a member.

• It is a revenue receipt and therefore is accounted as an income and credtited to Income and Expenditure Account.

19

Sale of old asset:

• Receipts from the sale of an old asset appear in the Receipts and Payments Account of the year in which it is sold.

• Any gain or loss on the sale of asset is taken to the Income and Expenditure Account of the year.

For example, if an item furniture with a book value of Rs.800 is sold for Rs.700, this amount ofRs.700 will be shown as receipt in Receipts and Payments Account and Rs.100 on the expenditure side of the Income and Expenditure Account as a loss on sale of old asset and while showing furniture in the balance sheet Rs. 800 will be deducted from its total book value.

Sale of Periodicals: It is an item of recurring nature and shown as the income side of the

Income and Expenditure Account.

Sale of Sports Materials: Sale of sports materials (used materials like old balls, bats, nets,

etc) is the regular feature with any Sports Club. It is usually shown as an income in the Income and Expenditure Account.

Payments of Honorarium: It is the amount paid to the person who is not the regular

employee of the institution. Payment to an artist for giving performance at the club is an example of honorarium. This payment of honorarium is shown on the expenditure side of the Income and Expenditure Account.

Endowment Fund: It is a fund arising from a bequest or gift, the income of which is devotedfor

a specific purpose. Hence, it is a capital receipt and shown on the Liabilities side of the Balance Sheet as an item of a specific purpose fund.

Government Grant:

• Schools, colleges, public hospitals, etc. depend upon government grant for their activities. The recurring grants in the form of maintenance grant is treated as revenue receipt (i.e. income of the current year) and credited to Income and Expenditure account

• Grants such as building grant are treated as capital receipt and transferred to the building fund account.

• It may be noted that some Notforprofit organisations receive cash subsidy from the government or government agencies. This subsidy is also treated as revenue income for the year in which it is received.

Special Funds

• The Not for Profit Organisations office create special funds for certain purposes/ activities such as 'prize funds', 'match fund' and 'sports fund', etc.

• Such funds are invested in securities and the income earned on such investments is added to the respective fund, not credited to Income and Expenditure Account.

• Similarly, the expenses incurred on such specific purposes are also deducted from the special fund.

20

For example, a club may maintain a special fund for sports activities. In such a situation, the interest income on sports fund investments is added to the sports fund and all expenses on sports deducted therefrom. The special funds are shown in balance sheet. However, if, after adjustment of income and expenses the balance in specific or Special fund is negative, it is transferred to the debit side of the Income and Expenditure. Example : Show how you would deal with the following items in the final account of a Club: Details Debit Credit

Amount (Rs.) Amount (Rs.) Prize Fund Prize Fund Investments 80,000 80,000 Income from Prize Fund Investments --- 8,000 Prizes awarded 6,000 ---

Solution

Balance Sheet of Club as on _________

Liabilities Amount (Rs.) Assets Amount (Rs.)

Prize fund 80,000 Add: Income fromInvestments 8,000 Less: Prizes Awarded (6,000)

82,000

Prize Fund Investments 80,000

Calculation of Cost of Material Consumed (E.g. Stationery/Sports/Materials/Medicines/Postage etc.)

Case 1. When Opening Stock, Purchases & Closing Stock are given Normally expenses incurred on stationary, a consumable items are charged to Income and Expenditure Account. But in case stock of stationery (opening and/or closing) is given, cost of stationery consumed is shown in Income and Expenditure Account and its stock in the balance sheet. For example, the Receipt and Payment Account shows a payment for stationery amounting to Rs.40,000 and there is an opening and closing stationery amounting to Rs. 12,000 and Rs.15,000 The amount of expense on stationery will be worked out as follows: Stationery Purchases 40,000 Add: Opening stock 12,000 Less: Closing stock (15,000) ______________ 37,000 ______________

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Case 2. When Opening & Closing Stock, Opening & Closing Creditors and Payments made for such items during the year are given.

For example calculate the sports material to be debited to Income & Expenditure a/c. For the yr. ended 31-3-2007 on the basis of the following information:

Particulars 1-4-2006 (Rs.) 31.3.2007 (Rs.)

Stock of sports material 7,500 6,400

Creditors for sports material 2,000 2,600

Amount paid for sports material during the yr. was Rs.19,000

Solution Purchase of Sports Material during the yr: Rs. Total payments made during the yr. for sports material - 19,000 Less: Creditors on 1/4/2006 - 2,000

--------------- 17,000

Add: Creditors on 31/3/2007 2,600 --------------

Sports material purchased during the year 19,600 --------------

Sports goods consumed during the yr. Rs. Opening stock 7,500 Add: Purchases during the yr. 19,600

------------- 27,100

Less: Closing stock 6,400 ------------- Sports material consumed 20,700

---------------

CONCEPT BASED EXERCISES

MCQ’s/VERY SHORT ANSWER TYPE QUESTIONS (1 Mark)

Q-1 The Receipt and Payment account of a Non-Profit Organizationisa

a) Nominal Account b) Real Account c) Income Statement Account d) Financial Statements

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Q-2 Inregard to Rent expenses paid inadvance of a non-profit organization which of

the following class if I cation is correct

a) Expense b) Liability c) Equity d) Assets

Q-3 Income & Expenditure Account is basedon

a) Cash Accounting b) Accrual Accounting c) Government Accounting d) Management Accounting

Q-4 Which of the following is regarded as apt to show purchase of fixed asset for a non

profit organisation

a) Income & Expenditure Account b) Profit & Loss Account c) BalanceSheet d) None of the above

Q-5 Which of the following is to be recorded in an income and Expenditure Account

a) Purchase of a fixed Asset b) Capital Expenditure incurred on a fixed asset c) Profit on the sale of a fixed asset d) Sale of a fixed asset

Q-6 XYZ club has abar that maintains as eparate trading account for it strading

activities.Which of the following is the treatmen to profit or losson bar trading

activities?

a) Profit or loss is directly shown in the Balance Sheet b) Profit or loss is to be presented in incomeand expenditure account c) Profit and loss is credited in income statement. d) Profit or loss is added to accumulated fund.

Q-7 Which of the following is the accounting equation for an on-profit organisation?

a) Asset= Capital +Liabilities b) Capital+ Liabilities=Assets c) Accumulated Fund+ Liabilities=Assets d) Liabilities= Assets + AccumulatedFund

23

Q-8 Subscription received but not yet earn e disconsidere das

a) Asset b) Liability c) Income

Q-9 Expenditure On What basis receipt sand payments account is made

a) Cash basis b) Accrual basis c) Both Cash & Accrual basis d) None of the above

Q-10 The control of non trading concern rest in the hand of

a) Directors b) Managing Agents c) Governing body d) Promoters

Q-11 If debit side of receipt and payment account exceeds the credit side, it

represents:

a) Deficit balance b) Surplus Balance c) Cash at Bank d) Bank Over draft

Q-12 Deficit balance can be shown in balance Sheetas:

a) Liability b) Assets c) Owner’sequity d) None of the above

Q-13 Receipt and Payment account includes

a) Revenueitems b) Cashitems c) Revenue & Cashitems

d) None of the above

Q-14 Which should be consider edascapital receipt to faclub

a) Donation b) sale of news paper c) sale of bar items d) sale of furniture

24

Q-15 At the beginning of an accounting year a club has assets of Rs. 19,000 and liabilities

of Rs.5,000.Rs.1,800 is the debit balance of the income & expenditures account. The

opening capital fundis

a) Rs. 18,000 b) Rs.11,200 c) Rs.15,800 d) Rs. 24,800

Q-16 The opening balance of the Prize fund of as ports club was Rs.6,400.Further

donations towards this fund received during the accounting year amounted to

Rs.4,300.During the year,Rs.3,500 was spent on prizes and Rs.400was received as interest

on investment of the Prize Fund.The closing balance of the Prize fundis

a) Rs. 1,900 b) Rs.10,200 c) Rs.10,600 d) Rs.7,600

Q-17 Salaries payable for the current year amount to Rs.8,500 at the end of theyear.

Outstanding salaries amounted to Rs. 300. Salaries paid in advance last year per taining

to the current year amounted to Rs.500.Prepaid salaries for the next year amount to

Rs.250.to tal amount paid for salaries during the years

a) Rs.7,550 b) Rs.7,500 c) Rs. 7,950 d) Rs.6,500

Q-18 Second hand furniture worth Rs. 6,000 was purchased. It was repaired for Rs.600 and

installed by workmen to whom Rs.200 was paid as wages.The furniture should be capitalized

for

a) Rs.6,200 b) Rs.6,800 c) Rs.6,600 d) Rs.6,000

Q-19 Fixed assets fundis

a) Endowment Fund b) Current restricted Fund c) Current unrestricted fund d) Meant for accounting of asses and depreciation

25

Q-20 Donations received for special purpose shouldbe

a) Credited to a separate fund account and shown in the Balance Sheet b) Treated as revenue c) treated as revenue unless the amount islarge d) Not recorded atall

Q-21 Amount received from the sale of old furniture by a club is treated as:

a) Revenue Receipt b) Capital Receipt c) Asset d) liability

Q-22 Receipt & Payment Accountshows a) A debit balance

b) A credit balance

c) Surplus or deficit

Q-23 Capital fund Subscription received in advance during the accounting year is

a) anincome b) anexpense c) Asset

d) Liability Q-24 Fill in theblanks:

1) Fund based accounting isused by---------------------------------------organisations. 2) Restricted fund can be used for -------------------------purpose 3) Endowment Fundis---------------------------Fund. 4) General Fund can be transferred to---------------------------Fund 5) When Expenditure is paid out of current/restricted fund,cash/bank account is

creditedand----------------------------is debited. Q-25 Sub scription received in advance during the accounting year is

Q-26 Identify the item which will not appear in Income and Expenditure Account

1) Purchase of 10% Investment 2) Rent received 3) Profit on sale of Asset 4) Subscription in arrears for current year

26

SHORT ANSWER TYPE QUESTIONS (3 & 4 MARK)

Q1.State features of Not‐for‐Profit Organizations. What are the sources of funds for such organisation? Q2. In 2014, the actual salaries paid amounted to Rs 20,000. Ascertain the amount chargeable to Income and Expenditure Account for the year ending March 31st 2014 from the following additional information: Prepaid salaries on March 31st 2013 Rs 2,400 Prepaid salaries on March 31st 2014 Rs 1,200 Outstanding salaries on March 31st 2013 Rs 1,800 Outstanding salaries on March 31st 2014 Rs 1,500 Q3.Compute the amount to be shown in Income and Expenditure Account for the year ending on March 31st 2014 from the following information: Stock of stationery on 1.4.13 3,000 Stock of stationery on 1.4.14 3,000 Creditors for stationery on 1.4.13 7,500 Amount paid during the year 24,000 Q4.T Sports Club received Rs 25,000 as Subscriptions during the year 2013 -14 out of which Rs.1,000 relates to previous year and Rs. 850 for next year. Subscriptions in arrear at the end of the year were Rs. 2,000. Calculate the amount of subscription chargeable to Income and Expenditure Account for the year ending on March 31, 2014. Q5.Compute the amount of subscription to be transferred to income and expenditure a/c and also show both opening and closing Balance Sheet position Subscription received 2009 6,000 2010 1,20,000 2011 2,000 There are 1,500 members of the club each pays 100. Subscription outstanding on December 31st, 2009 was 8,000 and subscription received in advance on that date was 1,200. Q6. Show how would deal with the following items in the final accounts of a Sports Club

Particular Debit Rs. Credit Rs.

Prize Fund

Prize Fund Investment

Income from prize fund investment

Prize Awarded

2,40,000

18,000

2,40,000

24,000

27

Q7. Delhi Club has furniture worth Rs. 20,000 on 1-04-12. It sold old furniture having book value Rs.5,000 (on 1-4-12 at a loss of 20% on 1-10-12. On the same date bought some furniture for Rs. 30,000. Provide depreciation @10%. Show how the information will be shown in the Income & Expenditure A/c Q8. How would you deal with the following items in the Balance sheet of a NPO?

Rs.

1. Donations received for Auditorium construction

(Expected total cost of the auditorium Rs.40,00,000) 25,00,000

2. Expenditure on construction of Auditorium 21,00,000

3. Receipts from Charity show 10,000

4. Charity show expenses 11,000

5. Prize Fund 25,000

6. 6% Prize fund Investment 25,000

7. Donation for Prize Fund 5,000

8. Prizes awarded 6,000

Q9.How are the following dealt with while preparing the final accounts for the year ended

31st March 2018?

Receipts and Payments Account (An Extract)

For the year ended 31st March 2018

Receipts Amount Rs Payments Amount Rs

By Payment for Medicines 1,50,000

Additional Information:

As at 1st April 2017 As at 1st April 2018

Stock of Medicines 80,000 70,000

Creditors of Medicines 1,00,000 1,20,000

28

LONG ANSWER TYPE QUESTIONS (6& 8 MARK) Q1.Following is the receipts and payments accounts of Parth recreation club for the year ended 31st March 2014 RECEIPT AND PAYMENTS ACCOUNT

For the year ended 31st March 2014

Receipts Amt(Rs) Payments Amt(Rs)

To cash in hand

To subscription

To entrance fee

To sell of refreshment

To sale of dance ticket

To interest on Investment @ 7%

8,320

26,000

3,900

9,880

5,850

4,550

By rent of hall

By salaries

By sports Equipments

By Dance Expenses

By supply of Refreshment

By Honorarium

By sundry Expenses

By Electricity Charges

By Cash in hand

3,640

5,200

16,640

4,940

6,760

1,040

3,250

1,820

15,210

58,500 58,500

Following additional information are also provided to you to Prepare Income & Expenditure Account and Balance Sheet:- (i)The value of assets and liabilities on 31st March 2013 were as follows Sport equipment Rs 6760 ; subscription in arrears Rs 1950 ,furniture Rs 12,480, Outstanding rent Rs 780 subscription received in advanced Rs 520 (ii)Salary outstanding Rs.2,000 (ii)The value of assets and liabilities on 31st March 2014 were: Sport equipment Rs 19,760 , subscription in arrears Rs 1,690, furniture Rs 11,180 , outstandingrent Rs 390 , subscription in advance Rs. 2340.

Q2.Following is the Receipts & Payments Account of a Club for the year ending March 31st 2014:

Receipts Amount ₹ Payments Amount ₹

Balance b/d

Subscriptions

2006 ₹ 4,000

2007 ₹40,000

2008 ₹ 4,500

Sale of old newspapers Government Grants

8,000

48,500

5,400 80,000

Salary

Newspaper

Rent

Fixed Deposit (On 1.4.2013 @ 12% p.a.)

Books

Furniture

60,000

15,000

10,000

30,000

20,000

9,000

29

Sale of old furniture

(Book value 9,000)

Profit from entertainment

18,100

3,000

Balance c/d

19,000

1,63,000 1,63,000

Prepare Income & Expenditure Account and Furniture A/c when: 1. Subscriptions outstanding as on 31.3.2014 were ₹ 5,000 and salary outstanding was ₹3,000. 2. On 1.4.2013 the library had furniture ₹50,000 and books ₹1, 20,000. 3. Depreciation on furniture @ 10% and on books 20% after considering the sale and purchase.

Q3. Following is the Receipts & Payments Account of the City Club for the year ended 31st March, 2014.

Receipts Rs. Payments Rs.

To Balance b/d

To Subscriptions

2012-13 500

2013-14 15,000

2014-15 1,000

To Life Membership fees

To Sale of Scrap

To Interest on Sports Fund Investment

5,000

16,500

12,000

200

2,000

By Affiliation Fee to the Pradesh Club

By Furniture (Oct 1)

By Sports Expenses

By Sundry Expenses

By Balance c/d

1,000

3,000

2,500

15,200

14,000

35,700 35,700

The club has 1600 members, each paying annual subscription of Rs. 10. Subscription of Rs. 450 is still in arrears for 2013-14. On April 1, 2013, the club’s assets and liabilities included Furniture Rs. 2,000; Sports Fund and 10% Sports Fund Investments Rs. 30,000 each. Provide depreciation on Furniture at 20% p.a. and prepare Income & Expenditure Account for the year ended March 31, 2014 and Balance Sheet of the Club as at that date.

Q4. From the following prepare Income & Expenditure a/c for the yr. ended 31.3.12 & ascertain the Capital fund on 31.3.2011

Receipts Amount Rs. Payments Amount Rs.

Balance b/d 39100 By Salary 6000

To Subscriptions

2009-10 - 2400

2010-11 -53000

2011-12 - 1000

56400

By Newspaper 4100

30

To Sale of scrap 2500 By Electricity

charges

2000

To Govt. Grants 20000 By Fixed Deposit

(on 1/7/2011

@9% p.a.)

40000

To Sale of old furniture (of book

value Rs. 8000)

11400 By Books 21200

By Rent 13600

To Interest on Fixed deposit 900 By Furniture 21000

By Balance c/d 22400

130300 130300


1. Subscription outstanding as on 31.3.2011 Rs.4000 & on 31.3.12 Rs.5000 2. On 31.3.12 Salary outstanding Rs.1200 & Rent outstanding Rs.2400 3. On 1/4/2011 assets were Furniture – Rs.30000 & Books Rs.14000

Q5. Prepare Income & Expenditure A/c & Balance Sheet of Leo Club Mumbai for the yr. ended 31St

Dec. 2007 from the following:

Receipts & Payments A/c

(Year ended 31-3-2007)


Cash in hand b/d 4500 Salaries (11 months) 1100

Subscriptions: 2006 – 100 Tournament exp. 1600

2007- 2400

2008 - 200 2700

Investments 1000

Furniture 400

Sale of old furniture (Costing Rs.200) 140 Stationery 1200

Tournament Receipts 2000 Sports expenses 15000

Sports Fund 10000 Misc. expenses 200

Donations for Sports 3000 Rent paid up-to Feb. 2009 1400

Cash in hand 440

22340 22340

31

(a) The club has 300 members each paying an annual subscription of Rs.10. (b) Rs.70 are still outstanding for the yr.2006. In 2006, 10 members had paid their subscription

for 2007 in advance. Stock of stationery in 2006 was Rs.100 & in 2007 Rs.140. (c) On 1-1-2007, club owned Land & Building valued at Rs.20,000 & furniture of Rs.1300. Interest

accrued on investment @6% p.a. for 3 months.

Q6. From the following Receipts and Payments Account of Charlie Cricket Club for the year ending

31st March 2018:

Receipts Amount Rs Payments Amount Rs

To balance b/d To Subscription: For 2016-17 30,000 For 2017-18 1,50,000 For 2018-19 80,000 To sale of old books (costing Rs 3200) To rent for use of Hall To sale of Newspapers To profit from Entertainment

2,60,000 3500 13,500 1800 15700

3,19,500

By General Expenses By Salary By Postage By Electricity Charges By Books By Newspapers By Fittings By Balance c/d

25,000 1,05,000 30,000 45,000 13,000 900 80,000 20,600

3,19,500

Additional Information: a) The club has 500 members each paying an annual subscription of Rs 400 for the year.

b) On 1st April 2017, the club owned land and building Rs 2,50,000, furniture Rs 80,000 and books Rs 16,000.

c) Provide depreciation on land and building @ 2% and furniture @ 10%.

d) Last year the subscription outstanding amounted to Rs 45,000 and subscription received in advance for this

year was Rs 30,000.

Prepare Income and Expenditure Account for the year ended 31st March 2018 and the Balance Sheet as on

that date.

ENRICHMENT EXERCISES

Q1. What is the objective of Not for Profit Organisation? What are the values involved in case of NPO?

Q2. Mr. Amit a Sole proprietor has profits of Rs. 20 lakhs has donated the 10% of his profits to Delhi Nursing Society. Show the treatment of the donated amount by the Delhi Nursing Society and also state the values involved.

Q3. Calculate the stationery consumed to be shown in Income & Expenditure A/c for the year ended 31st March 2012, from the following details:

32

Stock of stationery on 1/4/2011 Rs. 50,000 Stock of stationery on 31/3/2012 Rs. 40,000 Payment during the year for stationery Rs. 2,00,000 Creditors for stationery on 1/4/2011 Rs. 20,000 Creditors for stationery on 31/3/2012 Rs. 10,000

Q4. From the following calculate the subscription for the current year: 1.1.2012 (Rs.) 31.12.2012(Rs.)

Outstanding Subscription 9500 10000

Subscription received in advance 6200 8700

Subscription received during the year 2012 Rs.2,50,000

CHAPTER -2 FUNDAMENTALS OF PARTNERSHIP

SYNOPSIS Features of partnership Firm

1) Association of two or more persons: There must be at least two persons and maximum of 50

persons to form a partnership and they must be competent to contract.

2) Partnership Agreement or Deed: There must be an agreement among partners to form a

partnership. It can be written or oral.

3) Legal Business: The business of the partnership firm must be a legally allowed business.

4) Sharing of Profits or Losses: The partners must share profits or losses in a certain ratio.

5) Mutual Agency: The partners mutually take part in daily routine work or the work may be carried

on by one or more partners on behalf of the other partners. Every partner is legally liable for the

acts of all other partners, whether he is taking part in the activities of the firm or not.

6) Unlimited Liability: Partners' liability to the third parties is unlimited. If there are losses, and the

firm is not able to pay its debts fully, then all the partners shall be jointly and severally liable to

pay the debts of the firm to an unlimited extent.

Partnership Deed: The document, which contains terms of the agreement, is called'

Partnership Deed'. It generally contains the details about all the aspects affecting the

relationship between the partners including the objective of business, contribution of capital

by each partner, ratio in which the profits and the losses will be shared by the partners and

entitlement of partners to interest on capital, interest on loan, etc.

1.Partnership Deed is absent: a) interest on capital not provided, b) interest on drawings not charged, c) salary not paid d) interest on loan @6%p.a., e) profit sharing ratio is equal.

33

2. Rent paid to a partner- CHARGE against the profit. To be debited to P&L Account.

3. Interest on Drawings:- (IOD) a) Equal amounts drawn evenly during the year IOD=Total amount of Drawings X (Rate of interest/100) X (Average Period/12) Average period=(Time left after first drawing+ Time left after last drawing)/2

Equal amounts drawn evenly Average period

In the beginning of every month 6.5 months

At the end of every month 5.5 months

In the middle of every month 6 months

In the beginning of every quarter 7.5 months

In the middle of every quarter 6 months

At the end of every quarter 4.5 months

b) Equal amounts drawn evenly during 6 months IOD=Total amount of Drawings X(Rate of interest/100) X( Average Period/12)

Equal amounts drawn Average period

In the beginning of every month 3.5 months

At the end of every month 2.5 months

In the middle of every month 3 months

c) Unequal amount of drawings : use product method IOD=Sum of (Amount of each withdrawal X Time period) X (Rate/100) X (1/12)

Lumpsum drawing during the year (no date mentioned)= interest to be calculated for 6 months.

No interest on drawings to be calculated on the amount withdrawn by the partner out of the capital ( permanent drawings)

4. Interest on partners’ capitals:

To be calculated on the opening balance of capital accounts.

Capital at the end Add: Loss during the year Drawings Interest on Drawings Less: Share of profit Additional Capital Interest on Capital =Capital in the beginning

34

Case Treatment

When no clause in partnership agreement

Interest not allowed.

When partnership agreement provides for interest on capital but is silent as to the treatment of interest as a charge or appropriation

1)loss : No interest 2) Profit is equal or more than the IOC: IOC allowed 3) Profit is less than IOC: Interest to be allowed only to the extent of profit in the ratio of interest on capital.

When partnership agreement provides for IOC as a charge

IOC is allowed even in case of loss.

5.Salary and Commission to the partners: Appropriation of profit. (allowed only if profits are earned)

Commission allowed at a given rate of Net Profit before charging Commission: Net Profit (before Commission) X (Rate of Commission) 100

Commission allowed at a given rate of Net Profit after charging Commission: Net Profit (before Commission) X Rate of Commission (100 + Rate of Commission)

6. Interest on Partners’ Loan: Transferred to the debit side of the Profit & Loss A/C- charge on profits a) To provide Interest on Loan Interest on Partner’s Loan A/c Dr To Partner’s Loan A/c

b) To close Interest on Partner’s Loan P & L A/ c Dr To Interest on Partner’s Loan A/c

7. Past Adjustment: a) If fixed capital balances are given, then pass the journal entry with Current A/C. b) Correct format with narrations to be prepared while passing the journal entries.

8. Guarantee of profits: Guarantee of profit means a minimum amount of profit to be paid to a partner. This amount shall

be given to him if his share of profit is lower than the guaranteed amount. The deficit shall be

borne either by one of the old partners or by all the old partners in a particular agreed ratio. If

there is no agreement, then in their old profit sharing ratio, if his actual share of profit is more

than the guaranteed amount, then, he will be given his actual share of profit. He gets the

35

guaranteed amount or the actual share of profit, whichever is higher. (a) Guarantee given by all

partners

(i) Compare the amount of guarantee and his actual share of profit. If guaranteed amount

is more than his actual share of profit, then the guaranteed amount will be debited to

profit and loss Appropriation Account and the partner's account will be credited with the

guaranteed amount.

(ii) The deficiency shall be shared by other partners in their profit sharing ratio.

(b) Guarantee given by One Partner only

First calculate his share of profit. Compare it with the guaranteed amount. The amount of

deficiency is to be charged from the partner who gave guarantee.

(c) Guarantee given to a partner by other partners in a ratio different from their profit sharing

ratio

Distribute profit among all the partners in the profit sharing ratio. Work out the amount of

deficiency by comparing it with the guaranteed amount and his actual share of profit. The

other partners will bear the deficiency in an agreed new ratio.

Distribution of Profit among Partners

The profits and losses of the firm are distributed among the partners in an agreed ratio. However,

if the partnership deed is silent, the firm's profits and losses are to be shared equally by all the

partners.

You know that in the case of sole partnership the profit or loss, as certained by the profit and loss

account is transferred to the capital account of the proprietor. In case of partnership, however,

certain adjustments such as interest on drawings, interest on capital, salary to partners, and

commission to partners are required to be made. For this purpose, it is customary to prepare a

Profit and Loss Appropriation Account of the firm and as certain the final figure of profit and loss

to be distributed among the partners, in their profit sharing ratio.

36

The Proforma of Profit and Loss Appropriation Account is given as follows: Dr. Cr.

Particulars Amount

(Rs.)

Particulars Amount

(Rs.)

To Profit and Loss A/c (if there is loss)

To Interest on Capital A/c

To Salary/Commission to Partner

A/c

To General Reserve A/c

To Partners' Cap A/cs or

Current A/cs (Distribution of

Profit)

xxx

xxx

xxx

xxx

By Profit and Loss A/c (if there is profit)

By Interest on Drawings

By Partners' Cap A/cs or Current

A/cs

(distribution of loss)

xxx xxx

xxx

xxxx xxxx

Profit And Loss Appropriation Account: Profit & Loss Appropriation account to be started with Net Profit before salary to the partner, IOC,IOD, general reserve etc. It is the amount transferred from P& L Account.

Journal entries

Transfer of profit from P&L A/c P &L A/c Dr To P &L Appropriation A/c

Interest on Capital Interest on Capital A/c Dr To Partners Capital A/c / Current A/c

P &L Appropriation A/c Dr To Interest on Capital A/c

Interest on Drawings Partners Capital A/c / Current A/c Dr To Interest on Drawings

Interest on Drawings Dr To P &L Appropriation A/c

Partners’ Salaries/ Commission Partners’ Salaries/ Commission A/c Dr To Partners Capital A/c / Current A/c P &L Appropriation A/c Dr To Partners’ Salaries/ Commission A/c

Transfer to reserve P &L Appropriation A/c Dr To Reserve A/c

Transfer of credit Balance P &L Appropriation A/c Dr To Partners Capital A/c / Current A/c

37

10. Methods of maintaining Capital Accounts of Partners (a)Fixed Capital Method:

Two accounts are prepared for each partner-capital and current account

Under this method, capitals of partners remain unchanged except under special circumstances.

All adjustments regarding drawings, salary, etc. are made in current A/c.

Fixed Capital Account cannot have a negative balance.

Dr. Partner’s Capital Account Cr.

Date Particulars J.F. Amount

(Rs.)


(Rs.)

To Bank A/c(permanent withdrawal of capital)

To Balance c/d

(closing balance)

xxx

xxx

By Balance b/d

(opening balance)

By Bank A/c

(fresh capital

introduced)

xxx

xxx

Date xxx xxx

Dr. Partner’s Current Account Cr.


(Rs.)


(Rs.)

To Drawings

To Interest on drawings

To Profit and Loss

Appropriation A/c

(for share of loss)

To Balance c/d

xxx

xxx

xxx

xxx

xxx

By Balance b/d

By

Salaries/Commission

By Interest on capital

By Profit and Loss

Appropriation A/c

(for share of profit)

xxx

xxx

xxx

xxx

xxx

Date xxx xxx

38

(b)Fluctuating Capital Method:

Only one account is prepared for each partner.

All transactions relating to a partner are debited/credited in this account only.

Dr. Partner’s Capital Account Cr.


(Rs.)


(Rs.)

To Drawings

To Bank (permanent withdrawal of capital)

To Interest on drawings

To Profit and Loss

Appropriation A/c (for share of loss)

To Balance c/d

xxx xxx

xxx xxx

By Balance b/d

By Bank (fresh capital introduced)

By Salaries/Commission

By Interest on capital

By Profit and Loss

Appropriation A/c

(for share of profit)

xxx

xxx xxx

xxx

Date Xxxx xxxx

39

(Source: Internet)

Journal/Subsidiary Books

Ledger

Trial Balance

Trading and P&L A/c

To G.P.

To N.P.

By G.P.

P & L Appropriation A/c

Liabilities Amount Assets Amount By N.P.

To All Ps'cap A/cs A B C

+ + +

Partners' Capital A/cs

A B C – – – – – – – – –

By Bal b/d

By P&L App A/c

By Bal b/d

+ + + + + + + + +

A B C

Balance Sheet

Liabilities Amount Assets Amount

To Bal c/d

A's Capital B's Capital C's Capital

40


MCQ’s/ VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)

1. A partnership firm incurred a loss of Rs. 6, 40,000 for the year ended on 31.3.2014. What Journal entry will be passed to divide it among its partners, P and Q equally? 2. List any two items that may appear on the Debit side of a partner’s Capital A/c when they are fixed. 3. Why is P&L Appropriation A/c prepared in partnership firms?

4. How will you show the following in case the capitals are i) Fixed and ii) Fluctuating?

a) Additional capital introduced b) Drawings c) Withdrawal of capital d) Interest on capital and e) Interest on loan by partners? 5. Distinction between Profit and loss account and profit and loss appropriation account? 6. The partnership deed is silent on payment of salary to partners. Anita, a partner,claimed that

since she managed the business, she should get a monthly salary of Rs 10,000. Is she entitled for the salary? Give reason.

7. What share of profit would a ‘sleeping partner’, who has contributed 75% of the total capital, get in the absence of a deed?

8. Suresh and Ramesh are partners in a firm with capitals of Rs 3,00,000 and Rs 4,00,000 respectively. They do not have a partnership deed. Ramesh wants to share the profits in the ratio of capitals. State with reason whether the claim is valid.

SHORT ANSWER TYPE QUESTIONS (3 & 4 Mark)

1. Mohan and Shyam are partners in a firm. State whether the claim is valid if the partnership agreement is silent in the following matters:

(i) Mohan is an active partner. He wants a salary of Rs.10,000 per year;

(ii) Shyam had advanced a loan to the firm. He claims interest@10% per annum;

(iii) Mohan has contributed Rs.20,000 and Shyam Rs.50,000 as capital. Mohan wants equal

share in profits.

(iv) Shyam wants interest on capital to be credited @6% per annum.

2. State whether the following statements are true or false:

(i) Valid partnership can be formulated even without a written agreement between the

partners;

(ii) Each partner carrying on the business is the principal as well as the agent for all the other

partners;

41

(iii) Methods of settlement of dispute among the partners can't be part of the partnership

deed;

(iv) If the deed is silent, interest at the rate of 6% p.a. would be charged on the drawings made

by the partner

3. State the main provisions of Partnership Act related to accounting if there is no partnership deed. 4. R and L started business on Jan 1, 2013 with the capital of Rs 1,20,000 and Rs. 80,000

respectively introduced Rs. 50,000 to the firm on July 1, 2013 as additional capital.His drawings for the year were Rs. 20,000. Calculate interest payable to R and L @ 15 % p.a. 5. Calculate interest on S’s drawings if she had withdrawn:

(a)Rs. 14,000 during the year and rate of interest on drawings is 14% p.a. (b)Rs. 14,000 in the beginning of the every quarter and rate of interest on drawings is 14% p.a.

6. A and B are partners sharing profits in the ratio of 3:2. A is entitled to a salary of Rs.12,000 per annum B is entitled to a salary of Rs.18,000 per annum, While distributing profits for year ended on Mar 31,2013 A was given a salary of Rs.30,000 per annum and B was given a salary of Rs.10,000 per annum. This was noted in the month of April, 2013. It is decided to pass a rectifying entry in the current year. Give Journal entry.

7. Mona, Nisha and Priyanka are partners in a firm. They contributed Rs. 50,000 each as capital

three years ago. At that time, Priyanka agreed to look after the business as Mona and Nisha were busy. The profits for the past three years were Rs. 15,000, Rs. 15,000 and Rs. 50,000 respectively. While going through the books of accounts, Mona noticed that the profit had been distributed in the ratio of 1 : 1 : 2. When she enquired from Priyanka about this, Priyanka answered that since she looked after the business she should get more profit. Mona disagreed and it was decided to distribute profit equally retrospectively for the last three years. (i) You are required to make necessary correction in the books of accounts of Mona, Nisha

and Priyanka by passing an adjustment entry.

(ii) Identify the value which was not practised by Priyanka while distributing profits

LONG ANSWER TYPE QUESTIONS (6 & 8 Mark) 1. A and B are partners sharing profits in the ratio of 3:4. Their capital accounts and current accounts show the following balances as on Apr 1, 2015: Capital A/c Current A/c A Rs.1,60,000 Rs. 48,000(credit) B Rs. 40,000 Rs. 3,000(debit)

On July 1, 2015, A withdrew from his capital Rs.60,000 and B introduced fresh capital of Rs.22,000 on Nov 15,2015. Interest on capital is allowed to partners @5% p.a. but no interest is to be charged on the drawings of partners. A is entitled to a commission of 5% on profits after interest on capital and the commission.

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During the year, the partners earned a profit of Rs. 1,80,000 before interest and commission. Their drawings were:

A Rs. 18,000 B Rs. 12,000 Prepare Profit and Loss Appropriation Account, Partners’ Capital and Current Accounts. 2. A and B share profits as 4:1. Their capitals on March31, 2014 were Rs. 1,20,000 and

Rs.1,00,000 respectively. The profits for the year were Rs.80,000 which have already been distributed to them. Their drawings during the year were Rs.10,000 and Rs.20,000 respectively by A and B. It was subsequently found that: (a) The profits were distributed equally. (b) A was not given a special salary of Rs.6,000 p.a. and B was not given a commission of Rs. 2,000. © They were not allowed interest on their opening capitals @5% p.a., which is allowed as per agreement. (d)No interest was charged from them on the drawings, which is also provided on the average for half year @2% p.a. Make the necessary Journal entry to correct the omission.

3. A and B are partners sharing profits and losses in the ratio of 3:2. Their capital accounts showed balances of Rs.1,50,000 and Rs. 2,00,000 respectively on Jan 01, 2003. Show the treatment of interest on capital for the year ending December 31, 2006 in each of the following alternatives

If the partnership deed is silent as to the payment of interest on capital and the profit for the

year is Rs.50,000;

If partnership deed provides for interest on capital @8% p.a. and the firm incurred a loss of

Rs.10,000 during the year;

(a) If partnership deed provides for interest on capital @8% p.a. and the firm earned a profit of

Rs.50,000 during the year;

(b) If the partnership deed provides for interest on capital @8% p.a. and the firm earned a profit of

Rs.14,000 during the year.

4. A, B and C were partners. They started business in one of the remote tribal areas of Odisha. On

31st March, 2013, after making adjustments for profits and drawings their capitals were A – Rs.

4,00,000, B – Rs. 3,00,000 and C Rs. 2,00,000. The drawings of the partners were A – Rs. 4,000

per month, B – Rs. 3,000 per month and C – Rs. 2,000 permonth.

The profit of the firm for the year ended 31st March, 2013 was ? 6,00,000. Subsequently it was

found that the interest on capital @ 6% per annum due, had been omitted.

Showing your working notes clearly, pass necessary adjustment entry for the above. Also,

identify any two values highlighted in the above question.

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1. Will interest paid to a partner on loan be debited to P & L A/c even if there is a loss? 2. A, B and C are partners having capital of Rs. 10 lakhs, Rs.8 lakhs and Rs. 6 lakhs respectively in a firm sharing profits and losss equally. C is guaranteed a minimum profit of Rs 1,00,000 as share of profit every year. The firm incurred a loss of Rs. 3,00,000 for the year ended 31.3.2014. Pass Journal entries. 3. When is it that the Capital Account of a partner does not show a Debit Balance inspite of regular and consistent losses year after year? 4. What share of profits would a sleeping partner get in absence of a Deed who has contributed 75% of capital? 5. X presents the following Profit and Loss Appropriation Account to other Partner, Y: Profit and Loss Appropriation Account for the year ended on 31.3.2014

Particulars Amount Particulars Amount

X’s Salary Y’s Commission Interest on Capital: X- on 40,000@6% Y- on 30,000@ 6% Interest on X’s Loan@ 6% Profit transferred to: X- 4/7 8,000 Y- 3/7 6,000

7,000 4,000

2,400 1,800 6,000

14,000 35,200

Profit &Loss A/c Interest on Drawings X @ 6% Y @ 6%

33,600

1,000 600

35,200

There is no partnership deed. Y feels that he is not fairly treated. You are required to prepare Profit and Loss Appropriation Account as per provisions of Indian Partnership Act, 1932. 6. P and Q are partners with capitals of Rs. 6,00,000 and Rs. 4,00,000 respectively. The profit and Loss Account of the firm showed a net Profit of Rs. 4, 26,800 for the year. Prepare Profit and Loss account after taking the following into consideration:- (i) Interest on P's Loan of Rs. 2,00,000 to the firm (ii) Interest on 'capital to be allowed @ 6% p.a. (iii) Interest on Drawings @ 8% p.a. Drawings were; P Rs 80,000 and Q Rs. 1000,000. (iv) Q is to be allowed a commission on sales @ 3%. Sales for the year was Rs. 1000000 (v) 10% of the divisible profits is to be kept in a Reserve Account. 7. A and B contribute 5 lac and 3 lac respectively by the way of capital on which they agree interest of 6% p.a. Profit sharing ratio 3:2.Profit for the year is Rs.4,00,000 before allowing interest on capital. Pass necessary accounts.

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8. A ,B and C are in partnership and share profits in 3:1 and C receiving annual salary of 32,000 plus 5% on the profits after changing his salary and commission ,or ¼ th of the profits of the firm whichever is more. Any excess of the latter over the firm received by C is,under the partnership deed is to be borne by A and B in 3:2.The profits is Rs1,68,000 after charging salary of C .Show the distribution of profits among partners .

a) Ram, Mohan and Sohan are partners with capitals of Rs.5,00,000, Rs.2,50,000 and 2,00,000

respectively. After providing interest on capital @10% p.a. the profits are divisible as follows:

Ram ½, Mohan 1/3 and Sohan 1/6. Ram and Mohan have guaranteed that Sohan's share in the

profit shall not be less than Rs.25,000, in any year. The net profit for the year ended March 31,

2016 is Rs.2,00,000, before charging interest on capital. You are required to show distribution

of profit.

b) The net profit of X, Y and Z for the year ended March 31, 2006 was Rs.60,000 and the same was

distributed among them in their agreed ratio of 3:1:1. It was subsequently discovered that the

under mentioned transactions were not recorded in the books:

a. Interest on Capital @5% p.a.

b. Interest on drawings amounting to X Rs.700, Y Rs.500 and Z Rs.300.

c. Partner's Salary: X Rs.1000, Y Rs.1500 p.a.

The capital accounts of partners were fixed as: X Rs.1,00,000, Y Rs.80,000 and Z Rs.60,000.

Record the adjustment entry.

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CHAPTER-3 GOODWILL: NATURE AND VALUATION SYNOPSIS Meaning of Goodwill

Over a period of time, a well - established business develops an advantage of good name,

reputation and wide business connections. This helps the business to earn more profits as

compared to a newly setup business. In accounting, the monetary value of such advantage is

known as “goodwill”.

Need for Valuation of Goodwill

In a partnership firm, goodwill needs to be valued in the following circumstances:

1. Change in the profit sharing ratio amongst the existing partners;

2. Admission of new partner;

3. Retirement of a partner;

4. Death of a partner; and

5. Dissolution of a firm involving sale of business as a going concern.

6. Amalgamation of partnership firm

Methods of Valuation of Goodwill

Average Profit Method: 1) Calculate total normal past profits (exclude abnormal gains and expenses, and non business incomes and expenses.) 2) Calculate average profits 3) Goodwill= average profits * no of years purchase

Weighted Average Profit Method: 1) Assign weights to each year 1 2 3 4 … starting from the first year. 2) Multiply weights with the profits for each year to find their product. 3) Add all the products. 4) Calculate weighted average profits= total product/ total of weights. 5) Goodwill= weighted average profits* no of years purchase

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Super Profit Method: 1) Calculate Average Capital Employed= opening Capital + closing Capital

2 Capital employed= Owners funds+ long term debt OR Capital employed= total assets- current liabilities 2) Calculate average profits 3) Calculate normal profits= average capital employed* normal rate of return 100 4) Super profits= average profits- normal profits 5) Goodwill= super profits* no. of years purchase

Capitalization method: (a)Capitalization of Average Profits 1) Calculate average normal profit 2) Calculate Capitalized value of the firm= average profit *100 Normal rate of return 3) Determine value of net assets= Assets-outsiders’ liability 4) Goodwill= capitalized value-net assets (b) Capitalization method: capitalization of Super profits 1) Calculate Capital Employed 2) Calculate Normal Profit on Capital Employed 3) Calculate average profits 4) Calculate super profits 5) Goodwill= super profits * 100 Normal rate of return


MCQ’s/ VERY SHORT ANSWER TYPE QUESTIONS (1 Mark)

A. Multiple ChoiceQuestions

1. Good will is_____ a) Tangible asset b) Intangible asset c) Fictitious asset d) both (b) &(c)

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2. Good will of the firm on the basis of 2years'purchase of average profit of the last 3 years is

Rs. 25,000.Find average profit.

(a) Rs.50,000 (b) Rs.25,000 (c) Rs.10,000 (d) Rs. 2500

3. Calculate th evalue of good will at 3years'purchase when:Capital employed Rs.2,50,000;

Average profit Rs.30,000 and normal rate of return is I0%.

(a)Rs.3000 (b)Rs.25,000 (c)Rs.30,000 (d) Rs.5,000

4. What are superprofits

a)Actual profit–Normal Profit b)Normal Profit-Actual profit

c)Actual profit+Normal Profit d)None of theabove 5. The net assets of the firm including fictitious assets of 5,000 are 85,000.The net liabilities

of the firm are 30,000.The normal rate of return is 10% and the average profit so fthe firm

are 8,000.Calculate the good will as per capitalization of super profits.

(a)Rs.20,000 (b)Rs.30,000 (c)Rs.25,000 (d) None of theabove 6. Which of the following it emsare added to previous year’spr of its for finding normal

profits for valuation of good will.?

a)Loss on sale offixed assets b)Loss due to fire,earthquake etc c)Unde rvaluation of closing stock d) All of the above

7. Under which method of valuation of good will,normal ate of return is not considered?

a)Loss on sale offixed assets b)Loss due to fire,earthquake etc

c)Under valuation of closing stock d) All of the above 8. Following are the methods of calculating goodwill except:

a)Super profit method b)Average profit method

c)Weighted Average profit method d) Capital profit method

9. The excessa mount which the firm cangeton selling its assets overand above the sale

able value of its assets is called:

a)Surplus b) Superprofits

c)Reserve d)Goodwill

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10. When Good will is not purchased good will account can: (a) Never be raised in the books (b) Be partially aised in the books

(c ) Be raised as per the agreement of the partners 11. The good will o fthe firm is not affected by: (a) Location of the firm (b) reputation of the firm

(c) Better customer services (d) None of theabove 12. Weight edaverage profit method of calculating good will is used when:

(a) Profits are not equal (b) Profits show atr end (c) Profits are fluctuating (d) None of theabove 13. Capitalinvestedinafirmis5,00,000.Normalrateofreturnis10%.Average profitofthefirmare

64,000(afteranabnormallossof4,000).Valueofgoodwillat fourtimesthesuperprofitswillbe:

(a)Rs.72,000 (b)Rs.40,000 (c)Rs.2,40,000 (d)1,80,000

14. Name any two factors which affect the goodwill of a partnership firm. 15. State any two occasions on which the need for valuation of goodwill arise. 16. In a partnership firm assets are 5, 00,000 and liabilities 2,00,000. The normal rate of

return is 15%. State the amount of normal profits. 17. What are super profits? 18. How does the factor ‘efficiency of management’ affect the goodwill of a firm?

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1. Capital employed in a business is Rs.2,00,000. The normal rate of return on capital

employed is 15%. During the year 2002 the firm earned a profit of Rs.48,000. Calculate

good will on the basis of 3 years purchase of super profit?

2. A business has earned average profits of 1,00,000 during the last few years and the

normal rate of return in similar business is 10%. The assets of the business were Rs.

10,00,000 and its external liabilities 1,80,000.

Calculate the value of goodwill by Capitalization of super profit method if the goodwill is

valued at three years' purchase of super profit.


1.From the following information, calculate the value of goodwill of Bharat and Tushar (a) At three years' purchase of Average Profit. (b) At two years' purchase of Super Profit. (c) On the basis of Capitalisation of Super Profit. (d) On the basis of Capitalisation of Average Profit.

Information: Average capital employed in the business 5,00,000. Net trading results of the firm for the past years, 2010: 1,50,000, 2011: 1,25,000 (loss), 2012: 4,25,000. Rate of interest expected from capital having regard to the risk involved 15%.Remuneration to each partner for his service 2,500 per month. Assets (excluding goodwill) 6,00,000, liabilities 50,000. 2.Compute the value of goodwill on the basis of four years' purchase of the average profits based on the last five years? The profits/losses for the last five years were as follows:

2012 - Rs25,000; 2013 - Rs40,000; 2014 - (Rs15,000) loss; 2015 - Rs80,000; - Rs1,00,000

3.A business earned average profits of Rs. 1,00,000 during the last few years. The normal rate of return in similar type of business is 10%. The assets of the business were Rs. 10,00,000 and external liabilities was Rs. 1,80,000. Calculate the value of goodwill of the firm by super profit method, if the goodwill is valued at 2. 1/2 years’ purchase of super profits.

CHAPTER-4 CHANGE IN THE PROFIT SHARING RATIO

SYNOPSIS

(A)Accounting Treatment of accumulated profits and reserves: 1) Reserves and accumulated profits to be transferred to the partners’ capital accounts. Entry: Reserves/ P&L A/c ..dr.

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Workmen’s compensation Reserve ..dr. Investment fluctuation reserve …dr. To Partners’ Capital A/c ( IN OLD RATIO)

(a)Workmen’s compensation reserve:

1) If no claim on the compensation: W C Reserve to be distributed amongst all partners in their OLD RATIO.

2) If the claim is less than the amount of reserve: Distribute the remaining amount amongst the partners in OLD RATIO.( reserve-claim) Amount of claim to be shown in the Balance Sheet. 3) If the claim is more than the amount of W C Reserve: the excess of claim over the reserve amount to be written in the Revaluation A/c & the total amount of claim to be shown in the Balance Sheet. Nothing to be distribute to the partners. (b)nvestment Fluctuation Reserve: Excess of reserve over the difference between the book value and market value (Market Value being lower) to be distributed amongst the old partners in their OLD RATIO.

2) Transfer of Accumulated Losses: Partners’ Capital A/c …Dr. To Profit & Loss A/c To Deferred Revenue Expenses A/c

(B)Revaluation of assets and liabilities: (1) By opening Revaluation A/c 1) Increase in the value of an asset: Assets A/c …Dr. To Revaluation A/c

2) Decrease in the value of an asset: Revaluation A/c …Dr. To Asset A/c

3) Increase in the value of a liability: Revaluation A/c …Dr. To Liability A/c

4) Decrease in the value of a liability Liability A/c …Dr. To Revaluation A/c

5) For recording an unrecorded asset: Unrecorded Assets A/c …Dr.

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To Revaluation A/c

6) For recording an unrecorded Liability Revaluation A/c …Dr. To Unrecorded Liability A/c

7) Transfer of balance in Revaluation Account a) In case of Profit: Revaluation A/c To Partners’ capital account ( OLD RATIO) b) In case of Loss: Partners’ Capital A/c ..Dr. To Revaluation A/c

(2) Without openingRevaluation A/c (Adjustment of Profit / Losses On Revaluation of Assets and Liabilities through The Capital Accounts Only when partners decided not to show the revised value in new balance sheet)

Step1: Calculate the net effect of Revaluation: Increase in the value of assets ………. + Decrease in the amount of liabilities ………. - Decrease in the value of assets ……... - Increase in the amount of liabilities ……….. Net effect ……

Step2: To find the share of gain/ sacrifice

Step3: gaining partner= share gained * net effect of revaluation Sacrificing partner= share sacrificed * net effect of revaluation

Step4: For profit:Gaining Partners’ Capital A/c ….Dr. To Sacrificing Partners’ Capital A/c

For losses: Sacrificing Partners’ Capital A/c…….Dr. To Gaining Partners’ Capital A/c

NOTE: FOR CALCULATING THE AMOUNT, NET EFFECT OF REVALUATION TO BE MULTIPLIED WITH THE EXACT FRACTION OF THE GAIN OF SACRIFICE. RATIO NOT TO BE TAKEN.

Example: sacrifice of A= 3/10 Gain of B= -3/10 Net effect of revaluation= 30000 Net profit on revaluation for A= 30000* 3/10 B= 30000* 3/10 i.e. the exact proportion of the gain or sacrifice

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(3)Treatment of Goodwill : Gaining Partners Capital A/c- Dr To Sacrificing Partners Capital A/c

Existing Goodwill: Write off among partners IN OLD RATIO.



1. Any change in the relationship of existing partners which results in an end of the

existing agreement and enforces making of new· agreement is called:

(a) Revaluation of partnership (b) Reconstitution of partnership (c) Realisation of partnership (d) None of the above

2. The ratio in which a partner surrenders his share in favour of a partner is

knownas:

(a) New profit-sharing ratio (b) Sacrificing Ratio (c) Gaining Ratio (d) Capital Ratio

3. The ratio in which apartner receives rise in his share of profits is known as: (a) New Ratio (b) Sacrificing Ratio (c) Capital Ratio (d) Gaining Ratio

4. Reserves and accumulated profits are transferred to partners ' capital

accounts at the time of reconstitutionin:

(a) Old profit-sharingratio (b) SacrificingRatio (c) Gainingratio (d) New profit-sharingratio

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5. Increase and decrease in the value of assets and liabilities are recorded through:

(a) Partners' Capital Account (b) Revaluation Account (c) Profit and Loss Appropriatione (d) Balance Sheet

6. In which of the following case,revaluation accounts debited?

(a) Increase in value of asset (b) Decrease in value of asset (c) Decrease in value of liability (d) No change in value of assets

7. In which of the following cases,revaluation account is credited? (a) Decrease in value of liability (b) Increase in value of liability (c) Decrease in value of asset (d) No change in value of liability

8. Partner'scapital account is credited when there is

(a) Profit onrevaluation (b) transfer of general reserve (c) transfer of accumulated profits (d) All of theabove

9. Sacrificing ratio is the difference between:

(a) Newratioandoldratio (b) Oldratioandnewratio (c) New ratio and gainingratio (d) Old ratio and gainingratio

10. A and B are partners in a firm sharing profits in the ratio of 3:2.They

decided to share future profits equally. Calculate A’s gain orsacrifice (a) 2/10(sacrifice) (b) 5/10(gain) (c) 1/10(Gain) (d) 1/10(sacrifice

11. In case of change in profit-sharing ratio, the gaining partner must

compensate the sacrificing partners by paying the proportional amount of (a) capital (b) cash (c) goodwill (d) none of theabove

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12. In case of change in profit-sharing ratio, the accumulated profits are distributed to the partnersin (a) newratio (b) oldratio (c) sacrificingratio (d) equalratio

13. R;S and T sharing profits and losses in the ratio of 1:2:3,decided to share

future profit and lossese qually.They also decided to adjust the following accumulated profits, losses and reserves without affecing their book figures, by passing a single adjust mententry: General Reserve 40000

Profit and LossA/c 30000

Share .Issue expenses 10000

The necessary .adjustment entry will be:

(a) Dr. R and Cr. T by < I 0,000

(b) Dr. T and Cr. R by < 10,000

(c) Dr. S and Cr. R by < 10,000

(d) Dr.R and Cr. S by < 10,000

14.

U V

and W are partners sharing profits in the ration of 2:3:5. They also

decide to record the effect of the following revaluations and reassessments without affecting the book values of assets and liabilities by passing a single adjust mententry:

Book Value (Rs) Revised Value (Rs)

Land and Building 3,00,000 3,50,000

Furniture 1,50,000 1,00,000

Sundry Creditors 60,000 20,000

Outstanding Salaries 10,000 15,000

The single adjustment entry will (a) Dr. W and Cr.U by Rs. 10,500 (b) Dr. U and Cr. W by Rs. 10,500 (c) Dr.Vand Cr.U by Rs. 10,500 (d) Dr.Wand Cr.V by Rs. 10,500

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15. X,Y and Z are partners sharing profits and losses in the ratio of 5:3:2.They decide to share the future profits in the ratio of 3:2:1.Work men compensation reserve appearing in the balance sheet on the date if no information is available for the same will be: (a) Distributed among the partners in old profit sharing ratio (b) Distributed among the partners in new profit sharing ratio (c) Distributed among the partners in capital ratio (d) Carried forward to new balance sheet without any adjustment

16. A,B and C were are partners in a firm sharing profits in the ratio of 3:4:1 .They decided to:share profits equally w.e.f from 1 .4.2019. On that date the profit and loss account showed the credit balance of 96,000.instead of closing the profit and loss account ,it was decided to record an adjustment entry reflecting the change in profit sharing ratio.In the journal entry a) Dr.A by 4,000; Dr.B by 16,000; Cr C by 20,000

b) Cr.A by 4,000; Cr.B by 16,000; Dr C by 20,000 c) Cr.A by 16,000; Cr.B by 4,000; Dr C by 20,000 d) Dr.A by 16,000; Dr.B by 4,000; Cr C by 20,000

17. ……..shouldcompensate ............ inthecaseofreconstitutionofthefirm.

18. Increase in the value of assets and decrease in the value of liabilities result in ……..for the existing partners and should be to P/L Adjustment a/c

19. Apart nership is reconstituted due to change in profits haring ratio A,B and

Caresharing profits in the ratio of 3:2:1.They decided to share equally in future .B’s has

neither sacrificed nor gaine

20. When there is a change in the profit sharing ratio among the existing partners, why does it require revaluation of assets and reassessment of liabilities?

21. What is the accounting treatment of goodwill in the case of change in the profit sharing ratio of the existing partner?

22. State the ratio in which the partners share the profit and loss on revaluation of assets and

23. reassessment of liabilities.

24. X, Y and Z were in partnership sharing profits in the ratio of 4:3:1. The partners agreed to share future profits and losses in the ratio of 5:4:3. Calculate each partner's gain or sacrifice due to change in ratio.

25. Give the meaning of ‘reconstitution of a partnership firm’.

26. State any two occasions on which a firm can be reconstituted.

27. State the ratio in which the partners share the accumulated profits when there is a change in the profit sharing ratio amongst existing partners.

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1) P, Q and R are partners in a firm sharing profits in the ratio of 2:2:1 .On 1.4.2007 the partners decided to share future profits in the ratio of 3:2:1. On that day Balance Sheet of the firm shows general reserve of 50,000. Pass necessary entry for distribution of reserve. 2) Sharma, Verma and Khan were partners in a firm sharing profits and losses in 5:3:2 ratio. They decide to share the future profits equally. For this purpose, the goodwill of the firm was valued at 1,20,000. Pass an adjustment entry for the treatment of goodwill due to change in the profit sharing ratio.

3) A, B and C are in partnership sharing profits in the ratio of 1:2:3. Their Balance Sheet as at 31.3.2013 showed a balance of 1,20,000 in General Reserve. From 1.4.2013, they will share profits equally. Record the necessary journal entry to give effect to the above arrangement when partners decided not to close the General Reserve Account. 4)Anita, Asha and Amrit are partners sharing profits in the ratio of 3:2:1 respectively From 1st January, 2010, they decided to share profits in the ratio of 1:1:1. The partnership deed provided that in the event of any change in profit sharing ratio, the goodwill should be valued at three years’ purchase of the average of five years’ profits. The profits and losses of the preceding fiveyears:

Showing the working clearly, give the necessary journal entry to record the above change


1. X, Y and Z were sharing profits and losses in the ratio of 3:3:2. They decide to share future profits and losses equally with effect from April 1st 2008. They decide to record the effect of the following, without affecting their book values: Profit and Loss Account 66,000 Advertisement Suspense Account 18,000 General Reserve 24,000 Pass the necessary adjustment entry.

2. Alok, Yogesh and Sara are partners in a firm sharing profits and losses in the ratio of 5:3:2. They decide to share future profits and losses equally. Their Balance Sheet showed a debit balance of 4,000 in Profit and Loss Account and a balance of 24,000 in General Reserve. For this purpose, it was agreed that:

The goodwill of the firm be valued at 52,600.

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The land (having book value of 50,000) be valued at 70,000.

The stock (having book value of 50,000) be depreciated by 6%.

Creditors amounting to 400 were not likely to be claimed. Partners do not desire to record the revised values of assets and liabilities in the books. They also desire to leave the reserve and profits/ losses undistributed. Give effect to the change in profit sharing ratio by passing a single journal entry.

3. X, Y and Z are partners in a firm sharing profits and losses in the ratio of 4:3:2. They decide to share future profits and losses in the ratio of 2:3:4 with effect from 1st April, 2010. An extract of their Balance Sheet as at 31st March, 2010 is:

Liabilities Amount ( ) Assets Amount ( )

Workmen’s Compensation Reserve 90,000

Show the accounting treatment under the following alternative cases:

If there is no other information.

If a claim on account of workmen's compensation is estimated at 45,000

If a claim on account of workmen's compensation is estimated at 99,000.

4. E, F and G are partners in a firm sharing profits and losses in the ratio of 3:3:1. E and F decide that the profit sharing ratio of partners be made equal and that G be not charged any goodwill for the gain in her share of profit. Identify the value fulfilled by E and F. 5. P and Q were partners sharing profits and losses in 2:1.with effect from 1 April 2015 they agreed to share the profits equally. They prepared a revaluation account and unrecorded asset worth Rs 50,000 was found not to have recorded in the books. P was of the view that it should be credited to revaluation account whereas Q was of the view that it shoud be credited to the capital accounts of partners in equal proportion. Q agreed to the viewpoint of P? Explain what viewpoint must have been put forward by P to which Q agree? 6. A and V are partners sharing profits and losses in 2:1.with effect from 1 April 2015 they agreed to share the profits equally. On that date the balance sheet of the firm showed 75000 as workmen compensation reserve against which there was no liability .V expressed his opinion that it should be credited to the capital accounts equally. However Anand was of the opinion that it should be credited to the capital accounts in 2:1.He was able to convince V. Explain what argument must have been put forward by Anand to which V agreed.

58

CHAPTER-5 ADMISSION OF A PARTNER

SYNOPSIS

1) New profit sharing ratio a) When the new partner acquires his share in the old profit ratio from the old partners: Eg. A and B are partners sharing profits in the ratio of 5:3. C is admitted for 1/4th share. Total share=1 C’s share=1/4 Remaining share=1-1/4=3/4 A’s new share= 3/4 * 5/8 B’s new share= 3/4 * 3/8

b) When the new partner acquires his share in a particular ratio from the old partners: Eg. A and B are partners sharing profits in the ratio of 5:3. C is admitted for 1/4th share, which he takes 1/8th from A and 1/8th From B. ( or in the ratio of 1:1) Sol : A’s sacrifice= 5/8 A’ new share=old share-share sacrificed = 5/8-1/8 =4/8

B’s sacrifice=3/8 B’ new share= 3/8-1/8 =2/8

c) When the new partner acquires his share by surrender of a particular fraction of his share to the old partners: Eg. . A and B are partners sharing profits in the ratio of 5:3. C is admitted to the firm. A surrenders 1/5th of his share in favour of C and B surrenders 1/6th of his share. Sol. A’s sacrifice= 5/8 * 1/5 B’s sacrifice= 3/8* 1/6 A’ new share= 5/8-(5/8 * 1/5) B’s new share= 3/8-(3/8* 1/6)

2) Sacrificing ratio: a) When the share of new partner is given without the details of sacrifice made by the old partners or their new profit sharing ratio:

Sacrificing ratio= Old ratio

b) When old ratio of old partners and new ratio of all the partners given: Sacrifice of a partner= old share- new share

c) When the new partner acquires his share by surrender of a particular fraction of his share to the old partners: Eg. . A and B are partners sharing profits in the ratio of 5:3. C is admitted to the firm. A surrenders 1/5th of his share in favour of C and B surrenders 1/6th of his share.

59

Sol. A’s sacrifice= 5/8 * 1/5 B’s sacrifice= 3/8* 1/6

3) Treatment of Goodwill There are different situations relating to the accounting treatment of goodwill at the time of admission

of new partner. All these are given in detail under the following categories:

(I) Goodwill paid by the new partner to the old partners privately:

No entry will be passed in the books of the firm. Entry for cash brought in by him as capital shall only be

passed.

However if there is any goodwill a/c existing in the balance sheet of old partners before admission, it

should be immediately written off among the old partners in old ratio.

(II) When amount of goodwill brought in by new partner:

In this case there may be three situations:

Ex: Supposed there are two partners A and B. C is admitted as new partner.

When new partner brings his share of goodwill in cash

If there is any goodwill a/c in the balance sheet of old partners

A’s Capital A/c Dr

B’s Capital A/c Dr

To Goodwill A/c

(Being old goodwill written off in

old ratio)

When new partner is not able to brings his share of goodwill in cash


A’s Capital A/c/Current A/c

Dr B’s Capital A/c Current

A/c Dr

To Goodwill A/c


old ratio)

When new partner brings only part of his share of goodwill in cash

If there is any goodwill a/c in

the balance sheet of old

partners A’s Capital A/c

DrB’s Capital A/c Dr

To Goodwill A/c


old ratio)

Cash/Bank A/c Dr

To Premium A/c

To C’s Capital A/c

(Being cash brought in by new

partner for premium and capital)

Cash/Bank A/c Dr



partner for capital)

Cash/Bank A/c Dr

To Premium A/c



partner for a part of premium

and capital)

60

Premium for Goodwil A/c Dr

To A’s Capital A/c

To B’s Capital A/c

(Being premium amount

transferred to old partners’

capital A/cs in sacrificing ratio)

C’s Capital A/c/C's Current A/c Dr



(Being new partner’s share of

goodwill credited to old

partners in sacrificing ratio)

Premium for Goodwill A/c Dr



(Being a part of premium brings in cash transferred to old partners’ capital A/cs in sacrificing ratio)

………………………….................

C’s Cap/CurrentA/c Dr



(Being new partner’s cap a/c Dr

for part of premium not bring in

cash and Cr to old partners in

sacrificing ratio)

If premium amount withdraw old partners

A’s Capital A/c

B’s Capital A/c

To Cash/Bank A/c

n by

Dr

Dr


A’s Capital A/c

B’s Capital A/c

To Cash/Bank A/c

n by

Dr

Dr


A’s Capital A/c

B’s Capital A/c

To Cash/Bank A/c

n by

Dr

Dr

(III) When New Partner brings his share of goodwill in kind:

Exp: Supposed there are two partners A and B. C is admitted as new partner.

When new partner brings his share of goodwill in kind




To Goodwill A/c

(Being old goodwill written off in old ratio)

Assets A/c Dr

To Premium for Goodwill A/c


(Being cash brought in by new partner for premium and capital)

61

Premium for Goodwill A/c Dr



(Being premium amount transferred to old partners’capital A/cs in sacrificing ratio)

If premium amount withdrawn by old partners



To Cash/Bank A/c

4. Revaluation Profits or losses: To be distributed amongst the old partners in the OLD RATIO.

5. Reserves and surplus: To be distributed amongst old partners in their OLD RATIO.

6. Workmen Compensation Reserve: Excess of reserve over liability to be distributed amongst old partners in their OLD RATIO.

7. Investment Fluctuation Reserve: Excess of reserve over the difference between the book value and market value to be distributed amongst the old partners in their OLD RATIO.

Adjustment of capital and New Balance Sheet.

After the admission of a partner, the capitals of all partners may be adjusted as per agreement.

The adjustment may take any of the following forms:

(I) Adjustment of the capitals of the old partners on the basis of new partner's capital Steps:

(i) Calculate the total capital of the firm on the basis of new partner's capital and his share in

profits.

Total Capital/New Capital= New partner's capital x Reciprocal of the proportion of his share

in profit

(ii) Calculate the new capitals of all partners by dividing total capital in new ratio.

(iii) Prepare old partners' capital a/cs (after all adjustments regarding Revaluation, General

Reserve , Goodwill etc) and find out the actual balances of their capitals.

(iv) Compare the new capitals as in (ii) with old capital balances as in (iii) and work out surplus

or deficiency.

(v) Surplus will be paid back to the old partners and if there is deficiency the same will be

contributed in cash by the old partners.

62

(If it is specifically required under agreement, the surplus can be Cr to their current a/cs

and deficiency can be Dr to their current a/cs)

(vi) If goodwill is not brought in cash, it can be adjusted either (i) through new partner's capital

a/c – this will reduce his original capital contributed by him or (ii) if it is adjusted through

new partner's current a/c – this will not affect the original capital contributed by him.

(II) Finding the new partner's sufficient capital on the basis of the old partners' capital or the

total capital of the firm Steps:

(i) Prepare old partners' capital a/cs(after all adjustments regarding Revaluation, General

Reserve , Goodwill etc)

(ii) Calculate the total Capital of the new firm as follows:

Total Capital of the firm =

Combined adjusted

Reciprocal of the combined

capital of old partners proportion of their share of profit

(iii) New partner's capital will be equal to his share of the total capital.

(iv) If goodwill is not brought in cash by the new partner, it should be better Dr to his Current

Account. This will make the calculation of his sufficient capital more accurate and simple.



Q. 1 Which of the following is not the reconstitution of partnership? a) Admission of apartner b) Dissolution ofPartnership c) Change in Profit SharingRatio d) Retirement of apartner

x

63

Q. 2 On the admission of a new partner: a) Old partnership isdissolved b) Botholdpartnershipandfirmaredissolved c) Old firm isdissolved d) None of theabove

Q.3 Sacrificingratioisusedtodistribute ---------------------------- incaseofadmissionofapartner. a) Goodwill b) Revaluation Profit orLoss c) ProfitandLossAccount(CreditBalance) d) Both b andc

Q.4“Atthetimeofadmission,old partnership comestoan end”.Isthestatementtrue or false?

Q.5 Himanshu and Naman share profits & losses equally. Their capitals were Rs.1,20,000 andRs.80,000 respectively.There was also a balance of Rs.60,000 in General reserve and revaluation gain amounted to Rs.15,000.They admit friend Ashish with 1/5 share. Ashish brings Rs.90,000 as capital .Calculate the amount of goodwill of the firm. a) Rs.1,00,000 b) Rs.85,000 c) Rs.20,000 d) None of the above Q. 6 Yash and Manan are partners sharing profits in the ratio of 2:1. They admit Kushagra into partnership for 25% share of profit. Kushagra acquired the share from old partners in the ratio of 3:2. The new profit sharing ratio will be: a) 14:31:15 b) 3:2:1 c) 31:14:15 d) 2:3:1 Q.7 A and Ba repart ners sharing profit and losses in ratio of 5:3. Cis admitted for 1/4th share. On the date of reconstitution ,the debtors tood at Rs 40,000, bill receivable stood at Rs.10,000 and the provision for doubtful debts appeared at Rs.4000.A bill receivable, of Rs.10,000 which was discounted from the bank,earlier has been reported to be dishonored .The firm has sold, the debtor so arising to adebt collection agency at a loss of 40%. If bad debt snow have a risen for Rs 6,000 and firm decides to maintain provisions at same rate as before then amount of Provision to bed ebited toRevaluation Account would be: a) Rs4,400 b) Rs4,000 c) Rs3,400 d) None of the above

64

Q.8 Heena and Sudha share Profit & Losse qually.Their capital swere Rs.1,20,000 and Rs.80,000

respectively. There was also a balance of Rs.60,000 in General reserve and revaluationg a in

amounted to Rs.15,000.They admit friend Teen a with1/5 share.Teen a brings Rs.90,000 as

capital. Calculate the amount of good will of the firm.

a) Rs.85,000 b) Rs.1,00,000 c) Rs.20,000 d) None of the above

Q.9“As per Section 26 of the Indian Partnership Act,1932, aper son can be admitted as a new

partner if It isagreed in the Partnership Deed”.Is the statement Trueor False?

Q. 10 Which of the following is not true with respect to Admission of a partner? a) A new partner can be admitted if it isagreed in the partner shipdeed. b) If all the partner sagree, a new partner can be admitted. c) A new partner has to bring relatively higher capital as compared to the existing partners d) A new partner get sright in the assets of the firm

Q. 11 As per ------------ ,only purchased good will can be shown in the Balance Sheet. a) AS37 b) AS26 c) Section37 d) AS37

Q.12“A newly admitted partner can not pay his share of the good will to the sacrificing partner

sprivately”.Is the statement True or False?

Q.13“Unless agreed otherwise ,Sacrificing Ratio of the old partners will be the same as their Old

Profit Sharing Ratio”.Is the statement True or False?

Q. 14 A,and B are partners sharing profits in the ratio of 2:3.Their balance sheet shows

machinery at 2,00,000; stock ₹ 80,000,and debtors at ₹1,60,000.Cis admitted and the new profit

sharing ratio is 6:9:5.Machinery is revalued at ₹1,40,000 and a provision is made for doubt ful

debts @5%.As share in loss on revaluation amount to ₹20,000.Revalued value of stock will be:

a)₹62,000 b)₹1,00,000 c)₹60,000 d)₹98,000 Q. 15 At the time of admission of a partner, Employees Provident Fund is: a) Distributed to partners in the old profit sharing ratio b) Distributed to partners in the new profit sharing ratio c) Adjusted through gaining ratio d) None of the above

65

Q.16 If at the time of admission if there is someun recorded liability,it will be------------- to ------------------------------ Account. a) Debited,Revaluation b) Credited,Revaluation c) Debited,Goodwill d) Credited,Partners’Capital Q.17 At the time ofa dmission of a newpartner,the balance of Workmen Compensation Reserve will be transferred to: a) Old partners in the old profit sharing ratio b) Sacrificing partners in the sacrificing ratio c) Revaluation Account d) All partners in the new profit sharing ratio Q.18The firm of P,Q and Rwith profit sharing ratio of 6:3:1,had the balance in General Reserve Account amounting Rs.1,80,000.S joined asa new partner and the new profit sharing ratio was decided to be 3:3:3:1.Partners decide to keep the General Reserv eunchanged in the book so faccounts. The effect will be: a) P will be credited by Rs.54,000 b) P will be debited by Rs.54,000 c) P will be credited by Rs.36.000 d) P will be credited byRs.36,000 Q. 19 which statement is true with respect to AS-26? a) Purchased good will can be shown in the Balance Sheet b) Revalued good will can be shown in the Balance Sheet c) Both purchased good will and revalued can be shown in the Balance Sheet d) None of theabove Q. 20 Premium brought by newly admitted partner should be: a) Credited to sacrificing partners b) Credited to all partners in the new profit sharing ratio c) Credited to old partners in the old profit sharing ratio d) Credited to only gaining partners Q. 21 Sacrificing ratio is calculated because: a) Profit shown by Revaluation Account can be credited to sacrificing partners b) Good will brought in by the incoming partner can be credited to the new partner c) Good will brought in by the incoming partner can be credited to the sacrificing partners d) Both a andc Q.22 Aryaman and Bholu are partners sharing profit and losses in ratio of 5:3. Chirag is admitted for 1/4thshare.On the date of recon stitution, the deb to rs stood at Rs 40,000, bill receivable stood at Rs.10,000 and the provision for doubtful debts appeared at Rs.4000. A bill receivable, of

66

Rs10,000 which was discounted from the bank ,earlier has been reported to be dishonored. The firm has sold ,the debt or so arising to a debt collection agency at a loss of 40%. If bad debts now have arisen for Rs 6,000 and firm decide stomain tain provisions at same rateas before then amount of Provision to be debited to Revaluation Account would be: a.) Rs4,400 b.) Rs4,000 c.) Rs.3,400 d.) None of the aboveq

Q. 23 Revaluation Accountisa ------------------- Account. a) Real b) Nominal c) Personal d) Liability

Q. 24 Fill in the blanks:

1) When a new partner brings his share of goodwill in cash, the amount is debited to _______________ account.

2)If, at the time of admission, some profit and loss account balance appears in the books, it is transferred to _______________ account.

3)The ratio in which the old partners are surrendering their share of profits in favour of the new partner is called _______________.

4)If, at the time of admission, there is some unrecorded liability, it will be recorded in _______________ account.

5) X and Y are partners sharing profit in the ratio of 3:2. Z was admitted with 1¼ share in profits which he acquires equally from X and Y. The new ratio will be _______________. 6)Calculation of sacrificing ratio is necessary for dividing the _______________ brought in by the new partner. 7)In the absence of an express agreement old partners will contribute in

_______________ ratio towards new partner's share of profit. 8)If, at the time of admission, the revaluation account shows a profit, it will becredited to account

_______________ in ratio. 9)The capital balances of A and B are 25,000 and X 20,000 respectively after making all the

adjustments. If C, the incoming partner, is to bring in 1/3 of the total capital of the firm then his share of capital will be __________.

10)If the adjustment in the values of assets at the time of the admission of a partner shows profits, the same should be credited to the capital accounts of_____________ partners in their ____________ratio.

67


1. Amit and Sumit divided profits in the ratio of 3:2. Puneet is admitted with l/5th share, which he acquires from Amit and Sumit in their profit sharing ratio. Calculate new profit sharing ratio of partners.

2. X and Y are partners in a firm sharing profits and losses in the ratio of 7:5. They admit Z, who acquires his share as 1/12th from X and 1/81 from Y. Calculate the new profit sharing ratio and the sacrificing ratio.

3. L and M were partners in a firm sharing profits and losses in the ratio of 5:3. On 1st Jan 2013 they admitted O as a new partner. On the date of O's admission, the balance sheet of L and M showed a balance of 16,000 in general reserve and debit balance of 24,000 in profit and loss account. Pass the necessary journal entries for the treatment of these items on O's admission.

4. Hari, Ravi and Kavi were partners in a firm sharing profits and losses in the ratio of 3:2:1. They admitted Guru as a new partner for l/7th share in the profits. The new profit sharing ratio will be 2:2:2:1 respectively. Guru brought 3,00,000 for his capital and 45,000 for his l/7th share of goodwill. On the day of admission, Goodwill appeared in the books at 24,000. Showing your workings clearly, pass necessary journal entries in the books of the firm for the above mentioned transactions.

5. Kanwar and Tanwar were partners in a firm sharing profits in the ratio of 1:3. They admitted Anwar as a new partner for l/5th share in the profits. Anwar did not bring his share of goodwill

10,000 in cash. Pass the necessary journal entry for the treatment of goodwill on Anwar's admission.

6. X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. They admit Z as a partner for l/5th share. Z acquires his share from X and Y in the ratio of 2:3. The Goodwill of the firm has been valued at 25,000. Z brings in only 60% of his share of firm's goodwill and 1,00,000 as his capital in cash. The amount of goodwill is withdrawn by the concerned partners to the extent of 30% of what is credited to them. Pass the necessary journal entries.

7. Amar and Samar were partners in a firm sharing profits and losses in 3:1 ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could not bring his share of good will premium in cash. The Goodwill of the firm was valued at Rs.80,000 on Kanwar's admission. Record necessary journal entry for good will on Kanwar's admission.

8. P and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in 1:2 ratio. Calculate new profit sharing ratio.

68

9. A and B are partners with capitals of Rs. 90,000 and Rs. 1,00,000 respectively. They decide to admit C into the partnership for 1/4 th share in the future profits. C is to bring a sum of Rs. 80,000 as his capital. Calculate the amount of goodwill.

10. X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1. On 1st April, 2009, Y retires form the firm. X and Z agree that the capital of the new firm shall be fixed at Rs.2,10,000 in the profit sharing ratio. The capital accounts of X and Z after all adjustments on the date of retirement showed balances of Rs. 1,45,000 and Rs. 63,000 respectively. State the amount of actual cash to be brought in or to be paid of partners.

LONG ANSWER TYPE QUESTIONS (6 & 8 MARK)

1) The Balance Sheet of A and B who share profits in the ratio of 3:1 as on 31.3.2012, is as follows:

On 31st March, 2012 C was admitted into partnership for 1/5th share on the following terms: a) C pays 10,000 as his capital for one fifth share, and 5,000 for Goodwill. Half of sum is to be

withdrawn by A and B. b) Stock and Fixtures be reduced by 10% and a 5% Provision for Doubtful Debts be created on

Sundry Debtors and Bills Receivable. c) The value of Land and Buildings be appreciated by 20% d) There being a claim against the firm for damages, liabilities to the extent of? 1,000 should be

created. e) An item of 650 included in sundry creditors is not likely to be claimed and hence should be

written back. Pass the necessary journal entries and prepare the Balance Sheet of the reconstituted firm.

Liabilities Assets Creditors 41,500 Cash at Bank 26,500

A's Capital 33,000 Bills Receivable 3,000

B's Capital 17,000 Debtors 16,000

Stock 20,000

Furniture &Fixtures 1,000

25,000

91.500 91.500

69

2) On 31st March 2012, the Balance Sheet of Ram and Shyam, who were sharing profits in the ratio of 3:1 was as follows:

Liabilities Assets Creditors 2,800 Cash at Bank 2,000

Employees' Provident Fund 1,200 Debtors 6,500

General Reserve 2,000 Less: Provision 500 6,000

Ram's Capital 6,000 Stock 3,000

4,000 5,000

16,000 16,000

They decided to admit Mohan on that date for 1/5th share on the following terms: a. Mohan shall bring 6,000 as his share of premium. b. Unaccounted accrued income of 100 be provided for. c. The market value of investments was 4,500. d. A debtor whose dues of 500 were written off as bad debts paid 400 in full settlement. e. Mohan to bring capital to the extent of l/5 of the total capital of the new firm.

Prepare the Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the new firm.

3) A and B were partners of a firm sharing profits in the ratio of 3:2. They admitted C as a new partner for 1/6th share in the profits. C was to bring 140,000 as his capital and the capitals of A and B were to be adjusted on the basis of C's capital having regard to profit-sharing ratio. The Balance Sheet of A and B as at 31st March, 2012 was:

Liabilities Assets Creditors 36,000 Cash 10,000

Bills Payable 20,000 Debtors 34,000

General Reserve 24,000 Stock 24,000

A's Capital 1,50,000 Machinery 42,000

80,000 2,00,000

3.10,000 3,10.000

The other terms of agreement on C's admission were: a) C will bring 12,000 for his share of Goodwill. b) Building will be valued at 1,85,000 and Machinery at 40,000. c) A provision of 6% will be created on Debtors for doubtful debts. d) Capital Accounts of A and B will be adjusted by opening Current Accounts.

Prepare the Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the new firm.

4) P and S were partners in a firm sharing profits in the ratio of 3:2. Their Balance Sheet on 31.3.2012 was as follows:

Liabilities Assets Bank Overdraft 20,000 Cash 8,000

70

Creditors 30,000 Debtors 30,000

Provision for Doubtful Debts 1,000 Bills Receivable 40,000


V's Loan 20,000 Building 90,000

P's Capital 1,00,000 Land 1,48,000

1,80.000

3.66.000 3.66.000

On 1.4.2012, they admitted V as a new partner on the following conditions: a) V will get l/8th share in the profits of the firm. b) V's loan will be converted into his Capital. c) The goodwill of the firm was valued at X 80,000 and V brought his share of goodwill premium

in cash. d) Provision for doubtful debts was to be made equal to 5% of the debtors. e) Stock was to be depreciated by 5%. f) Land was to be appreciated by 10%.

Prepare Revaluation Account, Capital Accounts of the partners and the Balance Sheet of the new firm as on 1.4.2001.

5) X and Y are partners as they share profits in the proportion of 3:1 their balance sheet as at 31.03.17 as follows.

BALANCE SHEET As on 31.3.17

Liabilities Rs. Assets Rs.

Capital Account Land 1,65,000 X 1,76,000 Furniture 24,500 Y 1,45,200 Stock 1,32,000

Creditors 91,300 Debtors 35,200 Bills Receivable 28,600 Cash 27,500

4,12,500 4,12,500

On the same date, Z is admitted into partnership for 1/5th share on the following terms:

a) Goodwill is to be valued at 3½ years purchase of average profits of last for year which was Rs. 20,000 Rs. 17,000 Rs. 9,000 (Loss) respectively.

b) Stock is fund to be overvalued by Rs. 2,000 Furniture is reduced and Land to be appreciated by 10% each, a provision for Bad Debts @ 12% is to be created on Debtors and a Provision of Discount of Creditors @ 4% is to be created.

c) A liability to the extent of Rs. 1,500 should be created for a claim against the firm for damages.

d) An item of Rs. 1,000 included in Creditors is not likely to be claimed, and hence it should be written off.

Prepare Revaluation Account, Partners: Capital Accounts and Balance Sheet of the new firm if Z is to contribute proportionate capital and goodwill. The capital of partners is to be in profit sharing ratio by opening current Accounts.

71

6) A, B and C are equal partners in a firm, their Balance Sheet as on 31st March 2017 was as follows:


Sundry Creditors 27,000 Goodwill 1,17,000 Employees Provident Fund

6,000 Building 1,25,000

Bills Payable 45,000 Machinery 72,000 General Reserve 18,000 Furniture 24,000 Capitals: Stock 1,14,000

A 2,17,000 Bad Debts 1,02,000 B 1,66,000 Cash 12,000 C 90,000 Advertisement

Suspense A/c 3,000

5,69,000 5,69,000

On that date they agree to take D as equal partner on the following terms: a. D should bring in Rs. 1, 60,000 as his capital and goodwill. His share of goodwill is valued at Rs. 60,000.

b.Goodwill appearing in the books must be written off. c.Provision for loss on stock and provision for doubtful debts is to be made at 10% and 5% respectively.

d.The value of building is to taken Rs. 2,00,000. e.The total capital of the new firm has been fixed has been fixed at Rs. 4,00,000 and the partners capital accounts are to be adjusted in the profit sharing ratio. Any excess/Deficit is to be transferred to current account.

7) Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintanis

admitted into the firm with 1/4 share in profits. Chintan will bring in Rs.30,000 as his capital

and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance

Sheet of Azad and Babli as on December 31, 2006 (before Chintan's admission) was as

follows:

72

Dr. Balance Sheet as at 31-12-2015 Cr.


Creditors

Bills payables

General Reserve

Capital accounts:

Azad 50,000

Babli 32,000

8.000 4,000

6,000

82,000

Cash in hand

Cash at Bank

Sundry Debtors

Stock

Furniture

Machinery

Building

2,000

10,000 8,000 10,000 5,000 25,000

40,000

1,00,000 1,00,000

It was agreed that: a) Chintan will bring in Rs.12,000 ashish are of good will premium. b) Buildings were valued at Rs.45,000 and Machinery at Rs.23,000. c) A provision for doubtful debts is to be created @ 6% on debtors. d) The capital accounts of Azad and Babli are to be adjusted by opening current

accounts. Record necessary journal entries, show necessary ledger accounts and prepare the Balance Sheet after admission.

8) Dinesh, Ramesh and Suresh are partners in a firm sharing profits and losses in the ratio of

3:3:2. They decided to share the profits equally w.e.f. April 1, 2015. Their Balance Sheet as on

March 31, 2015 was as follows:


Creditors

General

Reserve

Partners'Loan:

Dinesh 40,000

Ramesh 30,000

P's Capital accounts:

Dinesh 1,00,000

Ramesh 80,000

Suresh 70,000

1,50,000

80,000

70,000

2,50,000

Cash at Bank

Bills Receivables

Sundry Debtors

Stock

Fixed Assets

40,000

50,000

60,000

1,20,000

2,80,000

5,50,000 5,50,000

It was also decide that:

73

1. The fixed assets should be valued at Rs.3,31,000.

2. A provisions of 5% on sundry debtors be made doubtful debts.

3. Goodwill of the firm is valued at Rs 90,000.

4. The value of stock be reduced to Rs 1,12,000.

Prepare Revaluation a/c, partners' capital a/cs and Balance Sheet.


1. X, Y and Z after completing their computer engineering decided to start the business developing computer software's. They entered into partnership for this purpose on 1st April 2013. Identify any four values which motivated them to form the partnership firm.

2. Aamir from Lucknow and Rajnikant of Chennai formed a partnership to sell ISI marked electronic goods to weaker sections of the society at low rates, sharing profits in the ratio of 3:1. After two years they decided to include Julie who has completed her graduation five years ago but still unemployed as a third partner without contributing any capital. Identify four values which motivated them to form a partnership firm.

3. A and B were partners in a firm sharing profits and losses in the ratio of 3 : 2. They admitted C as a new partner for 3/7th share in the profits and the new profit sharing ratio will be 2 : 2 : 3. C bought tRs. 2,00,000 as his capital and Rs. 1,50,000 as premium for goodwill. Half of their share of premium was withdrawn by A and B from the firm. Calculate sacrificing ratio and pass necessary journal entries for the above transactions in the books of the firm.

4. A and B were partners in a firm sharing profits in the ratio of 4 : 3. They admitted C as a new partner for 3/7th share in the profits of the firm. The new profit sharing ratio will be 2 : 2 : 3. C brought Rs. 2,00,000 as his capital and Rs. 60,000 for his share of premium as goodwill, half of which was withdrawn by A and B from the firm. Calculate sacrificing ratio and pass necessary journal entries in the books of the firm for the above transactions

5. A and B were partners in a firm sharing profits and losses in the ratio of 5 : 3. They admitted C as a new partner. A surrendered l/3rd of his share in favour of C and B surrendered 1/4 th of his share in favour of C. C brought Rs. 1,50,000 for his capital and Rs. 58,000 for his share of goodwill. Calculate new profit sharing ratio of A, B and C, sacrificing ratio of A and B and pass necessary journal entries for the above transactions on C’s admission.

6. K and Y were partners in a firm sharing profits in 3 : 2 ratio. They admitted Z as a new partner for l/3rd share in the profits of the firm. Z acquired his share from K and Y in 2 : 3 ratio. Z brought Rs. 80,000 for his capital and Rs. 30,000 for his l/3rd share as premium. Calculate the new profits sharing ratio of K, Y and Z and pass necessary journal entries for the above transactions in the books of the firm.

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CHAPTER-6RETIREMENT AND DEATH OF A PARTNER

SYNOPSIS

Gaining ratio: new share- old share

• Treatment of Goodwill:

1) Goodwill already existing in the balance sheet: write off by passing an entry:

Partners’ Capital A/c …Dr.

To Goodwill A/c ( old ratio)

2) For compensating the retiring partner:

Gaining Partners’ Capital A/c …Dr.

To Sacrificing Partners’ Capital A/c ( gaining ratio) 3) If any non retiring partner is also sacrificing, his capital account will also be credited along

with the retiring partner’s capital account. Share of goodwill to be calculated on the basis of the exact fraction of the sacrifice made by him.

• Revaluation of assets and liabilities: Profit or loss to be distributed to all the partners in OLD RATIO.

• Reserves and accumulated profits/ Losses To be distributed amongst all the partners in OLD RATIO.

• Workmen’s compensation reserve: 1) If no claim on the compensation: W C Reserve to be distributed amongst all partners in their old ratio. 2) If the claim is less than the amount of reserve: Distribute the remaining amount amongst the partners in OLD RATIO.( reserve-claim) Amount of claim to be shown in the Balance Sheet. 3) If the claim is more than the amount of W C Reserve: the excess of claim over the reserve Amount to be written in the Revaluation A/c & the total amount of claim to be shown in the Balance Sheet. Nothing to be distribute to the partners. • Amount due to the retiring partner: to be transferred to the retiring partner’s Loan A/c , if nothing is specified.

• Adjustment of capitals: 1) When total capital of the new firm is given: a) Calculate the new ratio of the remaining partners

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b) Calculate the proportion of the capital of the remaining partners on the basis of their new share in profit. i.e. total capital * new share in profit c) Find out the surplus or deficit by comparing the proportionate capital and the present adjusted capital d) Balance the 2 sides of capital A/c by Cash or Current A/c. 2) When total capital of the new firm is not given a) Calculate the adjusted capitals of the remaining partners. b) Calculate total capital of the firm= total adjusted capital c) Calculate the new capitals of the partners by dividing the total capital in new profit sharing ratio. d) Find out the surplus or deficit by comparing the proportionate capital and the present adjusted capital e) Balance the 2 sides of capital A/c by Cash or Current A/c. 3) When the retiring partner is to be paid through cash brought in by the remaining partners in a manner to make their capitals proportionate to their new profit sharing ratio. a) Calculate the adjusted capitals of the remaining partners. b) Calculate total capital of the firm= total adjusted capital of the remaining partners + shortage of cash to be brought in by the continuing partners to pay the retiring partners. c) Calculate the new capitals of the partners by dividing the total capital in new profit sharing ratio. d) Find out the surplus or deficit by comparing the proportionate capital and the present adjusted capital e) Balance the 2 sides of capital A/c by Cash or Current A/c

DEATH OF A PARTNER: ** Accounting procedures on the death of a partner are similar to that of retirement of a partner ( treatment of Goodwill, Revaluation of Assets, transfer of Reserves and losses) 1) At the time of closing the deceased partner’s capital account, the balance to be transferred to the Deceased Partner’s Executors Account. 2) Payment to be made to the executor, not to the deceased partner. 3) Payment to be made in the installments- interest @6% to be provided if nothing specified. 4) Profit to the deceased partner: a) Time basis Eg, The profit of the previous year is Rs. 24,000. A partner dies after two months of the close of the previous year. The profits for the two months will be 24000/12=4,000.

If the deceased partner took 3/10 share of profits, his share till date of death= 3/10 * 4,000=1,200.

b) Turnover basis

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Eg., A partner dies on June 1, 2015; Accounts closed last on March 31,2015. The profit till the date of death will be ascertained on the basis of sales, assuming profits for the year ended 31.3.16 will be same as for the year ended 31.3.2015. Suppose, Sales for the year ended 31.3.15 1,20,000 Profit for the year ended 31.3.15 24,000 Sales till June1, 2015 30,000 Then, Ratio of Profit to Sales= Profit/sales X 100=24,000/1,20,000 X 100= 20 %. Profit for the period till june1, 2015= 20 % of 30,000= 6,000. If deceased partner’s share=1/4 His share of profit = ¼ X 6,000= 1500.

CONCEPT BASED EXERCISES MCQ’s/ VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)

Q. 1 P, Q and R are partners sharing profits in the ratio of 8:5:3. P retires. Q takes 3/16th share from P and R takes 5/16th share from P. What will be the new profit sharing ratio?

a) 1:1 b) 10:6 c) 9:7 d) 5:3

Q. 2 X, Y and Z are partners sharing profits and losses in the ratio of 4:3:2. Y retires and surrenders 1/9th of his share in favour of X and the remaining in favour of Z. The new profit sharing ratio will be:

a) 1:8 b) 13:14 c) 8:1 d) 14:13

Q.3 Gaining ratio is used to distribute ------------------in case of retirement of a partner. a) Goodwill b) Revaluation Profit orLoss c) ProfitandLossAccount(CreditBalance) d) Both b andc

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Q. 4 X, Y and Z are partners in a firm. Y retires and his claim including his capital and his share of goodwill is R. 1,20,000. He is paid partly in cash and partly in kind. A vehicle at Rs.60,000 unrecorded in the book soft he firm and the balance in cash is given to him to settleh is account.The amount of cash to be paid to Y will be:

a) Rs.80,000 b) Rs.60,000 c) Rs.40,000 d) Rs.30,000

Q. 5 At the time of retirement of a partner, share of retiring partner’s goodwill will be creditedto CapitalAccount(s). a) RemainingPartner(s) b) RetiringPartner’s c) Both Sacrificing and GainingPartner(s) d) GainingPartner(s) Q. 6 A and B were partners. They shared profits as A- ½; B- 1/3 and carried to reserve 1/6. B died. The balance of reserve on the date of death was Rs. 30,000. B’s share of reserve will be:

a) Rs. 10,000 b) Rs. 8,000 c) Rs. 12,000 d) Rs. 9,000

Q.7 If good will is already appearing in the books of account sat the time of retirement, then it should be written off in --------------- --. a) NewRatio b) GainingRatio c) SacrificingRatio d) OldRatio Q. 8 As per Section 37 of the Indian Partnership Act, 1932,interest@ ------------------- ispayable to the retiring partner if full or part of his dues remain unpaid. a) 9%p.m. b) 12% p.m. b) 6%p.m. c) None of theabove Q. 9 “Retiring partner is not liable for firm’s acts after his retirement”. Is the statement

True or False?

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Q. 10 A, B and C were partners. Their partnership deed provided that they were to share profits as; A 26 per cent; B 34 per cent; C 40 per cent ; and that if a partner retires, his capital should remain in the business for a stated period at a fixed rate of interest, but that the retiring partner’s share should be credited with an amount for Goodwill, based upon one and a half year’s average profits, for the five years prior to his death, but be subject to deduction of 5 per cent from the book debts. C retired, and the profits of the firm for five years were agreed at Rs. 20,000 Rs.30,000;Rs.15,000(loss);Rs.5,000(loss);andRs.45,000 respectively.Book Debts stood at Rs.90,000.The share of Good will to be credited to C’s Account will be: a) Rs.2,700 b) Rs.6,300 c) Rs.7,200 d) Rs.3,600

Q. 11 When the balance sheet is prepared after retirement (subsequent to preparation ofRevaluationAccount), ------------------------ values are shown init. a) Historical b) Realisable c) Market d) Revalued Q.12Onretirementofapartner,debtorsofRs.34,000wereshownintheBalancesheet. Out of this Rs. 4,000 became bad. One debtor became insolvent. 70% were recovered from him out of Rs. 10,000. Full amount is expected from the balance debtors. On account of this item loss in revaluation account willbe:

a) Rs. 10,200 b) Rs.3,000 c) Rs.7,000 d) Rs.4,000

Q. 13 If at the time of retirement, there is some unrecorded asset, it will be ------------- to -- ----------- Account. a) Debited, Revaluation b) Credited,Revaluation c) Debited,Goodwill d) Credited, Partners’Capital Q. 14 Anil, Bimal and Chetan are partners sharing their profits and losses in the ratio of 4:3:2.On 1.7.2013,Chetan retired and on that date the capital so f Anil, Bimal and Chetan

after all necessary adjustments stood at Rs. 75,000, Rs. 65,000 and Rs. 45,000 respectively.

Anil and Bimal continued to carry the business for 6 months without settling Chetan’s

account. During the period of six months ending 31st December,2013, a profit of Rs. 50,000 is

earned by the firm. Keeping Chetan’s interest in mind,the amount payable toChetan will be:

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a) Rs. 1,350 b) Rs.13,362 c) Rs.12,162 d) Rs. 1,362 Q.16 Retiring partner is compensated for parting with the firm’s future profits in favour

of remaining partners. The remaining partners contribute to such compensation

amount in:

a) GainingRatio b) SacrificingRatio c) CapitalRatio d) Profit SharingRatio Q. 17 As per section ------------ of the Indian Partnership Act, a retiring partner becomes

entitled to profits after retirement if his dues remain unpaid

a) Section73 b) Section26 c) Section4 d) Section37 Q. 18 At the time of retirement, amount remaining in Investment Fluctuation Reserve after meeting the fall in value of Investment is: a) Credited in SacrificingRatio b) Credited in New Profit SharingRatio c) Credited in Old Profit SharingRatio d) Credited in GainingRatio Q. 19 P, Q and R were partners in a firm in the ratio of 5:4:3. They admit S for 1/7 share. It is agreed that Q would retain his original share. ----------- will be the sacrificing ratio between P and R. a) 5:4 b) 1:1 c) 5:3 d) 4:3 Q-20 Anaccount operated to as certain the loss or gain at the time of death of a

Partner is called

a) Realisation Account b) Executors Account c) Revaluation Account d) Deceased Partners capital account

Q-21 A,Band Care partners in a firm sharing profits and losses in the ratio of 2:2:1. On

March, 31,2018 Cdied. Account sare closed on December31st every year. The sales for the

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year 2017 was Rs. 6,00,000 and the profits were Rs. 60,000.The sales for the period for the

period January 1,2018 to March 31st2018 were Rs.2,00,000. The share of deceased Partner

in the current year’s profit on the basis of sales is

a) Rs.20,000 b) Rs.8,000 c) Rs.3,000 d) Rs.4,000

Q-22 A,BandC were partners sharing profits and losses in the ratio of 2:2:1.Books are

closed on 31st March every year.C died on November 5,2018. Under the Partnership deed

the executor softhed eceased partner are entitled to his share of profit to the date of death

calculated on the basis of last year’s profit .Profit fo rthe year ended 31stMarch,2018 was

Rs.2,14,000.C’s share of profit will be

a) Rs.28,000 b) Rs.32,000 c) Rs.28,800 d) Rs.48,000

Q-23 On death of a Partner, the remaining partner(s) who have gained due to change in profit

sharing ratio should compensate the

a) Deceased partneronly b) Remainingpartners(whohavesacrificed)aswellasdeceasedpartner c) Remainingpartnersonly(whohavesacrificed) d) None of theabove

Q-24 Which account is opened to transferd eceased partner’s share of profit to his capital

account

a) P&L Adjustmentaccount b) P&L Appropriationaccount c) P&L Suspenseaccount d) None of theabove Q-25 Kiran, umesh and Aditya were in Partnership firm.Suddenly on October 31,2018, Kiran

died. Amount payable to her on that date amounted to Rs.1,05,000.Rs.5000 was paid

immediately and balance was paid in 4 equal annual in stalments along with interest @12%

p.a. starting from 31st October 2019. Calculate the interest due a son 31stMarch,2019.

Financialy ear was followed as accounting year by the firm.

a) Rs.2,500 b) Rs.3,000 c) Rs.4,500 d) Rs.3,750

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Q-26 Karan ,Aman and Girish were Partners with capital sof Rs.3,00,000’;Rs.2,50,000 and

Rs.2,00,000 respectively as on31st March, 2018. Aman died, partners decided to pay the entire

amount to Aman’s Execut or but they only hadRs.50,000 cash and rest of the amount was to

be brought in by Karan and Girish in such a way that their future capital will be equal.

Calculate the amount to be brought in by Karan and Girish.

a) Rs.50,000 by Karan and Rs.1,50,000 by Girish b) Rs.50,000 by Girish and Rs.1,50,000 by Karan c) Rs.25,000 by Karan and Rs.1,25,000 by Girish d) Rs.25,000 by Girish and Rs.1,25,000 by Karan


1. What are the different ways in which a partner can retire from the firm. 2. Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3 : 2 : 1. Manisha retires and goodwill of the firm is valued at Rs. 1,80,000. Aparna and Sonia decided to share future in the ratio of 3 : 2. Pass necessary journal entries 3. Distinguish between sacrificing ratio and gaining ratio. 4.X, Y and Z are partners in a firm sharing profits and losses in the ratio of 5:4:1.The Partnership agreement provides that the share of profit of the deceased partner will be worked out on the basis of sales. The sales for the year 2009-10 was Rs 8,00,000 and the sales from April 1, 2010 to June 30, 2010 was Rs 1,50,000. The profit for the year ended 31st March 2010 amounted to Rs 1,00,000. Y died on 30th June 2010. Calculate his share of profit and pass necessary journal entry.

5.A, B and C were partners sharing profits in the ratio of 2:2:1. B retires on January 1, 2016 with A

and C agreeing to share the profits in future in the ratio of 3:2.Goodwill of the firm is Rs. 75000.

Pass necessary journal entry.

6.Roman, Preet and Sanjayare partners with equal profit sharing ratio. Roman decided to retire

from the firm and new ratio is fixed as 5:3.Share of Goodwill of Roman 80000..Pass necessary

journal entry

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1. Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3 : 2 : 1. On March 31, 2007, Naman retires. The various assets and liabilities of the firm on the date were as follows: Cash Rs. 10,000, Building Rs. 1,00,000, Plant and Machinery Rs. 40,000, Stock Rs. 20,000, Debtors Rs. 20,000 and Investments Rs. 30,000. The following was agreed upon between the partners on Naman’s retirement: (i) Building to be appreciated by 20%. (ii) Plant and Machinery to be depreciated by 10%. (iii) A provision of 5% on debtors to be created for bed and doubtful debts. (iv) Stock was to be valued at Rs. 18,000 and Investment at Rs. 35,000. Record the necessary journal entries to the above effect and prepare the revaluation account.

2. Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2 : 2 : 1. Their Balance Sheet as on March 31, 2015 was as follows:

Liabilities Amount(Rs.) Assets Amount(Rs.) Creditors Reserves Digvijay’s Capital Brijesh’s Capital Parakaram’s Capital

49,000 18,500 82,000 60,000 75,500

Cash Debtors Stock Buildings Patents

8000 19,000 42,000 2,07,000 9,000

2,85,000 2,85,000

Brijesh retired on March 31, 2015 on the following terms: (i) Goodwill of the firm was valued at Rs. 70,000 and was not to appear in the books. (ii) Bad debts amounting to Rs. 2,000 were to be written off. (iii) Patents were considered as valueless.

Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh’s retirement.

3. Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on December 31, 2015 was as follows : Balance Sheet at December 31, 2015

Liabilities Amount(Rs.) Assets Amount(Rs.)

Creditors Reserve Fund Capitals: Nithya 30,000 Sathya 30,000 Mithya 20,000

14,000 6,000

80,000

Investments Goodwill Premises Patents Machinery Stock Debtors Bank

10000 5,000 20,000 6,000 30,000 13,000 8,000 8,000

1,00,000 1,00,000

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Mithya dies on May 1, 2015. The agreement between the executors of Mithya and the partners stated that : (a) Goodwill of the firm be valued at 2.5 times the average profits of last four years. The profits of four years were : in 2011, Rs.13,000; in 2012, Rs.12,000; in 2013, Rs.16,000; and in 2014, Rs.15,000. (b) The patents are to be valued at Rs.8,000, Machinery at Rs.25,000 and Premises at Rs.25,000. (c) The share of profit of Mithya should be calculated on the basis of the profit of 2002. (d) Rs.4,200 should be paid immediately and the balance should be paid in 4 equal half-yearly instalments carrying interest @ 10%. Record the necessary journal entries to give effect to the above and write the executor’s account till the amount is fully paid. Also prepare the Balance Sheet of Nithya and Sathya as it would appear on May 1, 2002 after giving effect to the adjustments. 4. A, Band C were partners in a firm sharing profits equally: Their Balance Sheet on.31.12.2007

stood as: BALANCE SHEET AS AT 31.12.07 Liabilities Rs. Assets Rs. A Rs. 30,000 Goodwill 18,000 B Rs. 30,000 Cash 38,000 C Rs. 25,000 85,000 Debtors . 43,000 Bills payable 20,000 Less: Bad Debt provision 3,000 40,000 Creditors 18,000 Bills Receivable 25,000 Workers Compensation Fund 8,000 Land and Building 60,000 Employees provide4nt Fund 60,000 Plant and Machinery 40,000 General Reserve 30,000 2,21,000 2,21,000

It was mutually agreed that C will retire from partnership and for this purpose following terms were agreed upon.

i) Goodwill to be valued on 3 years’ purchase of average profit of last 4 years which were 2004 : Rs.50,000 (loss); 2005 : Rs. 21,000; 2006: Rs.52,000; 2007 : Rs.22,000.

ii) The Provision for Doubtful Debt was raised to Rs. 4,000. iii) To appreciate Land by 15%. iv) To decrease Plant and Machinery by 10%. v) Create provision of Rs;600 on Creditors. vi) A sum of Rs.5,000 of Bills Payable was not likely to be claimed. vii) The continuing partners decided to show the firm’s capital at 1,00,000 which would be

in their new profit sharing ratio which is 2:3. Adjustments to be made in cash Make necessary accounts and prepare the Balance Sheet of the new partners. 5. Following is the Balance sheet of P , Q and R as on 31st December 2010 sharing profits in the ratio of 5:3:2.

Particulars Rs Particulars Rs

Capital Accounts Cash 13000

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P 30000 Debtors 8000

Q 25000 Machinery 30000

R 15000 Stock 10000

Creditors 7000 Patents 6000

Reserve Fund 10000 Building 20000

87000 87000

P died on 1st July 2011 on the following terms-

i) Patents are to be valued at Rs 8000, Machinery at Rs 28000 and Building at Rs 30,000. ii) Interest on Capital is to be provided at 10% p.a. iii) Goodwill of the firm is valued at 2 years purchase of the average profits of the last five

years which were- 2006 - Rs 15,000 2007 – Rs 13000 2008 – Rs 12,000 2009—15,000 and 2010--- Rs 20,000

iv) Profit for the year 2011 has been accrued on the same scale as in 2010. v) P’s Executor is to be paid Rs 11,500 and balance transferred to his loan account.

Prepare Revaluation Account, P’s Capital account and P’s executors account.Also pass necessary journal entries.

6. L, M and N were partners sharing profits and losses in the ratio of 5:3:2. On 31st March 2016

their Balance Sheet was as under:


Capitals:

L 1,50,000

M 1,25,000

N 75,000

General Reserve

Creditors

3,50,00

30,000

1,50,000

Property

Patents

Machinery

Stock

Bank

1,20,000

30,000

1,50,000

1,90,000

40,000

5,30,000 5,30,000

N retired on 31st March 2016 and it was agreed that:

(i) Goodwill of the firm is to be valued at Rs.2, 00,000.

(ii) Machinery be valued at Rs.1, 40,000; Patents at Rs.40, 000 and Property at Rs.1, 50,000 on

this date.

Prepare partners' Capital Account and Revaluation Account and balance sheet.

7. Sachin, Virat and Kaif were partner in the firm. Virat retired on March31, 2016. All revaluation

and goodwill adjustments were made and his claim came to be Rs. 320000. The amount has been

transferred to Virat's Loan a/c. Prepare loan a/c

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i). If the amount is paid in four equal instalments plus interest @12%.

ii). If they pay on instalment of Rs. 140000 at the end of year including interest on outstanding

balance of the first two years and the balance including interest on third year.


1) Mohit, Neeraj and Sohan are partners in a firm sharing profits in the ratio of 2 : 1 : 1. Neeraj retires and Mohit and Sohan decided that the capital of the new firm will be fixed at Rs. 1,20,000. The capital accounts of Mohit and Sohan show a credit balance of Rs. 82,000 and Rs. 41,000 respectively after making all the adjustments. Calculate the actual cash to be paid off or to be brought in by the continuing partners and pass the necessary journal entries. 2) Vijay, Ajay and Mohan are friends. They passed B. Com. (Hons) from Delhi University in June, 2013. They decided to start the business of computer hardware. On Ist of August, 2013, they introduced the capital of Rs. 50,000, Rs. 30,000 and Rs. 20,000 respectively and started the business in partnership at Delhi. The profit sharing ratio decided between there was 4:2:1. The business was running successfully. But on Ist February, 2016, due to certain unavoidable circumstances and family circumstances, Ajay decided to settle in Pune and decided to retire from the partnership on 31st March, 2017; with the consent of partners, Ajay retires as on 31st March, 2017, the position of assets and liabilities are as follows: Balance Sheet of Vijay, Ajay and Mohan as on March 31, 2013

Liabilities Amount(Rs.) Assets Amount(Rs.) Capital Accounts : Vijay 1,80,000 Ajay 1,20,000 Mohan 1,00,000 Bills Payable General Reserve Creditors

4,00,000 12,000 42,000 90,000

Goodwill Stock Debtors Land and Buildings Machinery Motor Van Cash at bank

56,000 90,000 66,000 1,20,000 1,59,000 31,000 22,000

5,44,000 5,44,000

On the date of retirement, the following adjustments were to be made: 1. Firm’s goodwill was valued at Rs. 1,48,000. 2. Assets and Liabilities are to be valued as under:Stock Rs. 72,000; Land and Buildings Rs. 1,35,600; Debtors Rs. 63,000; Machinery Rs. 1,50,000; Creditors Rs. 84,000. 3. Vijay to bring Rs. 1,20,000 and Mohan Rs. 30,000 as additional capital. 4. Ajay was to be paid Rs. 97,200 in cash and the balance of his Capital Account to be transferred to his Loan Account Work out the amount due to Ajay and state as to how will you settle his account ? 3) X, Y and Z are partners sharing profits and losses in the ratio of 2:2:1 respectively. Their Balance Sheet as on 31st march 2007 was as follows—

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Balance Sheet as on 31/03/10

Liabilities Rs Assets Rs

Sundry Creditors 1,00,000 Cash at bank 20,000

Capital Accounts Stock 30,000

X 60,000 Sundry Debtors 80,000

Y 1,00,000 Investments 70,000

Z 40,000 Furniture 35,000

General Reserve 50,000 Buildings 1,15,000

3,50,000 3,50,000

Z died on 30th September 2007 and the following was provided—

a) “Z” will be entitled to his share of profit upto the date of death based on last year’s profit. b) Z’s share of Goodwill will be calculated on the basis of 3 years purchase of average profits

of last four years . The profits of the last four years was as follows— Year I – 80,000, Year II –Rs 50,000 Year III – Rs 40,000 and Year IV –Rs 30,000

c) Interest on Capital was provided at 12% p.a. d) Drawings of the deceased partner upto the date of death was Rs 10,000. e) Rs 15,400 should be paid immediately to the executor of the deceased partner and the

balance in four equal yearly instalments with interest at 12% on remaining balance. Prepare Z’s capital account and Z’s executors account till the account is finally closed.

4) Arti, Bharati and Seema are partners in a firm sharing profits in the proportion of 3:2:1. Their Balance

Sheet as on31st of March, 2013 stood as follows:

Particulars (Rs) Particulars (Rs)

Bills payable 12,000 Buildings 21,000

Creditors 14,000 Cash in hand 12,000

General Reserve 12,000 Cash lit Bank 13,700

Capital Accounts: Debtors 12,000

Arti 20,000 Bills Receivable 4,300

Bharti 12,000 Stock 1,750

Seema 8,000 Investment 13,250

78,000 78,000

Bharati died on 30th June, 2013 and according to the deed of the said partnership her executors are

entitled to be paid as under:

(i) The capital to her credit at the time of her death and interest thereon “10% per annum.

(ii) Her proportionate share of general reserve.

(iii) Her share of profits for the intervening period will be based on the sales during that period. Sales

were calculated as Rs. 1,20,000. The rate of profit during past three years had been10% on sales.

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(iv) Goodwill according to her share of profit to be calculated by taking twice the amount of profits of

the last three years less 20%. The profits of the previous three years were:

2000-2001 Rs. 8,200

2001-2002 Rs. 9,000

2002-2003 Rs. 9,800

The investments were sold at par and her executors were paid out.

Prepare Bharti's Capital Account and her Executor's Account.

5) A, B and C were partners in a firm sharing profits in the ratio of 5:3:2. On 31st March, 2015

their Balance sheet was as under:


Creditors

Reserves

A’s Capital

B’s Capital

C’s Capital

7,000

10,000

30,000

25,000

15,000

Buildings

Machinery

Stock

Patents

Cash

20,000

30,000

10,000

6,000

21,000

87,000 87,000

C died on Ist October, 2015. It was agreed between his executors and the remaining

partners that:

(a) Goodwill be valued and 2 years' purchase of the average profits of the previous five

years, which were 2011: Rs. 15,000: 2012: Rs. 13,000; 2013; Rs. 12,000; 2014: Rs.

15,000 and 2015: Rs. 20,000.

(b) Patents be valued at Rs. 8,000; Machinery at Rs. 28,000; Buildings at Rs. 30,000.

(c) Profit for the year 2005-06 be taken as having accrued at the same rate as the

previous year.

(d) Interest on capital be provided at 10% p.a

(e) A sum of Rs. 7,750 was paid to his executors immediately.

Prepare C's capital account and his executors account at the time of his death.

6) The balance sheet of A, B and C who were sharing profits and losses in the ratio of 1/2, 1/3 and

1/6 respectively, was as follows on 1st April, 2004

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A retired from the business on 1st April, 2004 and his share in the firm was to be ascertained on

the revaluation of the assets as follows

Stock Rs. 20,000; furniture Rs. 3,000; plant and machinery Rs. 9,000; building Rs. 20,000; Rs. 850

was to be provided for doubtful debts. The goodwill of the firm was valued at Rs. 6,000.

A was to paid Rs. 11,500 in cash on retirement and the balance in three equal yearly instalments

with interest at 9% per annum.

Prepare revaluation account, partners’ capital account and As loan account on the date of his

retirement.

CHAPTER-7 DISSOLUTION OF A PARTNERSHP FIRM

SYNOPSIS

Meaning of dissolution of partnership firm

Dissolution of partnership firm means that the firm closes down its business and comes to an end.

On the dissolution of partnership firm, assets of the firm are sold and liabilities are paid off and

out of remaining amount the accounts of partners are settled.

Thus, in case of dissolution of partnership, the firm may continue i.e. it does not mean the

dissolution of firm. But in case of dissolution of the firm, the partnership is automatically

dissolved.

Modes of dissolution of partnership firm:-

1) By mutual Agreement (Sec. 40)

2) Compulsory Dissolution (Sec. 41)

3) On Happening of an event (Sec. 42)

4) By Notice (Sec. 43)

5) By order of the Court (Sec. 44)

Difference between Realisation Account and Revaluation Account.

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Realisation A/c is prepared at the time of dissolution of firm and Revaluation A/c is prepared at

the time of admission/retirement or death of a partner.

Accounts prepared at the time of dissolution of partnership firm

1. Realisation a/c

2. Partner's Loan a/c

3. Partners' capital a/c

4. Cashor Bank a/c

1) For closing the Assets A/c- transfer all assets except cash, bank and fictitious assets to the realization A/c. Realisation A/c …Dr. To Assets A/c

Debtors & Provision for doubtful debt : transfer Debtors on the debit side of the Realisation A/c and Provision for doubtful debt on the credit side.

2) For closing the Liabilities: Transfer all external liabilities to Realisation A/c. Liabilities A/c …Dr. To Realisation A/c

Reserves

Reserves or Funds related to any asset appearing in the Balance Sheet- To be transferred to the Realisation A/c like Investment Fluctuation Reserve, Workmen compensation reserve

No liability against WCR: credited to Partners Capital Account WCR A/c Dr Partners’ capital A/c

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Liability Against WCR is less than WCR: amount of Liability Against WCR transferred to Realisation Account & the balance credited to Partners Capital Account WCR A/c Dr Realisation A/c Partners’ capital A/c

Liability Against WCR is equal to WCR: WCR A/c Dr Realisation A/c

Liability Against WCR is more than WCR: WCR A/c Dr Realisation A/c Realisation A/c Dr (amount of liability) Cash A/c

Other reserves/ losses - to be taken to Partners’ Capital accounts

3) For realization of assets: (recorded or unrecorded) a) Assets sold for cash-(to an outsider or a partner) Cash A/c Dr. To Realisation A/c b) Asset taken over by a partner: Partner’s Capital A/c …Dr. To Realisation A/c c) Asset given to a creditor for payment of his dues: No Entry 4) For settlement of Liabilities: (recorded or unrecorded) a) Payment of the liabilities: Realisation A/c Dr. To Cash A/c b) Partner agrees to settle a liability: Realisation Dr. To Partner’s Capital A/c 5) After transferring all the assets and liabilities and settlement of accounts, CHECK IF ANY ASSET OR LIABILITY IS LEFT FOR THE SETTLEMENT i.e. the ‘realization of any asset’ or ‘settlement of a liability’ is not given:

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a) Tangible /Intangible asset: realized value is zero. b) Settlement of liability: amount equal to the book value is paid.

6) Realization Expenses: a) When borne and paid by the firm: RealisationA/c Dr. To Cash A/c b) When borne by the firm but paid by a partner: Realisation A/c Dr. To Partner’s Capital A/c c) When expenses are to be BORNE by the partner but paid by the firm : (to be treated like drawings) Partner’s Capital A/c Dr. To CashA/c d) When fixed amount to be paid to a partner for realization expenses and the firm is to bear

the dissolution expenses: Realisation .Dr. To Partner’s Capital A/c( amount of remuneration) RealisationA/c Dr. To Cash A/c( realization expenses) e) When fixed amount to be paid to a partner for realization expenses and the partner is to bear

the dissolution expenses:

Realisation .Dr. To Partner’s Capital A/c f) When expenses are to be BORNE by one partner (x) but paid by another partner(y) X’s capital A/c Dr Y’s capital A/c NOTE: If the question is silent about the treatment of the realization expenses, then it is assumed that the realization expenses to be borne by the firm and paid by the firm. 7) For closing realization Account: Profit or loss on realization to be transferred to the partners’ capital account. 8) Partner’s Loan Account: not to be transferred to the realization or to the partner’ s capital account. Partner’s Loan A/c Dr. To Cash A/c

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Loan from the relative of the partner is an external liability and to be transferred to Realisation Account.



1. New ratio is not to be calculated on: a) Admission of apartner b) retirement of apartner c) death of apartner d) dissolution of apartnership

2. At the time of dissolution of partnership anun recorded asset take n by X a partner is

debited to: a) X capitalaccount b) realisationaccount c) cashaccount d) none of theabove

3. On firm's dissolution which of the following account is prepared at the last? a) Realisationaccount b) partners capitalaccount c) cash accountpartners d) loanaccount 4. On dissolution of a firm fictitio us assets a retransferred to: a) creditsideofpartnerscapitalaccount b) debit side of realisationaccount c) debitsideofpartnerscapitalaccount d) credit side of realisationaccount 5. On dissolution of a firm in which ratio profit and losso nrea lisation is distributed

among the partners: a) capitalratio b) profit sharingratio c) equally d) intheratioofamountduetoeachpartner. 6. On dissolution of the firm amount received from sale of unrecorded asset is credited to: a) partner’scapitalaccount: b) profit and lossaccount c) cashaccount d) realisationaccount

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7. Realisation account is a: a) personal b) realaccount c) nominalaccount d) none of theabove.

8. At the time of firm's dissolution credit balance of profit and loss account is credited to: a) realisationaccount b) partners capitalaccount c) cashaccount d) Profit and lossaccount.

9. On dissolution of a firm Good will appearing in the balance sheet is transferred to: a) capital account ofpartners b) cashaccount c) debit side of realisationaccount d) creditsideofrealisationaccount.

10. On dissolution the balance of partners’capital account appearing on the credit side of the

balance sheet is transferred to: a) debit side of realisationaccount b) credit side of realisationaccount c) debitsideofpartnerscapitalaccount d) creditsideofpartnerscapitalaccount.

11. A B and C are partners. The firm had give naloan ofRs 20,000 to B. They decided to dissolve

the firm.In the event of dissolution the loan will besettled by transferring it to the: a) debit side of realisationaccount b) transferringittothecreditsideofrealisationaccount c) transferittothedebitsideofB'scapitalaccount d) BpayingAandCprivately.

12. In case of dissolution, total creditor sof the firm wereRs40,000; creditors worth Rs10000 we

regivena piece off urniture costing Rs8000 in full and final settlement.Rema in ingcreditors allowed a discount of 10%.What will be the the amount with which cash will be credited in the realisation account for payment tocreditors:

a) 28,000 b) 27,000correct. c) 20,000 d) d.25,000 13. In case of dissolution A one of the partner was paid only RS.5000 for his loan to the firm

which amounted to Rs5500. Rs 500 will be recorded in which account and on whichside: a) Realisation account credit sidecorrect b) Realisation account debitside c) loan account debitside

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d) A's capital account creditside.

14. Section 41 of partnership act1932 deal swith dissolution of a firm a) by mutualagreement b) compulsory dissolutioncorrect c) bynotice d) by order ofcourt.

15. Settlemen to f accounts in case of dissolution no f partnership is deal with which

section of partnership act 1932? a) Section45 b) section46 c) section47 d) section48

16. In case of dissolution of partnership there was no workmen compensation fund and firm

had topayRs3000 as compensation to workers where will be this Rs3000 recorded in the book so f accounts?

a) debit side of realisationaccount b) credit side of realisationaccount c) debitsideofpartnerscapitalaccount d) creditsideofpartnerscapitalaccount.

17. Court may order dissolution of partnership firm a) whenapartnerhasbecomeofunsoundmind b) whenapartnerispermanentlyincapacitated c) whenapartnerisfoundguiltyofmisconduct d) all of theabove.

18. Which of the following is paid first in case of dissolution of partnership firm? a) Realisationexpenses b) Externalliabilities c) Securedloan d) Partner’sloan

19. At the time of dissolution total asset sare worth Rs3,00,000 and external liabilitie sare

worth Rs1,20,000. If asset srealised 120% and realisation expenses paid were Rs4,000, then profit/loss on realization will be:

a) ProfitRs60,000 b) LossRs60,000 c) LossRs56,000 d) ProfitRs56,000

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20. Anu, Bina and Charan are partners. The firm had given a loan of `20,000 to Bina. They decided to dissolve the firm. In the event of dissolution, the loan will be settled by:

a) Transferring it to debit side of Realization account. b) Transferring it to credit side of Realization account. c) Transferring it to debit side of Bina’s capital account. d) Bina paying Anu and Charan privately.

21. State the order of settlement of accounts on dissolution. 22. Distinguish between ‘dissolution of partnership’ and ‘dissolution of partnership firm’ on the

basis of closure of books. 23. Name the asset that is not transferred to the debit side of realisation account, but brings

certain amount of cash against its disposal at the time of dissolution of the firm. 24. When an asset is taken over by a partner, why is his capital account debited? 25. When a liability is to be discharged by a partner, why is his capital account credited? 26. A and B are partners in a firm sharing profits in the ratio of 3 : 2. Mrs A has given a loan of Rs

20,000 to the firm and the firm also obtained a loan of Rs 10,000 from B. The firm was dissolved and its assets were realised for Rs 25,000. State the order of payment of Mrs A’s loan and B’s loan with reason, if there were no creditor of the firm.

SHORT ANSWER TYPE QUESTIONS (3&4 MARK)

1. Distinguish between firm’s debts and partner’s private debts. 2. State the difference between dissolution of partnership and dissolution of partnership firm. 3. On what account realisation account differs from revaluation account. 4. Journalise the following transactions regarding realisation expenses : [a] Realisation expenses amounted to Rs.2,500. [b] Realisation expenses amounting to Rs.3,000 were paid by Ashok, one of the partners. [c] Realisation expenses Rs.2,300 borne by Tarun, personally. [d] Amit, a partner was appointed to realise the assets, at a cost of Rs.4,000. The actual amount of realisation amounted to Rs.3,000. 5.What journal entries would be passed for the following transactions on the dissolution of a

firm, after various assets (other than cash) and third parties liabilities have been transferred to

Realisation account?

1). Loan of Rs. 10,000 advanced by a partner to the firm repaid on the dissolution of the

firm

2). X, a partner takes over an unrecorded asset (typewriter) at Rs. 300

3). Undistributed balance (debit) of profit and loss account Rs. 30,000. The firm has three

partners X, Y and Z.

4). the assets of the firm realized Rs. 1, 25,000.

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LONG ANSWER TYPE QUESTIONS (6&8 MARK)

1. Give journal entries for the following transactions:

a. To record the realisation of various assets and liabilities. b. A Firm has a Stock of Rs. 1,60,000. Aziz, a partner took over 50% of the Stock at a discount

of 20%. c. Remaining Stock was sold at a profit of 30% on cost. d. Land and Buildging (book value Rs. 1,60,000) sold for Rs. 3,00,000 through broker who

charged 2% commission on the deal, e. Plant and Machinery (book value Rs. 60,000) was handed over to a Creditor at an agreed

valuation of 10% less than the book value, f. Investment whose face value was Rs. 4,000 was realised at 50%.

2. What journal entries would be recorded for the following transactions on the dissolution of a firm after various assets (other than cash) on the third party liabilities have been transferred to Realisation account. 1. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000. 2. There was unrecorded Bike of Rs. 40,000 which was taken over By Mr. Karim. 3. The firm paid Rs. 40,000 as compensation to employees. 4. Sundry creditors amounting to Rs. 36,000 were settled at a discount of 15%. 5. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim in the ratio of 3:4.

3. What journal entries will be recorded for the following transactions on the dissolution of a firm: [a] Payment of unrecorded liabilities of Rs.3,200. [b] Stock worth Rs.7,500 is taken by a partner Rohit.

[c] Profit on Realisation amounting to Rs.18,000 is to be distributed between the partners Ashish and Tarun in the ratio of 5:7.

[d] An unrecorded asset realised Rs.5,500.

4. The following is the Balance sheet of Tanu and Manu, who shares profit and losses in the ratio of 5:3, On December 31,2014: Balance Sheet of Tanu and Manu as on December 31, 2014

Liabilities Amount(Rs.) Assets Amount(Rs.) Sundry Creditors 62000 Cash at bank 16000

Bills payable Bank loan Reserve fund Capital Tanu 1,10,000

32,000 50,000 16,000

Sundry Debtors Stock Motor car Machinery Investment

55000 75,000 90,000 45,000 70,000

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Manu 90,000 2,00,000 3,60,000

Fixtures

9,000 3,60,000

On the above date the firm is dissolved and the following agreement was made: Tanu agree to pay the bank loan and took away the sundry debtors. Sundry creditors accepts stock and paid Rs.10,000 to the firm. Machinery is taken over by Manu for Rs.40,000 and agreed to pay of bills payable at a discount of 5%.. Motor car was taken over by Tanu for Rs.60,000. Investment realised Rs.76,000 and fixtures Rs.4,000. The expenses of dissolution amounted to Rs.2,200.

Prepare Realisation Account, Bank Account and Partners Capital Accounts.

5. X and Y are partners in the firm who decided to dissolve the firm. Assets and Liabilities are transferred to Realisation account. Pass necessary journal entries—

a) Creditors were Rs 1,00,000. They accepted Building valued Rs 1,40,000 and paid cash to the firm Rs 40,000 b) Aman, an old customer whose account of Rs 1000 was written off as bad in the previous year paid 40% of the amount. c) There were 300 shares of Rs 10 each in ABC Ltd which were acquired for Rs 2000 were now valued at Rs 6 each. These were taken over by the partners in the profit sharing ratio. d) Profit on Realisation Rs 42000 was divided among the partners. e) Land and Building (Book value Rs 1, 60,000) was sold for Rs 3,00,000 through a broker who charged 2% commission on the deal.

f) Plant and machinery (Book value Rs 60,000) was handed over to the creditor in full

settlement of his claim.

6. Following is the Balance sheet of Karan and Sandeep who share profits and losses equally as on 31st march 2010


Capitals-- Bank 40,000

Karan 1,00,000 Debtors 25,000

Sandeep 50,000 Stock 35,000

Creditors 30,000 Machinery 60,000

Workmen compensation fund 15,000 Furniture 40,000

Bank loan 5000

2,00,000 2,00,000

The firm was dissolved on the above date.

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a) Karan agreed to take over 50% of the stock at 10% less on its book value, the remaining stock was sold at a gain of 15%. Furniture and machinery realized for Rs 30,000 and 50,000 respectively.

b) There was unrecorded Investments which was sold for Rs 25,000. c) Debtors realized Rs 31,500 (with interest) and Rs 1200 was recovered for bad debts written

off last year. d) There was an outstanding bill for repairs which had to be paid Rs 2000.

Prepare necessary Ledger accounts to close the books of the firm.

7..Following is the Balance sheet of X and Y who share profits in the ratio of 4:1 as on 31st March 2016

Balance sheet As on 31st March 2016


Sundry Creditors 8,000 Bank 20,000

Bank overdraft 6,000 Debtors 17,000 Less provision 2000

15,000

X’s Brother’s loan 8,000 Stock 15,000

Y’s Loan 3,000 Investments 25,000

Investment Fluctuation fund

5,000

Building 25,000

Capitals- X-50,000 y-40,000

90,000

Goodwill

10,000

Profit and Loss a/c 10,000

1,20,000 1,20,000

The firm was dissolved on the above date and the following was decided— a) X agreed to pay off his brother’s loan b) Debtors of Rs 5000 proved bad. c) Other assets realized as follows—Investments 20% less, and Goodwill at 60%. d) One of the creditors for Rs 5000 was paid only Rs 3000. e) Building was auctioned for Rs 30,000 and the auctioneer’s commission amounted to Rs

1000. f) Y took over part of the stock at Rs 4000(being 20% less than the book value)Balance

stock realized 50% g) Realisation expenses amounted to Rs 2000.

Prepare Realisation account, Partners capital accounts and Bank account.

8) J, K and L decided to dissolve their partnership firm on 31st march, 2012. Heir balance sheet

on the day stood as under:

Dr. Bank a/c Cr.

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Capitals: J

K

L

J's Loan A/c

Creditors

10,000

10,000

10,000 30,000

12,000

18,000

Land

Furniture

Stock

Debtors

Bank

45,000

5,000

4,000

5,000

1,000

60,000 60,000

Land was sold for the 15% above the book value while furniture was settled for Rs. 450 less. Stock was realized in full while debtors worth Rs. 300 proved bad. Expenses of Realisation were Rs. 600. Record the above transactions by passing necessary journal entries. 9) X, Y and Z are partners sharing profits and losses in the ratio of 3:2:1. On 30th June, 2015, they

agreed to dissolve the partnership, they appointed Y to realize the assets and distribute the

proceeds. Y is to receive 5% commission on the sale of assets (except cash) as his remuneration

and is to bear all expenses of Realisation. Their balance sheet was as follows:

Balance Sheet

Dr. Cr.


Sundry creditors

Reserve fund Profit and

loss A/c Capital accounts:

X 70,000

Y 30,000

Z 20,000

Current accounts

X 12,500

Y 4,125

15,275

12,000

1,500

1,20,000

16,625

Cash at bank

Sundry debtors

Stock

Plant and Machinery

Goodwill

Current a/c - Z

3,740

20,000

42,200

61,000

15,000

23,460

165400 165400

Y reports the result of Realisation as follows:Sundry Debtors Rs. 12,000, Stock Rs. 18,250, Plant

and Machinery at 25% less than book value. Goodwill was valueless. Creditors were paid in full

and the expenses of Realisation amounted to RS. 380 Which Y, met personally. Prepare necessary

Ledger Accounts

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1. There was an old computer which was written-off in the books of accounts in the pervious year. The same has been taken over by a partner Nitin for Rs.3,000. Journalise the transaction, supposing. That the firm has been dissolved

2. All partners wishes to dissolve the firm. Yastin, a partner wants that her loan of Rs. 2,00,000 must be paid off before the payment of capitals to the partners. But, Amart, another partner wants that the capitals must be paid before the payment of Yastin’s loan. You are required to settle the conflict giving reasons.

3. X, Y and Z carrying on business as a partnership firm decided to dissolve the firm on

30.6.2011 when their balance sheet was as follows:

Balance Sheet


Creditors

Capitals:

X

Y

Z

1,20,000

90,000

60,000

34,000

2,70,000

Cash

Stock

Debtors

Tools

Car

Machinery

Buildings

25,000

62,000

37,000

8,000

12,000

60,000

1,00,000

304000 304000

The partnership deed provided that profits will be divided in the ratio of 3:2:1 respectively among X, Y and Z. Assets realized as follows: Stock Rs. 40,000, Tools Rs. 5,000. Machinery Rs. 78,000, Buildings Rs. 84,000. Car Rs. 25,000, Goodwill Rs. 60,000, Debtors Rs. 59,000. Creditors were settled at a discount of Rs. 720. There was unrecorded asset valued at Rs. 3,000, which was handed over to X for Rs. 2,000.Prepare Realisation account, cash account and partner's capital accounts 4.Achal and Vichal were partners in a firm sharing profits in the ratio of 3 : 5. On 31st March, 2011 their balance sheet was as follows:

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The firm was dissolved on 1st April, 2011 and the assets and liabilities were settled as follows (i)Land and building realised Rs 4,30,000. , (ii)Debtors realised Rs 2,25,000 (with interest) and Rs 1,000 were recovered for bad debts written-off (iii)There was an unrecorded investment which was sold for Rs 25,000. (iv)Vichal took over machinery at Rs 2,80,000 for cash. (v)50% of the creditors were paid Rs 4,000 less in full settlement and the remaining creditors were paid full amount. Prepare Realisation Account, Partner’s capital account and cash account. 5.Pass the necessary journal entries for the following transactions on the dissolution of the firm of K and L after the various assets (other than cash) and outside liabilities have been transferred to realisation account. (i)Bank loan Rs 15,000 was paid. (ii)Stock worth Rs 20,000 was taken over by a partner L. (iii)K paid Rs 9,000 to a creditor. (iv)A liability not appearing in the books of accounts settled Rs 3,700. (v)Expenses on realisation Rs 900 were paid by L. (vi)Profit on realisation Rs 7,100 was distributed between K and L in 7 : 3 ratio

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CHAPTER-8 ACCOUNTING FOR SHARE CAPITAL SYNOPSIS

Types of share capital:

i) Authorized capital: maximum amount that a company can raise as share capital. Stated in MOA.

ii) Issued capital: offered by the company. iii) Subscribed capital: applied by the public and allotted by the company. iv) Called up: amount of face value called up by the company. v) Paid up: the amount paid up by the shareholders against the called up amount of shares.

ISSUE OF SHARES FOR CASH (A)In case the issue price is paid in lump sum i.e. in one installment, the entry may be passed through ‘Share application and allotment account.

(i) Issue of shares at par:

On receiving share application money: Bank A/c Dr. To Share Application and Allotment A/c

For allotment of shares: Share Application and Allotment A/c Dr. To Share Capital A/c

(ii) Issue of shares at premium:

On receiving share application money: Bank A/c Dr. To Share Application and Allotment A/c (total money received including premium)

For allotment of shares: Share Application and Allotment A/c Dr. (total money received including premium) To Share Capital A/c (FACE VALUE) To Securities Premium Reserve A/c (premium money)

(B) In case the issue price is called up in installments

(i) Issue of shares at par:

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On receiving share application money: Bank A/c Dr. To Share Application A/c

For allotment of shares: Share Application A/c Dr. To Share Capital A/c

For Allotment money due: Share Allotment A/c Dr. To Share Capital A/c

Receipt of Allotment money: Bank A/c Dr. To Share Allotment A/c

Call money due: Share Call A/c Dr. To Share Capital A/c

Receipt of Call money: Bank A/c Dr. To Share Call A/c

(ii) Issue of shares at premium:

On receiving share application money: Bank A/c Dr. To Share Application A/c ( total money received including premium)

For allotment of shares: Share Application A/c Dr. (amount including premium) To Share Capital A/c (FACE VALUE) To Securities Premium Reserve A/c (premium money)

Calls in arrears

On non receipt of call: Calls in arrears A/c Dr. To Relevant Call A/c

On receipt of calls in arrears: Bank A/c Dr. To Calls in arrears A/c

Calls-in –Advance

Receipt of Calls-in –Advance

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Bank A/c Dr. To Calls-in –Advance A/c

Adjustment of Calls-in –Advance Calls-in –Advance A/ Dr. To Relevant Call A/c

SHARES ISSUED FOR CONSIDERATION OTHER THAN CASH

(A) Purchase of Assets S. Assets A/c Dr

To Vendor’s A/c (with Purchase consideration)

Purchase of Business S. Assets A/c Dr Goodwill A/c* Dr To Liabilities A/c To Vendor’s A/c To Capital Reserve**

* if Purchase consideration> Net Assets ** If Purchase consideration< Net Assets ( B) Issue of Shares

Issued at par Vendor’s A/c Dr

To Share capitalA/c

Number of shares to be issued= purchase consideration issue price of a share

Issued at premium Vendor’s A/c Dr To Share capitalA/c

To Securities Premium Reserve A/c ( premium money)

FORFEITURE OF SHARES:

When shares are issued at par: Share capital A/c Dr. (called up amount of face value) To Forfeited shares A/c (amount paid by the shareholder) To Calls in arrears A/c ( amount unpaid by the shareholder)

When shares are issued at premium: (a)Premium has been received

Share capital A/c Dr. (called up amount face value)

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To Forfeited shares A/c (money paid by the shareholder less premium) To Calls in arrears A/c (amount unpaid by the shareholder)

(b)Premium has not been received Share capital A/c Dr. (called up amount face value) Securities premium reserve A/c Dr. (premium)

To Forfeited shares A/c (money paid by the shareholder including premium) To Calls in arrears A/c (amount unpaid by the shareholder)

REISSUE OF FORFEITED SHARES:

(a)When shares are re issued:

Bank A/c Dr. ( amount received) Forfeited shares A/c Dr. ( discount allowed on reissue ) To Share capital A/c ( face value)

(b) After reissue of forfeited shares: Forfeited shares A/c Dr. To Capital reserve A/c

(Profit on reissue of reissue of transferred to Capital reserve)

NOTE: When all the forfeited shares are not reissued, transfer the proportionate amount from forfeited to capital reserve.



Ques.1 True/False:

According to the below given information the final call per share is Rs.22. The subscribed capital of accompany is Rs.80,00,000 and the nominal value of the share is Rs.100 each.There were no call sinar rear till the final call was made.The final call made was paid on 77,500 shares only.The balance in the call sinar rear amounted to Rs.55,000.

Ques.2 True/ False :

Securities premium received on issue of shares cannot be used for the purpose of buy back of

shares.

Ques.3True/False-Share application amount is in the nature of Real account

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Ques.4.Arrange the following in proper sequen ceas types of“Share Capital”

(A.) Paid up capital (B.) (ii.) Issued capital (C.) Subscribed capital (D.) (iv.) Called up capital

Ques.5 Maximum limit of premium on shares is : (A.)32% (B.)20% (C.) No limit (D.) 100% Ques.6 Amount of money not received out of call edupcapital is:

(A.)Added to share capital (B.)Subtracted from share capital (C.) Shown as current liabilities (D.) Shown as currentasset Ques.7 Following amounts were payable on issue of shares by acompany: Rs.3 on application,

Rs.3 on allotment, Rs.2 on first call and Rs.2 on final call.Xholding 500 shares paid only

application and allotment money whereas Y holding 400 shares did not pay final call. Amount

of calls in arrear will be:

(A.)3,800 (B.)2,800 (C.)1,800

(D.)6,200

Ques.8Rajan Limited issued 50,000 shares at a price lower than the nominal value of the

share.The shares issued are called:

(A.) Sweat equity shares (B.) Redeemable Preference shares (c) Equity shares (d) Bonus shares

Ques.9ELtd.had allotted 10,000 shares to the applicants of14,000shares on pro- rata basis

,application money on an other 6000shares was refunded.The amount payable on the

application was Rs.2.Sitaraman applied for 420 shares.The number of shares allotted to him

will be:

(A.) 60 shares (B.)340 shares (C.)320 shares (D.)300 shares

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Ques. 10 Acompany issued 4,000 equity shares of rupees10each at par payable as under: On application rupees 3, on allotment rupees 2;on first call rupees 4 and on final call rupees 1 per share.Applicants werer eceived for 16,000 share.Application for 6,000 shares were rejected and pro-rata allotment was made to the applicants for 10,000 shares.How much amount will be received in cash on first call, when excess application money is adjusted towards amount due on allotment sand calls: (A.) Rupees 6.000 (B.) nil (C.)Rupees 16,000 (D.)Rupees 10,000 Ques.11 A company issued 4000 equity shares of rupees 50 each at par payable as under: On application rupees 20%, on allotment 40% ;on first call10%; on final call-balance Applications were received for10,000 shares .Allotment was made pro-rata.How much amount will be received incash on allotment? (A) Rupees 6.000 (B) nil (C.) Rupees 16,000 (D.) Rupees 20,000 Ques.12. Which one of the following is not a part of subscribed capital: A) Equity shares issued tovendor B) Preference shares of convertibletype C) Forfeitedshares D) Bonusshares

Ques.13.When nominal(face)value of a share is called up by the company but as some

shareholders did not pay the money, the shares are forfeited . The share capital is shown in the

balance sheet (notes) of a company under the following heading:

A) Subscribed and fully paid up B) Subscribed but not fully paid up C) Subscribed and called up D) Subscribed but not called up

Ques.14. Zee Ltd issued15,000equity shares of Rs.20 each at a premium of Rs.5 payable Rs.5 on application, Rs.10 on allotment (including premium)and the balance on first and final call.The company received applications for 22,500 shares and allotment was made pro-rata. Bittoo to whom 1,200 shares were allotted, failed to pay the amount due on allotment. All his shares were for feited after the call was made.The for feited shares werer eissued to Dheeraj at par.Assuming that no other bank transaction stook place, the bank balance of the company after the above transactions is:

A)Rs.6,85,000 B)Rs.3,60,500

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C)Rs.3,78,000 D)Rs.6,34,000

Ques.15.Zen Ltd purchased the sundry assets of M/s Surat Industries for Rs.28,60,000 payable in

fully paid shares of Rs.100 each. State the number of shares issued to vendor when issued at

premium of 10%.

A)28,000 B)31,778 C)28,600 D)26,000 Ques.16.The subscribed share capital of Mukand Ltd is Rs.1,00,00,000 of Rs.100 each.There

were no calls in arrear till the final call was made.The final call made was paid on 97,500

shares.The calls in arrear amounted toRs.87,500.The final call on share:

A) Rs.20 b) Rs.35 C) Rs.25 D) Rs.45 Ques.17. These shares which in addition to the fixed preference dividend, carry a right to

participate in the surplus profits, if any,after dividend at as tipulated rate has been paid to the

equity share holders are called:

A) Participating preferenceshares B) Convertible preferenceshares C) Redeemable preferenceshares D) Cumulative preferenceshares

Ques.18.T Ltd had allotted 20,000 shares to the applicant so f 24,000 shares on pro rata

basis.The amount payable on application is Rs.2.Manoranjan applied for 450 shares. The

number of shares allotted and the amount carried forward for adjustment against allotment

money due from him is:

A) 150 shares,Rs.375 B) 375 shares,Rs.150 C) 400 shares,Rs.100 D) 300 shares,Rs.300

Ques.19. Acompany for feited 3,000 shares of Rs.10 each (which were issued at par) held by

Kishore for non payment of allotment money of Rs.5 per share.The called up value pershare

was Rs.8.On for feiture,the amount debited to share capital:

A) Rs.30,000 B) Rs.24,000 C) Rs.15,000 D) Rs.6,000

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Ques.20.Z limited issued shares of Rs.100 each at a premium of 10%. Mr. Q purchased 500

shares and paid Rs.20 on application but did not pay the allotment money of Rs.30.If the

company for feited his 30% shares, the for feature account will be credited by:

A) Rs.4500 B) Rs.3500 C) Rs.1650 D) Rs.3000

Ques.21. Daisy Limited for feited 200 shares Rs.10 each who had applied for 500 shares, issued at a premium of 10% for non payment of final call of Rs.3per share. Out of these 100 shares were issued as fullypaid up for Rs.15.The profit on reissue is: A) Rs.700 B) Rs.6400 C) Rs.300 D) Rs.400

Ques.22. Mithas Limited was for med with share capital of Rs.50,00,000 divided into 50,000

shares of Rs.100 each.9,000 shares were issued to the vendor as fully paid for purchase

consideration of a furniture acquired .30,000 shares were allotted in payment of cash on which

Rs.70 per share was called and paid.State the amount of subscribed capital:

A)Rs.50,00,000 B)Rs.30,50,000 C)Rs.30,00,000 D)Rs.20,00,000 Ques.23.FaltuLimited invited application for 2,00,000 shares of Rs.10each.These shares were issued at premium of Rs.11 each which was allowed at the time of allotment .All money was called and duly received excepton 10,000 shares on which only application money of Rs.3 per share was received.The company forfeited all the shares. 7000 of forfeited share where re-issued at Rs.13per share.State the amount of securities premium to be show nunder the head-Reserve and surplus. A) Rs.20,00,000 B) Rs.11,11,000 C) Rs.8,11,000 D) Rs.21,11,000

Ques.24.Match the following:

a) CumulativePref.Share i)Repaidaftersometime b) ParticipatingPref.Share ii)convertsintoequity shares

c) RedeemablePref.shares iii)Dividendaccumulatesifnot paid

d) ConvertiblePref.shares iv)Getsshareinsurplusprofit

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25. What do you mean by ESOP? 26. What do you mean by Private placement of shares? 27. What are Sweat Equity shares? 28. Can forfeited shares be issued at a discount? If so to what extent?

29. What is issued capital? How does it differ from Authorized capital?

30. Differentiate between Reserve capital and Capital Reserve on the basis of time when it can

be used.

31. What is the name given to the part of capital of a company which is called-up only on

winding up?

32. Give the meaning of minimum subscription?

33. What is meant by ‘undersubscription’?

34. What is the maximum amount of discount at which forfeited shares can be re-issued?

35. .Give any one purpose for which the amount received as ‘securities premium reserve’ may

be utilised.

36. A Ltd forfeited 100 equity shares of Rs 10 each issued at premium of 20% for the non-

payment of final call of Rs 5 including premium. State the maximum amount of discount at

which these shares can be re-issued.

37. What rate of interest the company pays on calls-in-advance, if it has not prepared its own

Articles of Association?

38. Give any two alternatives available to a company for the allotment of shares in case of over

subscription.

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SHORT ANSWER TYPE QUESTIONS (3 &4 MARK)

1. X ltd issued 10,000 equity shares of rs 10 each at a discount of 10% payable as : On application Rs2; On allotment Rs 4; On final call Rs 4. All the shares offered were subscribed and amount was received. Pass journal entries. Show Share Capital head in the Balance sheet of the company.

2. R Ltd purchased assets from P ltd for Rs3,50,000 A sum of Rs. 75,000 was paid by means of a bank draft and for the balance due, R Ltd issued Equity Shares of Rs10 each at a premium of 10%. Journalise.

3. A company issued 15,000 fully paid up equity shares of Rs100 each for the purchase of the following assets and liabilities from Gupta Ltd : Plant Rs 3,50,000 Land and Building Rs 6,00,000 Stock Rs 4,50,000 Creditors Rs 1,00,000 Journalise. 4. Vimal Ltd. purchased machinery of Rs. 9,90,000 from Kamal Ltd. The payment to Kamal Ltd. was made by issuing equity shares of Rs. 100 each. Pass necessary journal entries in the books of Vimal Ltd. for purchase of machinery & the issue of shares when-

shares were issued at par.

shares were issued at 10% discount.

shares were issued at 25% premium. 5.On 1 April, 2013 Janta ltd. was formed with an authorized capital of Rs.30,00,000 divided

into 30,000 shares of Rs. 100 each. The company issued 10,000 shares at par.

The issue price was payable as follows:

On application - Rs 30 per share

On allotment - Rs 50 per share

On final call - Rs 20 per share

The issue was fully subscribed and the company allotted shares to all the applicants. All money

was received except the final call money on 1,000 shares.Show the ‘share capital’ in the balance

sheet of the company as per Schedule III of the companies act,2013 as at 31 march,2014 and also

show note st to accounts.

6.Rohit Ltd. Purchased assets from Rohan & Co. ,for Rs 350,000. A sum of Rs 75000 was paid by

means of a bank draft and for the balance due Rohit Ltd. Issued equity shares of Rs. 10. each at

Premium of 10%. Journalise the above transactions in the books of the company.

7. Mohan Ltd. forfeited the following equity shares of Rs 10. Each issued at a premium of Rs 2

per shares :-

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i)700 shares issued to X for the non-payment of second and final call of Rs 3 per shares.

ii)500 shares issued to Z for the non-payment of first call of Rs 2 per shares and second and final

call of Rs 3 per share. The forfeited shares were reissued to Y for Rs 11 per share fully paid.

Pass entries to record the forfeiture and reissues of share.

B. Sundram Ltd purchased furniture for Rs 3,00,000 from Ravindram Ltd, Rs 1,00,000 were paid by

drawing a promissory note in favour of Ravindram Ltd. The balance was paid by issue of equity

shares of Rs 10 each at a premium of 25%. Pass journal entries in the books of Sundram Ltd.

C. SSP Ltd forfeited 300 shares of Rs 10 each issued at a premium of Rs 2 per share for the non-

payment of allotment of Rs 4 per share (including premium). The first and final call of Rs 3 per

share has not been made yet, 50% of forfeited shares were re-issued at Rs 8 per share fully paid-

up. Pass necessary journal entries for the forfeiture and re-issue of shares.


1. Pass Journal entries: a) X Ltd. forfeited 1000 equity shares of Rs.10 each issued at a premium of Rs.3 per share for the non payment of final call of Rs.6 ( including premium) ) per share. The forfeited shares were re-issued as fully paid up for Rs.7 per share. Pass necessary journal entries in the books of the company.

b) Y Ltd. forfeited 800 equity shares of Rs.100 each issued at a discount of 10% for the non payment of final call of Rs.3 per share. The forfeited shares were re-issued at Rs.12 per share as fully paid up. Pass necessary journal entries in the books of the company.

c) Z Ltd. issued equity shares of Rs.100 each at a premium of Rs.10 per share for the purchase of furniture of Rs.99,000.

2. Z Ltd. invited applications for issuing 40000 equity shares of Rs.10 each at a premium of Rs.2 per share. The amount was payable as follows: On application Rs.6 ( including premium) and balance on allotment. Applications for 50000 shares were received . Pro-rata allotment was made to all applicants. Excess money received on application was adjusted towards sums due to allotment. A shareholder to whom 8000 shares were allotted failed to pay the allotment money and therefore, his shares were forfeited. Later on the forfeited shares were reissued for Rs.70000 as fully paid-up. Pass necessary journal entries in the books of Z Ltd. 3. X Ltd issued a prospectus inviting application for 2000 shares of Rs 10 each at a premium of Rs 2 per shares payable as follows;

On application of Rs 2 , On allotment Rs 5,

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On first call Rs 3 on second call & Final call of Rs 2

Application were received for 3000 shares & pro-rate allotment was made on the application for 2400 shares . Money over paid on application was employed on account of sum due on allotment. Ramesh to whom 40 shares were allotted failed to pay anything after application & Mohan ,the holder of 60 shares failed to pay the two calls. Show Journal entries . 4. a.) Eee ltd. forfeited 200 shares of Rs 10 (Re 8 called up) on which the holder had pai application and allotment money of Re. 5 per share. Out of which 50 shares were re-issued to F Ltd. As fully paid for Re. 8 per share. Journalize. b.) Aptech Ltd. Forfeited 300 shares of Re. 10 each , on which first call of Re. 3 per share was not received, the second and final call of Rs. 2 per share has not yet been called. Out of these 75 shares were reissued to G as Rs. 8 paid up for each share. Journalize. c.) The directors of M Ltd. Resolved that 2000 equity shares of Rs 10 each on which Rs. 7.50 was paid be forfeited for non payment of final call of Rs 2.50 of these 1800 shares were reissued as fully paid for Rs 6 per share. Journalize. d.) Y Ltd. Forfeited 100 shares of Rs 100 each issued at 20% premium for non payment of first call of Rs30 per share & second call of Rs 20 per share. Out of these 40 shares were reissued as fully paid up for Rs90 per share. Journalize. e.) HI Ltd. Forfeited 10 shares of Rs 10 each (Rs.6 called up) issued at a discount of 10% to Mr. Y on which he had paid an application money of Rs. 2 per share. Out of these, 8 shares were reissued to Z as Rs.8 called up for Rs.9 per share. Journalize.

5. Sakshi Ltd. Issued a prospectus ,inviting application for 100000 shares of Rs.10 each at a premium of Rs.5 per share , payable as follows: On application Rs.4.50; on allotment Rs.7.50(including premium); on first call Rs.2 and on final call Re.1.00. Application were received for 125000 shares and allotment was made pro-rated to the applicants of 120000 shares, remaining application being refused. Money received in excess on the application was adjusted towards the amount due to allotment. D, to whom 2000 shares were allotted, failed to pay allotment money and on his failure to pay the first call, is shares were forfeited. M, the holder of 3000 shares, failed to pay the calls, and so is shares were also forfeited. All these shares were sold to R, credited as fully paid for Rs.8 per share. Pass necessary journal entries to record the above issue of shares by the company. 6. Super Star ltd. issued a prospectus inviting applications for 2,000 shares of Rs 10 each at a

premium of Rs 2 per share, payable as:

On applications - Rs 3 (including Re 1 premium),

On allotments - Rs 4(including Rs 1 premium) On first call - Rs 3, On second and final call -Rs 2

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Applications were received for 3,000 shares and pro rata allotments were made on the

applications for 2,400 shares. It was decided to utilise excess applications money towards the

amount due on allotments. Ramesh to whom 40 shares were allotted, failed to pay the allotments

money and on his subsequent failure to pay the first call, his shares were forfeited. Ramesh to

whom 40 shares were allotted, failed to pay the allotments money and on his subsequent failure

to pay the first call, his shares were forfeited. Rajesh who applied for 72 shares failed to pay the

two calls on such failures, his shares were forfeited of the shares forfeited, and 80 shares were

sold to Krishna credited as fully paid up for Rs 9 per share, the whole of Ramesh’s share being

included. Give journal entries to record the above transactions (including cash transactions).

7. X Ltd. issued 50,000 shares of Rs 10 each at a premium of Rs 2 per shares payable as follows Rs

3 on application, Rs 6 on allottment (including premium)and Rs 3 on call. Applications were

received for 75,000 shares and a pro rata allotment was made as follows :

To the applicants of 40,000 shares , 30,000 shares were issued and for the rest 20,000 shares

were issued. All money due was received except the allotment and call money from Ram who had

applied for 1,200 shares (out of the group of 40,000 shares). All his shares were forfeited. The

forfeited shares were reissued for Rs 7 per share fully paid up. Pass necessary journal entries for

the above transactions.


1. M Ltd. has a balance of Rs. 2,50,000 in Securities Premium Account. The company’s management does not want to carry over this balance. You are required to suggest the methodfor utilizing Securities Premium Account that would achieve the objective of the management and maximize the return to shareholders.

2. A company is registered with the following share capital: 1,25,000 Equity Shares of Rs.10 each, payable in the following manner: 10% on application: 20% on allotment; 30% on first call and the balance on final call. The company offered to the public for subscription 0f 80,000 Equity Shares. The public applied for 75,000 shares. The company duly allotted these shares. It made only the first call by 31.3.2015. The first call money was received on all these shares except 300 shares. Show Share Capital head in the Balance sheet of the company. 3. A Ltd. Invited applications for issuing 1,00,000 equity shares of Rs 10 each. Applications were received for 2,20,000 equity shares. Applications for 20,000 shares was rejected and their application money was refunded. Shares were allotted to remaining applications as follows:

Alloted 50% shares of Raj who had applied for 50,000 shares.

Alloted in full to Amir who had applied for 20,000 shares.

Alloted shares to remaining applicants on pro-rata basis.

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Which value has been affected by the company by rejecting applications for 20,000 shares and

by making discriminatory pro-rata allotment? Can there be some better alternative?

4.DN Ltd issued 50,000 shares of 110 each payable as Rs 2 per share on application, Rs 3 per

share on allotment and Rs 5 on first and final call. Applications were received for It was decided

that

(i)Refuse allotment to the applicants of 10,000 shares.

(ii)Allot 20,000 shares to Mohan who had applied for similar number.

(iii)Allot the remaining shares on pro-rata basis.

Mohan failed to pay the allotment money and Sohan who belonged to the category (iii) and was

allotted 3,000 shares paid both the calls with allotment. Calculate the amount received on

allotment.

5.On 1st April, 2012, Vishwas Ltd was formed with an authorised capital of Rs 10,00,000 divided

into 1,00,000 equity shares of Rs 10 each. The company issued prospectus inviting applications

for 90,000 equity shares. The company received applications for 85,000 equity shares. During

the first year, Rs 8 per share were called. Ram holding 1,000 shares and Shyam holding 2,000

shares did not pay the first call of Rs 2 per share. Shyam’s shares were forfeited after the first

call and later on 1,500 of the forfeited shares were re-issued at Rs 6 per share,

Rs 8 called up.

Show:

(i)Share capital in the balance sheet of the company as per Revised Schedule VI Part I of the

CompaniesAct,2013.

(ii)Also prepare ‘notes to accounts’ for the same.

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CHAPTER-9 ISSUE OF DEBENTURES

SYNOPSIS

ISSUE OF DEBENTURES FOR CASH

(1)Issue at par:

For receipt of debenture application money: Bank A/c Dr. To Debenture application A/c

For transfer of application money to debenture A/c Debenture application A/c Dr.

To X% Debenture A/c

For debenture allotment money due: Debenture allotment A/c Dr.

To X% Debenture A/c

For receipt of allotment money Bank A/c Dr. To Debenture allotment A/c

For debenture call money due Debenture ------- call A/c Dr. To X% Debenture A/c

For receipt of call money Bank A/c Dr. To Debenture ---- call A/c (2)Issue at Premium

(a)When premium amount is due with application money

For debenture application money received including premium: Bank A/c Dr. To Debenture application A/c

For debenture application money adjusted: Debenture application A/c Dr. To X% Debenture A/c To Security Premium Reserve A/c

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(b)When premium amount is due with allotment/call money

For debenture allotment/call money due including premium Debenture allotment A/c Dr. To X% Debenture A/c To Security Premium Reserve A/c

For receipt of debenture allotment/call money: Bank A/c Dr. To Debenture allotment/ Call A/c

NOTE: Other entries will be made in the same manner as discussed above in case of issued at Par

(3)Issue at Discount

For debenture allotment money due excluding discount : Debenture allotment A/c Dr. Discount on issue of Debenture A/c Dr. To X% Debenture A/c

For receipt of debenture allotment money: Bank A/c Dr. To Debenture allotment A/c

NOTE: Other entries will be made in the same manner as discussed above in case of issued at Par.

ISSUE OF DEBENTURES FOR CONSIDERATION OTHER THAN CASH:

a) i) When assets are purchased: Sundry assets A/c Dr.

To Vendor A/c ii) when business is purchased: Assets A/c Dr. Goodwill A/c * Dr. ( if Cr. Is greater than Dr.) To Liabilities A/c

To Vendor A/c ( purchase consideration) To Capital reserve A/c ** ( if Dr. is greater than Cr.)

b) When debentures are issued to the vendor: i) Issued at par:

Vendor A/c Dr. To X% Debentures A/c

ii) Issued at discount: Vendor A/c Dr.

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Discount on issue of debenture A/c Dr. To X% Debentures A/c (FV)

iii) Issued at premium: Vendor A/c Dr. To X% Debentures A/c (FV) To Securities premium reserve A/c

Calculation ofNo. Of Debentures to be Issued: Purchase Consideration

= ---------------------------------------- Issue Price of the Debenture

Issue Price = F.V.(when issued at par) OR F.V.+ Premium (when issued at premium) OR F.V. – Discount (when issued at discount)

ISSUE ENTRIES FROM THE POINT OF VIEW OF REDEMPTION:

Case Conditions of Issue Condition on Redemption

1 Issued At Par Redeemable At Par

2 Issued At Discount Redeemable At Par

3 Issued As Preminum Redeemable At Perimium

4 Issued At Par Redeemable At Preminum

5 Issued At Discount Redeemable At Preminum

6 Issued At Preminum Reedemable At Preminum

a) Issued at par & redeemable at par: i) Bank A/c Dr. (amount received) To Debenture application and allotment A/c

ii) Debenture application and allotment A/c Dr. (amount received) To X% Debenture A/c ( F V) b) Issued at discount & redeemable at par: i) Bank A/c Dr. To Debenture application and allotment A/c (amount. Received .i.e. F V – Discount)

ii) Debenture application and allotment A/c Dr. (amount received)

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Discount on issue of debenture A/c Dr. (discount allowed) To X% Debenture A/c (FV)

c) Issued at premium & redeemable at par: i) Bank A/c Dr.

To Debenture application and allotment A/c (amt. recd.i.e. F V + premium)

ii) Debenture application and allotment A/c Dr. (amt. recd.i.e. F V + premium)

To X% Debenture A/c (FV) To Securities premium reserve A/c (premium)

d) Issued at par & redeemable at premium: i) Bank A/c Dr.

To Debenture application and allotment A/c (amount received)

ii) Debenture application and allotment A/c Dr. (amount received ) Loss on issue of debentures A/c Dr. (premium on redemption) To X% Debenture A/c (FV)

To Premium on redemption of debenture A/c (premium on redemption )

e) Issued at discount & redeemable at premium: i) Bank A/c Dr.

To Debenture application and allotment A/c (amount received)

ii) Debenture application and allotment A/c Dr. (amount received ) Discount on issue of Debentures A/c Dr. (discount allowed) Loss on issue of debentures A/c Dr. (premium on redemption) To X% Debenture A/c (FV)

To Premium on redemption of debenture A/c (premium on redemption) f) Issued at premium & redeemable at premium: i) Bank A/c Dr.

To Debenture application and allotment A/c(amount received)

ii) Debenture application and allotment A/c Dr. (amount received ) Loss on issue of debentures A/c Dr.(premium on redemption) To X% Debenture A/c (FV)

To Premium on redemption of debenture A/c (premium on redemption) To Securities premium reserve A/c (premium on issue)

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ISSUE OF DEBENTURES AS A COLLATERAL SECURITY

Concept Bank lends money to the companies only on the security of some valuable property. If the primary security is not sufficient to cover the risk, then the bank asks for additional security or a secondary security. This additional security is called Collateral Security.

Conditions

No interest is payable on the debentures issued as collateral security because interest on loan is being paid.

The liability of the company is for the amount of loan and not for the face value of debenture issued.

ACCOUNTING TREATMENT

a) When Journal entry is not passed for issue of debenture as Collateral Security. i) For taking the loan from bank Bank A/c …Dr. To Bank loan A/c NOTE: Debentures issued for long term loan from bank but no journal entry is passed.

Extract of Balance Sheet

Particulars Note No.

2013-14 Rs.

2012-13 Rs.

I. EQUITY AND LIABILITIES 2. Non-Current Liabilities (a) Long-term borrowings

1

……

Note 1

Particulars Amount

Long term borrowings: Loan from bank ( secured by issue of ……., x% debentures of Rs….. each as collateral security)

……………

a) When Journal entry is passed: i) For taking the loan from bank Bank A/c …Dr. To Bank loan A/c

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ii) For issuing debenture as collateral security

Debentures suspense A/c Dr. To X% Debentures A/c

Disclosure in the balance sheet: Extract of Balance Sheet


2013-14 Rs. 2012-13 Rs.

I. EQUITY AND LIABILITIES 2. Non-Current Liabilities (a) Long-term borrowings

1

……

Note 1

Particulars Amount

Long term borrowings: Loan from bank x% debentures of Rs….. each as collateral security …………….. Less : debenture suspense -----------------

……………

Interest on debentures: a) When interest is due:

Debentures interest A/c Dr. To Debenture holders’ A/c

b) When interest is paid: Debenture holders’ A/c Dr.

To Bank A/c To TDS Payable A/c

c)For payment of TDS to Govt. TDS Payable A/c Dr. To Bank A/c

d) At end of the financial year: Statement of profit & Loss A/c Dr. To Debentures interest A/c

Note- Interest is calculated on the Face Value of the debentures.

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1. Debentures which are transferable by me redelivery are a) Registered debentures b) First debentures c) Bearer debentures d) Second debentures.

2. When debentures are issued at par and redeem able and premium the losson such

an issue is debited to: a) profit and loss account b) debenture application and allotment account c) losson issue of debentures account d) discount on issue of debentures account.

3. Excess value of net asset sover purchase conside ration at the time of

purchase of business is credited to: a) Generalre serve b) Capitalre serve c) Vendor's account d) Goodwill account.

4. When debentures are issued at discount and redeem able at a premium which one of

the following account is debited at the time of issue? a) Debentures account b) Premium on redemption of debentures account c) Loss on issue of debentures account d) none of these.

5. ABC took over the assets of Rs 7,60,000 and liabilities of Rs 80,000 of Y limited for

purchase consideration of Rs 5,85,000 payable by the issue of 12% debentures of Rs100 each at a discount of10%.The number of debentures to be issued is:

a) 6600 b) 500 c) 4500 d) 5400

6. XYZ limited issued 4000,12% debentures of Rs100 each at a premium of 5% The total amount of interest for one year will be:

a) 48,000 b) 58,000 c) 50,000 d) 50,400.

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7. ABC limited issues 10,000 9% debentures of 100 each at a premium of 5% payable at

a premium of 10%, the losson issue of debentures account will be debited toby: a) Rs10,00,000 b) Rs1,00,000 c) Rs10,50,000 d) Rs1,05,000

8. Premium received on issue of debentures may be util is edfor writing off:

a) Premium allowed on redemption of debentures b) writing off preliminary expenses c) writing off discount allowed on issue of shares d) all of the above.

9. Acompany can issued ebentures

a) forcash b) as a collateral security c) for consideration other thancash d) any of the above.

10. What is the nature of premium on redemption of debenture account

a) Realaccount b) nominalaccount c) personalaccount d) none of theabove.

11. When the number of debentures applied is less than number of debentures

offered to public the issue is said to be: a) Over subscribed b) Under subscribe c) Fully subscribed d) none of the above.

12. Maximum limit on premium on issue of debentures is

a) a.10% b) b. 20% c) c. 15% d) d. no limit.

13. Debentures that do not carry any charge or security on asset sof the company are

knownas: a) Secured debentures b) Unsecured debentures c) Convertible debentures d) Registered debentures.

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14. Debentureis: a) Written in strument acknowledging a debt written by it sholder.

b) Anoral acknowledgement of debt by acompany c) A written in strument acknowledging a debt written by its company d) None of these.

15. Interest on debentureis calculated on:

a) its face value b) its issue price c) its book value d) its cost price.

16. Debentures issued as collateral security will be to debenture suspense

account: a) debited b) credited c) sometimes debited and some times credited d) none of these.

17. Collateral security means security:

a) primary b) secondary c) government d) valuable.

18. 10% debenture issued at Rs 105 is repayable at Rs 110, the face value of debenture

being Rs 100.Calculate the amount of loss on redemption of debentures: a) 10 b) 5 c) 15 d) 25

19. A ltd took over the assets of Rs6,60,000 and liabilities of Rs80,000 of B Ltd for an

agreed purchase consideration of Rs6,00,000 payable 10% in cas hand the balance by issue of 15% debentures of Rs100 each at 10% discount. The number of debentures to be issued is:

a) 6600 b) 5400 c) 6000 d) 4500

20. Debentureinterest:

a) Ispayableonlyincaseofprofits b) accumulatesincaseoflossesareinadequateprofits c) ispayableirrespectiveofprofitorloss d) none of theabove.

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21. What is the nature of interest on debentures? 22. Why would an Investor prefer to invest in debentures rather than shares? 23. What is meant by debenture issued as collateral security? 24. What is meant by issue of debenture as purchase consideration? 25. Pass the necessary journal entry when 10,000 debentures of Rs 100 each are issued as

collateral security against a bank loan of 780000. 26. Give the meaning of ‘debenture’.


Q.1 Journalise the following transactions: (a) 10 debentures issued at Rs. 100 repayable at Rs. 100. (b) 10 debentures issued at Rs. 95, repayable at Rs. 100 (c) 10 debentures issued at Rs. 105 , repayable at Rs. 100 (d) 10 debentures issued at Rs. 100, payable at Rs. 105. (e) 10 debentures issued at Rs. 95, Repayable at Rs. 105.

Q.2 A Ltd issued 5,000 13% debentures of Rs.100 each at par and raised a loan of Rs.80, 000 from Bank. Collaterally secured by Rs. 100,000 13% debentures. How will You show the debenture in the Balance Sheet of the Company assuming that the company has recorded the issue of Debentures as collateral security in the books.

Q.3 XYZ Co. Ltd., issued 10000 10% debentures of Rs.100 each at a premium of Rs. 5 payable as follows: On application Rs.40, on Allotment Rs.65 (including premium) all the debentures were subscribed and money was received, pass necessary journal entries to record the issue of debentures

Q.4 Pass Journal Entries to record the Issue of Debentures a) 5000 15% debenture of Rs.100 each issued at Discount of 5% and redeemable at premium at

5% after 5 years. b) 10000 15% debenture of Rs.100 each issued at a premium of 10% and redeemable at par after

6 years

Q.5 X Ltd. Issued 9% Debentures of Rs.10, 00,000 on April 01, 2012. Journalize for the amount of interest of such debentures for the year ended March 31, 2013.

Q.6 A company purchased assets of the book value of Rs. 6,00,000 and took over Liabilities of Rs1,50,000 from Golden Ltd. It was agreed that the purchase consideration settled at Rs. 4,80,000 be paid by issuing debentures of Rs100 each at a premium of 10%. It was further decided that any fraction debenture be paid in cash. Give journal entries in the books of thepurchasing company.

Q.7 Mohit Ltd. Purchased building worth Rs.1,40,000; machinery worth Rs.1,20,000 and stock for Rs.40,000 from Rajan Ltd and also took over liabilities of Rs.50,000 for a purchase

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consideration of Rs.3,30,000. Mohit Ltd issued 12% debentures of Rs.50 each at a premium of 10%. Pass entries in the books of Mohit Ltd. Q.8 T ltd. Issued 5,000, 10% debentures of Rs 100 each on 1st April 2012. The issue was fully subscribed. According to the terms of issue, interest on debentures is payable on half yearly on 30th September and 31st march and tax deducted at source is 10%.

Pass the necessary journal entries related to the debenture interest for the half yearly ending on 31st March, 2013 and transfer of debenture interest for the half yearly ending on 31st March 2013 and transfer of debenture interest to statement of profit and loss.

Q.9 Exe. Ltd. purchased assets of the book value of Rs. 4,00,000 and took over the liabilities of Rs. 50,000 from Mohan Bros. It was agreed that the purchase consideration, settled at Rs. 3,80,000, be paid by issuing debentures of Rs. 100 each. What Journal entries will be made in the following three cases if debentures are issued.

(a) at par (b) at a discount of 10% (c) at a premium of 10%?

It was agreed that any fraction of debentures be paid in cash.

Q 10. Beta Ltd issued 5,000, 9% debentures of Rs 500 each. Pass the necessary journal entries for

the issue of debentures in the books of the company in the following case.When debentures are

issued at a premium of 25% to the vendors for machinery purchased for Rs 6,25,000.

Q 11. lfa Ltd issued 10,000, 9% debentures of Rs 100 each. Pass the necessary journal entries for

issue of debentures in the following case.When debentures are issued at a premium of 25% to

the vendors for the purchase of machinery worth Rs 1,25,000. Journalise.

Q 12.Tata Ltd issued 5,000, 10% debentures of Rs 100 each on 1st April, 2012. The issue was fully

subscribed. According to the terms of issue, interest on debentures is payable half-yearly on

30th September and 31st March and tax deducted at source is 10%.Pass the necessary entries

related to the debenture interest for the half-yearly ending on 31st March, 2013 and transfer on

interest on debentures to statement of profit and loss.


Q.1 Drumbeats Ltd. had a prosperous shoe business. They were manufacturing shoes in India and exporting to Italy. Being a socially aware organization, they wanted to pay back to the society. They decided to not only supply free shoes to 50 orphanages in various parts of the country but also give employment to children from those orphanages who were above 18 years of age. In order to meet the fund requirements, they decided to raise 50,000 equity shares of Rs. 50 each and 40,000 9% debentures of Rs. 40 each. Pass the necessary journal entries for issue of shares and debentures. Also identify one value which the company wants to communicate to the society.

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Q.2 Sunrise Company Ltd. has an equity share capital of Rs. 10,00,000. The company earns a return on investment of 15% on its capital. The company needed funds for diversification. The finance manager had the following options: (i) Borrow Rs.5,00,000 @15% p.a. from a bank payable in four equal quarterly installments starting from the end of the fifth year (ii) Issue Rs.5,00,000, 9% Debentures of Rs. 100 each redeemable at a premium of 10% after five years. To increase the return to the shareholders, the company opted for option (ii). Pass the necessary journal entries for issue of debentures.

Q.3 A company purchased Machinery of Rs.5,70,000 from Babu enterprises by issuing 9% debentures of Rs.100 each at 5% discount, to be redeemed at 10% premium. Pass necessary entries for purchase of assets and issuing of debentures.

Q.4 Board of Directors of Pearl Global Industries Ltd. wants to start a new unit at a remote area of Assam. The new unit can be started in the form of labor intensive with a capital of ` 5 crore or in the form of automatic plant with a capital of Rs. 30 crore. Directors decided to start this unit in the form of labor intensive for generation of employment opportunities in remote areas. Therefore company purchased land for Rs. 2, 00,00,000 and machinery for Rs. 3,00,00,000.In consideration of these assets Company issues 13% Debentures at par. Identify the values involves in the decision of directors of Pearl Global Ltd. and Journalize the transactions.

Q.5 According to the SEBI guidelines, Debentures can be secured by a charge on the assets of the company. A ‗Debenture Trust Deed‘is entered into between the company and the debenture holders. Identify the values involved in this decision of SEBI.

Q.6 Animesh Ltd issued 1,000, 12 % Debenture of 100 each in the following manner: (i) For cash at par Rs. 50,000 nominal (ii) For creditors of Rs. 45,000 against purchase of machinery Rs. 35,000 nominal (iii) To SBI bank against a loan of Rs. 10,000 as collateral security Rs. 15,000 nominal Q.7 Z ltd has issued debentures on which interest is payable every year on 1 March. The company failed to pay the interest on debentures due on 1st March, 2013 and the payment was made on 1st May, 2013. Identify the values affected by delayed payment of interest. Q.8 V ltd acquired assets of Rs. 40 lakhs and took over creditors of Rs 4 lakhs from S ltd. V ltd issued 12% debentures of Rs. 100 each at a premium of 20% as purchase consideration. Calculate the number of debentures issued by V ltd.

Q9.On 1st April, 2013, JMD Ltd. Co. issued 7,000 debentures of 200 each at a discount of 5%. Debentures were to be redeemed at the end of seven years. Pass journal entry for the issue and show the ‘ Discount on Issue of Debentures A/c’

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Q10. On 1st April, 2014, Reliance Limited Company issued debentures of the face value of 5,00,000 at a discount of 6%. The debentures were repayable in 5 years by annual drawings of 1,00,000 at the end of each year. Calculate the amount of discount to be written off each year and show the Discount on Issue of Debentures A/c Q11.A company issued 6% Debentures of Rs. 1,00,000 at 10% discount, redeemable at par. Assume further that debentures are to be redeemed by Drawings method in the following manner : Year End Amount (Face Value) At the end of 2nd year 10,000 At the end of 3rd year 20,000 At the end of 4th year 30,000 At the end of 5th year 40,000 Pass Journal entries for issue of Debentures and prepare 'Discount on Issue of Debentures Account'.

Q 12. On 1st April, 2011, Naveen Sadhu Ltd. issued 5,000, 14% debentures of Rs. 200 each at a discount of 5% repayable as follows : On 31st March, 2014 3,00,000 On 31st March, 2015 4,00,000 On 31st March, 2016 3,00,000. Show the journal entry for the amount of discount to be written off.

Q 13..Pass the necessary journal entries for the issue of debentures in the following cases (i)Rs 40,000,12% debentures of Rs 100 each issued at a premium of 5% redeemable at par. (ii)Rs 70,000,12% debentures of Rs 100 each issued at a premium of 5% redeemable at Rs 110 Q 14. Pass the necessary journal entries for the issue of debentures in the following cases (i) Rs 30,000,12% debentures of Rs 100 each issued at a discount of 5% redeemable at par. (ii)Rs 60,000,12% debentures of Rs 100 each issued at a discount of 5% redeemable at Rs 105. Q 15. av Lakshmi Ltd invited applications for issuing 3000, 12% debentures of Rs 100 each at a premium of Rs 50 per debenture. The full amount was payable on application. Applications were received for 4,000 debentures. Applications for 1,000 debentures were rejected and application money was refunded. Debentures were allotted to the remainingapplicants. Pass necessary journal entries for the above transactions in the books of Nav Lakshmi Ltd Q16. What is meant by issue of debentures as collateral security? Explain with the help of an example. Q 17. Mohit Ltd took over assets of Rs 8,40,000 and liabilities of Rs 80,000 of Ram Ltd at an agreed value of Rs 7,20,000. Mohit Ltd paid to Ram Ltd by issue of 9% debentures of Rs 100 each at a premium of 20%.Pass necessary journal entries to record the above transactions in the bpoks of Mohit Ltd. Q 18. Y Ltd purchased machinery Rs 55,000 from Z Ltd 10% was paid by Y Ltd by accepting a bill of exchange in favour of Z Ltd and the balance was paid by issue of 9% debentures of Rs 100 each at par, redeemable after 5 years.Pass necessary journal entries in the books of Y Ltd.

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CHAPTER-10 REDEMPTION OF DEBEBTURES

SYNOPSIS

Meaning: Redemption of debenture means the repayment of amount to the debenture holders. Debentures are redeemed on the due date. A company may also, if so authorized by its AOA and the terms of issue redeem the debenture before the due date by instalments i.e. draw of lots, purchase from open market or by conversion into shares etc.

Sources of redemption

Redemption out of capital and

Redemption out of profits.

Debenture Redemption Reserve

As per Section 71(4) of Companies Act 2013- The company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures. If debentures have to be redeemed only out of profits then DRR is created with full value.

As per rule 18(7) of the Companies (share capital and debenture)Rules,2014

Type of companies Type of debentures DRR per cent

All India Financial Institutions regulated by the Reserve Bank of India (RBI)

Public and privately placed debentures

Nil

Banking companies Public and privately placed debentures

Nil

Non banking financial companies (NBFC) and other financial institutions covered by section 2(72) of the Companies Act, 2013

Privately placed debentures Nil

Public issued debentures 25

Other companies (listed or unlisted, manufacturing or infrastructure companies)

Public and privately placed debentures

25

Every company is required to create/maintain DRI shall before the 30th day of April of each year, deposit or invest, as the case may be, a sum which shall not be less than 15 % of the amount of its debentures maturing during the year ending on the 31st day of March next following in any one or more of the following methods, namely: (a) in deposits with any scheduled bank, free from charge or lien (b) in unencumbered securities of the Central Government or of any State Government;

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(c) in unencumbered securities mentioned in clauses (a) to (d) and (e) of section 20 of the Indian Trusts Act, 1882; (d) in unencumbered bonds issued by any other company which is notified under clause (fl of section 20 of the Indian Trusts Act, 1882;

The amount deposited or invested, as the case may be, above shall not be utilized for any purpose other than for the repayment of debentures maturing during the year referred to above, provided that the amount remaining deposited or invested, as the case may be, shall not at any time fall below 15 per cent of the amount of debentures maturing during the 3lst day of March of that year

I REDEMPTION OF DEBENTURES ON MATURITY IN LUMP SUM

Redemption out of capital

(a ) On Debentures becoming due for payment

When the debentures are redeemed at par Debentures A/c Dr. (deb. due for redemption)

To Debenture holder’s A/c

When the debentures are redeemed at premium Debentures A/c Dr. (deb.due for redemption) Premium on redemption of debentures A/c Dr.

To Debenture holder’s A/c (b) On payment Debenture holder’s A/c Dr.

To Bank A/c

2.Redemption of Debenture out of Profits 1. Creation of DRR( before starting the redemption):

Surplus in Statement of Profit & Loss Dr. To DRR A/c

2.Investment for redemption of debenture (15% of debenture to be redeemed) Debenture Redemption investment A/c Dr. To Bank A/c

For the amount of debenture due

When the debentures are redeemed at par Debentures A/c Dr. (deb. due for redemption)


When the debentures are redeemed at premium Debentures A/c Dr. (deb.due for

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redemption) Premium on redemption of debentures A/c Dr


When the debenture redemption investment encashed: Bank A/c Dr. To Debenture Redemption Investment A/c

Income (interest received and tax have been deducted) Bank A/c Dr. TDS collected A/c Dr. To Interest earned A/c

On payment Debenture holder’s A/c Dr.

To Bank A/c

When all the debentures are redeemed: Debenture redemption reserve A/c Dr.

To General Reserve A/c

II REDEMPTION OF DEBENTURES BY DRAW OF LOTS

Redemption of debenture by draw of lots means the redemption is made in annual installment. The amount if installment is worked out by dividing the total amount of debenture by the number of years it is to last. The amount of debentures to be redeemed each year is selected by lottery. Thus this procedure is known as draw of lots.

DRR is created before commencing redemption of debentures under this method also. The journal entries are same as redemption out of profit


MCQ’s/ VERY SHORT ANSWER TYPE QUESTIONS (1 MARK) Q1 If debentures of Rs 50,000 are issued at parbutrede emable at a premium of10%. By what principle of accounting, the loss on issue of debentures account will be debited with`5,000 while passing the issue entry? (a) Principle of Revenuerecognition (b) Principle ofMateriality (c) Principle ofConservatism/Prudence (d) Principle of FullDisclosure.

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Q2. X Ltd. Has issued 10,000 6% debentures of`100 each.The company decided to redeem half of its debentures at 10% premium.There was a balance of`3,40,000 in Debenture redemption reserve. As per SEBI guidelines what amount still need to be transferred to Debenturered emptionre serve account out of profits.

(a) Rs6,60,000 (b) Rs1,60,000 (c) Rs5,50,000 (d) Rs2,75,000 Q3.TherulesregardingtransferofDRRtogeneralreserveismentionedin (a) Companies Ac2013 (b) Rule 18(7) c of Companies (c) Rule2014c.Section71(4)ofCompanies(ShareCapitalandDebentures)Rules,2014 (d) All of the above.

Q4 Alfa Ltd. Issued 20,000, 8% debentures of Rs10 each at par.Thed ebentures are redeem ableata premium of 20% after 5years.The amoun to f loss on redemption of debentures shouldbe: (a) Rs50,000 (b) Rs40,000 (c) Rs30,000 (d) Rs16,000 Q5.Debentureredemptionreserveiscreated (a) before redemptionstarts (b) attheclosureofpreviosaccountingyear (c) before30thAprilofthecurrentyear (d) all the above. Q6 Premium on redemption of debentures is a (a) Liabilityaccount (b) AssetAccount (c) ExpenseAccount (d) None ofthese. Q7.Gaurav Ltd. Purchased machinery costing Rs1,71,000. It was agreed that the purchase consideration be paid by issuing 12% debentures of Rs100 each. Assumed ebentures have been issued at a discount of 10%. No. of debentures issued to vendor are: (a) 1500 (b) 1900

(c) 2000 (d) 2100

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Q8 In case the question is silent ,DRR is created on the nominal value of out standing redeemabled ebentures to the extent of (a) 25% (b) 15% (c) more than 25% (d) anyoftheabove

Q9 Debentures cannot be redeemed at (a) Premium (b) Discount (c) more than 10% premium (d) at Par

Q10 If debentures are issued at par and redeeme data premium then which account will be debited by the amount of premium on debentures. (a) Discount on issue of debentures (b) Premium on redemption of debentures (c) Profit and lossaccount (d) Loss on issue of debentures

Q11TheprovisionsoftheCompaniesAct2013inrespectofredemptionofdebenturesareto protect the interestof (a) Debetureholders (b) Creditors (c) Shareholders (d) Bankers

Q12BestCompanyLtddecidestoredeem10000,10%debenturesofRs100eachon30thJune 2018.TheCompanyshallinvestinspecifiedsecuritiesonorbefore (a) 30th April2017 (b) 30th April2016 (c) 30th June2017 (d) 30th April2018

Q13 Amount is set aside to Debenture redemption reserve (DRR) by (a) All the Companies (b) All companies except banking companies (c) All Companies except All India Financial Institutions (d) All Companies except Banking Company and all India Financial institutions regulated by

RBI. Q14 Amount is not set aside to Debenture redemption reserve if (a) The debentures are notconvertible (b) Thedebenturesarepartlyconvertible (c) The debentures are fullyconvertible. (d) None ofthese.

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Q15 Premium payable on redemption of debentures is in the nature of

(a) LiabilityAccount (b) AssetAccount (c) ExpenseAccount (d) None ofthese.

Q16 Once the debentures are redeemed, amount of debenturered emption reserve is

transferred to (a) CapitalReserve (b) BalanceinProfitandlossaccount (c) GeneralReserve (d) Capital Redemptionreserve

Q17GLimitedhasoutstanding100008%debenturesofRs100eachthatareredeemableata premium of Rs 10.Out of these 5000 debentures are to be redeemed on 31st December 2018 DebentureredemptionInvestmentshouldbe (a) 75,000 (b) 82,500 (c) 1,50,000 (d) 1,65,000

Q18 Global savings Bank is to redeem 40000 10% debentures of Rs 100 each on 31st December 2018.How much amount should it invest in specified securities?

(a) 6,00,000 (b) 10,00,000 (c) 5,00,000 (d) Nil

Q19 H Limited has out standing 10,000, 8% debentures of Rs100 each that are redeemable at a premium of Rs10 each.Out of these 5000 debentures are to be redeemed on31stDecember 2018. Denturered emption investment should be (a) 75,000 (b) 82,500 (c) 1,50,000 (d) 1,65,000

Q20 Amount is not invested in debenture redemption Investment if (a) Debentures are not convertible (b) The debentures are partly convertible (c) The debentures are fully convertible (d) None of theabove.

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Fill in the Blanks 1. Debenturesareredeemedsettingaside25%ofthenominalvalueofdebenturesto

DebentureRedemptionReserve.Itisredemptionoutof

2. Amounttobesetasideto before redemption ofdebentures.

3. Debenture Redemption Investment shouldbemade

30thApriloftheyear inwhichdebenturesreredeemed.

4. Discount or loss on issue of debentures isa

5. Oncethedebenturesreredeemed,amountofDRRistransferredto____________

State True of False 1. DebentureRedemptionInvestmentismadebycompaniesrequiredtosetasideamount to

Debenture redemptionReserve. 2. Debentureredemptionreservemaybesetasidebyacompanyoutofanyreserve.

3.SurpluscannotbetransferredtoDebentureRedemptionReserve. 4. DebentureRedemptionInvestmentcanbeusedbytheCompanyforanypurposeafterthe

debentures have beenredeemed. 5. GeneralReservecanbetransferredtoDebentureRedemptionReserve.

Q.1 LCM Ltd., purchased for cancellation its own 10, 00,000, 9% debenture of Rs.500 each of Rs.480 each. Record the necessary Journal entries.

Q.2 When is ‘Debenture Redemption Reserve’ created?

Q.3 INFRA Developers Ltd.(an infrastructure company) issued 5,00,000 8% Debentures of Rs.100 each on April 1, 2008 redeemable on April 1, 2012. How much amount of Debenture Redemption Reserve is required before the redemption of debentures? Q.4 Which companies are exempted from creating debenture redemption reserve by SEBI? Q.5 Name 2 sources of finance for redemption of debentures

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Q.1 Mona Ltd had outstanding Rs.8,00,000; 9% debentures of Rs.100 each to be redeemed at 10% premium out of profits. The balance in D.R.R as on that date was Rs.1,40,000. Pass necessary entries for redemption of debentures.

Q.2. A Ltd. issued Rs. 10lacs 9% debentures of Rs. 100 each on 1st April, 2008 redeemable in five equal installments through draw of lots beginning from the year ending 31st march 2011. Assume that Company has transferred sufficient amount to Debenture redemption reserve. Pass journal entries for redemption of debentures for 1st year and state the value symbolized by redeeming the debentures through draw of lots?

Q.3. Z Ltd had Rs 40,00,000, 8% debentures due to be redeemed out of profits on 1st Oct 2013 at a premium of 5%. The company had a debenture redemption reserve of Rs 8,70,000. The company complied with the legal requirements with respect to Debenture Redemption reserve and investment. Pass the necessary journal entries at the time of redemption. Q.4. S ltd issued 5,000 6 % debentures of Rs 200 each at a premium of 5% on June 30 2011,

redeemable on June 30 2015. The issue was fully subscribed. The board of directors decided to

transfer the required amount to debenture redemption reserve on March 31, 2015. It was

decided to invest 15% of the face value of debentures to be redeemed towards debenture

redemption investment on 30th April, 2015. Investments were encashed and debentures were

redeemed on due date.

Record the necessary entries for issue and redemption of debentures.

Q.5. V ltd has 6,000 8% debentures of Rs 100 each due for redemption in four equal annual

instalments starting from March 31, 2015. DRR has a balance of Rs 70,000 on that date. Record

the journal entries. The company complied with respect to investment made in government

securities on 30th April 2014.


Q.1 The management of Shobhit Ltd. Decided to export its products to African countries. To meet the requirement of additional funds, the finance manager decided to issue 1,00,000 9% debenture on 1-4-2008. The face value of each debenture was Rs. 100. These debentures were redeemable in four installments starting from the end of third year, which was as follows: Year Amount

III 10,00,000 IV 20,00,000 V 30,00,000 VI 40,00,000

Prepare 9% debenture account from 1.4.08 till the entire debenture was redeemed.

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Q.2 L.G. Ltd issued 2,000 12% debenture of Rs. 100 each on 1st April 2013. The issue was fully subscribed. According ti the terms of issue, interest on the debentures is payable half yearly on 30th September and 31st march and the tax deducted at source is 10%.Pass necessary journal entries related to the debenture interest for the half yearly ending 31st March, 2014 and transfer of interest on debenture of the year to the statement of profit and loss.

Q.3 Which value is indicated on Creation of Debenture Redemption Reserve by company?

Q.4 Shubh ltd has the following balances appearing in the balance sheet

Rs

Securities premium reserve 22,00,000

9% debentures 1,20,00,000

Underwriting commission 10,00,000

The company decided to redeem its 9 % debentures at a premium of 10%. You are

required to suggest the ways in which the company can utilize the Securities Premium a/c.

Q5. Z Ltd. Issued 20,00,000, 8% debentures on 1st April, 2001 at a premium of 5%. On 31st March, 2006, out of these 2,00,000, 8% debentures were redeemed by converting them into equity shares of 100 each issued at par and 5,00,000, 8% debentures were converted into 10%preferance shares of 100 each and issued at a premium of 25%. Pass necessary journal entries in the books of Z Ltd. for the redemption of debentures Q6.Manish Ltd issued Rs 38,00,000, 8% debentures of 1100 each on 1st April, 2007. The terms of

issue stated that the debentures were to be redeemed at a premium of 5% on 30th June, 2009.

The company decided to transfer out of profits t 5,00,000 to debenture redemption reserve on

31st March, 2008 and Rs 4,50,000 on 31st March, 2009.Pass necessary journal entries regarding

the issue and redemption of debentures, without providing for either the interest or loss on

issue of debentures.

Q7.X Ltd has Rs 8,00,000, 9% debentures due to be redeemed out of profits on 1st October, 2009

at a premium of 5%. The company had a debenture redemption reserve of Rs 4,14,000. Pass

necessary journal entries at the time of redemption.

Q8.Pass necessary journal entries for the issue and redemption of debentures in the following

cases 20,000, 12% debentures of Rs 50 each were issued and to be redeemed as follows

(i)Issued at par and redeemed at a premium of 10%.

(ii)Issued at a premium of 10% and redeemable at a premium of 20%.

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CHAPTER-11

Financial Statements of a Company

SYNOPSIS

STATEMENT OF PROFIT & LOSS

Particular Note No.

Figure as at the end of Current Reporting Period

Figure as at the end of Previous Reporting Period

1 2 3 4

1 Revenue from Operation

2. Other Income

3. Total Revenue (1+2)

4. Expenses: Cost of material Consumed Purchased of Stock in Trade Change in Inventories of Finished Goods Work-in-Progress and Stock in Trade Employees Benefits Expenses Finance Costs Depreciations and Amortization Expenses Other Expenses Total Expenses

5. Profit Before Tax (3-4)

6. Tax

7. Profit After Tax

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BALANCE SHEET OF A COMPANY

COMPANY NAME Address of the company

Balance Sheet as at March 31st ,2013

(Amount in Rs.)

Particulars Note As at March 31, 2013

As at March 31, 2012

I EQUITY AND LIABILITIES 1 Shareholder's funds: (a) Share Capital 1

(b) Reserves and surplus 2 (c) Money received against share warrants

2 Share application money pending for allotment

3 Non - current liabilities:

(a) Long - term borrowings 3 (b) Deferred tax liabilities (Net) 4 (c) Other Long - term liabilities 5 (d) Long - term provisions 6

4 Current liabilities (a) Short - term borrowings 7

(b) Trade payables 8 (c) Other current liabilities 9 (d) Short - term provisions 10

Total

II ASSETS 1 Non - current assets: (a) Fixed assets

(i) Tangible assets 11.1

(ii) Intangible assets 11.2

(iii) Capital work-in-progress

(iv) Intangible assets under development

(v) Fixed assets held for sale 12

(b) Non - current investments 13 (c) Deferred tax assets (Net) 14 (d) Long-term loans and advances 15 (e) Other non-current assets 16

2 Current assets: (a) Current investments 17

(b) Inventories 18 (c) Trade receivables 19 (d) Cash and cash equivalents 20 (e) Short-term loans and advances 21 (f) Other current assets 22

Total

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MCQ’s/ VERY SHORT ANSWER TYPE QUESTIONS (1 MARK) 1. Feature of financial analysis is to present the data contained in financial statements in

(a) Easyform (b) Convenient and rationalgroups (c) Comparableform (d) Alloftheabove

2. Which analysis is considered as dynamic?

(a) HorizontalAnalysis (b) verticalAnalysis (c) internalAnalysis

3. externalAnalysis Under what heads and sub-heads the following items will appear in the Balance sheet of a company as per revised schedule III: (i) Un-called liability on partly paid up shares purchased (ii) Premium on Redemption of Debentures (iii) Security deposit for telephones (iv) Employees Earned leave payable on retirement (v)Proposed dividend 2. Under which major heads and sub head will you show the following items in the Balance Sheet of a Company:

Share Forfeiture A/c

Capital Reserve

Debentures

Provision for Tax

Loose Tools 3. Name any two tools of financial statement analysis.

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SHORT ANSWER TYPE QUESTIONS (3&4 Mark)

1. List the major heads under which the ‘Equity and Liabilities’ are presented in the Balance Sheet of a company as per Schedule III Part I to the Indian Companies Act 2013.

2. List the major heads under which the assets are presented in the Balance Sheet of a company as per Schedule III part I of the Companies Act 1956.

3. Name the sub-heads under the head (a) ‘Shareholders Funds’ and (b) ‘Non-current liabilities as per Schedule III Part 1 of the Balance Sheet.

4. Name the sub-heads under the head ‘Non-current assets’ in the Balance Sheet under Schedule-III of the Indian Companies Act, 1956.

5. On 1st April, 2014, Ashok Ltd. was formed with an authorized capital of Rs 1,00,00,000 divided into 2,00,000 equity shares of Rs. 50 each. The company issued prospectus inviting applications for 1,50,000 shares. The issue price was payable as under: On application 15 On allotment 20 On call Balance The issue was fully subscribed and the company allotted shares to all the applicants. The company did not make the call during the year. The company also issued 5,000 share of ` 50 each fully paid up to the vendor for purchase of office premises. Show the ‘Share Capital’ in the Balance Sheet of the company as at 31st March, 2015 and also show ‘Notes to Accounts’.

6.Under which Head following items of Revenue of Non-Financial Company will be shown: a. Sale of Services b. Dividend Income c. Sale of Scrap d. Interest on Income e. Net Gain / Loss on sale of Investment

7.Under which Head you will show the following items in the Statement of Profit and Loss: a. Interest on Terms Loan b. Dividend Earned c. Leave Encashment d. Profit on Sale of Building 8. Under which Head you will show the following items in the Statement of Profit and Loss: a. Goodwill Amortized b. Returns from Revenue from Operations c. Carriage Inwards d. Selling and Marketing Expenses

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9. Under which Head you will show the following items in the Statement of Profit and Loss: a. Miscellaneous Expenses b. Cash Discount Received c. Interest on loan d. Profit on Sale of Assets 10.Under which Head you will show the following items in the Statement of Profit and Loss: a. Bonus to Employees b. Sale of Scraps c. Gratuity paid d. Depreciations on Computers e. Electricity Expenses 11. Under which Head you will show the following items in the Statement of Profit and Loss: a. Dividend Earned b. Rent c. Sale of Products d. Selling and Marketing Expenses e. Opening Inventories of finished Goods 12.Under which Head you will show the following items in the Statement of Profit and Loss: a. Discount on Issue of Debentures Written Off b. Excess Provision Written Off c. Salary d. Patent Amortized e. Return from Revenue from Operations 13. Under which Head you will show the following items in the Statement of Profit and Loss: a. Interest on Terms Loan b. Rent of Factory c. Audit Fee d. Depreciation on Furniture e. Purchase of material 19. State under which major heading the following items will be presented in the Balance Sheet of a

Company as per revised :

a. Trade Mark

b. Capital Redemption Reserves

c. Income received in advance

d. Stores and spares

e. Office equipment

f. Current investment

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1. Where is ‘Calls-in-advance’ shown in Balance Sheet of a Company? 2. A company has issued 1,000 9% Debentures of Rs.1,000 each. On 1.10.2014 to be redeemed on 31.7.2015. How would you show these in the Balance Sheet as at 31.3. 2015?

4. State under which major headings the following items will be presented in the balance sheet

of a company as per Schedule III Part I of the Companies Act, 2013. (i)Trade marks (ii)Capital redemption reserves (iii)Income received in advance (iv)Stores and spares (v)Office equipments (vi)Current investments.

5. Under what heads and sub-heads, will the following items appear in the balance sheet of a

company as per Schedule III, Part I of the Companies Act, 2013 (i)Debentures (ii) Loose tools (iii) Calls-in-advance

6. State the major headings under which the following items will be put as per Schedule III, Part I of the Companies Act, 2013. (i) Long-term investments (ii) Bills of exchange (iii)Motor car (iv) Discount on issue of shares (v)Securities premium reserve (vi) Unclaimed dividend

CHAPTER-12

FINANCIAL STATEMENT ANALYSIS SYNOPSIS

Meaning: Financial Statement Analysis is a systematic process of critical evaluation of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm. Tools or Techniques of Financial Statement Analysis: The most commonly used techniques of financial analysis are as follows: (i) Comparative Statements: These statements mean a comparative study of components of financial statements of two or more years of the enterprise itself.

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(ii) Common Size Statements: These are the statements which indicate the relationship of different items of a financial statement with some common item by expressing each item as a percentage of the common item. (iii) Ratio Analysis: Ratio Analysis is the process of determining and interpreting numerical relationship between figures of the financial statements. (iv) Cash Flow Statement: A Cash Flow Statement is a statement that shows the flow of cash and cash equivalents during a period. Types of Financial Analysis: Financial Statement Analysis can be of following types: (i) Internal Analysis: It refers to analysis made on the basis of accounting records and other related information of the company. (ii) External Analysis: It refers to analysis made on the basis of published statements, reports and information. (iii) Horizontal or Dynamic Analysis: It refers to analysis and review of financial statements for a number of years. (iv) vertical or Static Analysis: It refers to analysis and review of financial statement for a single year. (v) Intra-Firm Analysis: It refers to comparison of financial variables of an enterprise for two or more accounting periods. (vi) Inter-Firm Analysis: It refers to comparison of financial variables of two or more enterprise for the same accounting period. Objectives and Significance of Financial Analysis: (i) To Assess the Earning Capacity. (ii) To Measure the Efficiency of the Management. (iii) To Assess the Solvency. (iv) To make Inter-firm and Intra-Firm Comparison. (v) To Forecast and Prepare Budgets. (vi) To providing useful information to various interested parties. (vii) To Measure the Financial Strength. Parties Interested in Financial Analysis: (i) Management (ii) Creditors or Suppliers (iii) Shareholders or Owners or Investors (iv) Employees and Trade Unions (v) Bankers and Lenders (vi) Government (vii) Tax Authorities (viii) Researchers (ix) Other Parties Limitations of Financial Analysis:

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(i) Ignores Price-level Changes (ii) Historical Information (iii) Ignores Qualitative or Non-monetary Aspects (iv) Suffers from Limitations of Financial Statements (v) Window Dressing (vi) Variation in Accounting Policies (vii) Personal Bias


MCQ’s/VERY SHORT ANSWER TYPE QUESTIONS (1 MARK) 1. Feature of financial analysis is to present the data contained in financial statements in

a) Easyform b) Convenient and rationalgroups c) Comparableform d) Alloftheabove

2. Which analysis is considered as dynamic?

a) HorizontalAnalysis b) verticalAnalysis c) internalAnalysis d) externalAnalysis

3. Which analysis is considered as Static?

a) HorizontalAnalysis b) verticalAnalysis c) cinternalAnalysis d) externalAnalysis

4. WhichAnalysisisbasedononeyear’sdata?

a) HorizontalAnalysis b) verticalAnalysis c) Cash FlowStatement d) DividendAnalysis

5. State any one limitation of financial statement analysis. 7. State any one objective of financial statement analysis 8. State one advantage of financial statements analysis. 9. State how qualitative aspects are ignored in financial statements analysis

10. State the interest of tax authorities in the analysis of financial statements. 11. How is ‘window dressing’ a limitation of financial statements analysis?

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SHORT ANSWER TYPE QUESTIONS (3 MARKS) 1. What is meant by analysis of financial statements? State any two limitations of

analysis of it. 2. Explain advantages or objectives of financial statements analysis 3. What is vertical analysis of financial statements? 4. What is the importance of financial statements analysis?

CHAPTER-13 TOOLS OF FINANCIAL STATEMENT ANALYSIS- COMPARATIVE AND

COMMON SIZE STATEMENTS

SYNOPSIS

Meaning

Comparison of financial statements refers to the comparative study of components of Balance Sheet and Statement of Profit and Loss over period of two or more years both in absolute and percentage form.

Objective

It facilitates comparison and helps in taking decisions about the operating and financial performance of the business.

It highlights the trend of changes in the figures relating to performance, efficiency and financial position for number of years side by side.

It helps in management in forecasting and planning for future profitability and financial soundness of the business.

It helps in comparing the firm’s performance with the average performance of the industry.

Format of Comparative Balance Sheet Balance Sheet as at …….. 2019 and 2018


2017-18 Rs.

2018-19 Rs.

Absolute Change (Increase/ Decrease)

Percentage (increase/ Decrease

A B (B-A)=C C/A * 100 = D

I. EQUITY AND LIABILITIES 1. Shareholders funds (a) Share capital (b) Reserves and Surplus 2. Non-Current Liabilities

-- --

-- --

-- --

-- --

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(a) Long-term borrowings (b) Long-term provisions 3. Current Liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions

-- --

-- -- -- --

-- --

-- -- -- --

-- --

-- -- -- --

-- --

-- -- -- --

Total

- - - -

II. ASSETS 1. Non-Current Assets (a) Fixed Assets (i) Tangible assets (ii) Intangible assets (b) Non-current investments (c) Long-term loans and advances 2. Current Assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets

-- -- -- -- --

-- -- -- --

-- -- -- -- --

-- -- -- --

-- -- -- -- --

-- -- -- --

-- -- -- -- --

-- -- -- --

Total

- - - -

Format of Comparative Statement of Profit & Loss Comparative Statement of Profit & Loss for the years ended 31st March 2018& 2019

Particulars

Note No.

2017-18 Rs.

2018-19 Rs.

Absolute Change (Increase/ Decrease)

Percentage (increase/ Decrease

A B (B-A)=C C/A * 100 = D

i. Revenue from Operations

---

---

---

---

ii. Other Income

---

---

---

---

iii. Total Revenue (i+ii)

---

---

---

---

iv. Expenses Cost of Materials Consumed Purchases of Stock-in-Trade Changes in inventories of

---

---

---

---

---

---

---

---

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Common size Financial Statements Meaning

Common size financial statements are the statements in which items of Balance Sheet and Statement of Profit and loss for two or more years are expressed into percentages to some common base. The base is Revenue from operations in case of statement of profit and loss and the total of Balance Sheet in case of Balance Sheet. Objective

It shows the changes in various items in relation to Revenue from operations or Total assets and Total liabilities.

Format of Common – Size Statement of Profit & Loss Common Size Statement of Profit & Loss for the year ended 31st March 2019

Particulars

Note No.

Absolute Amount

2018-19 Rs.

Percentage of Revenue from Operations 2018-19 Rs.

i. Revenue from Operations

---

100

ii. Other Income

---

---

iii. Total Revenue (i+ii)

---

---

iv. Expenses

Finished Goods Work-in-Progress and Stock-in- Trade Employees Benefits Expenses Finance Costs Depreciation and Amortization Expenses Other Expenses

---

--- --- --- --- --- ---

---

--- --- --- --- --- ---

---

--- --- --- --- --- ---

---

--- --- --- --- --- ---

iv. Total Expenses ---

---

---

---

v. Profit before Tax (iii – iv) ---

---

---

---

vi. Tax --- --- ---

---

vii. Profit after tax (v – vi)

---

---

---

---

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Cost of Materials Consumed Purchases of Stock-in-Trade Changes in inventories of Finished Goods Work-in-Progress and Stock-in-Trade Employees Benefits Expenses Finance Costs Depreciation and Amortization Expenses Other Expenses

---

--- ---

--- --- ---

---

--- ---

--- --- ---

iv. Total Expenses ---

---

v. Profit before Tax (iii – iv)

---

---

vi. Tax

---

---

vii. Profit after tax (v – vi)

---

---

Format of Common – Size Balance Sheet Common Size Balance Sheet as at 31st March 2019 Particulars Note

No. Absolute Amount

2018-19 Rs.

Percentage of Balance Sheet Total 2018-19

I. EQUITY AND LIABILITIES 1. Shareholders funds (a) Share capital (b) Reserves and Surplus 2. Non-Current Liabilities (a) Long-term borrowings (b) Long-term provisions 3. Current Liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions

-- --

-- --

-- -- -- --

-- --

-- --

-- -- -- --

Total

- 100

II. ASSETS 1. Non-Current Assets (a) Fixed Assets (i) Tangible assets (ii) Intangible assets

-- --

-- --

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(b) Non-current investments (c) Long-term loans and advances 2. Current Assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets

-- -- --

-- -- -- -- -- --

-- -- --

-- -- -- -- -- --

Total

- 100


MCQ’s/ VERY SHORT ANSWER TYPE QUESTIONS (1 MARK) 1. The most commonly used too ls for financial analys is are: (A) Comparative Statements (B) Common Size Statements (C) Accounting Ratios (D) All of the above

2. Which one of the following is not a method/tool of analys is of financial statements? (A) Accounting Ratios (B) Break Even Point (C) Statements of Receipts andPayments (D) Fund FlowStatemen

3. Which of the following is the objective of comparative statements? (A) Tomake the data simpler and under stand able (B) To indicate the trend (C) To help inforecasting (D) All of the above

4. Comparative Balance Sheet: (A) Provides a summarized view of the operation sof the firm (B) Presents the financial position of the firm (C) Presents the change in various site m sof balance sheet

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5. None of the above Comparative Statement of Profit and Loss provides information about: (A) Rateo fincreaseor decreasein revenue from operations (B) Rateo fincreaseor decreasein cost of revenue from operations (C) Rateo fincreaseor decreasein net profit (D) All of the above

6. Which analys is depicts the relationship between two figures: (A) Ratio Analysis (B) Trend Analysis (C) Cumulative figures and averages (D) Dividend Analysis 7. Fixed Assets of accompany increased from Rs.3,00,000 to Rs.4,00,000.What is the

percentage of change? (A) 25% (B) 33.% (C) 20% (D) 40%

8. A company’s current liabilities decreased from Rs.4,00,000 to Rs.3,00,000.What is the

percentage of change? (A) 25% (B) 33.% (C) 20% (E) 40%

9. A company’s working capital is Rs.10 Lakh (Negative balance) in the year 2018. It became

Rs.15 Lakh (positive balance) in the year 2019.What is the percentage of change?

(A) 150% (B) 100% (C) 250% (D) 50%

10. Revenue from Operations Rs.4,00,000; Cost of Revenue from Operations 60% of Revenue from Operations; Operating expenses Rs.30,000 and rate of incometax is 40%. What will be the amount of profit after tax?

(A) Rs.64,000 (B) Rs.78,000 (C) Rs.52,000 (D) Rs.96,000

11. Main objective of Common Size statement is: (A) To present the changes in various items

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(B) To provide for a common base for comparison (C) To establish relationship between various items (D) All of the Above

12. Main objective of Common Size Balance Sheet is: (A) To establish relationship between revenue from operations and other items of statement of

profit and loss (B) To present changes in assets and liabilities (C) To present changes in various items of income and expenses

(D) All of the above

13. Common Size Statements are prepared (A) In the form of ratios (B) In the form of Percentages (C) In both of the above (D) None of the above

14. Which of the following is untrue: (A) Common size Balance Sheet (B) Common size Statement of Profit and Loss (C) Common size Cash Flow Statement (D) None of the above

15. Main objective of Common Size Statement of Profit and Loss is: (A) To present changes in assets and liabilities (B) To judge the financial soundness (C) To establish relationship between revenue from operation sand other items of statement of

Profit and Loss.

(D) All of the above

16. In the statement of Profit and Loss of a Common Size Statement: (A) Figure of net revenue from operations is assumed to beequal to100 (B) Figure of gross profit is assumed to beequal to100 (C) Figure of net profit is assumed to beequal to100

(D) Figure of assets is as summed to beequal to100

17. In the Balance Sheet of a Common sizeStatement: (A) Figure of current liabilities is assumed to be100 (B) Figure of fixed assets is assumed to be100 (C) Figure of total assets is assumed to be100 (D) Figure of share capital is assumed to be100

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18. TotalassetsofafirmareRs.20,00,000anditsfixedassetsareRs.8,00,000.Whatwillbe

thepercentageoffixedassetsontotalassets?

(A) 60% (B) 40% (C) 29% (D) 71%

19. If total assets of a firm are Rs.8,20,000 and its fixed assets are Rs 5,90,400 ,what will be

the percentage of current assets on total assets?

(A) 42% (B) 58% (C) 28% (D) 72%

20. If net revenue from operations of a firm are Rs.1,20,000; cost of revenue from operations is

Rs.66,000 and operating expenses are Rs.21,600, what will be the percentage of operating income on net revenue from operations?

(A) 55% (B) 45% (C) 73%

(D) 27% 21. What is meant by Comparative Balance Sheet? 22. State the purpose of preparing a Common Size Statement. 23. Which item is assumed to be 100 while preparing common size statement of profit and loss? 24.What is meant by a common size statements?

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SHORT ANSWER TYPE QUESTIONS (3 &4 MARK) Q1From the following prepare- a. Comparative Statement of Profit & Loss b. Common Size Statement of Profit & Loss for the year ended on 31st March 2012

Note No. 31.03.2012 Rs. 31.03.2011 Rs. Revenue from operations 15,00,000 10,00,000

Expenses 10,50,000 6,00,000

Other Income 10,50,000 2,00,000

Tax 50% 50%

Q2. From the following information, prepare a comparative statement of profit and loss for the year

2009-2010

Other Information (i)Income tax is calculated @ 50%. (ii)Manufacturing expenses are 50% of the total of that category.

Q3. From the following statement of profit and loss of Suntrack Ltd, for the years ended 31st March, 2011 and 2012, prepare a ‘comparative statement of profit and loss’.


Q.1 From the following prepare a. Comparative Statement of Profit & Loss b. Common Size Statement of Profit & Loss for the year ended on 31st March 2012

Particular Note No.

31.03.2012 Rs.

31.03.2011 Rs.

Revenue from operations 30,00,000 20,00,000

Other income (% of Revenue from operations) 15% 20%

Expenses (% of Revenue from operations) 60% 50%

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Q.2 From the following Balance Sheets of Universe Ltd., as on 31 March 2013 & 2014 a. prepare a Comparative Balance Sheet b. Common Size Balance Sheet for the year ended on 31st March 2014 c. Identify the value involved.

Universe Ltd. Balance Sheets as at 31st March 2014 & 2013


31.03.14 Rs.

31.03.13 Rs.

1 2

I. Equity and Liabilities 1. Shareholders’ funds (a) Share capital (b) Reserves and Surplus

2. Non-Current Liabilities Long term borrowings

3. Current Liabilities Trade payables

20,00,000 3,00,000

9,00,000

3,00,000

15,00,000 4,00,000

6,00,000

2,00,000

Total

35,00,000

27,00,000

II. ASSETS (1) Non-Current Assets (a) Fixed Assets (i) Tangible assets (ii) Intangible assets (2) CURRENT ASSETS (a) Inventories (b) Cash and cash equivalents

20,00,000 9,00,000

3,00,000 3,00,000

15,00,000 6,00,000

4,00,000 2,00,000

Total 35,00,000 27,00,000

The company gives free training in Information & Technology and provides jobs to the handicapped person. Q 3.Prepare Comparative and Common Size income statement from the following information for the year’s ended March 31, 2014 and 2015.

Particulars 2014(Rs.) 2015(Rs.)

1.Net Sales 2.Cost of Goods Sold 3.Indirect Expenses 4.Income Tax rate

8,00,000 60% of sales 10% of Gross profit 50%

10,00,000 60% of sales 10% of Gross Profit 60%

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Q4. On the basis of the following information extracted from the statement of Profit &Loss for

the year ended 31st March 2013-14. Prepare a comparative statement of profit and loss:

Particulars Note 31-3-13 31-3-14

Revenue from operations 30,000 20,000

Expenses 21,000 12,000

Other income 3,600 4,000

Tax rate 50% 50%

CHAPTER-14 RATIO ANALYSIS

SYNOPSIS

Meaning Ratios computed on the basis of accounting information are called accounting ratios. Thus accounting ratio is a numerical relationship between two accounting variables of financial statements. Objective of Accounting Ratio

To provide the deeper analysis of the liquidity, solvency, profitability and activity levels in the business.

To provide the information for making inter firm comparison and intra firm comparison or comparing performance with the best industry standards.

To know areas of the business which need more attention.

Advantages

It helps the management to analyze the past performance of the firm and also to make further projections.

It allows interested parties like shareholders, investors, creditors, government and analyst to make an evaluation of various aspects of the performance of an enterprise.

Classification of Accounting Ratios Accounting Ratios may be classified as follows from objective point of view:

Liquidity Ratios

Solvency Ratios

Activity or Turnover or Efficiency Ratio

Profitability Ratios (i) LIQUIDITY RATIOS (for short term solvency)

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Current Ratio/ Working Capital Ratio = Current Assets -----------------------------

Current Liabilities

Current Assets = Current Investments + Inventories + Trade Receivables + Cash and Cash Equivalents + Short Term Loans and Advances + Other Current Assets (prepaid expenses + accrued incomes+ advance tax)

Current Liabilities = Short-Term Borrowings + Trade Payables + Other Current Liabilities + Short-term Provisions

Significance – The ratio indicates short term financial soundness. A higher ratio means better capacity to pay its current liabilities. The ideal current ratio is taken as 2:1. A very high ratio means unnecessarily locked up funds in either inventories because of poor sale or trade receivables due to inefficiently collection policy or idle cash or bank lying without any investment.

Liquid Ratio = Liquid Assets --------------------------

Current Liabilities

Liquid Assets = Current Assets – Inventories – Other current assets


Significance – Quick assets are highly liquid assets i.e. can be converted into cash quickly. A quick ratio of 1:1 is considered safe and ideal. Higher the ratio will indicate idle liquid assets.

(ii) SOLVENCY RATIOS

Debt Equity Ratio = Debt -------------------------------- Equity / Shareholders’ Funds

Debt =Long Term Borrowings + Long Term Provisions Equity / Shareholders’ Funds = Share Capital + Reserves and Surplus Share capital = Equity Share Capital + Preference Share capital OR Equity / Shareholders’ Funds = Non- Current Assets + Working Capital - Non Current

Liabilities

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Non-Current Assets = Tangible Assets + Intangible Assets + Non-Current Investments + Long-Term Loans & Advances

Working Capital = Current Assets – Current Liabilities Non-Current Liabilities = Long-Term Borrowings + Long-Term Provisions Significance – This ratio assess the ability of the firm to meet its long term liabilities.A lower ratio indicates that the long term lenders are well protected or secure. Standard ratio is 2:1. If the ratio is more than this it shows a rather risky financial position.

(b) Total Assets to Debt Ratio= Total Assets ------------------- Debt Total Assets = Non-Current Assets (Tangible Assets + Intangible Assets + Non-Current Investments + Long-Term Loans & Advances) + Current Assets (Current Investments + Inventories + Trade Receivables + Cash & Cash Equivalents + Short-Term Loans & Advances + Other Current Assets).

Debt =Long Term Borrowings + Long Term Provisions

Significance – It measures the extent to which long term debts are covered by assets. A higher total asset to debt ratio implies the use of lower debts in financing the assets which means a larger safety margin for lenders. On the other hand low ratio represents risky financial position as it implies the use of higher debts in financing the assets of the business.

(c) Proprietary Ratio = Proprietors Funds ------------------------------ Total Assets Proprietors Funds = Share Capital + Reserves and Surplus Share capital = Equity Share Capital + Preference Share capital OR

Proprietors Funds = Non Current Assets + Working Capital - Non Current Liabilities Non-Current Assets = Tangible Assets + Intangible Assets + Non-Current Investments +

Long-Term Loans & Advances Working Capital = Current Assets – Current Liabilities Non-Current Liabilities = Long-Term Borrowings + Long-Term Provisions Total Assets = Non-Current Assets (Tangible Assets + Intangible Assets + Non Current

Investments + Long-Term Loans & Advances) + Current Assets (Current Investments + Inventories + Trade Receivables + Cash & Cash Equivalent + Short-Term Loans & Advances + Other Current Assets).

Significance – A higher ratio is sign of sound financial position. It shows the proportion of total assets provided by equity and hence the firm is less dependent on external source of finance. A low ratio is a danger signal for long term lenders.

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(d) Interest Coverage Ratio = Profit before interest and tax ---------------------------------------------- Interest on Long Term Debt Profit before interest and tax = Profit after interest and tax + tax+ Interest on long term debt

Significance – It shows how many times the interest charges are covered by the profits available to pay interest. A high ratio insures the safety of payment of interest to the lenders and adds to the confidence of lenders. (iii) ACTIVITY / TURNOVER / EFFICIENCY RATIOS

(a) Inventory Turnover Ratio = Cost of Revenue from Operation ------------------------------------------------ = .. times Average Inventory

Cost of Revenue from Operation = Cost of materials consumed + purchase of stock-in-trade + change in Inventory (Finished Goods; Work in Progress & Stock-in-trade) + Direct Expenses

OR Opening Inventory + Net Purchases + Direct Expenses – Closing Inventories

OR Revenue from Operations – Gross Profit

Average Inventory = Opening Inventory+ Closing Inventory ----------------------------------------------------- 2

Significance – This ratio measures how fast inventory is converted into revenue. Higher the ratio, more efficient management of inventories.

(b) Trade Receivables Turnover Ratio/ Debtors turnover ratio = Credit Revenue from Operations ---------------------------------------------- = … times

Average Trade Receivable Credit Revenue from Operations = Revenue from Operations – Cash Revenue from Operations

Average Trade Receivables = Opening Trade Receivables +Closing Trade Receivables ------------------------------------------------------------------------- 2

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Where Trade Receivables = Debtors + Bills Receivables Significance –It shows the efficiency in the collection of amount due from trade receivables. Higher ratio indicates that debts are being collected more quickly. (c ) Trade Payables Turnover Ratio/ Creditors turnover ratio = Net Credit Purchases ------------------------------------------------- = … times Average Trade Payables Average Trade Payables = Opening Trade Payables + Closing Trade Payables --------------------------------------------------------------------- 2 Trade Payables = Creditors + Bills Payables

Significance –It shows the number of times the creditors are paid. A higher turnover ratio or shorter payment period shows the availability of less credit. (d) Working Capital Turnover Ratio = Revenue from Operations ----------------------------------- =…. Times Working Capital Working Capital = Current Assets – Current Liabilities Current Asset = Current Investments + Inventories + Trade Receivables + Cash and Cash Equivalents + Short Term Loans and Advances + Other Current Assets


Significance – It shows how the working capital has been employed in the process of carrying on business. Higher the ratio, better the efficiency in the utilisation of working capital. (iv) PROFITABILITY RATIOS

(a) Gross Profit Ratio = Gross Profit ------------------------------------- x100 Revenue from Operations

Gross Profit = Revenue from Operations – Cost of Revenue from Operations Cost of Revenue from Operations = Cost of materials consumed + purchase of stock-in-trade

+ change in Inventory (Finished Goods; Work in Progress & Stock-in-trade) + Direct Expenses

Or

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Opening Inventories + Net Purchases + Direct Expenses – Closing Inventories Or Revenue from Operations – Gross Profit

Significance –Higher the ratio, lower the cost of revenue from operation (cost of goods sold).

Operating Ratio=Cost of Revenue from Operations+ Operating Expenses -------------------------------------------------------------------- x100 Revenue from Operations Cost of Revenue from Operations = Cost of materials consumed + purchase of stock-in-

trade + change in Inventory (Finished Goods; Work in Progress & Stock-in-trade) + Direct Expenses

Or Opening Inventories + Net Purchases + Direct Expenses – Closing Inventories

Or Revenue from Operations – Gross Profit

Operating Expenses = Employees Benefit expenses + Depreciation + Other expenses Other expenses = Office, Administrative, Selling and Distribution Expenses etc.

Significance – To assess the operational efficiency of business. Lower ratio is better .

(c ) Operating Profit Ratio = Operating Profit ----------------------------------- x100 Revenue from Operations Operating Profit = Net Profit (After Tax) + Non Operating Expenses / Losses – Non

Operating Incomes OR

Gross Profit + Other Operating Incomes – Other Operating Expenses

Non Operating Expenses = Finance cost + Other Non Operating Expenses Finance cost = Interest on Long Term Borrowings etc. Other Non Operating Expenses = Loss on sale of Non Current Assets etc. Non Operating Incomes = Other Incomes Other Income = Interest received on investments + Profit of sale of Non-Current Assets etc.

Significance – To determine the operational efficiency of management. Operating Profit Ratio + Operating Ratio = 100

Net Profit Ratio = Net Profit after Tax ----------------------------------- x100 Revenue from Operations

Significance – To determine the overall efficiency of management.

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Return on Investment or Net Profit after Tax Return on Capital Employed = ----------------------------------- x100 Capital Employed

Capital Employed may be calculated by any of the following two Methods. (1) Liabilities Side Approach = Shareholders’ Funds ( Share Capital + Reserves & surplus) +

Non-Current liabilities (Long term borrowings + Long term Provisions)

(2) Assets Side Approach = Non-Current Assets + Working Capital Non-Current Assets =Tangible Assets + Intangible Assets + Non- Current investments + Long-term Loans & Advances Working Capital = Current Assets - Current Liabilities Note: It is assumed that all Investments are Trade Investments.

Significance – To determine the overall performance of the enterprise. It measure how efficiently the resources of the business are used.


MCQ’s/ VERY SHORT ANSWER TYPE QUESTIONS ( 1 MARK) 1. Two basic measures of liquidity are:

(A) Nventory turn over and Current ratio (B) Current ratio and Quick ratio (C) Gross Profit ratio and Operating ratio (D) Current ratio and average Collectionperiod

2. Current ratiois:

(A) Solvency Ratio (B) Liquidity ratio (C) Activity Ratio (D) Profitability Ratio

3. Current Ratio is:

(A) Liquid Assets/Current Assets (B) Fixed Assets/Current Assets (C) Current Assets/Current Liabilities (D) Liquid assets/Current Liabilities

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4. Liquid Assets donot include: (A) Bills Receivable (B) Debtors (C) Inventory (D) Bank Balance

5. Ideal Current Ratiois:

(A) 1:1 (B) 1:2 (C) 1:3 (D) 2:1

6. Working Capital is the: (A) Cash and Bank Balance (B) Capital borrowed fromBanks (C) Difference between Current Assets and Current Liabilities (D) Difference between Current Assets and Fixed assets

7. Current assets include only those as sets which are expected to be realized with in…… (A) 3months (B) 6months (C) 1year (D) 2years

8. A Company’s liquid assets are Rs. 5,00,000 and its current liabilities are

Rs.3,00,000. The reafter, it paid Rs.1,00,000 to it strade payables. Quick ratio will be: (A) 1.33:1 (B) 2.5:1 (C) 1.67:1 (D) 2:1

9. A Company’s Quick Ratio is 1.5:1; Current Liabilities are Rs.2,00,000 and Inventory is Rs.1,80,000.Current Ratio will be:

(A) 0.9:1 (B) 1.9:1 (C) 1.4:1 (D) 2.4:1

10. Fixed Assets Rs.5,00,000; Current Assets Rs.3,00,000; Equity Share Capital Rs.4,00,000;

Reserve Rs.2,00,000; Long–term debts Rs. 40,000. Proprietory Ratio will be: (A) 75% (B) 80% (C) 125% (D) 133%

164

11. If Debt equityratio exceeds ........... ,it indicates risky financial position. (A) 1:1 (B) 2:1 (C) 1:2 (D) 3:1

12. Equity Share Capital Rs.20,00,000; Reserves Rs.5,00,000; Debentures Rs.10,00,000; Current Liabilities Rs.8,00,000. Debt-equity ratio will be: (A) 0.4 : 1 (B) 0.32:1 (C) 0.72:1 (D) 0.5 : 1

13. On the basis of following data, the Debt-Equity Ratio of a Company will be:Equity Share

Capital Rs. 5,00,000; General Reserve Rs.3,20,000; Preliminary Expenses Rs.20,000; Debentures Rs.3,20,000; Preliminary Expenses Rs.20,000; Debentures Rs.3,20,000; Current Liabilities Rs.80,000.

(A) 1:2 (B) 0.52:1 (C) 0.4:1 (D) 0.37:1

14. On the basis of the following information received from a firm,its Proprietory Ratio will be:

Fixed Assets Rs.3,30,000; Current Assets Rs.1,90,000; Preliminary Expenses Rs.30,000; Equity share Capital Rs.2,44,000; Preference Share capital Rs.1,70,000; Reserve Fund Rs.58,000. (A)70% (B)80% (C)85% (D) 90%

15. On the basis of the following information received from a firm, its Total Assets-Debt ratio will be: (A)40% (B)60% (C)30% (D) 70%

1. State with reason whether repayment of long-term loan will result in increase,decrease or no change of debt equity ratio.

2. What will be the operating profit ratio, if operating ratio is 83.64%? 3. The gross profit ratio of a company is 50%. State with reason whether the decrease in rent

received by Rs 15,000 will increase, decrease or not change the ratio. 4. Quick ratio of a company is 1.5:1. State giving reason whether the ratio will improve,

decline or not change on payment of dividend by the company. 5. The debt-equity ratio of a company is 0.8:1. State whether the long-term loan obtained by

the company will improve, decrease or not change the ratio.

165

SHORT ANSWER TYPE QUESTIONS (3 &4 MARK)

1 From the following compute Current Ratio Items Amount

a) Total Assets 1,00,000 b) Non-Current Liabilities 20,000 c) Shareholders Funds 60,000 d) Non-Current Assets 50,000

2 The current Ratio of a company is 2:1. State giving reasons which of the following would improve, reduce or not change the ratio:

a) Cash paid to trade payables b) Sale of fixed tangible assets for cash c) Issue of new shares for cash d) Payment of final dividend already declared.

3 The Current Ratio of A Ltd. is 4.5:1 and Liquid Ratio is 3:1. Inventories are 3,00000. Calculate Current Liabilities.

4 Akshara Ltd. has 8% Debentures of 5,00,000. Its profit before interest & tax is 2,00,000. Calculate Interest Coverage Ratio.

5 Assuming that the Debt-Equity Ratio is 2:1, state, giving reasons, which of the following transactions would (i) Increase; (ii) Decrease; (iii) Not alter the Debt-Equity Ratio : i) Issue of new shares for cash ii) Conversion of debentures into equity shares. iii) Sale of a fixed asset at profit. iv) Purchase of a fixed asset on long-term deferred payment basis. v) Payment to creditors 6 Calculate Working Capital Turnover Ratio from the following S.No. Items Amount 1. Current Asset 9,00,000 2. Revenue from Operations 24,00,000 3. Current Liabilities 1,00,000

7 Current Assets of a company are 17,00,000. Its current ratio is 2.5 and liquid ratio is 0.95. Calculate Current Liabilities and Inventory

8 The current Ratio of a firm was 2.2:1 and its current liabilities were 1, 00,000. Thereafter, it paid 20,000. Calculate current Ratio after making a payment to creditors.

166

9 From the following compute (a) Current Ratio (b) Quick Ratio Items Amount Current Investments 40,000 Inventories 5,000 Trade Receivables 2,000 Short-Term Provisions 3,000 Other Current Liabilities 5,000 Short-term Loans & Advances 4,000 Tangible Fixed Assets 1,00,000 Trade Payable Cash & Cash Equivalents 10,000 Prepaid expenses 2,000 Advance tax 8,000

10 From the following compute: a) Debt to Equity Ratio b) Total Assets to Debt Ratio c) Proprietary Ratio Items Amount Long-Term Borrowings 1,00,0 Long-Term Provisions 50,000 Current Liabilities 25,000 Non-Current Assets 1,80,000 Current Assets 45,000

11 Calculate Working Capital Turnover Ratio from the following Items Amount Revenue from Operations 12,00,000 Current Assets 5,00,000 Total Assets 8,00,000 Non Current Liabilities 4,00,000 Shareholders’ Funds 2,00,000

12 Cost of Revenue from Operations = 3,00,000 Inventory Turnover Ratio = 6 Times Find out the value of Opening Inventory, if opening inventory is 10,000 less than the closing inventory.

13 Calculate Gross Profit Ratio from the following: Items Amount Opening Inventories 50,000 Purchases 1,50,000 Returns outwards 20,000 Wages 10,000 Revenue from Operations 2,50,000 Closing Inventories 40,000

167

14 From the following calculate (a) Net Profit Ratio (b) Operating Profit Ratio

Items Amount Revenue from Operations 2,00,000 Gross Profit 75,000 Office Expenses 15,000 Selling Expenses 26,000 Interest on Debentures 5,000 Accidental losses 12,000 Income from Rent 2,500 Commission received 2,000

15 From the following calculate Return on Investment (or Return on Capital Employed) Items Amount

Share Capital 50,000 Reserves & Surplus 25,000 Net Fixed Assets 2,25,000 Non Current Trade Investments 25,000 Current Assets 1,10,000 12% Long term borrowings 2,00,000 Current Liabilities 85,000 Net Profit before tax ` 60,000

16. From the following information, calculate interest coverage ratio and give your comments also : Rs. Net Profit after Interest and Tax 1,20,000 Rate of Income Tax 50% 15% Debentures 1,00,000 12% Mortgage Loan 1,00,000

17. From the following details, calculate Opening inventory: Closing inventory 60,000; Total Revenue from operations 5,00,000 (including cash revenue from operations 1,00,000); Total purchases 3,00,000 (including credit purchases 60,000). Goods are sold at a profit of 25% on cost.

18 Calculate Creditors turnover ratio from the following information Revenue from operation Rs.10,00,000; Gross profit ratio 20%; Stock turnover ratio 5 times; stock at the beginning is 40,000 less than the stock at the end; Creditors at the beginning is Rs.1,50,000; creditors at the end is 1,00,000 more than the beginning.

168

19. From the following calculate:

(a) Current Ratio

(b) Working Capital turnover Ratio

(I) Revenue from operation 3,00,000

(II) Total Assets 2,00,000

(III) Shareholder’s funds 1,20,000

(IV) Non current liabilities 40,000

(V) Non Current Assets 1,00,000


1 The operating ratio of A ltd. is 55% and that of B Ltd. is 65%.Which company is following the value of efficient utilization of resources? Explain your answer.

2 Nimani Ltd. is into the business of back office operations. Honesty and hard work are the two pillars on which the business has been built. It has a good turnover and profits. Encouraged by huge profits, it decided to give the workers bonus equal to two months salary. Following is the Comparative Statement of Profit and Loss of Nimani Ltd. for the years ended 31st March 2013 and 2014. (a) Calculate Net Profit ratio for the years ending 31st March 2013 and 2014. (b) Identify any two values which Nimani Ltd. wants to communicate to the society.


2012-13

2013-14

Absolute Change

Percentage change

Revenue from operations Less Employee benefit expenses Profit before tax Tax rate 40% Profit after tax

20,00,000

8,00,000 12,00,000 4,80,000 7,20,000

30,00,000

10,00,000 20,00,000 8,00,000 2,00,000

10,00,000

2,00,000 8,00,000 3,20,000 4,80,000

50

25 66.67 66.67 66.67

3 You are given the following information: Cash sale 2,00,000 Credit sale 4,00,000 Stock Turnover Ratio = 5 times Gross Profit Ratio 20 % Complete the value of opening stock and closing stock if closing stock is 1.5 time of opening stock

4 X Ltd has a debt Equity Ratio at 3:1. According to the Management, it should be maintained at 1;1. What are the two choices to do so?

169

5 The stock turnover ratio of a company is 5 times. State, giving reason, whether the ratio improves or declines or does not change if goods costing 20,000 are sold for 18,000.

6 Assuming that the Debt equity ratio is 1:2, state giving reason whether the ratio will improve,

decline or will have no change if equity shares are issued for cash.

7 Calculate Operating ratio— Rs Net Sales = 5,40,000 Net Purchases 3,10,000 Opening Stock 75,000 Direct expenses 32,000 Closing Stock 50,000 Selling expenses 25,000 Distribution expenses 15,000 8 Calculate Inventory Turnover Ratio— Sales = Rs 4,00,000 Average stock – Rs 55,000 Gross Loss ratio =10%

9 Net profit after Interest but before tax Rs 1,40,000 15% Long term debt : Rs 4,00,000 Shareholders fund : Rs 2,40,000 Tax rate : 50% , Calculate Return on capital employed. a) From the following information, calculate any two of the following ratios

(i)Debt-equityratio (ii)Working capital turnover ratio (iii) Return on investment Information Equity share capital Rs 10,00,000, general reserve Rs 1,00,000, balance of statement of profit and loss after interest and tax Rs 3,00,000, 12% debentures Rs 4,00,000, creditors Rs 3,00,000, land and buildings Rs 13,00,000, furniture Rs 3,00,000, debtors 12,90,000, cash Rs 1,10,000.Revenue from operations i.e. sales for the year ended 31st March, 2011 was Rs 30,00,000. Tax rate is 50%.

b) (i)A business has a current ratio of 3 : 1 and quick ratio of 1.2 : 1. If the working capital is Rs 1,80,000. Calculate the total current assets and value of inventory. (ii) From the given information calculate the inventory turnover ratio. Revenue from operations (Sales) Rs 2,00,000, gross profit 25% on cost, inventory at the beginning is 1/3 of the inventory at the end which was 30% of sales.

c) (i) Net profit after interest but before tax Rs 1,40,000, 15% long-term debts Rs 4,00,000,shareholders’ funds Rs 2,40,000 and tax rate 50%. Calculate return on capital employed. (ii) Opening inventory Rs 60,000, closing inventory Rs 1,00,000, inventory turnover ratio 8 times and selling price 25% above cost. Calculate the gross profit ratio.

170

CHAPTER-15 CASH FLOW STATEMENT

SYNOPSIS

Meaning of CFS: It is a statement that shows the flow of Cash and Cash Equivalents during the period.

Cash and cash equivalents include Cash, Bank and Marketable Securities. Importance of CFS

Short Term Planning

Helps in Assessing Liquidity and Solvency

Efficient Cash Management

Comparative Study

Evaluate Management Decisions

Reasons for Cash Positions Limitations of CFS

Non-Cash Transactions ignored

Not a substitute for Income Statement

Historical in nature

When does Cash Flow arise? Any transaction which affects either:

Current Account (other than Cash and Cash equivalents) and Cash and cash equivalents.

A Non-Current Account (other than Cash and Cash equivalents) and Cash and cash equivalents.

Transactions not regarded as Cash Flow Movement between the items of Cash and cash equivalents. Eg. Cash deposited in Bank. Non-cash transactions in which Cash and cash equivalents are not involved Eg. Issue of shares for Consideration other than Cash. Special items

Proposed Dividend- proposed by the Board of Directors and approved by the shareholders: is paid in the next year.

Current year’s amount : No effect is given to Proposed dividend of CY as it is not accounted in the books of account as per AS-4(Revised). Previous year’s amount: Add back to Current year’s profit to calculate NPBT &Net Dividend paid (Proposed Dividend-Dividend unpaid) to be treated as Outflow. In case, any adjustment is given relating to dividend, Proposed Dividend Account be prepared to calculate the missing value.

171

Proposed Dividend A/c


Bank A/c (paid)(Financing-outflow) Bal c/d

Bal b/d Statement of P &L(prov. made Add to NPBT)

Provision for Tax: Current year’s amount: Add back to Current year’s profit to calculate NPBT Previous year’s amount: to be deducted from Cash Generated from Operations to determine Cash Flow from Operating Activities. In case, any adjustment is given relating to tax paid/provision, Provision for Tax Account be prepared to calculate the missing value.

Provision for Tax A/c

Interim Dividend-declared by theBoard of Directors and also paid within the financial year.

Add back to Current year’s profit to calculate NPBT and Show as Outflow under Financing Activity.

Sale of Fixed Asset/ investment Loss on sale-- Deduct from NPBT/ Profit on Sale- Add to NPBT

Issue of Bonus shares- not shown in CFS.

Issue of shares at premium-Inflow from Issue of shares = Face value + premium.

Increase in Underwriting Commission- Outflow from Financing Activity.

Decrease in value of Land- treated as sale of Land (inflow from investing activities).

Bank Overdraft- Treated as a Financing Activity. CashCredits.


Bank A/c (paid)(Operating-Outflow) Bal c/d

Bal b/d Statement of P &L(prov. Made) Add to NPBT)

172

173

174


VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)

Q1From the following particulars, what will be the amount of provision for tax made during they ear? Provision forTaxation 31.3.2011 50,000 31.3.2012 40,000 The Company paid taxes Rs 45,000 for the year 2011-2012. (a) Rs45,000 (b) Rs35,000 (c) Rs40,000 (d) Rs50,000 Q2.From the following information, the out flow of cash for the purchase of machinery will be: Written down value of machinery as on 1.4.2011-Rs5,00,000 Written down value of machinery as on 31.3.2012-Rs7,00,000 Depreciation on machinery charged during the year Rs60,000 Machinery having book value Rs25,000 sold for Rs20,000 (a) Rs2,70,000 (b) Rs2,80,000 (c) Rs2,75,000 (d) Rs2,85,000 Q3. Which of the following transactions would result inflow of cash: (a) Cash with drawn from Bank for office use. (b) Purchase of machinery worth Rs2,00,000 and issued shares in consideration there of. (c) Sale off urniture for Rs3,000 to Mr.Mohan. (d) Cash received from DebtorsRs6,000 Q4.From the following in formation find the cash generated from operations: Operating Profit before working capital changes1,00,000 Depreciation on fixed assets 15,000 Loss on sale of Furniture 5,000 Interest paid 13,000 Dividend received Rs.10,000. Increase indebtors 8,000 Decrease in stock7,000 Increase in creditors 4,000 (a) Rs1,18,000 (b) Rs1,24,000 (c) Rs1,03,000 (d) Rs1,00,000

175

Q5 Which of the following transactions would not create a cash flow ? (a) Acompanypurchasedsomeofitsownstockfromastockholder (b) Amortization of apatent (c) Payment of a CashDividend (d) Saleofequipmentatbookvalue Q6. Bank Overdraft and cash credit are to be treated as: (a) Cash Equivalents (b) Non Current Liabilities (c) Investing Activity (d) Short Term Borrowings Q7.From the following information find out the in flow of cash Office Equipment` 31stMarch,201460,000 31stMarch,20131,00,000 Additional Information: Depreciationfortheyear2013-14isRs7,000,PurchaseofofficeEquipmentduringtheyearRs 10,000PartofOfficeEquipmentsoldataprofitofRs6,000 (a) Rs48,000 (b) Rs49,000 (c) Rs44,000 (d) Rs33,000 Q8.From the following information find out the cash flow from financing activities. Proposed Dividend: 31st March 2013 20,000 31 st March 2014 15,000 AdditionalInformation:EquityShareCapitalraised3,00,00010%DebenturesRedeemed1,00,000 PreferenceSharecapitalRedeemed50,000.InterimDividendpaidduringtheyear20,000 (a) Rs1,25,000 (b) Rs1,00,000 (c) Rs1,50,000 (d) Rs1,30,000 Q9. Declaration of Final Dividend would result in (a) Outflow in Financing activities. (b) Outflow in Operating activities. (c) Inflow in Operating activities. (d) No Flow ofcash.

176

Q10.From the following in formation find out the cash out flow cash out flow from financing activities. Year-I Year – II ProposedDividendRs1,20,0001,50,000 12%DebenturesRs4,00,0005,00,000 AdditionalInformation:AdditionalDebentureswereissuedattheendofyear. InterimDividendpaid50,000.PreferenceSharecapitalissuedRs2,00,000. (a) Rs82,000 (b) Rs2,08,000 (c) Rs2,38,000 (d) Rs2,48000 Q11. From the following information find out the inflow of cash 31stMarch,2015 31stMarch,2014

Plant and Machinery Account Rs6,00,000 Rs4,50,000

Accumulated Depreciation Rs1,60,000 Rs1,00,000

Additional Information: Depreciation for the year 2014‐15 is Rs80,000. During the year Machinery was Purchased for Rs 2,50,000 and apart of asset was sold at aprofit of Rs.40,000. (a) Rs1,20,000; (b) Rs1,00,000; (c) Rs80,000; (d) Rs40000 Q12. Which of the following transactions would result in neither cash in flow nor out flow of cash and cash equivalents. (a) Issue of share capital (b) Issue of bonus shares (c) redemption of debentures (d) Trade receivable realized.

Q13Gain on sale of tangible current asset is an (a) Operating activity (b) Investing activity (c) Financingactivity (d) d.Cash and Cash Equivalents

177

Fill in the Blanks

1. The basis of Cash Flow Statementis 2. Debentures issued for consideration other than cash are not shown in the Cash Flow

Statement because is not received against the issue. 3. Loss on issue of debentures written off is shown by way of deduction from of thedebentures. 4. Patents purchased and completely amortized in they ear of purchase is added under

and shown as an outflow under

5. Purchase of securities by an on-finance company is

State True of False

1. Gratuity paid to are tiring employee is an Operating activity. 2. Issue of Bonus shares is shown as a financing activity. 3. Shares issued to promoter sinc on sideration of their service sares how nasa financing

activity. 4. Operating activities are principal revenue producing activities of an enterprise and

those activities that are not investing or financing activities. 5. Buy Back of shares is an extraordinary item for financing activity.


1.

178

3.

4.

5.

6.Calculate the net amount of cash flow if a fixed asset costing Rs. 32,000(having a book value of Rs. 24,000) is sold at a loss of Rs. 8,000.

179

7 .From the following information calculate cash flow from operating activities: Profit and loss account For the year ended on 31-03-2016


To Cost of goods sold 6,20,000 By sales 9,60,000

To selling and distribution expenses 52,000 By Profit on sale of furniture 12,000

To office Expenses 1,20,000 By interest Received 2,400

To Loss on sale of machinery 57,600 To depreciation 24,000 To Discount on debentures 8,000 To payment for taxation 28,800 To Net Profit 64,000 9,74,400 9,74,400

Additional information 31.03.15 31.03.16 Debtors 1,12,000 1,31,200 Stock 67,200 92,000 Creditors 50,000 60,000 Outstanding expenses 2,800 1,600

8. X Ltd. made a profit of Rs.1, 00,000/- after charging depreciation of Rs.20,000/- on assets and

a transfer to General Reserve of Rs.30,000/-. The Goodwill written off was Rs.7, 000/- and

the gain on sale of machinery was Rs.3, 000/-. The other information available to you

(changes in the value of current assets and current liabilities) is as follows:

At the end of the year Debtors showed an increase of Rs.6, 000/-, creditors an increase of

Rs.10, 000/-, prepaid expenses an increase of Rs.200/-, Bills Receivable a decrease of Rs.3,

000/-, Bills Payable a decrease of Rs.4, 000/- and outstanding expenses a decrease of Rs.2,

000/-. Ascertain the cash flow from the operating activities.

9. Calculate Cash Flow from Operating Activities from the following details:

Particulars 31st March, 2014 (Rs.) 31st march, 2013(Rs.)

Surplus, i.e., balance in statement of P/L 3,00,000 2,00,000

Bills Receivable 1,80,000 1,40,000

Depreciation 3,20,000 3,00,000

Outstanding Rent 40,000 16,000

Prepared Insurance 12,000 14,000

Goodwill 1,60,000 2,00,000

Inventories (stock) 1,80,000 1,40,000

180

10. Calculate Cash Flow from Operating Activities from the following:

a. Profit for the year is Rs. 2,50,000 after considering the following items:

Particulars Rs.

a) Depreciation on Fixed Assets 10,000

b) Amortization of Goodwill 5,000

c) Transfer to general Reserve 7,000

d) Profit on Sale Land 3,000

b. Following is the position of current assets and current liabilities:

Particulars Closing Opening

Balance (Rs.) Balance (Rs.)

Trade Receivables 23,000 22,000

Trade Payables 10,000 15,000

Prepaid Expenses 4,000 6,000

11. From the following information, calculate Cash Flow from Investing Activities:

Particulars Closing Balance Opening Balance

(Rs.) (Rs.)

Machinery (at cost) 4,20,000 4,00,000

Accumulated depreciation 1,10,000 1,00,000

Patents 1,60,000 2,80,000

Additional Information:During the year, a machine costing Rs. 40,000 with its accumulated

depreciation of Rs. 24,000 was sold for Rs. 20,000.Patents were written off to the extent of Rs. 40,000

and some patents were sold at a profit of Rs. 20,000.

181

LONG ANSWER TYPE QUESTIONS (6 MARK)

1. Following is the Balance Sheet of Wisben Ltd.as at 31st March 2014 and 2013:


31.03.2014(Rs.) 31.03.2013(Rs.)

I.EQUITY &LIABILITIES: (1)Shareholders Funds (a)Share Capital (b)Reserves and Surplus(Profit &Loss Balance) (2)Non-Current Liabilities Long Term Borrowings (3)Current Liabilities Trade Payable Short Term Provision Total II.ASSETS: (1)Non-Current Assets (a)Fixed Assets Tangible Assets (2)Current Assets (a)Inventories (b)Trade Receivables (c)Cash and Cash Equivalents Total

(1)

(2)

7,00,000 2,00,000

3,00,000

10,000 20,000 12,30,000

11,00,000

70,000 32,000 28,000 12,30,000

6,00,000 1,10,000

2,00,000

15,000 10,000 9,35,000

8,00,000

60,000 40,000 35,000 9,35,000

Notes To Accounts

(1) Long Term Borrowings

Particulars 2014 2013

10% Debentures 3,00,000 2,00,000

(2) Short Term Provision

Particulars 2014 2013

Provision for Tax 20,000 10,000

Adjustments: During the year a piece of machinery of the book value of Rs.80,000 was sold for Rs.65,000. Depreciation provided on tangible assets during the year amounted to Rs.2,00,000 Prepare Cash Flow Statement.

182

2. The Balance Sheet of Raksha Ltd. As on 31-03-2014 and 31-03-2015 were as follows:

Balance

Sheet

Notes to Accounts :-

Note No. Particulars Amount Amount

31-03-14 31-03-15

1. Reserves and Surplus Profit

and Loss Balance 2,50,000 1,50,000

2. Short Term Provisions

Proposed Dividends 50,000 40,000

3. Tangible Assets Plant

and Machinery 8,00,000 5,00,000

5. Cash and Cash Equivalents

Cash 4,00,000 3,15,000

ADDITIONAL INFORMATION:

(a) Rs. 50,000 depreciation has been charged to plant and machinery during the year 2014-15,

(b) A piece of machinery costing Rs. 12,000 (book value Rs. 5,000) was sold @ 60% profit on book value.

Particulars Note No. Amount Amount 31-03-15 31-03-14

( I ) EQUITY AND LIABILITIES

1. Shareholder’s Fund

Equity Share Capital 10 , 00,000 7 , 00,000

Reserves and Surplus 1 2 , 50,000 1 , 50,000

2. Current Liabilities

Short-term Provisions 2 50,000 40,000

Total 13 , 00,000 8 , 90,000

( II ) ASSETS

1. Non Current Assets

Fixed Assets

Tangible Assets 3 8 , 00,000 5 , 00,000

2. Current Assets

a) Inventory ( 00,000 , 1 75,000

( b) Cash and Cash Equivalents 4 , 4 00,000 3 , 15,000

Total 13 , 00,000 8 , 90,000

183

3.From the following Balance Sheet of Ajanta Limited as on March 31, 2017, prepare a Cash Flow

Statement:

Particulars Note Number

31-3-2017

(Rs.)

31-3-2016 (Rs.)

I.Equity and Liabilities

(1) Shareholders’ Funds

(a) Equity Share Capital

(b) Reserves and Surplus

(2) Non- Current Liabilities

Long-Term Borrowings- 9 % Debentures

(3) Current Liabilities

(a) Trade Payables

(b) Other Current Liabilities

1

2

3

10,00,000

2,40,000

3,20,000

1,80,000

1,80,000

10,00,000

1,20,000

2,40,000

2,40,000

1,60,000

Total 19,20,000 17,60,000

II. Assets

(1) Non-Current Assets

(a) Fixed Assets Tangible Assets

(b) Non-Current Investments

(2) Current Assets

(a) Inventories

(b) Trade Receivables

(c) Cash and Cash Equivalents

4

5

13,40,000

2,40,000

1,20,000

1,60,000

60,000

12,00,000

1,60,000

1,60,000

1,60,000

80,000

Total 19,20,000 17,60,000

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Notes to Accounts

Note Number

Particulars 31-3-2017

(Rs.)

31-3-2016

(Rs.)

1,20,000

1,20,000

1,20,000

……………

2,40,000 1,20,000

1,40,000 40,000

1,20,000

1,20,000

1,80,000 2,40,000

1,80,000

1,60,000

1,80,000 1,60,000

14,90,000

(1,50,000)

13,00,000

(1,00,000)

13,40,000 12,00,000

2,40,000

1,60,000

2,40,000 1,60,000


(a) During the year 2016-17, a machinery costing Rs. 50,000 and accumulated

depreciation thereon Rs. 15,000 was sold for Rs. 32,000.

(b) 9 % Debentures Rs. 80,000 were issued on April 1, 2016.

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1. Finserve Ltd is carrying on a Mutual Fund business. It invested ` 30,00,000 in shares and `15,00,000 in debentures of various companies during the year. It received ` 3,00,000 as dividend and interest. Find out cash flows from investing activities.

2. Give an example of a transaction, a part of which is classified or shown as Investing Activity and another part is classified as Financing Activity.

3. Alliance Ltd. purchased a building and paid the consideration by issue of Equity shares. How should this transaction be recorded in Cash Flow Statement?

4. P Ltd is a leasing company. It has shown interest earned under Investing Activity. Is the treatment right? Give reason.

5. D ltd is engaged in trading commodities. It has won a lottery prize of Rs. 2,00,000. How should this be shown in Cash Flow Statement?

6. How will you classify loans given by Birla Finance Ltd.? While preparing cash flow statement.

7. How will you classify deposits by customers in HDFC Bank while preparing cash flow statement.

8. State with reason whether ‘withdrawal of cash from bank’ will result into, inflow,outflow or no flow Of cash

9. Give one difference between an operating activity and a financing activity.

STUDY TIPS

Accountancy is mostly about fundamentals and calculations. Make sure that the concepts

are absolutely clear.

Solve as many problems as possible. Get hold of previous years' papers.

Show workings properly.

Write narrations with all Journal Entries.

Be clear about various formats of different statements of accounts. Draw formats neatly using scale and pencil.

Revise the lessons taught in class each day, as these will still be fresh in your mind. Even the slightest of doubt should be clarified with the teacher the very next day.

Solve as many question papers and practice books as possible. Follow the previous years' question papers to know the trend and type of questions that are frequently asked.

Highlight important points and formulae so that you can locate them easily.

As a part of your preparations, do the following: a) Latest CBSE sample papers (available on CBSE’s website) b) Previous years’ CBSE question papers for 2008 & 2009. c) Pre-board question papers of at least five other reputed schools. These papers must be done in examination conditions within a time limit of three hours. Students should get them

186

evaluated and analyse their mistakes. Weak topics and concepts must be revised thoroughly.

Always do a numerical question from a fresh page, try to complete an account/ statement on a single page.

Make good use of the reading time to ascertain the level of difficulty of various questions and to decide the sequence in which the paper is to be attempted. The time must also be utilized to analyse and break up a question in small parts for easy understanding.

187

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SAMPLE PAPER -1

SUBJECT: ACCOUNTANCY

Time Allowed: 3 Hours M .Marks:80

General Instructions: (i) This question paper contains two parts – A and B. (ii) All parts of a question should be attempted at one place.

PART- A ACCOUNTING FOR NOT-FOR-PROFIT ORGANISATIONS, PARTNERSHIP FIRMS AND COMPANIES 1. Deceased partner’s share in the Profit between the date of last Balance Sheet and the date of

death is credited to Deceased Partner’s Capital Account through Profit and Loss Adjustment Account. Is it correct? (1)

2. A and B are partners in a firm sharing profits in the ratio of 3 : 2. Mrs. A had given a loan of Rs.20,000 to the firm and the firm had also taken a loan of Rs.10,000 from B. The firm was dissolved and its assets realized Rs.25,000. State the order of payment of Mrs. A’s Loan and B’s Loan, if there were no other creditors in the firm. (1)

3. Compute the salaries to be debited to Income and Expenditure Account of National Club for the year ending 31st March, 2019 from the following information: (1)

1st April, 2018 31st March, 2019 Outstanding Salaries Rs.9,500 Rs.7,000 Prepaid Salaries Rs.2,800 Rs.5,200 Salaries paid during 2018-19: Rs.1,48,900. 4. Give the Journal entry to distribute ‘General Reserve’ of Rs.40,000 at the time of admission of

Z, when 25% of the General Reserve is to be transferred to Provision for Doubtful Debts. The firm has two partners X and Y. (1)

5. Give the Journal entry to distribute ‘Investment Fluctuation Reserve’ of Rs.40,000 at the time of a admission of W when Investment (market value Rs.1,90,000) appears at Rs.2,00,000. The firm has three partners X, Y and Z. (1)

6. Debentures Redemption Reserve is created by all companies except __________. (1) 7. There is no difference between ‘Y gives 1/3rd of his share’ and ‘Y gives 1/3rd from his share’. Is

it correct? (1) 8. At the time of change in profit-sharing ratio, reserves, accumulated profits and losses existing

in the books of the firm are transferred to Partners’ Capital Accounts in their old profit-sharing ratio because ___________. (1)

9. Param, Parul and Pankaj are partners sharing profits in the ratio of 5 : 3 : 2. Pankaj retired and his share was taken by Param and Parul equally. Will new profit-sharing of Param and Parul be 3: 2? (1)

10. X, Y and Z are partners sharing profits and losses in the ratio of 5: 4: 3. Z retired and is credited for Rs.9, 000 as goodwill. The amount debited to ‘X’ for goodwill will be (1) (a) Rs.20,000. (b) Rs.16,000. (c) Rs.5,000. (d) Rs.4,000.

200

11. After retirement of a partner, the combined share of the remaining partners will(1) (a) Not change. (b) Increase. (c) Decrease. (d) Increase or Decrease.

12. Sukriti Ltd. forfeited 100 shares of Rs.10 each for non-payment of final call of Rs.2. Out of the forfeited shares, 60 shares were reissued @ Rs.9 per share as fully paid. On reissue, amount to be transferred to Capital Reserve is (1) (a) Rs.420. (b) Rs.80. (c) Rs.200. (d) Rs.540.

13. On dissolution of a firm, a creditor of Rs.70, 000 accepted Stock of Rs.60, 000 at a discount of 20% and the balance in Cash. Realization Account will be debited with(1) (a) Rs.48,000 (b) Rs.70,000 (c) Rs.22,000 (d) Rs.10,000

14. Following information was given by the Secretary of the Crazy Jay Club: (3)

(a) Subscription received in 2018-19 as per Receipts and Payment

A/c………………………………. (b) Advance subscription received in 2017-

18…………………………………………………………………….. (c) Subscription outstanding at the end of 2018-19 (including Rs.1,500 for 2017-

18)…………. (d) Advance subscription received for 2019-

20…………………………………………………………………… (e) Subscription written off during 2018-

19………………………………………………………………………… (f) Subscription receivable on 1st April,

2018……………………………………………………………………..

Rs. 89,000 5,000 12,500 3,000 600 8,400

Required: (i) Calculate subscription income to be credited to Income and Expenditure Account for the

year ended 31st March, 2019. (ii) Show how the relevant items will be shown in the Income and Expenditure Account for the

year and in the Balance Sheet as at the end of the year. Or

State any three differences between Income and Expenditure Account and Profit and Loss Account.

15. X, Y and Z are partners in a firm sharing profits in the ratio of 5 : 3 : 2. They decided to share future profits in the ratio of 2 : 3 : 5, with effect from 1st April, 2019. Workmen Compensation Reserve existed at Rs.12,000 in the Balance Sheet as at 31st March, 2019. Show the accounting

201

treatment of Workmen Compensation Reserve in each of the following two cases: (4) Case I : If no other information is given Case II : If a claim of Rs.22,500 on account of Workmen Compensation is estimated.

16. Mohit Ltd. has 10,000; 10% Debentures of Rs.100 each due for redemption on 31st March, 2019. Debentures are to be redeemed out of profits and Debentures Redemption Reserve has a balance of Rs.3,60,000 on that date, pass necessary Journal entries for Redemption of Debentures. Ignore interest on debentures. (4)

17. Ram, Shyam and Rahim are partners sharing profits in the ratio of 4 : 3 : 2. Shyam retired and the goodwill of the firm was valued at Rs.2,16,000. Ram and Rahim will share future profits in the ratio of 5 : 3. Pass necessary Journal entries for goodwill separately under the following situations: (4) (i) When Goodwill Account is raised and written off. (ii) When only Shyam’s share of goodwill is raised and written off.

Or X, Y and Z are entered into partnership on 1st April, 2017 to share profits and losses in the ratio of 12 : 8 : 5. Z was a technically qualified person who left his job to join the firm as partner. hence, it was agreed that Z’s share in profit will not be less than Rs.1,00,000 p.a. Profits and losses for the years ended 31st March, 2018 and 2019 were Rs.4,00,000 and Rs.4,00,000 (Loss) respectively. Pass the necessary Journal entries in the books of the firm.

18. X, Y and Z were partners sharing profits in the ratio of 2: 3 : 1. Their Balance Sheet as at 31st March, 2019 is given below: (4)


50,000 25,000 7,50,000 1,50,000 15,00,000

30,000 6,25,000 1,25,000 2,00,000 7,25,000 7,40,000 30,000

24,75,000 24,75,000

X, Y and Z decide to alter their profit-sharing ratio as 3 : 2 : 1 w.e.f. 1st April, 2019. They have agreed on the following terms: (i) Goodwill is to be valued at 2 years’ purchase of average profits of the last three completed

years. the profits for the years ended 31st March, were as follows:

Year 2016-17 2017-18 2018-19

Profit (Rs) 1,20,000 2,32,500 3,45,000

(ii) Land and Building was found undervalued by Rs.50,000 and stock was found overvalued by Rs.95,000.

(iii) Provision for doubtful Debts is to be equal to 5% of the debtors. (iv) 10% of the sundry creditors be written back as no longer payable.

202

(v) Claim on account of Workmen Compensation is Rs.20,000. (vi) Out of total insurance premium debited to Profit and Loss Account, Rs.12,500 is prepaid

insurance. You are required to prepare Revaluation Account and the Capital Accounts of the partners.

19. (a) Moon Ltd. issued 25,000, 10% Debentures of Rs.100 each. give Journal entries in the following cases when: (6) (i) The debentures were issued at a premium of 20%. (ii) The debentures were issued as a collateral security to bank against a loan of

Rs.20,00,000. (iii) The debentures were issued at premium to a supplier of machinery costing

Rs.28,00,000 as full and final payment. (b) Machinery was purchased for Rs.25,00,000 from Sun Ltd. which was paid by issuing a

cheque for Rs.5,00,000, giving acceptance for Rs.5,00,000 and balance by issuing 10% Debentures at par.

Pass the Journal entries Or

Jupiter Ltd. issued 10,000, 8% Debentures of Rs.100 each at a discount of 10% and redeemable at a premium of 10%after 5 years. It had balance of Rs.1,00,000 in Securities Premium Reserve. Pass Journal entries for issue of debentures and prepare Loss on Issue of Debentures Account.

20. From the following Receipts and Payments Account, prepare Income and Expenditure Account of Patel Education Society for the year ending 31st Marc, 2019 and Balance Sheet as on that date: (6)

Dr. RECEIPTA AND PAYMENTS ACCOUNT for the year ended 31st March, 2019 Cr.


33,500 3,000 500 35,000 750 1,000 4,000 3,200

12,000 1,200 5,250 25,000 2,000 10,000 25,500

80,950 80,950

(i) Following were the assets and liabilities as on 1st April, 2018: Utensils Rs.8,000, Furniture Rs.25,000, Consumable stores Rs.3,500, Creditors Rs.12,000.

(ii) On 31st March, 2019 Stock of Consumable Stores was Rs.7,000; Creditors were Rs.5,500; Outstanding Subscription Rs.750; and Accrued Interest on Fixed deposits was Rs.250.

(iii) Charge depreciation on the closing balance of Furniture and Utensils @ 10% and 15% respectively.

203

21. Bharat Ltd. issued 50,000 shares of Rs.10 each at a premium of Rs.2 per share for subscription payable as follows: (8) Rs.3 on Application, Rs.6 on Allotment (including premium), and Rs.3 on Call.

Applications were received for 75,000 shares and pro rata allotment was made as follows: To the applicants of 40,000 shares, 30,000 shares were issued and for the rest 20,000 shares were issued. All money due was received except the allotment and call money from Ram who had applied for 1,200 shares (out of the group of40,000 shares). All his shares were forfeited. The forfeited shares were reissued for Rs.7 per share fully paid-up. Pass necessary Journal entries for the above transactions. Or Grand Auto Ltd. invited applications for 5,00,000 Equity Shares of Rs.10 each at a premium of Rs.2 per share. The amount was payable as follows: On Application - Rs.5 (including premium), On Allotment - Rs.4, On First and Final Call - Rs.3. Applications for 7,50,000 shares were received. Applications for 1,50,000 shares were rejected and pro rata allotment was made to the remaining applicants. Excess application money was utilized towards sum due on allotment. Giri who had applied for 12,000 shares failed to pay the allotment and call money. His shares were forfeited. Out of the forfeited shares, 5,000 shares were reissued for Rs.8 per share fully paid-up. The company maintains Calls-in-Arrears Account. Pass necessary Journal entries in the books of Grand Auto Ltd.

22. X and Y were in partnership, sharing profits and losses in the ratio of X-3/5 AND Y-2/5. On 1st April, 2018, they admit Z into the partnership on the following terms: (8) Z would have1/6th share, which is taken 1/8th from X and 1/24th from Y by paying Rs.1,00,000 equivalent to that share of goodwill, which was retained in the business by the existing partners. Z also brought Rs.2,00,000 as his capital into the firm. It was further agreed that machinery would be reduced to 90% of its book value, investment would be valued at its market value, i.e., Rs.80,000 and land and building would be valued at 150% of the book value. Balance Sheet of X and Y as at 31st March, 2018 was as follows:

Liabilities Rs. Assets Rs. 5,10,000 4,00,000

1,00,000 1,00,000 4,00,000 1,10,000 1,00,000 60,000 40,000

9,10,000 9,10,000

204

Interest on drawings is to be ignored but interest on capital (on opening balance of the year) is to be allowed at 10%. Profit for the year ended 31st March, 2019 was Rs.4,18,000 before charging interest on capitals. Drawings made by the partners were as follows: X-Rs.1,00,000; Y-Rs.80,000; and Z-Rs.50,000. You are required to Journalize the opening adjustments and prepare Profit and Loss Appropriation Account and ‘Partners’ Capital Accounts for the year ended 31st March, 2019. Or Puneet, Pankaj and Pawan are partners in a business sharing profits in the ratio of 2 : 2 : 1. Their Balance Sheet as at 31st March, 2018 was as follows:


2,00,000 1,00,000 4,00,000

40,000 60,000 1,60,000 1,40,000 70,000 2,30,000

7,00,000 7,00,000

Pawan died on 30th September, 2018. The Partnership Deed provided as follows: (i) Deceased partner will be entitled to his share of profit up tot eh date death calculated

on the basis of previous year’s profit. (ii) He will be entitled to his share of goodwill of the firm calculated on the basis of 3 year’s

purchase of average of last 4 year’s profit. Profits for the last four financial years ended 31st March, are: for 2014-15: Rs.1,60,000; for 2015-16: Rs.1,00,000; for 2016-17: Rs.80,000; for 2017-18: Rs.60,000.

(iii) Drawings of the deceased partner up to the date of death were Rs.20,000. (iv) Interest on capital is to be allowed at 12% per annum.

Continuing partners agreed that Rs.30,800 will be paid to his legal heir immediately and the balance in two equal yearly instalments starting from 30th September, 2019 with interest @ 12% p.a. on outstanding balance. Show Pawan’s Capital Account and his Executor’s Account till the settlement of the amount due.

PART B ANALYSIS OF FINANCIAL STATEMENTS

23. Cash Flow Statement is not a substitute for Income Statement because ________.(1) 24. Financial Analysis ignores qualitative factors. Is it correct? (1) 25. In case of Common-size Statements, values of previous year are taken as base for comparison.

Is it correct? (1) 26. Current Ratio is 1 : 1 and current liability of Rs.25,000 is paid by cheque. Will it change the

Current Ratio. (1) 27. Debtors are Rs.5,00,000 and Provision for Doubtful Debts are Rs.10,000. If Provision for

Doubtful Debts is increased to Rs.25,000, it will increase, decrease or not change Trade Receivables Turnover Ratio. (1)

205

28. Following analysis is based on one year’s data: (1) (a) Cash Flow Statement (b) Dividend Analysis (c) Horizontal Analysis (d) Vertical Analysis

29. Which of the following is not a limitation of analysis of financial statements? (1) (a) Subjectivity (b) Window dressing (c) Intra-firm Comparison (d) Only quantitative analysis

30. Prepare a Comparative Statement of Profit and Loss from the following information extracted from the Statement of Profit and Loss of Fun Sports Ltd. for the year ended 31st March, 2019: (3)

Particulars 31st March, 2019 31st March, 2018

Revenue from Operations Employee Benefit Expenses Depreciation Other Expenses Tax Rate

Rs.70,00,000 Rs.35,00,000 Rs.8,00,000 Rs.16,00,000 40%

Rs.50,00,000 Rs.20,00,000 Rs.5,00,000 Rs.12,00,000

40%

Or State the main heads and sub-heads under which following items will be shown in the Balance Sheet of a Company: (a) Accrued Interest. (b) Debentures Redeemable within 12 months of the Balance Sheet. (c) Calls-in- Advance. (d) Calls-in-Arrears.

31. (a) Capital Employed: Rs.1,00,000, (2 + 2=4)

Non-current Assets: Rs.80,000, Cost of Revenue from Operations: Rs.3,20,000, Gross Profit Ratio: 20%, Calculate Working Capital Turnover Ratio. (b) Inventory Turnover Ratio: 4 Times, Inventory at the end was Rs.20,000 more than Inventory in the beginning, Revenue from Operations: Rs. 3,00,000, Current Liabilities: Rs.40,000, Quick Ratio: 0.75 : 1, Calculate Current Ratio. Or From the following information, calculate Debt to Equity Ratio and Total Assets to Debt Ratio: Rs.

Rs.

Equity Share Capital 2,00,000

12% Debentures 16,00,000

10% Preference Share Capital Current Liabilities

206

3,00,000 6,80,000 Reserves and Surplus: General Reserve 2,50,000

Fixed Assets (Tangible) 21,00,000 Long-term Trade Investments 2,00,000

Surplus, i.e., Balance in Statement of Profit and Loss 1,50,000

Current Assets 8,80,000

32. (a) From the following information, calculate Cash Flow Operating Activities:(4 + 2=6)

Particulars 31st March, 2019 Rs.

31st March, 2018 Rs.

Surplus, i.e., Balance in the Statement of Profit and Loss Inventory Trade Receivables Outstanding Expenses Goodwill Cash in Hand Machinery

71,000 12,000 58,000 14,600 57,000 9,000 82,000

89,000 4,000 45,000 10,000 27,000 12,000 56,000

(i) A piece of machinery costing Rs.50,000 on which depreciation of Rs.20,000 had been charged was sold for Rs.10,000. Depreciation charged during the year was Rs.18,000.

(ii) Income Tax Rs.23,000 was paid during the year. (iii) Interim Dividend paid during the year was Rs.36,000. (iv) During the year, Non-current Investments were sold at a profit of 20% which is

transferred to Capital Reserve. Book value of investment sold Rs.10,000. (b) From the following information, calculate Cash Flow from Investing Activities:

Particulars 31st March, 2019 Rs.

31st March, 2018 Rs.

Machinery (At Cost) Accumulated Depreciation

4,10,000 90,000

2,50,000 60,000

Additional Information: During the year, a machine costing Rs.80,000 with its accumulated depreciation of Rs.50,000 was sold at a profit of 20%.

207

Sample Paper-2 Accountancy – Class XII CBSE SQP (2019-20) General Instructions:

(i) This question paper contains two parts – A and B.

(ii) Part A is compulsory for all.

(iii) All parts of a question should be attempted at one place.

PART A

(Accounting for Not-for-Profit Organizations, Partnership Firms and Companies)

1 How are the following items presented in financial statements of a Not-for- Profit organisation:- (a) Tournament Fund- 80,000 (b) Tournament expenses-14,000

1

2 At what rate is interest payable on the amount remaining unpaid to the executor of deceased partner, in absence of any agreement among partners, when (s)he opts for interest and not share of profit. (a) 12% p.a.

(b) 8% p.a.

(c) 6% p.a.

(d) 7.5%p.a.

1

3 State the order of payment of the following, in case of dissolution of partnership firm.

i. to each partner proportionately what is due to him/her from the firm for advances as

distinguished from capital (i.e. partner’ loan); ii. to each partner proportionately what is

due to him on account of capital; and iii. for the debts of the firm to the third parties;

1

4 A and B are partners in a firm having a capital of ₹ 54,000 and ₹ 36,000 respectively. They admitted C for 1/3rd share in the profits C brought proportionate amount of capital. The Capital brought in by C would be:

a) ₹ 90,000

b) ₹ 45,000

c) ₹ 5,400

d) ₹ 36,00

1

5 Amit, a partner in a partnership firm withdrew ₹ 7,000 in the beginning of each quarter. For how

many months would interest on drawings be charged?

1

Ankit, Unnati and Aryan are partners sharing profits in the ratio of 5:3:2. They decided to share

future profits in the ratio of 2:3:5 with effect from 1st April,2018. They had the following balance in

their balance sheet, passing necessary Journal Entry:

Particulars Amount(₹)

Profit and loss Account (Dr) 60,500

7 A and B are partners in a firm. They admit C as a partner with 1/5th share in the profits of the firm. C

brings ₹ 4,00,000 as his share of capital. Calculate the value of C’s share of Goodwill on the basis of

his capital, given that the combined capital of A and B after all adjustments is ₹ 10,00,000

1

8 Riyansh, Garv and Kavleen were partners in a firm sharing profit and loss in the ratio of 8:7:5. On

2nd November 2018, Kavleen died. Kalveen’s share of profits till the date of her death was calculated

at₹ 9,375. Pass the necessary journal entry.

1

9 A and B are partners in a firm sharing profits and losses in the ratio of 3:2.On 1st April, 2019 they

decided to admit C their new ratio is decided to be equal. Pass the necessary journal entry to

distribute Investment Fluctuation Reserve of₹ 60,000 at the time of C’s admission, when Investment

appear in the books at₹ 2,10,000 and its market value is ₹1,90,000.

1

208

10 ‘Complete the following statement’

When a liability is discharged by a partner, at the time of dissolution, Capital Account is credited

because ______________ .

1

11 A and B are in partnership sharing profits and losses in the ratio of 3:2. They admit C into partnership

with 1/5th share which he acquires equally from A and B. Accountant has calculated new profit

sharing ratio as 5:3:2. Is accountant correct?

1

12 Wellness Co. Ltd. has issued 20,000, 9% Debentures of ₹ 100 each at a premium of 10% on 1st April,

2018 redeemable as follows:

31st March, 2021 – 10,000 debentures 31st March, 2022 – 4,000 debentures 31st March, 2023 – balance debentures.

It transferred to Debentures Redemption Reserve the required amount as applicable rules of the

Companies Act and Rules, 2014 on due date. How much amount will be transferred to General

Reserve on 31st March, 2021

a) ₹ 1,00,000

b) ₹ 2,50,000

c) ₹ 5,00,000

d) ₹ 20,00,000

1

13 A portion of share capital that is reserved by the company and will be utilized only on the happening of winding up of the company is called ________.

1

14 a)Calculate the amount of medicines consumed during the year ended 31st March,2019

Particulars Amount (₹)

Opening Stock of Medicines 50,000

Closing stock of Medicines 45,000 more than

opening stock

Amount paid for medicines during the year 2,00,000

Opening Creditors 20,000

Closing Creditors 50% of opening creditors

Or

Distinguish between Income and Expenditure Account and Receipt and payment Account on basis of :-

i. Nature

ii. Nature of items iii.

Period

3

3

15 Danish, Ana and Pranjal are partners in a firm sharing profits and losses in the ratio of 5:3:2. Their books are closed on March 31st every year.

Danish died on September 30th , 2019, The executors of Danish are entitled to:-

i. His share of Capital i.e. ₹ 5,00,000 along-with his share of goodwill. The total goodwill of the firm was valued at ₹ 60,000.

ii. His share of profit up to his date of death on the basis of sales till date of death. Sales for the year ended March 31, 2019 was ₹ 2,00,000 and profit for the same year was 10% on sales. Sales shows a growth trend of 20% and percentage of profit earning is reduced by 1%.

iii. Amount payable to Danish was transferred to his executors.

Pass necessary Journal Entries and show the workings clearly.

4

209

16 Maanika, Bhavi and Komal are partners sharing profits in the ratio of 6:4:1. Komal is guaranteed a minimum profit of ₹ 2,00,000. The firm incurred a loss of ₹22,00,000 for the year ended 31st March,2018. Pass necessary journal entry regarding deficiency borne by Maanika and Bhavi and prepare Profit and Loss Appropriation Account.

OR

The partners of a firm, Alia, Bhanu and Chand distributed the profits for the year ended

31st March, 2017, ₹ 80,000 in the ratio of 3:3:2 without providing for the following adjustments:

a) Alia and Chand were entitled to a salary of ₹ 1,500 each p.m.

b) Bhanu was entitled for a salary of ₹ 4,000 p.a.

Pass the necessary Journal entry for the above adjustments in the books of the firm. Show workings

clearly.

4

17

Bliss Products Ltd. registered with capital of ₹ 90,00,000 divided into 90,000 equity shares of ₹ 100 each. The company issued prospectus inviting applications for 50,000 equity shares of ₹ 100 each payable as ₹ 20 on application, ₹ 30 on allotment, ₹ 20 on first call and balance on second call. Applications were received for ₹40,000 shares. Raman to whom 1600 shares were allotted failed

to pay final call money and these shares were forfeited. Of the forfeited shares, 600 shares were

reissued to Sukhman, credited as fully paid for ₹ 90 per share. Present the Share Capital as per

Schedule III of Companies Act, 2013

4

18 The firm of R, K and S was dissolved on 31.3.2019. Pass necessary journal entries for the following after various assets (other than cash and Bank) and the third party liabilities had been transferred to realisation account.

(i) K agreed to pay off his wife’s loan of ₹ 6,000.

(ii) Total Creditors of the firm were ₹ 40,000. Creditors worth ₹10,000 were given a piece of furniture costing ₹8,000 in full and final settlement. Remaining creditors allowed a discount of 10%.

(iii) A machine that was not recorded in the books was taken over by K at ₹ 3,000 whereas its expected value was ₹ 5,000.

(iv) The firm had a debit balance of ₹ 15,000 in the profit and loss A/c on the date of

dissolution.

4

210

19 From the following Receipts and Payments Accounts of Rolaxe Club, for the year ended 31st March, 2019. Prepare Income and Expenditure Account for the year ended 31st March, 2019. Receipts and Payments Account for the year ended 31st March, 2019

Receipts Amount (₹) Payments Amount (₹)

To Balance b/d By Advertisement 13,100

Cash in hand 17,050 By Rent rates and Taxes 14,000

Current a/c with bank 18,570 By Repairs 15,000

To Donations 20,000 By Printing and Stationery 16,000

To Proceeds from charity Show 16,200 By Government Bonds 5,000

To Subscription 52,000 By Telephone Expenses 1,000

To Life membership fees 5,250 By Furniture (purchased on

1st July, 2018)

70,000

To Entrance Fees 6,000 By Balance c/d

To Interest on investment @

7% for the year.

7,200 Cash in hand 3,170

Cash at Bank 5,000

1, 42,270 1, 42,270

Additional Information :-

i) Depreciate furniture by 15% p.a.

ii) There were 416 Life Members on 31.3.2018 the subscription payable by each member, to be a life time member is ₹ 125

iii)

Subscription outstanding on 31st March, 2018 6,000

Subscription outstanding on 31st March, 2019 7,000

Subscription received in advance on 31st March, 2018 4,000

Subscription received in advance on 31st March, 2019 5,000

6

20 Journalise the following transactions

a) Mehar Ltd. issued ₹ 1,00,000, 12% Debentures of ₹ 100 each at a premium of 5% redeemable at a premium of 2%

b) 12 % Debentures were issued at a discount of 10% to a vendor of machinery for payment of

₹ 9,00,000

6

c)Issue of 10,000 11% debentures of ₹ 100 each as collateral in favour of State Bank of India. Company opted to pass necessary entry for issue of debentures.

Or

Faith and Belief Ltd has total redeemable debentures of ₹ 5,00,000. It decides to redeem

these debentures in two instalments of ₹ 3,00,000 and ₹ 2,00,000 on December 31st 2018

and March 31st 2020 respectively. Assuming that the Company has sufficient funds in

Debenture Redemption Reserve Account, pass necessary journal entries for the year ending

March 31st 2020.

21 Gautam and Yashica are partners in a firm, sharing profits and losses in 3:1 respectively. The balance sheet of the firm as on 31st March 2018 was as follows:

Balance Sheet

As at 31.3.2018

8

211

Liabilities Amt(₹) Assets Amt(₹)

Sundry creditors

Bills payable

Capitals

Gautam 4,00,000

Yashica 1,00,000

50,000

30,000

5,00,000

Furniture

Stock

Debtors

Cash in hand

Machinery

60,000

1,40,000

80,000

90,000

2,10,000

5,80,000 5,80,000

Asma is admitted as a partner for 3/8th share in the profits with a capital of ₹2,10,000 and

₹50,000 for her share of goodwill. It was decided that:

i. New profit sharing ratio will be 3:2:3

ii. Machinery will depreciated by 10% and Furniture by ₹5,000.

iii. Stock was re-valued at ₹2,10,000.

iv. Provision for doubtful debts is to be created at 10% of debtors.

v. The capitals of all the partners were to be in the new profit sharing ratio on basis of capital of new partner any adjustment to be done through current accounts.

Prepare Revaluation Account, Partners Capital Account and the Balance Sheet of the new firm.

Or

X,Y and Z were in partnership sharing profits in proportion to their capitals. Their Balance Sheet as on 31st March, 2018 was as follows:

Liabilities Amount (₹) Particulars Amount (₹)

Sundry Creditors 16,600 Cash 15,000

Workmen’s Compensation

Fund

9,000 Debtors 21,000 Less-Prov for Doubtful Debts (1400)

19,600


Capitals :

X 90,000

Y 60,000

Z 30,000 1,

80,000

Machinery Building 58,000

1,00,000

2, 11,600 2,11,600

On the above date, Y retired owing to ill health. The following adjustments were agreed upon for calculation of amount due to Y.

a) Provision for Doubtful Debts to be increased to 10% of Debtors.

b) Goodwill of the firm be valued at ₹ 36,000 and be adjusted into the Capital Accounts of X and Z, who will share profits in future in the ratio of 3:1.

c) Included in the value of Sundry Creditors was ₹ 2,500 for an outstanding legal claim, which will not arise.

d) X and Z also decided that the total capital of the new firm will be ₹ 1,20,000 in their profit

212

sharing ratio. Actual cash to be brought in or to be paid off as the case may be.

e)Y to be paid ₹ 9,000 immediately and balance to be transferred to his Loan Account. Prepare

Revaluation Account, Partner’s Capital Accounts and Balance Sheet of the new firm after Y’s

retirement.

22 Saregama Ltd invited applications for issuing 80,000 equity shares of ₹ 100 each at a premium of ₹ 10. The amount was payable as follows On Application – ₹ 30

On allotment – ₹ 30 (including a premium of ₹ 10)

On 1st call – ₹ 30

On Final Call Balance

Applications of 1,20,000 shares were received. Allotment was made on pro rata basis to all applicants. Excess money received on application was adjusted on sums due on allotment. Dhwani, who was allotted 1,600 shares, failed to pay allotment money and Sargam who applied of 6,000 shares did not pay 1st call money. These shares were forfeited immediately after 1st call.

2,000 of these shares (including all shares of Dhwani were issued to Tarang for ₹ 95 per share as 80 paid up. Pass necessary journal entries in books of Saregama Ltd. by opening call in arrear, call in advance account, if final call has not been made.

Or

a. X Ltd. forfeited 10 shares of ₹ 10 each, ₹ 7 called up on which the shareholder had paid

application and allotment money of ₹ 5 per share. Out of these, 8 shares were re-issued to Y

for ₹8 per share at ₹ 8 per paid up per share. Record the journal entries for forfeiture and

reissue of shares by opening call in arrear, call in advance account.

b. L ltd forfeited Mr M’s shares who has applied for 600 shares and was allotted 400 shares failed to pay allotment money of ₹ 4 per share including premium of ₹ 2 on which he had paid application money of ₹ 2 only. Pass necessary journal entries for forfeiture of shares by opening call in arrear, call in advance account.

c. Crown Ltd forfeited 50 shares of ₹ 10 each, for non- payment of final call money of ₹ 3 per

share. Out of these 20 shares were reissued to Taj at₹ 8 per share. Record the journal

entries for forfeiture and reissue of shares assuming that the company maintains call in

arrear, call in advance account.

8

PART B

OPTION 1

(Analysis of Financial Statements)

23 What will be the effect on current ratio if a bills payable is discharged on maturity? 1

24 The two basic measures of operational efficiency of a company are

a) Inventory Turnover Ratio and Working Capital Turnover Ratio

b) Liquid Ratio and Operating Ratio

c) Liquid Ratio and Current Ratio

d) Gross Profit Margin and Net Profit Margin

1

25 Debt Equity Ratio of a company is 1:2. Purchase of a Fixed asset for ₹ 5,00,000 on long term deferred

payment basis will increase, decrease or not change the ratio?

1

26 State the importance of financial analysis for labour unions. 1

27 M/s Mevo and Sons.; a bamboo pens producing company, purchased a machinery for ₹ 9,00,000. It

received dividend of ₹ 70,000 on investment in shares. The company also sold an old machine of the

book value of ₹ 79,000 at a loss of ₹ 10,000. Compute Cash flow from Investing Activities.

1

28 Whether the following statement is True or False.

‘Patents purchased by a company will be an operating activity.’

1

213

29 While preparing Cash Flow Statement, match the following activities

I. Payment of cash to acquire Debenture by a.Financing activity an Investing Company

II. Purchase of Goodwill b.Investing Activity

III. Dividend paid by manufacturing company c.Operating activity

1

30 From the following details calculate Interest Coverage Ratio: Net

profit after tax - ₹ 7,00,000

3

6% debentures of ₹ 20,00,000

Tax Rate 30%

Or

Under which major heads and sub-heads will the following items be placed in the Balance Shee of the company as per Schedule III, Part I of the Companies Act, 2013?

(i) Debentures with maturity period in current financial year

(ii) Securities Premium Reserve

(iii) Provident Fund

t

Following information is extracted from the Statement of Profit and Loss of Crypto Finance Lt

For the year ended 31st March 2017 and 31st March 2018. Fill in the missing figures Comparative

Statement of Profit and Loss

for the years ended 31st March 2017 and 31st March 2018

Particulars 2016-17 (₹)

2017-18 (₹)

Absolute

Increase/

Decrease (₹)

Percentage

Increase/

Decrease (%)

Revenue from

Operations

10,00,000 ? 2,00,000 20%

Add other Income ? 60,000 ? 20%

Total Revenue ? 12,60,000 ? 20%

Less Employee

Benefit Expenses

50,000 60,000 10,000 ?

Profit before tax 10,00,000 12,00,000 2,00,000 ?

Less Tax (50%) 5,00,000 6,00,000 1,00,000 ?

Profit after tax 5,00,000 6,00,000 1,00,000 20%

Or

From the following Balance Sheet of R Ltd., Prepare a Common Size Statement Balance

Sheet As at 31st March, 2019.

Particulars Note

no.

31.3.2019

(₹)

31.3.2018 (₹)

I EQUITY AND LIABILITIES 1.Shareholder’s Funds:

a. Share Capital

b. Reserve and Surplus 2.Current Liabilities:

a.Trade Payable

5,00,000

1,60,000

1,40,000

4,00,000

1,20,000

80,000

Total 8,00,000 6,00,000

214

II ASSETS

1. Non-Current Assets:

a. Fixed Assets:

i.Tangible Assets

ii.Intangible Assets

2. Current Assets

a. Inventories

b. Trade Receivables

c. Cash and Cash Equivalents

3,20,000

40,000

1,60,000

2,40,000

40,000

2,40,000

60,000

60,000

2,00,000 40,000

Total 8,00,000 6,00,000

From the following Balance Sheet of Dreams Converge Ltd as at 31.3.2018 and 31.3.2017;

Calculate Cash from operating activities. Showing your workings clearly

Particulars Note

No.

31.3.2018

(₹)

31.3.2017

(₹)

I. EQUITY AND LIABILITY :

1. Shareholder’s Fund:

a.Share Capital

7,00,000

5,00,000

b.Reserve and Surplus

2.Non-Current Liabilities:

3,50,000

2,00,000

Long Term Borrowings

3.Current Liabilities:

50,000

1,00,000

a.Trade Payables 1,22,000 1,05,000

b.Short term Provisions (Provision for tax) 50,000 30,000

TOTAL 12,72,000

=======

9,35,000

=======

II. ASSETS :

1.Non Current Assets:

a.Fixed Assets:

i.Tangible Assets 1 5,00,000 5,00,000

ii.Intangible Assets 2 95,000 1,00,000

b.Non-current Investments

2.Current Assets:

1,00,000

Nil

a.Inventory 1,30,000 55,000

b.Trade Receivable 1,47,000 80,000

c.Cash and Cash Equivalents 3,00,000 2,00,000

TOTAL 12,72,000

=======

9,35,000

=======

Notes

Note

Number

Particulars 31.3.2018 (₹) 31.3.2017

(₹)

1 Tangible Assets:

Machinery 2,80,000 2,00,000

Accumulated depreciation (1,00,000) (80,000)

1,80,000 1,20,000

Equipment 3,20,000 3,80,000

215

5,00,000 5,00,000

2 Intangible Assets :

Goodwill 95,000 1,00,000


i. Machinery of the book value of 80,000 (accumulated depreciation ₹ 20,000 ) was so

at a loss of ₹ 18,000

REFERENCES/ WEBSITES

TEXT BOOKS: T S GREWAL, V WASON, NCERT, DR. BALBIR SINGH, D K GOEL, P C

TULSIAN

WEBSITES: cbse.nic.in, mycbseguide.com, studiestoday.com, meritnation.com,

kvsangathan.nic.in

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