Financial Accounting I 1005

8/9/2019 Financial Accounting I 1005

1/28

Question Paper

Financial Accounting I (111): October 2005 Answer all questions.

Marks are indicated against each question.

1. Which of the following is false?

(a) Operating profit is the difference between gross profit and operating expenses(b) Gross profit reflects operating performance and is not affected by non-operating profit(c) Earning Before Interest and Tax (EBIT) is the sum of operating profit and non operating

surplus/deficit(d) Non-operating surplus represents gain from sources other than normal business(e) Income from investment and profit from disposal of assets are the main components of non-

operating income.

(1 mark)

< Answer >

2. Under Hybrid system of accounting for revenues and expenses

(a) Accrual basis is used for revenues and cash basis for expenses(b) Accrual basis is used for expenses and cash basis for revenues(c) Accrual basis is used irrespective of whether an item is revenue or expense

(d) Cash basis is used irrespective of whether an item is revenue or expense(e) Cash basis or Accrual basis is used depending on the nature of the items of revenues and

expenses.

(1 mark)

< Answer >

3. Which of the following events is not recorded/disclosed in the books of a business?

(a) Significant monetary events after the balance sheet date(b) Depreciation of fixed assets on revised basis(c) Government investigations into the pricing policies of the business(d) Realization of bad debts(e) Payment of royalty.

(1 mark)

< Answer >

4. Which of the following is not a source of fund?(a) Sale of an asset (b) Increased cash balance due to idle fund

(c) Issue of shares (d) Borrowing from banks(e) Operating profits.

(1 mark)

< Answer >

5. Which of the following are current assets of a business?

I. Bank (Credit) Balance.II. Stock.III. Debtors.IV. Pre-paid expenses.V. Accrued income.

(a) Both (I) and (IV) above (b) Both (II) and (III) above

(c) (I), (II) and (III) above (d) (II), (III), (IV) and (V) above(e) (I), (II), (III) and (IV) above.

(1 mark)

< Answer >

6. Under the Companies Act, a company is normally not permitted to have an accounting period extendingbeyond

(a) 6 months (b) 1 year (c) 15 months (d) 18 months (e) 2years.

(1 mark)

< Answer >

7. Which of the following accounts will invariably have a credit balance?

(a) Accounts receivable (b) Accounts payable(c) Purchases account (d) Bank account (e) Cash account.

(1 mark)

< Answer >

age 1 of 28


2/28

8. In the context of Accounting standards, which of the following statement is false?

(a) All significant policies adopted in the preparation and presentation of financial statements shouldnormally be disclosed in one place of the statement

(b) Any change in the accounting policies which has a material effect in the current period should bedisclosed

(c) Where any change in the accounting policies has no material effect in the current period but hasmaterial effect in later period, the fact of change should be disclosed in the financial statement ofthe later period

(d) Where the effect of the change in accounting policy is not ascertainable, wholly or in part, the factshould be indicated

(e) If fundamental accounting assumptions are followed in financial statements, specific disclosure isnot required.

(1 mark)

< Answer >

9. As per Accounting Standard 16, a qualifying asset is

(a) An asset which costs more than Rs.20 Lakhs

(b) An asset that takes a long time to get ready for intended use or sale(c) An asset which qualifies for a particular rate of depreciation(d) An asset which qualifies to be a part of reconstruction(e) An asset that takes less than predicted time for intended use.

(1 mark)

< Answer >

10. The total amount of net sales can be arrived from the

(a) Sales Book less returns inward(b) Cash account less returns outward(c) Sales account less returns inward(d) Bank account plus cash account less returns inward(e) Sales account less returns outward.

(1 mark)

< Answer >

11. Cash sales to X will be posted to --------- side of----- -- account

(a) Debit, Xs (b) Credit, Xs (c) Debit, sales(d) Credit, sales (e) Credit, cash.

(1 mark)

< Answer >

12. Personal accounts can take the form of

I. Natural persons accounts like proprietors account, suppliers accounts, receivers accounts.II. Artificial persons and body of persons accounts like limited companys accounts, insurance

companys accounts, any government accounts.III. Representative personal accounts like salaries outstanding account, unexpired insurance account,

interest receivable account.IV. Representative personal accounts like provision for bad and doubtful debts, provisions for

discount on debtors, reserve for discount on creditors account.

(a) Only (I) above (b) Both (I) and (II) above(c) Both (I) and (III) above (d) Both (I) and (IV) above

(e) All (I), (II), (III) and (IV) above.

(1 mark)

< Answer >

13. Purchase of vehicle by the proprietor for his son out of business cash will

(a) Increase assets and decrease capital(b) Increase assets and decrease liability(c) Decrease assets and decrease capital(d) Decrease assets and increase liability(e) Affect neither asset nor liability.

(1 mark)

< Answer >

14. If the goods purchased are in transit, then the journal entry at the end of the period will be

(a) Goods-in-transit A/c Dr.To Suppliers A/c

(b) Goods-in-transit A/c Dr.

To Purchases A/c(c) Stock A/c Dr.

To Good-in-transit A/c(d) Suppliers A/c Dr.

< Answer >

age 2 of 28


3/28

To Goods-in-transit(e) Goods-in-transit A/c Dr.

To Trading A/c.

(1 mark)

15. PQR Ltd. maintains two accounts known as account No.1 and account No.2 in Canara Bank. OnSeptember 30, 2005 the overdraft as per pass book for account No.1 is Rs.86,552. But the overdraft asper cash book is not the same and on comparing the pass book and the cash book he finds the following:

I. Out of the total cheques of Rs.7,400 deposited on September 27, 2005, one cheque amounting toRs.2,650 was collected on October 4, 2005.

II. Out of the total cheques of Rs.12,560 issued on September 22, 2005, two cheques of Rs.1,500each were not presented until September 30, 2005.III. A cheque amounting to Rs.2,260 was sent to the supplier through post on September 29, 2005 and

is expected to reach him only after October 3, 2005.IV. Bank charges amounting to Rs.63 and interest charges amounting to Rs.262 have not yet been

recorded in the cash book.V. A cheque of Rs.1,000 deposited in account No.2 on September 02, 2005 was wrongly credited to

account No.1.

VI. A cheque deposited on September 15, 2005 for Rs.500 was returned by bankers on October 3,2005.

VII. A cheque of Rs.200 issued for account No.1 by mistake was recorded in bank column of the cashbook for account No.2 and this cheque was presented for payment on October 4, 2005.

From the above particulars, the bank overdraft as per cash book as on September 30, 2005 is

(a) Rs.88,337 (b) Rs.89,337(c) Rs.89,137 (d) Rs.91,597 (e) Rs.89,662.

(2 marks)

< Answer >

16. Which of the following receipts is of a capital nature?

(a) Amount realized from sale of equipments(b) Amount recovered from bad debts written off(c) Interest received on fixed deposit

(d) Amount received from debtors(e) Legal claim against debtors received.

(1 mark)

< Answer >

17. Biravi started a business on August 10, 2005 with capital of Rs.30,000. In the following month, heentered into the following transactions:

The total in the purchase day book to be posted to the debit of the purchase account is

(a) Rs.4,000 (b) Rs.7,000 (c) Rs.9,000

(d) Rs.10,000 (e) Rs.11,000.

(1 mark)

Particulars Rs.

Sold goods to Sen 5,000Sold goods to Ramesh 2,500

Purchased goods from Suresh 2,000Sales returns by Sen 1,000Purchased goods for cash from Lalith 1,000Sold goods to Rajan 6,000Sales returns by Rajan 1,500Purchased goods from Suresh 5,000Sold goods to Meera for cash 3,000

Purchase returns to Suresh 1,200Sold goods to Ram 2,500Purchased goods from Mahesh 2,000

Purchase returns to Mahesh 500

< Answer >

18. Which of the following rectification entries is to be passed for goods returned by X amounting to

Rs.500 wrongly entered in the Purchase Return Book?

(a) Debit Purchase Return Rs.500Credit Sales Return Rs.500

(b) Debit Sales Return Rs.500

Credit Xs A/c Rs.500

< Answer >

age 3 of 28


4/28

(1 mark)

(c) Debit Sales Return Rs.500

Debit Purchase Return Rs.500Credit Xs A/c Rs.1000

(d) Debit Sales Return Rs.500

Credit Purchase Returns A/c Rs.500

(e) Debit Purchase Return A/c Rs.500Credit Purchase A/c Rs.500.

19. Basheer receives three bills of exchange from Akbar, dated June 1, 2005 for 3 months. First bill is forRs.4,000, second bill is for Rs.3,000 and the third bill is for Rs.5,000. The second bill is immediatelyendorsed in favor of Kumar on June 4, 2005, the third bill was discounted on June 4, 2005 with the bankfor Rs.4,700. The journal entry for the endorsement of the second bill in the books of Basheer is

(1 mark)

Rs. Rs.

(a) Bills receivable account Dr. 3,000

To Kumar account 3,000

(b) Bills receivable account Dr. 3,000

To Akbar account 3,000

(c) Kumar account Dr. 3,000

To Bills receivable account 3,000

(d) Bills payable account Dr. 3,000To Bills receivable account 3,000

(e) Kumar account Dr. 3,000

To Bills payable account 3,000.

< Answer >

20. Bills receivable account is a/an

(a) Nominal account (b) Personal account(c) Intangible asset (d) Real account(e) Representative personal account.

(1 mark)

< Answer >

21. A holder of a 3 months bill for Rs.9,000/- discounts it after one month with a factor whose discount

charge is 10% p.a. The net amount received by the holder is

(a) Rs.8,775 (b) Rs.8,781 (c) Rs.8,100 (d) Rs.8,850 (e)Rs.8,783.

(1 mark)

< Answer >

22. A bill dated 26-10-2005 payable after 30 days after sight is accepted on 28-10-2005. The due date of thebill is

(a) 01-12-2005 (b) 28-11-2005 (c) 29-11-2005

(d) 02-12-2005 (e) 30-11-2005.

(1 mark)

< Answer >

23. Saachi, for mutual accommodation of herself and Ankurita, drew a bill for 3 months for Rs.8,000. The

bill was discounted at 5% and 1/4th of the proceeds were remitted to Ankurita. On the due date, Saachi

fails to pay her share and hence Ankurita draws another accommodation bill of Rs.12,000 for 2 monthson Saachi and discounts the same at 4% and remits half of the proceeds to Saachi. The total amount ofdiscount charges borne by Saachi was

(a) Rs.75 (b) Rs.50 (c) Rs.115 (d) Rs.100 (e)Rs.120.

(1 mark)

< Answer >

24. When a discounted bill is retired, the drawer credits

(a) Bank account (b) Acceptors account(c) Third partys account (d) Bills receivable account (e) No account.

(1 mark)

< Answer >

25. Unearned income account is

(a) A current asset (b) A current liability (c) An expense

< Answer >

age 4 of 28


5/28

(d) An income (e) Deferred expense.

(1 mark)

26. Pioneer Company, a dealer in cosmetics, records its inventory under first-in-first-out method, so as to

minimize accumulation of outdated stock. The opening stock as on September 01, 2005 is 150 units atthe rate of Rs.20 per unit. The purchases and sales made during the month are:

Purchases:

Sales:

With effect from September 01, 2005, the company decided to change the method of inventory

valuation from the FIFO method to LIFO method. The change in the value of inventory consequentupon the change in the method of valuation is

(a) Increase in the value of closing stock by Rs.1,500

(b) Decrease in the value of closing stock by Rs.3,000(c) Increase in the value of closing stock by Rs.3,000(d) Decrease in the value of closing stock by Rs.500(e) Decrease in the value of closing stock by Rs.2,250.

(3 marks)

Date No. of units Cost price per unit

04-09-2005 200 Rs.25

14-09-2005 100 Rs.22

21-09-2005 300 Rs.3026-09-2005 150 Rs.40

Date No. of units

03-09-2005 10010-09-2005 15015-09-2005 10025-09-2005 20028-09-2005 200

< Answer >

27. An exporter had the following transactions with his consignee in U.S.A. On 28.2.05 goods costing Rs.2lakhs were sent. The goods were received by the consignee on 5.3.05. The consignee sold 50% of the

consignment for Rs.1,20,000/- on 28.3.05 and the balance for Rs.1,20,000/- on 4.4.05. How muchrevenue can be treated as being realized as on 31.3.05?

(a) Rs.1,00,000 (b) Rs.1,20,000 (c) Rs.2,20,000(d) Rs.2,00,000 (e) Rs.2,40,000.

(1 mark)

< Answer >

28. Zee Motors Ltd., a dealer in second-hand cars has the following five vehicles of different models andmakes in their stock at the end of the financial year 2004-2005:

The cost of Maruti Esteem includes a sum of Rs.5,500 for the repair of engine and Rs.2,000 for therepair of air conditioner of the vehicle. The value of stock included in the balance sheet of the companyas on March 31, 2005 was


(1 mark)

Car Fiat AmbassadorMaruti

EsteemMaruti 800 Zen

Cost

(Rs.)

90,000 1,15,000 2,75,000 1,00,000 2,10,000

Net realizablevalue (Rs.)

95,000 1,55,000 2,65,000 1,25,000 2,00,000

< Answer >

29. On April 07, 2005, i.e, a week after the end of the accounting year 2004-05, a company undertookphysical stock verification. The value of stock as per physical stock verification was found to beRs.35,000.

The following details pertaining to the period April 01, 2005 to April 07, 2005 are given:

I. Goods costing Rs.5,000 were sold during the week.II. Goods received from consignor amounting to Rs.4,000 included in the value of stock.III. Goods earlier purchased but returned during the period amounted to Rs.1,000.IV. Goods earlier purchased and accounted but not received Rs.6,000.

After considering the above, the value of stock held as on March 31, 2005 was

< Answer >

age 5 of 28


6/28

(a) Rs.27,000 (b) Rs.19,000 (c) Rs.43,000(d) Rs.51,000 (e) Rs.35,000.

(2 marks)

30. On April 01, 2004, the debit balance of the machinery account of Bright Light Ltd. was Rs.5,67,000.

The machine was purchased on April 01, 2002. The company charged depreciation at the rate of 10%per annum under diminishing balance method. On October 01, 2004, the company acquired a newmachine at a cost of Rs.60,000 and incurred Rs.6,000 for installation of the new machine. The companydecided to change the system of providing depreciation from the diminishing balance method to thestraight-line method with retrospective effect from April 01, 2002. The rate of depreciation will remainthe same. The company decided to make necessary adjustments in respect of depreciation due to thechange in the method in the year 2004-2005. The balance outstanding to the debit of machinery account

as at March 31, 2005 after effecting the above changes was


(3 marks)

< Answer >

31. On April 01, 2004, the provision for bad and doubtful debts of Chitra Lekha Limited showed a creditbalance of Rs.11,200. On March 31, 2005 the Sundry Debtors showed a balance of Rs.5,00,800, which

includes the following:

Sinha Rs. 7,600 identified as bad debt and is to be written offGupta Rs.18,000 expected to realize only 80%Patel Rs.16,000 expected to realize only 60%Iyer Rs.11,000 likely to file insolvency petition and the percentage of recovery is not

known.

All other debts as on the date of finalization of accounts are estimated to be good. The company

maintains a suitable provision for doubtful debts. The amount transferred to profit and loss account onaccount of provision for bad and doubtful debts for the year ended March 31, 2005 was


(2 marks)

< Answer >

32. Light and Sound Ltd. provides the following information for the year ended March 31, 2005.

i. Opening balance of provision for bad debts Rs.12,450.ii. Opening balance of provision for discount on debtors Rs.4,500.iii. Sundry debtors included Rs.40,000 in respect of credit sale of furniture on

January 15, 2005.iv. Credit sales during the year was recorded as Rs.5,75,000. The debtors amount of Rs. 17,500 has

been declared as bad.v. A credit sale of Rs.7,300 to Mr. Rao on March 4, 2005 was taken in debtors

account as Rs.3,700.vi. Amount collected from sundry debtors was Rs.3,15,000.vii. Discount allowed during the year was Rs.1,000.viii. Opening balance of sundry debtors Rs.1,63,000.

The provision for bad and doubtful debts at 5% and provision for discount on debtors at 2% are to bemade.

The amount of provision for discount on debtors chargeable to Profit and Loss Account for the periodended March 31, 2005 is

(a) Rs.4,500 (b) Rs.3,494 (c) Rs.6,994 (d) Rs.1,000 (e)Rs.6,500.

(3 marks)

< Answer >

33. Under the direct write off method of recognizing a bad debt expense, which of the following statementsis/are true?

I. The bad debt expense is not matched with the related sales.

II. Accounts receivables are overstated in the year of sales.III. Revenue is overstated in the year of sales.IV. It violates the matching principle of accounting.

(a) Only (I) above (b) Both (I) and (II) above(c) Both (II) and (III) above (d) (I), (III) and (IV) above(e) All (I), (II), (III) and (IV) above.

(1 mark)

< Answer >

age 6 of 28


7/28


8/28

The amount debited to furniture account is(a) Rs.90,000 (b) Rs.91,000 (c) Rs.1,00,000(d) Rs.1,02,000 (e) Rs.1,03,000.

(1 mark)

Cost of second hand furniture 90,000Cost of repainting the furniture 10,000Wages paid to employees for fixing the furniture 2,000

Fire insurance premium 1,000

42. Which of the following statements are true?

I. Recoupable shortworkings is a current asset.II. Lapsed shortworkings is a nominal account.III. Shortworkings is the part of minimum rent not represented by the use of rights.

IV. Shortworkings is the amount by which the minimum rent exceeds the actual royalty.V. The occurrence of shortworkings in any period indicates that the lessee is liable to pay the

minimum rent.

(a) Both (I) and (II) above (b) Both (II) and (III) above(c) (I), (II) and (IV) above (d) (II), (IV) and (V) above(e) All (I), (II), (III), (IV) and (V) above.

(1 mark)

< Answer >

43. Mr. Karam took on lease a mine on January 01, 2000 on the following terms:

On March 31, 2000, Mr. Karam inturn leased one-fourth of the mine to Mr. Param on the followingterms:

The output from the mine is as under:

In the books of Mr. Karam, the amount transferred from royalties receivable account to profit and lossaccount for the year 2004-05, is(a) Rs.45,000 (b) Rs.36,000 (c) Rs. 9,000(d) Rs.1,43,000 (e) Rs.1,88,000.

(2 marks)

Royalty at the rate of Rs.20 per ton of output

Minimum rent of Rs.1,00,000 per annumShortworkings of any year can be recouped in the next 3 years

Royalty at the rate of Rs.25 per ton of output

Minimum rent of Rs.30,000 per annumShortworkings can be recouped in the first 3 years of the lease

YearOutput in tons

Mr. Karam Mr. Param

1999-2000 3,000 2000-2001 2,000 7002001-2002 3,000 900

2002-2003 5,000 1,300

2003-2004 6,500 1,500

2004-2005 8,000 1,800

< Answer >

44. In case of sub-lease, royalty receivable to be paid to lessor must be transferred to

(a) Lessors account (b) Lessees account(c) Profit and loss account (d) Royalty payable account(e) Production account.

(1 mark)

< Answer >

45. Bhaya Ltd. granted a lease to Bharani Ltd., for extracting minerals from its property for a period of 12years from April 01, 2001. The terms of agreement are:

Royalty - at the rate of Rs.25 per ton of output

Minimum rent - Rs.6,00,000 per annum.

It was further agreed that the shortfall in any year may be recouped from any excess of royalty over theminimum rent in the next 2 years subject to a maximum of Rs.50,000 per annum.

The following is the data pertaining to output of the Bharani Ltd., for the past four years:

Year Output (tonnes)

2001-02 18,000

2002-03 20,0002003-04 25,000

< Answer >

age 8 of 28


9/28

The journal entry to record the irrecoverable short workings in the year 2004-05 isRs. Rs.

(a) Short workings account Dr. 25,000To Suspense account 25,000

(b) Short workings account Dr. 1,75,000To Suspense account 1,75,000

(c) Profit and loss account Dr. 50,000To Short workings account 50,000

(d) Profit and loss account Dr. 1,00,000

To Short workings account 1,00,000(e) No entry, as there are no irrecoverable short workings.

(3 marks)

2004-05 32,000

46. Which of the following is the correct response to indicate the impact on profit, assets, owners equityand total liabilities of a firm on account of following adjustments outside trial balance?

(1 mark)

Adjustments Effect on

Profit

Effect on

Assets

Effect on

Owners Equity

Effect on

Liabilities(a) Commission received in

advanceDecrease Increase No effect Increase

(b) Outstanding wages Decrease No effect Decrease Increase

(c) Stock destroyed by fire;but no claim admitted

Decrease Decrease Decrease Decrease

(d) Provision for bad debts Decrease Decrease No effect Decrease

(e) Insurance unexpired Decrease Increase Decrease No effect

< Answer >

47. A cheque of Rs.3,456 received from A after allowing him discount of Rs.19 was endorsed to B in fullsettlement of Rs.3,475. The cheque was finally dishonored but no entries were passed in the books.Which of the following rectification entry is to be made?

(2 marks)

Rs. Rs.

(a) Bs account Dr. 3,475

To As account 3,475

(b) A s account Dr. 3,475

Discount received account Dr. 19

To Bs Account 3,475To Discount allowed 19

(c) A s account Dr. 3,456

To Bs account 3,456

(d) B s Account Dr. 3,456

To As account 3,456

(e) A s account Dr. 3,456

Discount received account Dr. 19

To Bs Account 3,456

To Discount allowed 19.

< Answer >

48. On March 31, 2005 just before preparing the final accounts, Mr. Munimji, the accountant of RajeshEnterprises prepared a trial balance, which did not agree. He put the difference in a newly openedsuspense account. Later he discovered the following errors:

i. A sale of Rs.2,250 has been passed through the Purchase Day Book. The customers account has,however, been correctly debited.

ii. A purchase of Rs.781 has been posted to the debit of creditors account as Rs.817.

iii. While carrying forward the total of sales book from one page to the next, the amount was writtenas Rs.91,761 instead of Rs.97,161.

iv. Goods amounting to Rs.18,000 had been returned by a customer and were taken into stock, but noentry in respect thereof was made in the books of account.

After the posting of rectification entries, the suspense account was fully closed with Nil balance. Whatwas the balance in suspense account for tallying the Trial Balance?

(a) Rs.6,098 (b) Rs.11,498 (c) Rs.8,302

(d) Rs.2,498 (e) Rs.19,248.

< Answer >

age 9 of 28


10/28

(3 marks)

49. The accountant of Baroda Alkalies Ltd. has drawn the below trial balance as on March 31, 2005.

In the above trial balance which of the following accounts are wrongly placed?

(a) Opening stock, General Reserve, Bank deposits and Carriage on goods purchased(b) General Reserve, Bank deposits, Purchase returns, Export duty and Import duty(c) General Reserve, Carriage on goods sold, Creditors, Plant and machinery, Commission on sales(d) Plant and machinery, Creditors, Purchase returns, Bank deposits and General Reserve(e) Creditors, Debtors, Sales, Purchases and Commission on sales.

(2 marks)

Particulars Debit (Rs.) Credit (Rs.)

Opening stock 10,000Purchases 50,000

General Reserve 5,000Carriage on goods purchased 1,000

Bank deposits 50,000

Cash in hand 2,000Purchase returns 1,500

Sales 92,600Sales returns 2,400Share capital 1,50,000

Import duty 1,200Export duty 1,050

Debtors 50,000

Creditors 22,500Plant and Machinery 62,500

Salaries 20,000Wages 10,000Bills receivable 15,000Bills payable 10,000Interest received 3,000Commission on sales 1,000Miscellaneous expenses 6,600

Carriage on goods sold 1,850

2,01,100 3,68,100

< Answer >

50. Which of the following is/are the asset(s) of a business?

I. Debit balance of analytical petty cash book.

II. Credit balance of a bank pass book.III. Debit balance of bank column of cash book.IV. Debit balance of cash column of cash book.V. Credit balance of bank column of cash book.

(a) Only (V) above (b) Both (III) and (IV) above(c) (I), (II) and (III) above (d) (I), (II), (III) and (IV) above(e) All (I), (II), (III), (IV) and (V) above.

(1 mark)

< Answer >

51. Which of the following statements is true?

(a) Depreciation provision is of the discretion of the management

(b) Depreciation is a charge against profit(c) Depreciation is provided only when there is profit(d) Depreciation is an appropriation of profit(e) Depreciation is a loss to the business.

(1 mark)

< Answer >

52. While finalizing the current years profit, the company realized that there was an error in the valuationof closing stock of the previous year. In the previous year, closing stock was valued more by Rs.50,000.As a result

(a) Previous years profit is overstated and current years profit is also overstated

(b) Previous years profit is understated and current years profit is overstated(c) Previous years profit is understated and current years profit is also understated(d) Previous years profit is overstated and current years profit is understated

< Answer >

age 10 of 28


11/28

(e) There is no impact on the profit of either the previous year or the current year.

(1 mark)

53. Consider the following particulars pertaining to the business of Mr. Agarwal:

The profit for the year 2004-05 was

(a) Rs.4,45,000 (b) Rs.55,000 (c) Rs.30,000(d) Rs.95,000 (e) Rs.75,000.

(1 mark)

ParticularsAs on April 01, 2004

Rs.As on March 31, 2005

Rs.

Capital 3,50,000 ?Loan from bank 1,75,000 1,25,000Sundry creditors 25,000 35,000

Fixed assets 2,75,000 2,55,000

Inventory 1,50,000 1,75,000Sundry debtors 70,000 90,000Cash and bank 55,000 85,000

< Answer >

54. Neeraj Ltd. started its operations on April 15, 2004. Consider the following data pertaining to the

company for the year 2004-05:

The balance of cash as on March 31, 2005 is


(2 marks)

Particulars Rs.

Sales (85% collected during the year 2004-05) 8,00,000

Bad debts written off 2,000Issue of shares for cash 5,00,000Purchase of fixed assets for cash 4,00,000

Depreciation 40,000Amount received by way of short-term loan 1,00,000

Short-term loan repaid 25,000Payment towards manufacturing and administrative expenses 3,50,000Amount paid to purchase of raw materials 1,50,000Amount deposited in bank 2,00,000

< Answer >

55. Consider the following data pertaining to Pampa Frozen Food Ltd. for the year ended March 31, 2005:

Capital (1.04.2004) Rs.1,25,000Cash sales Rs.4,00,000Decrease in inventory Rs. 40,000Plant & Machinery Rs.1,70,000Rent received Rs. 55,000

Purchases Rs.2,85,000Sales commission paid Rs. 12,000Drawings Rs. 22,000

Additional Information:

Rent includes Rs.2,500 as received in advance.

A credit purchase of Rs.15,000 was wrongly recorded in sales day book as Rs.51,000. The company has the practice of depreciating the Plant and Machinery at the rate of 15% per

annum on straight line method. The original cost of the Plant and Machinery was Rs.2,00,000.

Sales commission was paid only to the extent of two thirds of the amount payable.

Considering the above data and the additional information, the net profit of the company for the period

ended March 31, 2005 was


(2 marks)

< Answer >

56. The total cost of goods available for sale with a company during the current year is Rs.12,00,000 andthe total sales during the period are Rs.13,00,000. If the gross profit margin of the company is 33 1/3%on cost, the closing inventory during the current year is

< Answer >

age 11 of 28


12/28


(1 mark)

57. Which of the following should not be treated as revenue expenditure?

(a) Interest on loans and debentures(b) Annual fire insurance premium on plant and equipment(c) Sales tax paid in connection with the purchase of equipment(d) Repairs and maintenance on fixed assets(e) Machinery spares consumed.

(1 mark)

< Answer >

58. Sheeba & Co. made the following payments in respect of insurance premium:

The insurance premium outstanding/prepaid for 2004-05 (if any) is

(a) Rs.10,667 (prepaid) (b) Rs.10,667 (outstanding)(c) Rs.12,150 (prepaid) (d) Rs.12,150 (outstanding)(e) Rs.11,123 (prepaid).

(1 mark)

Date of payment Particulars

April 02, 2004July 15, 2004December 25, 2004

Payment of Rs.32,000 for 3 months ended June 30, 2004Payment of Rs.64,000 for the 6 months ended December 31, 2004Payment of Rs.48,600 for the 4 months ended April 30, 2005.

< Answer >

59. The term Insolvency denotes

(a) The excess of assets over liabilities(b) A criminal offence

(c) The failure of a business to meet the financial obligations(d) The excess of cash with loss of production(e) The shortage of cash due to increased level of production.

(1 mark)

< Answer >

60. If an individual asset is increased, there will be a corresponding

(a) Increase of another asset or increase of capital(b) Decrease of another asset or increase of liability(c) Decrease of specific liability or decrease of capital

(d) Increase of drawings and liability(e) Decrease of capital and decrease of another asset.

(1 mark)

< Answer >

61. The following is the Trial Balance of Karnataka Mills as on 31st March 2005:

Particulars Debit Rs. Credit Rs.

Purchases 15,000Debtors 20,000

Interest earned 400

Salaries 3,000

Sales 32,100

Purchase returns 500

Wages 2,000Rent 1,500Sales returns 1,000

Bad debts written off 700

Capital 12,000

Creditors 10,000

Drawings 2,400

Provision for bad debts 600

Printing and Stationery 800

Insurance 1,200

Opening stock 5,000

Office expenses 1,200

< Answer >

age 12 of 28


13/28

Additional information:

Following adjustments are required to be made for the year ended 31.03.2005:

i. Depreciate furniture and fittings by 10% on original cost.

ii. Make a provision for doubtful debts equal to 5% of debtors.iii. Salaries for the month of March amounting to Rs.300 were unpaid which must be provided for.

The balance in the account includes Rs.200 paid in advance.

iv. Insurance is prepaid to the extent of Rs.200.v. Provide Rs.800 for office expenses.vi. Stock valued at Rs.600 was put by A, the proprietor for his personal use.vii. Closing stock was valued at Rs.6,000.

Based on the above information, the total of assets in the balance sheet as on 31.03.2005 after makingall the adjustment would be:


(3 marks)

Furniture and Fittings 2,000Accumulated depreciation 200

Total 55,800 55,800

62. On March 31, 2005, the closing stock of Xylol Ltd. was Rs.34,50,000. On April 1, 2005, stock ofRs.22,50,000 was destroyed by fire. The company closes its accounts on 31st March 2005. If theBalance Sheet of the company on March 31, 2005, was finalized on April 25, 2005, then the balancesheet will show the closing stock at

I. Rs.34,50,000 without disclosing the loss by fire.

II. Rs.12,00,000 without disclosing the loss by fire.

III. Rs.34,50,000 disclosing the loss by fire in foot note.

IV. Rs.12,00,000 disclosing the loss by fire in foot note.

(a) Only (I) above (b) Only (II) above

(c) Only (III) above (d) Both (II) and (III) above (e) Both (I) and (IV) above.

(1 mark)

< Answer >

63. Consider the following Trial Balance and additional information pertaining to Ravera Ltd. for the year

ended March 31, 2005.

Trial balance as on March 31, 2005

Additional information:i. Goods worth Rs.4,000 were distributed by salesmen as free sample, but no entry has been made

for this.ii. Provide depreciation of Rs.78,000 on the fixed assets.

iii. A cheque for Rs.4,000 received from a customer was dishonoured by the bank but the same hasnot been recorded in the books. The customer has become insolvent and 50% of the amount isexpected to be realized from his estate.

iv. A purchase invoice of Rs.6,000 received from a supplier has not been entered by oversight.

The gross profit and the net profit/net loss of Ravera Ltd. for the period ended March 31, 2005 are

Particulars Debit balance (Rs.) Particulars Credit balance (Rs.)

Opening stock 30,000 Purchase returns 28,000

Purchases 6,30,000 Sundry creditors 1,20,000

Sales returns 40,000 Sales 15,85,000

Sundry debtors 1,50,000 Discount received 10,400

Fixed assets 11,70,000 Share Capital 7,00,000

Salaries 3,80,000 10% Debentures 4,80,000

Wages 2,10,000 Reserves & Surplus 1,80,000

Rent, rates & taxes 80,000

Telephone expenses 1,23,000

Discount allowed 12,000

Insurance premium 5,400

Carriage inward 6,800

Carriage outward 8,200Cash at bank 26,000

Investments (10%) 2,00,000

Closing stock 32,000

31,03,400 31,03,400

< Answer >

age 13 of 28


14/28

(a) Rs.7,00,200 and Rs.12,000 (profit) respectively

(b) Rs.6,94,200 and Rs.16,000 (loss) respectively

(c) Rs.6,97,000 and Rs.20,000 (loss) respectively

(d) Rs.6,94,200 and Rs.10,000 (loss) respectively

(e) Rs.6,90,200 and Rs.16,000 (profit) respectively.

(3 marks)

64. Which of the following is false about revaluation?

(a) An increase in the book value of a fixed asset arising out of revaluation can be credited to GeneralReserve

(b) An increase in book value of a fixed asset arising out of revaluation should be credited toRevaluation Reserve A/c

(c) An increase in book value of a fixed asset arising out of revaluation not exceeding the decrease inbook value on revaluation recorded previously can be credited to P&L A/c

(d) A decrease in book value of a fixed asset arising out of revaluation can be debited to P&L A/c if itis not related to a previous increase on revaluation

(e) Revaluation reserve is generally not available for distribution.(1 mark)

< Answer >

65. Which of the following statements is true with regard to accounting for branches?

(a) Under debtors system, Branch account is real account(b) Under stock and debtors system, Branch adjustment account discloses the gross profits made by

the Branch(c) Branch stock account is always prepared at cost price

(d) There are three methods for maintaining branch accounts Trading method, Debtors method andStock and Debtors method

(e) In case of independent branches, if the head office makes the payment for the fixed asset, entryshould be passed in the books of branch.

(1 mark)

< Answer >

66. Consider the following data pertaining to Spices Ltd.:

During the year 2004-05, the sales were Rs.3,60,000 and all were on credit. The cash purchases wereRs.80,000 and credit purchases were Rs.2,00,000. Expenses paid during the year were Rs.70,000.

The amount received from sundry debtors during the year 2004-05 and the closing balance of sundrydebtors as on March 31, 2005 were respectively

(a) Rs.1,80,000 and Rs.2,30,000 (b) Rs.3,70,000 and Rs.40,000(c) Rs.4,10,000 and Rs.Nil (d) Rs.3,60,000 and Rs.50,000

(e) Rs.1,90,000 and Rs.2,20,000.

(2 marks)

Particulars As on April 01, 2004

Rs.

As on March 31, 2005

Rs.

Cash & bank 60,000 90,000

Sundry debtors 50,000 ?

Sundry creditors 70,000 80,000

< Answer >

67. Meradiyan Ltd. has a branch at Tirupati. Following are particulars relating to its branch for the periodended March 31, 2005:

Particulars Amount in Rs.

Stock at branch on April 01, 2004 6,00,000Debtors on April 01, 2004 2,40,000Petty cash on April 01, 2004 4,000Goods sent to branch (2004-05) 10,00,000Goods returned to Head office 12,000Cash sales at branch 6,00,000Credit sales at branch 8,40,000

Sale returns to branch 5,000Bad debts written off 6,000Discount allowed to customers 2,000Branch expenses paid by Head office 60,000Petty cash sent to branch 10,000Petty expenses incurred by Branch 8,000Stock on March 31, 2005 2,50,000

Cash received from customers 7,00,000

< Answer >

age 14 of 28


15/28

The branch profit for the period ended March 31, 2005 credited to general profit and loss account andbranch debtors on March 31, 2005 are respectively

(a) Rs.34,500 and Rs.3,69,000 (b) Rs.15,480 and Rs.3,75,000(c) Rs.78,500 and Rs.3,72,000 (d) Rs.21,000 and Rs.3,67,000(e) Rs.2,500 and Rs.3,80,000.

(3 marks)

68.Household Appliances Ltd. transfers goods to its Kanpur Branch at cost plus 25%. It maintains the

branch accounts under Stock and debtors system. The following are the details pertaining to itsKanpur Branch for the year 2004-05:

The amount transferred to general profit & loss account for the year ended March 31, 2005 was


(2 marks)

Particulars Rs.

Opening stock at branch 12,000Goods sent to branch 58,000Cash sent to branch for:Rent 3,300Salaries 1,500Other expenses 1,200 6,000

Cash sales 22,500

Credit sales 42,500Closing stock at branch 5,000

< Answer >

69. In case of manufacturing concerns, the balance in goods sent to branch account will be transferred to

(a) Purchases account (b) Sales account(c) Trading account (d) Branch account (e) Branch stock account.

(1 mark)

< Answer >

70.

Revanth Ltd. of Mysore sends goods to its Hyderabad Branch at cost plus %. Out of the goods sent

to the branch during the month of September 2005, a part was lost in transit. The transactions pertainingto the branch during the month of September 2005 were as under:

The cost price of the goods lost in transit is

(a) Rs.1,000 (b) Rs.1,500 (c) Rs.2,000 (d) Rs.1,333 (e)Rs.500.

(2 marks)

133

3

Particulars Rs.

Opening stock (invoice price) 30,000Goods received from Head office

(invoice price) 1,30,000Credit sales 88,000Closing stock (invoice price) 24,000

Opening cash balance 4,000Closing cash balance 14,000Cash sent to Head office 90,000Cash collected from debtors 54,000

< Answer >

71. The total of debit side of trial balance of a company is Rs.2,45,000 and that of the credit side isRs.2,72,900. Subsequently the following mistakes are discovered.

The total of the corrected trial balance is


(2 marks)

ParticularsCorrect Amount

(Rs.)Amount which appears

in trial balance (Rs.)

Opening stock 40,500 40,600Advertisement expenses 15,000 15,000 (credit side)

Interest from investments 36,000 30,000

Sundry creditors 76,000 80,000

< Answer >

age 15 of 28


16/28

Suggested Answers

Financial Accounting I (111): October 2005

1. Answer : (b)

Reason : Operating profit reflects operating performance, not gross profit. Operating profit is not affected by non-operatingprofit. Hence statement (b) is false. All the other statements are true.

< T

2. Answer : (b)

Reason : Accrual basis is used for expenses and cash basis is used for revenue. This statement is correct. Other options are

incorrect.

< T

3. Answer : (c)

Reason : In recognition of money measurement concept, the events and transactions which are of monetary in nature arerecorded in the books of a business. The statement in alternative (c) the Government investigation into the pricingactivities of the business does not involve any monetary treatment and so does not find any place in the books. Thesignificant monetary events after the balance sheet date, depreciation of fixed assets on revised basis, realization of

bad debts, royalty payments are to be recorded in the books. Therefore, (c) is the correct answer.

< T

4. Answer : (b)

Reason : Keeping idle funds so that cash balance increases is use of funds. The sale of an asset, issue of shares, borrowingfrom banks and operating profits are sources of funds.

< T

5. Answer : (d)

Reason : Current assets are the assets which can be converted into cash with in an accounting period i.e. usually twelve

months. Bank (credit) balance / Bank overdraft is a liability of a business and is not a current asset. Thus, (d) thecombination of alternatives (II) stock, (III) debtors, (IV) pre-paid expenses, accrued income (V) are current assets ofa business is the correct answer.

< T

6. Answer : (c)

Reason : As per the companies Act, the accounting period of a company in the normal circumstance shall not exceed15months. Answer (c) is correct.

< T

7. Answer : (b)

Reason : Accounts payable will invariably have credit balance. Accounts receivable will have a debit balance whereas bank

account under overdraft facility can show a debit balance and cash account will invariably show a debit balance forthe simple reason that one cannot pay more than what one has.

< T

8. Answer : (c)

Reason : If a change is made in the accounting policies which has no material effect on the financial statement for the current

period but which is reasonably expected to have a material effect in later periods, the fact of such change should bedisclosed in the period in which the change is adopted. Hence option (c) is wrong. All others are correct.

< T

9. Answer : (b)

Reason : Accounting Standard 16 defines a qualifying asset as an asset that takes a long time to get ready for intended use orsale.

< T

10. Answer : (c)

Reason : In sales account both cash and credit sales are being credited and the balance in the sales account will disclose thegross total sales of the business and less inward returns will indicate the net sales.

Cash book is used to enter all cash transactions including cash sales whereas sales book is used to record only creditsales. Similarly bank account at the most may disclose cash sales through cheques and amount received fromdebtors in the form of cheques, which may not be related to the relevant accounting period.

< T

11. Answer : (d)

Reason : When goods are sold for cash, the journal entry is to debit cash account and credit sales account. Therefore the rightoption is (d).

< T

12. Answer : (e)

Reason : All the categories listed from (I) to (IV) are personal accounts and hence option (e) is the correct answer.

< T

13. Answer : (c)

Reason : When cash is paid for buying the vehicle, the decrease in cash balance will decrease the assets. But the amount paidwill be considered as personal drawings of the proprietor and will be deducted from the capital of the proprietorwhich in turn will decrease the capital.

< T

14. Answer : (b)

Reason : This is an adjusting entry to be passed in respect of goods purchased and already entered in the purchase book.Since goods are not in stock but in transit, it cannot be included in closing stock. So will be debited to goods-in-transit and will appear on the asset side of balance sheet. The amount has already been debited to purchase account.

Hence purchases account has to be reduced to the extent of the cost of goods in-transit by crediting the purchasesaccount.

< T

age 16 of 28


17/28

15. Answer : (b)

Reason : Bank Reconciliation statement as on September 30, 2005

Particulars Rs. Rs.

Bank overdraft as per passbook 86552Add : cheques issued but not presented for payment 3000Add: cheques sent to the supplier through post, but has not reachedhim, hence not presented

2260

Add: A cheque wrongly credited to account No.1 by bank insteadof account No.2

1000 6260

92812

Less: cheque deposited but not yet collected by bank 2650Less: bank charges and interest not recorded in Cash book 325Less. Cheques deposited on September 15, 2005, but not cleared

by the bank until September 30, 2005

500 3475

Bank overdraft as per Cash Book 89337

< T

16. Answer : (a)

Reason : Amount realized from sale of equipments is treated as capital receipt. Amount recovered from bad debts writtenoff, interest received on fixed deposit, amount received from debtors and legal claim against a debtor received are

treated as revenue receipts

< T

17. Answer : (c)

Reason : Purchase book records only credit purchases, and cash purchases are recorded in the cash book.

Purchases Book

Dr. Cr.Date

2005

Particulars Invoice

No.

L.F Amount

Rs.

Sep. Mr. Suresh 2,000Mr. Suresh 5,000Mr. Mahesh 2,000

9,000

< T

18. Answer : (c)

Reason : Goods worth Rs.500 returned by X is against goods sold to him. So it should have been entered in the Sales ReturnBook instead of Purchase Return Book. Having entered in the Purchase Return Book, the entries that might havebeen passed are debit Xs A/c and credit Purchases A/c. whereas the correct entries are to debit Sales Return A/cand credit Xs A/c by Rs.500 each. To reverse the wrong entries, Xs A/c should be credited by twice the amountdebited to his account and Purchase Return and Sales Return to be debited by Rs.500 each.

< T

19. Answer : (c)

Reason : On the receipt of the second bill of exchange the entry made in the books of Basheer is

On the endorsement of the bill to Kumar the entry to be made is

Rs. Rs.Bills receivable account Dr.

To Akbar account

(Being bill received from Akbar)

3,000

3,000

Rs. Rs.Kumars account Dr.

To Bills receivable account(Being bill endorsed to Kumar)

3,000

3,000

< T

20. Answer : (d)

Reason : Bills receivable account is a real account

< T

21. Answer : (d)

Reason : The net amount received by the holder is worked out as below

Discount paid = = Rs.150/-

Bill amt. Less discount = Rs.9000 Rs.150 = Rs.8850/-

9000 x 10 x 2

100 x 12

< T

22. Answer : (e)

Reason : 30 days from the date of acceptance is 27-11-2005.

Plus 3 days of grace will be 30-11-2005.

Hence, the due date of the bill with 3 days of grace, is on 30-11-2005.

< T

age 17 of 28


18/28

23. Answer : (c)

Reason : Discount of the 1st bill = Rs.8,000 = Rs.100 (for 3 months)

Share of Saachi = 1 =

Share of discount of Saachi = Rs.100 = Rs.75.

Discount of the 2nd bill = Rs.12,000 = Rs.80 (for 2 months)

Share of discount of Saachi = Rs.80 = Rs.40.

Total share of discount = Rs. 75 + Rs. 40 = Rs. 115.

12

3

100

5

4

1

4

3

4

3

4 2100 12

1

2

< T

24. Answer : (e)

Reason : A bill discounted with a bank when retired, the drawer does not pass any entry as he has already passed hisbeneficial interest on the bill to the bank.But the situation is different in case of dishonor of the bill.

< T

25. Answer : (b)

Reason : Unearned income is a liability till it is earned. Once it is earned it becomes income. (b) is the correct answer.

< T

26. Answer : (e)Reason :

Value of closing stock as per FIFO = 6,000

Value of closing stock as per LIFO = 3,7502,250

FIFO LIFOReceipt Issue Balance Receipt Issue Balance

1.09.2005 15020=3000 1.09.2005 15020=30003.09.2005 10020=2000 5020=1000 3.09.2005 10020=2000 5020=10004.09.2005 20025=5000 5020=1000 4.09.2005 20025=5000 5020=1000 20025=5000 20025=500010.09.2005 5020=1000 10.09.2005 15025=3750 5020=1000 10025=2500 10025=2500 5025=125014.09.2005 10022=2200 10025=2500 14.09.2005 10022=2200 5020=1000 10022=2200

15.09.2005 10025=2500 10022=2200 5025=125021.09.2005 30030=9000 10022=2200 10022=2200 30030=9000 15.09.2005 10022=2200 5020=1000

25.09.2005 10022=2200 5025=1250 10030=3000 20030=6000 21.09.2005 30030=9000 5020=100026.09.2005 15040=6000 20030=6000 5025=1250 15040=6000 30030=900028.09.2005 20030=6000 15040=6000 25.09.2005 20030=6000 5020=1000 5025=1250 10030=3000

26.09.2005 15040=6000 5020=1000 5025=1250 10030=3000 15040=6000

28.09.2005 15040=6000 5020=1000 5030 = 1500 5025=1250 5030=1500

< T

27. Answer : (b)

Reason : In case of consignment revenue is recognized only on actual sale.Therefore only Rs.120000/- can be considered asrevenue realized.

< T

28. Answer : (b)

Reason :

The value of the stock at the lower of cost and net realizable value is as follows:

Car Fiat Ambassador MarutiEsteem

Maruti800

Zen Total

(Rs.)

Value

(Rs.)

90,000 1,15,000 2,65,000 1,00,000 2,00,000 7,70,000

< T

age 18 of 28


19/28

The appropriate stock figure is Rs.7,70,000 as calculated above.

29. Answer : (c)

Reason : The working is as follows:- Rs.

Value of physical stock 35,000

Add: goods purchased not received 6,000

Goods sold during the week 5,000

Goods earlier purchased but returned 1,000

47,000

Less goods held on consignment 4,000Closing stock as on 31.03.05 43,000

< T

30. Answer : (b)

Reason: The balance outstanding to the debit of machinery account Rs.5,52,700

Bright Light Limited

Cost of machinery on April 1, 2002

Rs.5,67,000 x 100/90 x 100/90 = Rs.7,00,000

Note : Depreciation provided on reducing balance method :

2002-03 (10% on Rs.7,00,000) Rs. 70,000

2003-04 (10% on Rs.6,30,000) Rs. 63,000

Rs.1,33,000

Depreciation to be provided on the straight line method :

2002-03 (10% on Rs.7,00,000) Rs. 70,000

2003-04 (10% on Rs.7,00,000) Rs. 70,000

Rs.1,40,000

Further depreciation to be provided for

Rs. 1,40,000 Rs.1,33,000 = Rs. 7,000

As per AS- 6 any change in the method of depreciation is treated as a change in accounting policy and its effectshould be quantified and disclosed.

Machinery Account

Dr Cr.

Date Particulars Rs. Date Particulars Rs.

1.4.2002 To Balance 7,00,000 31.3.2003 By Depreciation

(on Rs.7,00,000@10%)

70,000

31.3.2003 By Balance c/d 6,30,000

7,00,000 7,00,000

1.4.2003 To Balance

b/d

6,30,000 31.3.2004 By Depreciation(on Rs.6,30,000@ 10%)

63,000

By Balance c/d 5,67,000

6,30,000 6,30,000

1.4.2004 To Balanceb/d

5,67,000 31.3.2005 By Depreciation(due to change inmethod)

7,000

1.10.2004 To Bank(Newmachine)

60,000 By Depreciation(on Rs.7,00,000@ 10% p.a for theyear)

70,000

To Bank(installationexpenses)

6,000 By Depreciation(on Rs.66,000 for6 months@10%p.a.)

3,300

By Balance c/d 5,52,700

6,33,000 6,33,000

< T

31. Answer : (b)

Reason : The amount debited to profit and loss account in respect of provision for doubtful debts is Rs.17,400 and theclosing provision is Rs.21,000.

Provision for bad and doubtful debts

< T

age 19 of 28


20/28


21/28

36. Answer : (e)

Reason: The statement in alternative (e) is incorrect because, withdrawal of goods by the proprietor of the business shouldbe debited to drawings and credited to purchases account and not credited to capital account This is a falsestatement and is the correct answer. Wages paid on installation of machinery should be credited to cash account anddebited to machinery account (a) A sale of computer that has been used in the business should be debited to cashaccount and credited to office equipment account (b); Error of posting of a correctly recorded transaction affectsone or more accounts (c); Repairs of a machinery purchased second hand should be debited to machinery account

(d) are the correct statements and not the correct answers.

< T

37. Answer : (c)

Reason : Machinery Account

Date Particulars Amount Date Particulars Amount

April 1,2003

To balance b/f 60,000 March 31,2004

By depreciation 12,000

March 31,2004

By balance c/d 48,000

60,000 60,000

April 1,2004

To balance b/f 48,000 Sept.30, 2004 By depreciation 4,800

By bank 30,000

March 31,2005

By P&L a/c (loss) 13,200

48,000 48,000

< T

38. Answer: (a)

Reason: Where the depreciable asset is revalued, the provision for depreciation should be based on the estimate of theremaining useful life of such asset on the revalued amount.

< T

39. Answer : (c)

Reason : Bank charges recorded twice in cash book will be added to the overdraft as per cash book in the preparation ofreconciliation statement is not correct. Since charges have been twice credited to bank a/c in cash book, the O.Dbalance is in excess. To reconcile the cash book balance with pass book, bank charge is to be added to pass bookbalance. Adding to cash book balance results in further widening the difference.

< T

40. Answer : (b)

Reason : Useful life of a depreciable asset is the period for which an enterprise can profitably deploy in production whichmay be equal to or less than the expected life, life period, production life, asset life etc. of an asset. Obviously an

enterprise is expected to use a depreciable asset up to its useful period only.

< T

41. Answer : (d)

Reason : The total cost of the furniture should be treated as Rs.1,02,000. All the amounts mentioned should be capitalizedexcept the fire insurance premium since without such expenditure the furniture would not be available for use.

Cost of second hand furniture Rs. 90,000Cost of repainting Rs. 10,000Wages for installation Rs. 2,000

Furniture a/c Rs.1,02,000

< T

42. Answer : (e)

Reason : All the following statements are true (I) Recoupable shortworkings is a current asset and it is shown in the balancesheet either till they are recovered or written off; (II) Lapsed shortworkings is a nominal account and is to bedebited to profit and loss account in the year of lapse of the time; (III) Shortworkings is the part of minimum rent

not represented by the use of rights because the amount of shortworkings is paid due to the agreement of minimumrent without making use of the rights vested in; (IV) Shortworkings is the amount by which the minimum rentexceeds the actual royalty; and (V)The occurrence of shortworings in any period indicates that the lessee is liable topay the minimum rent. Thus, the statements above stated are true and the combination of all the above (e) is thecorrect answer. The other alternatives (a), (b), (c) and (d) are not the correct answers.

< T

43. Answer : (c)

Reason : Royalty table for sub-lease (Royalty @ Rs.25 per ton)

YearOutput intonnes

Royalty ShortworkingsShortworkingsrecouped

Shortworkingsnot recouped

Amountreceivable

2000-01 700 17,500 12,500 30,0002001-02 900 22,500 7,500 30,0002002-03 1,300 32,500 2,500 17,500 30,0002003-04 1,500 37,500 37,500

2004-05 1,800 45,000 45,000

< T

age 21 of 28


22/28

The amount transferable to Profit and loss account from royalties receivable account for the year 2004-05 =Rs.45,000 (1,800 Rs.20) = Rs.45,000 Rs.36,000 = Rs.9,000.

Note : The amount of Rs.36,000 (1,800 x Rs.20) will be transferred from royalties receivable account to royaltiespayable account.

44. Answer : (d)

Reason : Since it has been sub-leased royalty receivable from sub-lease will become royalty payable.

< T

45. Answer : (c)

Reason : The amount of shortworkings lapsed during the year 2004-2005 amounts to Rs.50,000.

Analysis of royalty payable (Royalty @ Rs.25 per ton)

YearOutput(tons)

Actualroyalty(Rs.)

Minimum

rent (Rs.)

Shortworkings

(Rs.)

Shortworkingsrecouped(Rs.)

Payment(Rs.)

Shortworkingslapsed(Rs.)

Shortworkingsc/f (Rs.)

2001-02

18,000 4,50,000 6,00,000 1,50,000 6,00,000 1,50,000

2002-03

20,000 5,00,000 6,00,000 1,00,000 6,00,000 2,50,000

2003-04

25,000 6,25,000 6,00,000 25,000 6,00,000 1,25,000 1,00,000

2004-05

32,000 8,00,000 6,00,000 50,000 7,50,000 50,000 Nil

< T

46. Answer : (c)

Reason : Stock destroyed by fire ,but no claim admitted will be a loss and profit will be reduced to the extent. This willdecrease the capital and the total liabilities on the one hand and value of stock(assets) on the other hand.

< T

47. Answer : (b)

Reason :

On the receipt of cheque from A the entry made was

When this cheque is endorsed to B in full settlement of Rs.3,475 the entry made in records is

On dishonor of the cheque, the entry to be made is

Bank account Dr.Discount allowed a/cDr.

To A s account

3,45619

3,475

Bs account Dr.To Discount received a/cTo Bank account

3,475 193,456

A s accountDiscount received a/c

To B s accountTo Discount allowed a/c

Dr.Dr.

3,47519

3,47519

< T

48. Answer : (b)

Reason :

Rectification entries in the books of Excellent enterprises

On posting the above rectification entries in the suspense account, the suspense account looks as follows:

Particulars Debit

(Rs.)

Credit

(Rs.)Suspense accountTo Purchase accountTo Sales account

Dr. 4,5002,2502,250

Suspense accountTo Creditors account

Dr. 1,5981,598

Suspense accountTo Sales account

Dr. 5,4005,400

Returns inward accountTo Customers account

Dr. 18,00018,000

Particulars Amount Particulars Amount

To Purchase account 2,250 By Balance

(Difference in trial

< T

age 22 of 28


23/28

balance transferred toSuspense account)

11,498

To Sales account 2,250

To Creditors account 1,598

To Sales account 5,400

11,498 11,498

49. Answer : (d)

Reason : Plant and machinery: P & M Shows a debit balance as it is an asset and is debited on purchase of asset wronglylisted on credit side.

Creditors: Shows a credit balance, it is a personal account and is credited when purchases are made on credit. Henceit should shows a credit balance. Wrongly placed on debit side.

Purchases returns: Purchases shows a debit balance. However when goods purchased are returned, we credit thepurchase return account and correspondingly debit the creditor account. Wrongly placed on debit side.

Bank deposits: Bank deposits are excess funds deposited with Bank, hence our asset, and shows a debit balance.Wrongly placed on credit side.

General Reserve: It denotes accumulated profits and belong to the owners who contributed capital, hence shows acredit balance. Wrongly placed on debit side.

All the above items have been wrongly treated by the accountant wrongly. The correct trial balance is as follows.

Debit (Rs.) Credit (Rs.)

Opening stock 10,000

Purchases 50,000

General Reserve 5,000

Carriage on goods purchased 1,000Bank deposit 50,000

Cash in hand 2,000

Purchase returns 1,500

Sales 92,600

Sales returns 2,400

Share Capital 1,50,000

Import duty 1,200

Export duty 1,050

Debtors 50,000

Creditors 22,500

Plant & Machinery 62,500

Salaries 20,000

Wages 10,000

Bills Receivable 15,000

Bills payable 10,000

Interest received 3,000

Commission on sales 1,000

Miscellaneous expenses 6,600

Carriage on goods sold 1,850

2,84,600 2,84,600

< T

50. Answer : (d)

Reason : Debit balance in cash and bank columns of cash book form current assets of the business. The credit balance inbank column of cash book represents amount overdrawn from the bank and is a liability to the business. Hencestatement (d) is true.

Debit balance of analytical petty cash book is not in any way different from cash book and is an asset. Creditbalance as per pass book is amount of deposit lying with the bank and is an asset to the firm

< T

51. Answer : (b)

Reason : Depreciation is provided as a charge against profit. It is not an appropriation of profit. It is provided irrespective ofwhether the business is making loss or profit. Hence statement (b) is a true statement.

< T

52. Answer : (d)

Reason : If the previous year closing stock is valued more, then, previous years profit is overstated and current years profitis understated. Closing stock overstatement and opening stock understatement increases the profits and vice versa isalso equally true.

< T

53. Answer : (d)

Reason : According to the basic accounting equation, assets = liabilities + owners equity.

Hence owners equity = assets liabilities.

Capital = Rs.2,55,000 + Rs.1,75,000 + Rs.90,000 + Rs.85,000 (Rs.1,25,000 + Rs.35,000)

< T

age 23 of 28


24/28

= Rs.6,05,000 Rs.1,60,000 = Rs.4,45,000

Profit for the year 2004-05 = Capital as on March 31, 2005 Capital as on April 01, 2004

= Rs.4,45,000 Rs.3,50,000 = Rs.95,000

54. Answer : (b)

Reason :

Particulars Rs.

Cash sales (8,00,000 85%) 6,80,000

Issue of shares 5,00,000Amount received by way of short-term

loan

1,00,000

12,80,000Less: Purchase of fixed assets 4,00,000Short tem loan repaid 25,000Payment towards expenses 3,50,000Amount paid to purchase of raw materials 1,50,000Amount deposited in bank 2,00,000

Cash balance as on March 31, 2005 1,55,000

< T

55. Answer : (c)

Reason : Net Profit of Joy Ltd. for the year ending March 31, 2003:

The net profit is Rs.13,500

Dr. Cr.

Particulars Rs. Rs. ParticularsTo Purchases 2,85,000 By Cash sales 4,00,000Add: Omitted to be recorded 15,000 Less: Wrong Credit

51,000 3,49,000

To Decrease in inventory 3,00,000 40,000

To Gross Profit 9,000

3,49,000 3,49,000To Sales Commission 12,000 By Gross Profit 9,000+ Accrued6,000 18,000

By Rent received55,000

To Depreciation

30,000

Less: received in

advance

2,500 52,500To Net Profit 13,500

61,500 61,500

< T

56. Answer : (c)

Reason : Cost of goods available for sale 12,00,000

Less: Cost of goods sold (Rs.13,00,00 x0.75) 9,75,000

Closing stock 2,25,000

(note: 33 1/3 % on cost is 25% on sales)

< T

57. Answer : (c)

Reason : A revenue expenditure is an expenditure whose benefit expires within the current accounting period and is in thenature of recurring and is therefore written off to P& L account. Machinery spares are usually charged to the profitand loss statement as and when consumed

.Sales tax paid in connection with the purchase of office equipment is a

non-recurring expenditure whose benefit is going to last for more than one accounting period and hence not arevenue expenditure.

< T

58. Answer : (c)

Reason : For the financial year 2004-05, the payments made on April 02, 2004 for 3 months and July 15, 2004 for 6 monthsfully belong to the period 2004-05. Since the period 2004-05 ends on March 31, 2005, in respect of the payment ofRs.48,600 paid on December 25, 2004 for the 4 months ended April 30, 2005 implies that one month advancepayment was made in respect of the next financial year. Hence the prepaid insurance is Rs.12,150 (Rs.48,600/4)

< T

59. Answer : (c)

Reason : It is a situation in which a company is unable to meet its financial obligations when they become due. This canhappen when their liabilities are more than their assets.

< T

60. Answer : (b)

Reason : When an asset is increased, another asset may be decreased or a new liability is created or a specified liability will be

< T

age 24 of 28


25/28

increased. For example, if materials are purchased paying cash, stock of materials will increase and cash will be decreased tothe same extent. If the purchase is on credit, instead of decreasing the cash balance, Sundry Creditors (liability) willbe increased. Hence option (b) which reads as If an individual asset is increased, there must be a correspondingdecrease in another asset or increase in a specific liability is true.

61. Answer : (b)

Reason : The total of assets in the balance sheet as on 31.03.2005 after making all the adjustment is Rs.26,800.

Karnataka Mills

Balance Sheet as on March 31, 2005

Trading and Profit and Loss account

Dr. Cr.

Liabilities Rs. Rs. Assets Rs. Rs.

Capital 12,000 Fixed AssetsLess: Drawings 2,400 Furniture and Fittings 2,000Less: Stock drawn 600 Depreciation for 2004-

05 400 1,600

9000 Debtors 20,000Add: Profit 6,900 15,900 Less: Provision for bad

debts 1,00019,000

Outstanding officeexpenses 800

Prepaid insurance 200

Creditors 10,000 Closing stock 6,000Outstanding salaries 300Less: Paid in advance 200 100

26,800 26,800

Particulars Amount Amount Particulars Amount Amount

To opening stock 5,000 By sales 32,000To Purchase 15,000 Less: Return 1,000 31,100Less: Returns 500Less: Drawings 600 By Closing stock 6,000

13,900To wages 2,000To Gross profit 16,200

37,100 37,100To salaries

(3,000200+300)

3,100 By Gross profit 16,200

To rent 1.500 By interest 400To Bad debts(700+1,000600)To printing & stationary 800To Insurances 1,200Less prepaid 200 1,000To office expense 1,200Add : Outstanding 800 2,000To Depreciation 200To Net profit 6,900

16,600 16,600

< T

62. Answer : (c)

Reason : According to Accounting Standards on disclosure norms, any material loss/damage caused after the Balance Sheetdate is to be disclosed in the foot note. Since the loss does not pertain to the accounting period, the full value of theclosing stock is to be shown in the Balance Sheet.

< T

63. Answer : (b)

Reason : Revera Ltd.Dr. Trading and Profit & Loss A/c. for the year ended March 31, 2005 Cr.

Particulars Rs. Rs. Particulars Rs. Rs.

To Opening stock 30,000 By Sales 15,85,000To Purchases 6,30,000 Less: Sales returns 40,000 15,45,000Less: Purchases returns 28,000 By Advertisement (Free samples) 4,000

6,02,000

Add: Purchases 6,000 6,08,000

To Wages 2,10,000To Carriage inward 6,800To Gross profit 6,94,200

< T

age 25 of 28


26/28

15,49,000 15,49,000

To Salaries 3,80,000 By Gross Profit 6,94,200To Rent, rates & taxes 80,000 By Discount received 10,400To Telephone expenses 1,23,000 By Interest on investments 20,000To Discount allowed 12,000To Insurance premium 5,400To Carriage outward 8,200To Interest on debentures 48,000To Advertisement 4,000To Depreciation 78,000 By Net loss 16,000

To Provision for insolvent customer 2,000

7,40,600 7,40,600

64. Answer : (a)

Reason : An increase in net book value arising on revaluation of fixed assets is normally credited directly to owners interestsunder the heading of revaluation reserves and is regarded as not available for distribution. A decrease in net bookvalue arising on revaluation of fixed assets is charged to profit and loss statement except that, to the extent that sucha decrease is considered to be related to a previous increase on revaluation that is included in revaluation reserve, itis sometimes charged against that earlier increase. It sometimes happens that an increase to be recorded is a reversalof a previous decrease arising on revaluation which has been charged to profit and loss statement in which case theincrease is credited to profit and loss statement to the extent that it offsets the previously recorded decrease. (AS10)

< T

65. Answer : (b)

Reason : The subordinate divisions of a business are the branches of a business and one of the popular systems of accountingtreatment is stock and debtors system. The head office prepares (a) branch account (b) branch debtors account (c)

branch expense account (d) branch adjustment account (e) branch stock reserve account and (f) branch profit andloss account.

Branch adjustment account is prepared to adjust the difference of selling price and cost. The resultant figure is thegross profit.

Here the goods are invoiced at selling price.

The other statements are false because (a) branch account is personal account and not a real account (c0 branchstock account is prepared at selling price also.(d) There are two methods for maintaining branch accounts Tradingmethod or Debtors method and Stock and Debtors method.(e) In case of independent branches, if the head officemakes the payment for the fixed asset, entry will not be passed in the books of branch.

< T

66. Answer : (b)

Reason :

Sundry debtors account

Sundry Creditors

Cash Account

Dr. Cr.Date Particulars Rs. Date Particulars Rs.

April 01, 2004 To Balance b/d 50,000 2004-05 By Cash 3,70,000

2004-05 To Sales 3,60,000 March 31,2005

By Balance (Balancingfigure)

40,000

4,10,000 4,10,000

Dr. Cr.


2004-05 To Cash(balancing figure)

1,90,000April 01,2004

ByBalance b/d

70,000

March 31,

2005To Balance c/d 80,000

2004-05By Purchases 2,00,000

2,70,000 2,70,000


April 01,2004

To Balance 60,000 2004-05 By Purchasescash

80,000

2004-05 To Debtors 3,70,000 By Expenses 70,000By Creditors 1,90,000By Balance c/f 90,000

4,30,000 4,30,000

< T

67. Answer : (d)

Reason : Branch Account

Particulars Rs. Particulars Rs.

< T

age 26 of 28


27/28

Memorandum Debtors Account

To Balance b/d By Remittances:

Stock6,00,000

Cash sales 6,00,000

Debtors 2,40,000 Cash received

Petty cash4,000

8,44,000 From Debtors 7,00,000 13,00,000

To Goods sent to branch 10,00,000

To Bank account: By Goods sent to Branch(returns)

12,000

Expenses 60,000 By Balance c/dPetty cash 10,000 Stock 2,50,000

To Profit (P&L account) 21,000 Debtors 3,67,000

Petty cash 6,000

19,35,000 19,35,000


To Balance b/d 2,40,000 By Cash received 7,00,000

To Credit Sales 8,40,000 By Sales returns 5,000

By Bad debts 6,000

By Discount allowed 2,000By Balance c/ d

(Closing debtors)

3,67,000

10,80,000 10,80,000

68. Answer : (b)

Reason :

Branch adjustment account

Profit and loss account

Dr. Cr.


To Branch stock reserve (loading on closing

stock) 1,000

By Branch stock reserve (loading on

opening stock) 2,400

To P/L account (gross profit) 13,000 By Goods sent to branch (loading ongoods sent to branch) 11,600

14,000 14,000

To Branch expenses (3,300 + Rs.1,500 +

Rs.1,200) 6,000

By Branch adjustment account (Gross

profit)13,000

To Net profit (balancing figure) 7,000

13,000 13,000

< T

69. Answer : (c)

Reason : In case of manufacturing concerns, the balance in goods sent to branch account will be transferred to TradingAccount (c).In case of trading concerns the balance in goods sent to branch account will be transferred to purchasesaccount(a) and it is not the correct answer in the present situation. The alternative (b) is not the correct answerbecause it is not a sale to be credited to sales account.. The alternative (d) is incorrect because goods sent to branchaccount is created by debiting the branch account and crediting goods sent to branch account and again the balancein it is not transferred to branch account.

In case of accounting for branches under stock and debtors system the branch stock account is maintained to routeall transactions relating to goods sent and received back. Hence it is not correct answer. Thus (c) is the correctanswer.

< T

70. Answer : (b)

Reason : Dr. Branch Cash A/c Cr.


To Openingbalance

4,000By Remitted toHO

90,000

To Cash collected

from debtors54,000

< T

age 27 of 28


28/28

< TOP OF THE DOCUMENT >

Dr. Branch Stock A/c Cr.

Invoice Price = Rs.2,000

Margin on cost price = i.e., 25% on sales.

Cost price of the goods lost in transit= Rs.2,000 = Rs.1,500.

To Cash sales(Balancing figure)

46,000By Closingbalance

14,000

1,04,000 1,04,000


To Openingbalance

30,000 By Credit sales 88,000

To Goods receivedfrom Head office

1,30,000 By Cash sales 46,000

By Closing

balance24,000

By Stock lost(Balancing figure)

2,000

1,60,000 1,60,000

133 %

3

3

4

71. Answer : (b)

Reason :

Particulars Rs.

Total of debit side of trial balance 2,45,000

Add : Advertisement expenses 15,000

Less : Opening stock (excess taken) 100

Total of trial balance (Debit side) 2,59,900

Particulars Rs.

Total of credit side of trial balance 2,72,900

Add : Interest on investments (less taken) 6,000

Less : Sundry creditors (excess taken) 4,000

Less : Advertisement expenses (wrongly

taken)

15,000

Total of trial balance (credit side) 2,59,900

< T

age 28 of 28

Documents

Financial Accounting I 1005