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S.Y.B.Com.
ACCOUNTANCY AND FINANCIAL
MANAGEMENT PAPER -II
13
(Revised Syllabus w.e.f Academic Year 2014-15)
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CONTENTS
Unit No. Title Page No.
1. Final Accounts of Partnership Firms I 01
2. Partnership Final Accounts II 08
3. Partnership Final Accounts III 22
4. Piecemeal Distribution 96
5. Amalmagation of Firms I 146
6. Amalmagation of Firms II 155
7. Accounting with the use of Accounting Software 209
8. Fire Insurance Claims 216
9. Redemption of Preference Shares Part I 236
10. Redemption of Preference Shares Part II 250
11. Redemption of Debentures I 313
12. Redemption of Debentures II 322
13. Accounting with the use of Accounting Software 360
vvvv
Syllabus
S.Y.B.Com.Accountancy and Financial Management Paper - II
With Effect from the Academic Year 2014-2015
SECTION - I
Modules at a Glance
Sr.No.
Modules No. ofLectures
1 Partnership Final Accounts based onAdjustment of Admission or Retirement /Death of a Partner during the Year
18
2 Piecemeal Distribution of Cash 14
3 Amalgamation of Firms 14
4 Accounting with the use of Accounting Software 14
Total 60
Sr.No.
1 Partnership Final Accounts based on Adjustment ofAdmission or Retirement
Simple final accounts questions to demonstrate the effect on final
Accounts when a partner is admitted during the year or whenpartner
Retires / dies during the year
Allocation of gross profit prior to and after admission / retirement/ death when stock on the date of admission / retirement is notgiven and apportionment of other expenses based on time /Sales/other given basis
Ascertainment of gross profit prior to and afteradmission/retirement / death when stock on the date of admission /retirement is given and apportionment of other expenses based ontime / Sales / other given basis
Excluding Questions where admission / retirement / death takesplace in the same year
I
2 Piecemeal Distribution of Cash
Excess Capital Method only
Asset taken over by a partner
Treatment of past profits or past losses in the Balance sheet
Contingent liabilities / Realization expenses/amount kept asidefor expenses and adjustment of actual Treatment of securedliabilities
Treatment of preferential liabilities like Govt. dues / labour dues etc
Excluding: Insolvency of partner and Maximum Loss Method
3 Amalgamation of Firms
Realization method only
Calculation of purchase consideration Journal/ledger accounts ofold firms Preparing Balance sheet of new firm Adjustment ofgoodwill in the new firm
Realignment of capitals in the new firm by currentaccounts / cash or a combination thereof
Excluding
Common transactions between the amalgamating firms
4 Accounting with the use of Accounting Software
• Cost Centre, Cost Categories
• Inventory- Creation of groups, Creation of stocks, StockCategories
• Inventory vouchers-Stock Journal, Manufacturing Journal,Godown
• Management, Batch wise Management
����������������
II
SECTION II
Modules at a Glance
Sr.No.
Modules No. ofLectures
5 Fire Insurance Claims 15
6 Redemption of Preference Shares 15
7 Redemption of Debentures 15
8 Accounting with the use of Accounting Software 15
Total 60
Sr.No.
5 Fire Insurance Claims
Computation of loss of stock by fire
Ascertainment of claim as per the insurance policy
Excluding loss of profit and consequential loss
6 Redemption of Preference Shares
Company Law / Legal Provisions for redemption ofpreference shares in Companies Act
Sources of redemption including divisible profits and proceeds offresh issue of shares
Premium on redemption from security premium and profits ofcompany
Capital Redemption Reserve Account - creation and use
7 Redemption of Debentures
Redemption of debentures by payment from sources including outof capital and / or out of profits.
Debenture redemption reserve and debenture redemption sinkingfund excluding insurance policy.
Redemption of debentures by conversion into new class of shares or debentures with options- including at par, premium and discount.
8 Accounting with the use of Accounting Software
Advance accounting and Inventory Vouchers: Purchase and SalesOrder, Reorder, Delivery Notes, Budgeting and Controls,
Invoice-Product Invoice and Service Invoice
Shortcut Keys: Special key Combination, Special Functional keyCombination
Management Information System (MIS)
III
Reference Books
Sr.No.
Title of the
Reference Book
Authors Publisher
1 Introduction toAccountancy
T.S. Grewal S. Chand and Co. (P) Ltd., New Delhi
2 Advanced Accounts
Shukla and Grewal S. Chand and Co. (P) Ltd., New Delhi
3 Advanced accountancy
R.L. Gupta and
M. Radhaswamy
S. Chand and Co. (P) Ltd., New Delhi
4 Modern Accountancy
Mukerjee and Hanif Tata Mc. Grow Hill and Co. Ltd., Mumbai
5 Financial Accountancy
Lesile ChandWichk Pretice Hall of India Adin Bakley (P) Ltd.
6 FinancialAccounting forManagement Textsand Cases
Dr. Dinesh D. Harsalekar
Multi-Tech. Publishing Co. Ltd., Mumbai
7 Financial Accounting
P.C.Tulsian Tata Mc. Grow Hill and Co. Ltd., Mumbai
8 Accounting Principles
R.N. Anthony and J.S. Reece
Richard Irwin Inc.
9 Financial Accounting
J.R. Monga, Girish Ahuja and Ashok Shehgal
Mayur Paper Back
10 Advanced Accounts
M.C. Shukla, T. S. Grewal and Gupta
S. Chand and Co. (P) Ltd., New Delhi
11 Compendium ofStatement andStandard ofAccounting
Institute of CharteredAccountants of
India, New Delhi
12 Indian Accounting Standard
Ashish Bhattacharya
Tata Mc. Grow Hill and Co. Ltd., Mumbai
13 Financial Accounting
Williams Tata Mc. Grow Hill and Co. Ltd., Mumbai
14 Indian AccountingStandards and USGAAP
Dolphy Desouza Snow White Publications Ltd.
15 CompanyAccounting
Standards
Shrinivasan Anand Taxman
����������������
IV
PATTERN OF QUESTION PAPER FOR 100 MARKS
MAXIMUM MARKS – 100 DURATION – 3 HRS
SECTION I
1. In all there will be 4 questions.
2. No. of questions to be solved 3.
3. Question No. 1 will be compulsory having no option carrying 18
marks.
4. Question No. 2 having no option carrying 16 marks.
5. Question No. 3 & 4 each having internal options, each carrying
16 marks.
6. Not more than one question shall be on Theory.
7. Question No. 1 and 2 shall be the practical problems only.
8. Question No. 2 will be of objective type.
SECTION II
1. In all there will be 4 questions.
2. No. of questions to be solved 3.
3. Question No. 5 will be compulsory having no option carrying 18
marks.
4. Question No. 6 having no option carrying 16 marks.
5. Question No. 7 & 8 each having internal options, each carrying
16 marks.
6. Not more than one question shall be on Theory.
7. Question No. 5 and 6 shall be the practical problems only.
8. Question No. 6 will be of objective type.
����������������
V
1
FINAL ACCOUNTS OF PARTNERSHIPFIRMS I
Unit Structure :
1.0 Objective
1.2 Introduction
1.3 Partnership Deed
1.4 Partnership Final Account
1.5 Profit and Loss Appropriation Accounts
1.6 Guarantee of Profits to / Or by a Partner
1.7 Joint Life Policy
1.0 OBJECTIVE OF THE UNIT
After studying the unit the student will be able to :
• Define the meaning of Partnership Deed.
• Transfer the Trial Balance.
• Describe the Accounting Procedure and the treatment tovarious adjustments in Final Accounts.
• Calculate the Interest on Capital and Interest on Drawings.
• Solve the practical problems.
1.1 INTRODUCTION
A Partnership is defined by section 4 of the IndianPartnership Act 1932, as “The relation between persons who haveagreed to share profits of business carried on by all or by any ofthem acting for all: Persons who have entered into Partnership areindividually called as Partners and collectively called as a firm.
1.1.1 There are three important characteristics of Partnership
1) There should be AGREEMENT between two or more persons.2) This agreement must be to SHARE the profits of the business.3) The business must be carried on by all the partners or by any
one of the partner acting for all of them.
1
1.2 PARTNERSHIP DEED
We have seen above that Partnership is created by anAGREEMENT. It is not necessary to have a written agreement.However written agreement is desirable because it can avoiddispute in future. The Deed of Partnership is a document in writingwhich contains the important terms that the partners have agreedamong themselves. The partnership deed should be properlydrafted and stamped as required by Stamp Act.
1.2.1 Partnership deed specific:-In case of specific Provision in the Partnership deed
(which may be oral or written), the appropriation (or distribution) ofProfit is done accordingly.
1.2.2 Partnership deed is silent (or absence of Partnershipdeed):-In this case, following provisions of section 13 of the Indian
Partnership Act, 1932 would be applicable:-1) Interest on capital - Not Allowed.2) Interest on capital - Such interest is payable only if allowed by
the partnership deed. Out of profits.3) Interest on drawings - Not Allowed.4) Salary to Partners - Not Allowed.5) Commission to Partners - Not Allowed.6) Interest on Partners loan - 6% p.a. allowed.7) Profit/ or Loss Sharing ratio - Equal for all Partners (Even ifPartner’s capital may be unequal).
1.3 PARTNERSHIP FINAL ACCOUNTS
Each partner should know the financial performance of thebusiness for the year. Each partner has unlimited liability andtherefore, he should also know the state of affairs (i.e. Assets andLiabilities) on a particular date. The accounts of a partnershipbusiness are prepared on the basis of double entry as well asaccrual basis. The accounts consider outstanding expenses,prepaid expenses, outstanding Income, etc. to determine profit (orloss) during the accounting year.
The final accounts of partnership firm includes:-
1) Trading Account to disclose the Gross Profit (or Gross Loss)during the accounting year.
2) Profit and Loss Account to disclose Net Profit (or Net Loss)during the accounting year.
2
3) Profit and Loss Appropriation Account to disclose thedistribution of Net Profit (or Net Loss) among partners afterconsidering interest on partners capital, interest on drawing,salary to partners etc. If there is no appropriation, then the netprofit from the Profit and Loss Account is transferred to Capital.
4) Balance Sheet to disclose the Assets and Liabilities at the endof the accounting year.
5) Manufacturing Account may be prepared (in addition to TradingAccount) to disclose Cost of Goods produced and otherelements of cost taking figure in Manufacturing Account showscost of production, which should be transferred to TradingAccount.
6) Partners Capital Accounts are prepared separately and then theclosing balance is transferred to the Balance Sheet. WhenPartners Capital A/c, If Partner’s Capital A/c are fixed, it istransferred to Current Account.
1.4 PROFIT AND LOSS APPROPRIATION A/C
This is a special Account prepared in case of onlyPARTNERSHIP firm. It shows how the Net profit/Net Loss hasbeen distributed (Appropriated) amongst Partners.
Note: In case of Partnership firm any remuneration paid or payableto partners in the form of salary, rent. Interest on capital,commission etc. is treated as distribution of profit and not asbusiness expense. Therefore the above expenses if paid orpayable to partners shall not be debited to Profit and Loss Accountbut shall be debited to Profit and Loss Appropriation A/c.
Thus this A/c will be debited by:1) Net Loss (transferred from credit side of Profit & Loss Account)2) Salaries, Rent, Interest on Capital, Commission etc. to Partners
This A/c will be credited by 1) Net Profit (transferred from the Debit side of Profit & Loss A/c)2) Interest on Drawing charged to Partners.
The difference in this account will show the Final NetProfit/Loss which can distributed amongst the partners in their profitsharing ratio.
If the Credit side is heavier-profit to be distributedIf the Debit side is heavier –Loss transferred to PartnersAccount
3
1.4.1 INTEREST ON CAPITAL OR SALARY ETC
Interest or Salary is payable only out of the Profit (i.e. onappropriation of Profit). Therefore,1) In case of loss, no interest or Salary is allowed.2) In case if Profit is less than Interest, etc then such interestetc. is limited to the extent of profit.
However, the partner may decide to waive such intimation(by specific provision in the partnership deed) that interest, etc. isallowed even (if there is a loss) then the amount of loss isincreased and such increased (entire) loss is shared by the partnerin the profit (and loss) sharing ratio.
1.4.2 INTEREST ON DRAWINGS
The partner may be charged Interest on the Drawing. So asto make distribution of profit more equitable, Interest on Drawing ischarged on the different amounts withdrawn on the different datesduring the accounting year. The interest on drawings is calculatedby the Product Method or the Average Due Date Method. Usually,when a partner draws a fixed amount monthly, then the interest ondrawings is calculated as follows:-
Withdrawals Interest on total Drawings
a) Beginning of each month(e.g. 1st January ,1st February… 1st December
b) Middle of each month (notgiven) (e.g. 15th January, 14th
February,…. 15th December)c) End of each month (e.g. 31st
January, 28th February, 31st
December)
For 6.5 month
For 6 month
For 5.5 month
1.5 GUARANTEE OF PROFITS TO/OR BY A PARTNER
According to the partnership deed, one or few partners areguaranteed a minimum amount of profit, therefore, such partnerwould receive guaranteed (minimum) profit or profit as per profitsharing ratio which ever is higher.
The different types of guarantee arrangements are as follows:-
1) A Partner is given an undertaking that his share in profits(including salary, interest on capital etc) will not be below a certainamount. Such guarantee may be given by one partner or by allother remaining partners. Usually, in such a case in future, when
4
the concerned Partner’s share of profit exceeds the minimum limitsthen the excess profit (above minimum limit) is refunded (to theextent profits overdrawn in the past)
2) A partner guarantees that the profit of the firm would above acertain figure in such case the profit is lower, then the guarantorpartner’s account is debited and profit and loss Appropriation A/c iscredited.
3) A partner guarantees that, if particular partner’s share of profitexceeds a certain amount, then he would suffer to the extent ofdifference (i.e. to the extent of profit above certain amount theguarantor partner would receive less profits).
1.6 JOINT LIFE POLICY
The object of taking life policy on the lives of the partner is toinsure against the chances or disturbance in the business due todeath of any one of the partners. The amount payable to the legalrepresentative of the deceased partner is paid out of the policyamount received from the Insurance Company; otherwise, theassets may have to be sold, which may result in the disturbance toor closure of the business. The firm can take one Joint Policy onthe life of all partners, or otherwise, it may take separate policies onthe life of each partner.
Accounting treatment may be one of the following three ways:-
1.6.1 Premium paid is treated as expense of the firm anddebited to Profit and Loss A/c when amount is received it iscredited to Partners Capital in their profit sharing ratio
1.6.2 When premium paid is treated as assets: - In this casepremium paid is debited to Joint Life Policy A/c. Joint Life PolicyA/c is kept at surrender value, on date of balance-sheet. Thebalance in Policy A/c in excess of surrender value is treated as lossand transferred to P & L A/c. When amount received on surrenderof policy or maturity of policy, is credited to Joint Life Policy A/c.Balance in Joint Life Policy being profit credited to Partners CapitalA/c in their profit sharing ratio.
1.6.3 When premium paid treated as asset and Joint lifepolicy reserve is maintained. In this case premium paid isdebited to Joint Life Policy A/c at the end of the year Joint LifePolicy Reserve is created to the extent of premium paid by debitingto Profit and Loss A/c and crediting to Joint life policy reserve a/c.Both Joint Life Policy and Joint Life Policy Reserve A/c are broughtdown to surrender value by debiting Joint Life Policy Reserve A/ccrediting Joint Life Policy A/c. At the end of the year Joint Life
5
Policy is shown on Assets side of the Balance Sheet. Joint LifePolicy Reserve a/c is shown on the Liability side of the BalanceSheet.
On the maturity of the policy or when policy is surrenderedfollowing entries are passed.
When Joint Life Policy premium paid a) Joint Life Policy A/c ……Dr. To Bank A/c
b) For transferring to Profit & Loss A/c (equal to premium paid) Profit & Loss A/c ……Dr. To Joint Life Policy Reserve A/c
c) For bring balance in Joint life policy to surrender value Joint Life Policy Reserve A/c ….. Dr. To Joint Life Policy A/c
Above entries are repeated every year, if joint life policysurrendered or matured.
On maturity of policy/surrender following entries are passed.a) Bank A/c …..Dr. To Joint Life Policy A/c
b) For excess amount received Joint Life Policy A/c…….Dr To Joint Life Policy Reserve A/c
c) For transferring Joint life policy Reserves to Partners Capital A/c in their profit sharing ratio. Joint Life Policy Reserve A/c…..Dr To All Partners Capital A/c
Check Your Progress :
Define
• Partnership Deed
• Profit and Loss Appropriation Account
• Joint Life Policy
Fill in the Blanks
• Any salary paid or payable to a Partner is treated as____________________________________
• If Any Commission is paid or payable to a Partner shall bedebited to -------------------------------------------------------------.
6
• When the Joint Life Policy Premium paid is treated asExpenses of the firm it is to be debited to -------------------------
• Variable expenses related to sales are to be divided in the-----------------------------------Ratio.
State whether True or False
• In case of Partnership Firm any Interest paid on Capital of aPartner is treated as Expenses of the firm.
• In case of Loss, no Interest or Salary is allowed.
• No Interest is to be payable to a New Partner beforeAdmission.
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7
2
PARTNERSHIP FINAL ACCOUNTS - II
Unit Structure
2.0 Objectives
2.1 Adjustment to Final Accounts
2.2 Revaluation Assets and Liabilities on Admission orRetirement of Partner
2.3 Adjustment Relating to Reserves / Goodwill
2.4 Hidden Adjustments
2.5 Proforma of Final Accounts
2.6 Accounting Procedure
2.0 OBJECTIVES
After studying the unit the students will be able to:
• Understand the adjustments and journal entries and effets ofthe adjustments to Final Accounts.
• Revaluate assets and liabilities on admission and retirementof the partner.
• Understand the adjustments related to Goodwill andReserves.
8
2.1
AD
JU
ST
ME
NT
TO
FIN
AL
AC
CO
UN
TS
:
Ad
jus
tme
nt
Jo
urn
al
En
trie
sE
ffe
ct
in P
& L
A/c
or
P &
L A
dj.
A/c
Eff
ec
t in
Ba
lan
ce S
he
et
1.
Ou
tsta
nd
ing
or
Un
pa
id e
xp
en
se
s e
.g.
Sa
lary
Ou
tsta
nd
ing.
2.
Ou
tsta
nd
ing
In
co
me
or
Inco
me
no
t re
ce
ive
d o
rIn
co
me R
ece
iva
ble
or
Inco
me E
arn
ed b
ut n
ot
Re
ce
ived
e.g
. In
tere
st
du
e b
ut
no
t re
ce
ive
d.
3.
Pre
pa
id E
xp
en
se
s o
rE
xp
end
itu
re p
aid
in
ad
va
nce
or
Une
xp
ire
dIn
su
ran
ce
e.g
. P
rep
aid
Insu
ran
ce.
4.
Ba
d D
ebts
wri
tte
n o
ff.
Sa
lary
/s a
/c -
Dr.
To O
uts
tand
ing S
ala
ry A
/c
Inte
rest
Rece
iva
ble
A/c
-
Dr.
To I
nte
rest
A/c
Pre
paid
In
su
ran
ce
A/c
– D
r.T
o I
nsu
ran
ce
A/c
Bad
De
bts
A/c
-
Dr.
To S
un
dry
De
bto
rs A
/c.
Add
to t
he
expe
nse
s,
e.g
. sa
lary
Add
to t
he
Inco
me
on
cre
dit s
ide
, e.g
. fr
om
In
tere
st
De
duct
fro
m t
ha
t e
xp
end
itu
re o
n d
eb
it s
ide
e
.g.
fro
m In
su
ran
ce
.
Sho
w o
n t
he d
eb
it s
ide a
s
ad
ditio
n to
th
e b
ad d
eb
ts
giv
en
in
tria
l b
ala
nce
.
Sho
w o
n t
he L
iab
ility
sid
e a
s O
uts
tan
din
g
Sa
lary
.
Sho
w o
n t
he A
sse
ts S
ide
as O
uts
tan
din
g In
tere
st.
Sho
w o
n t
he A
sse
ts S
ide
as P
repa
id Insu
ran
ce
.
De
duct
fro
m t
he
De
bto
rs
on
Asse
ts S
ide.
Sho
w o
n t
he L
iab
ility
S
ide
as In
tere
st
9
5.
Inco
me R
ece
ive
d in
Ad
va
nce
, e
.g.
Inte
rest
for
thre
e m
onth
sR
ece
ived
in
Ad
va
nce.
6.
De
pre
cia
tio
n o
n F
ixe
dA
sse
ts (
like
dep
recia
tion
on
mach
ine
ry.)
7.
Re
se
rve
fo
r D
isco
un
t on
Cre
dito
rs.
8.
Re
se
rve
fo
r D
isco
un
t on
De
bto
rs.
(Ca
lcu
late
at
giv
en
% o
n th
e b
ala
nce
of
De
bto
rs a
fter
ded
uctin
gB
ad
Deb
ts a
nd
R.D
.D.
giv
en
in
th
e a
dju
stm
en
ts.)
9.
Bill
s R
ece
iva
ble
Dis
co
un
ted is
Dis
ho
nou
red.
Inte
rest
(In
co
me
) A
/c -
Dr.
To I
nte
rest
Re
ceiv
ed
in
A
dva
nce.
De
pre
cia
tio
n a
/c
- D
r.T
o M
achin
ery
a/c
.
Re
se
rve
fo
r D
is.
On
Cr.
A/c
-Dr.
To D
iscou
nt
Re
ce
ived
A/c
.
Dis
co
un
t A
llow
ed
A/c
-
Dr.
To
R
ese
rve
fo
r d
iscou
nt o
nD
eb
tors
A/c
De
bto
rs A
/c -
Dr.
To B
an
k A
/c.
De
duct
fro
m t
he
In
co
me
o
n c
red
it s
ide
e.g
. fr
om
In
tere
st
Rece
ive
d.
Sho
w o
n t
he d
eb
it s
ide a
s
de
pre
cia
tion
on
mach
ine
ry.
Sho
w o
n t
he C
red
it S
ide
.
Sho
w s
epa
rate
ly o
n th
e
De
bit s
ide.
--
Re
ce
ive
d in
Ad
va
nce.
De
duct
fro
m t
ha
t a
sse
ts
on
th
e a
ssets
sid
e e
.g.
from
mach
ine
ry.
De
duct
fro
m C
redito
rs o
nL
iabili
ty S
ide
.
De
duct
fro
m t
he
De
bto
rs.
De
duct
fro
m t
he
Ba
nk
A/c
an
d A
dd
to t
he
D
eb
tors
on t
he
Assets
S
ide
10
10
.W
ritin
g o
ff d
iffe
red
Re
ve
nue
Exp
end
itu
re e
.g.
Write
Off
Pre
limin
ary
Exp
en
se
s.
11
.B
ill R
ece
iva
ble
dis
ho
nore
d is r
em
ain
ed
to
be a
dju
ste
d.
12
.S
un
dry
Deb
tors
in
clu
de
aD
eb
tor
for
Dis
ho
no
r B
illa
nd
ha
lf th
e a
mou
nt
isirre
co
ve
rab
le.
13
.G
oo
ds w
ith
dra
wn
by t
he
Part
ne
r.
14
.G
oo
ds P
urc
ha
se
dre
ma
ine
d to
be
re
co
rde
dth
ou
gh
in
clu
ded
in
Sto
ck.
P &
L A
/c
- D
r.T
o P
relim
ina
ry E
xpe
nse
s A
/c
De
bto
rs A
/c -
Dr.
To B
ills R
eceiv
ab
le A
/c.
Bad
De
bts
A/c
-
D
r.T
o D
eb
tors
A/c
Dra
win
gs A
/c
-
Dr.
To T
rad
ing
A/c
Pu
rch
ase
s A
/c
- D
r.T
o C
red
ito
rs A
/c
De
bit S
ide
of
P &
L A
/c
--
Sho
w o
n t
he D
ebit S
ide
as
Bad
De
bts
.
Sho
w o
n t
he c
red
it s
ide
of
Tra
din
g A
/c.
Add
to P
urc
ha
se
s o
n
De
bit s
ide
of
the
Tra
din
g
A/c
.
De
duct
fro
m t
ha
t A
ccou
nt o
n t
he A
ssets
S
ide
e.g
. fr
om
P
relim
inary
Exp
en
ses
A/c
.
De
duct
fro
m B
IR &
Ad
d
to D
ebto
rs o
n t
he a
ssets
sid
e.
De
duct
fro
m t
he
De
bto
rs
on
th
e A
sset
Sid
e.
De
duct
fro
m t
he
Ca
pita
l A
/c o
f th
e P
art
ne
r o
n t
he
Lia
bili
ty S
ide
.
Add
to t
he
Cre
dito
rs o
n
the L
iab
ility
Sid
e.
11
15
. G
oo
ds s
old
are
in
clu
de
d
in
th
e c
losin
g s
tock a
s it
w
as n
ot d
eliv
ere
d.
16
. S
ale
in
clu
de
s g
oo
ds s
en
t
o
n s
ale
or
retu
rn b
asis
.
17
. G
oo
ds d
istr
ibu
ted
as f
ree
sam
ple
s.
18
. W
ages p
aid
for
in
sta
llatio
n o
f M
ach
ine
ry
d
eb
ited
to W
age
s A
/c.
-- At S
elli
ng
Price
:S
ale
s A
/c –
D
r.T
o D
eb
tors
A/c
At C
ost
Price
:S
tock w
ith
Cu
sto
me
rs A
/c-D
r.T
o T
rad
ing
A/c
Ad
ve
rtis
em
en
t A
/c –
Dr.
To T
rad
ing
A/c
Ma
ch
ine
ry A
/c –
Dr.
To W
ages A
/c
De
duct
fro
m t
he
Clo
sin
g
Sto
ck o
n t
he
cre
dit s
ide
of
Tra
din
g A
/c
(a)
De
duct
fro
m s
ale
on
cre
dit s
ide
of
Tra
din
g A
/c
at
se
llin
g p
rice t
o th
e
exte
nt
it is n
ot
ap
pro
ve
d
by c
usto
me
rs.
(b)
Add
to t
he
Clo
sin
g
Sto
ck a
t co
st
on c
red
it
sid
e o
f T
rad
ing
A/c
.
(a)
Sho
w o
n t
he
cre
dit
sid
e o
f T
rad
ing
A/c
.(b
) A
nd
on t
he
de
bit s
ide
o
f P
& L
A/c
. as
Ad
ve
rtis
em
en
t.
De
duct fr
om
th
e W
ages
on
th
e
deb
it
sid
e
of
Tra
din
g a
/c.
De
duct
fro
m t
he
C
losin
g S
tock o
n th
e
Assets
Sid
e.
(a)
De
duct
fro
m D
ebto
rs
on
Asse
ts S
ide a
t sa
les
price
.(b
) A
dd
to t
he
Clo
sin
g
Sto
ck a
t co
st
on A
sse
ts
Sid
e.
-- --
Add
to
the
Ma
ch
ine
ry o
nth
e A
ssets
Sid
e.
12
19
. L
oss o
f go
od
s b
y f
ire
and
In
su
ran
ce
Co
mp
an
y
A
dm
itte
d C
laim
.
20
. L
egal ch
arg
es p
aid
for
A
cquis
itio
n o
f p
rope
rty
de
bite
d t
o L
ega
l E
xp
en
se
s
A
/c
21
. In
tere
st
on
Pa
rtne
r’s
cap
ita
l.
22
. S
ala
ry to
Pa
rtne
r.
23
. In
tere
st
on
Pa
rtne
r’s
D
raw
ing
Insura
nce C
laim
A/c
– D
r.L
oss b
y F
ire
A/c
– D
r.T
o T
rad
ing
A/c
.
Pro
pert
y A
/c –
Dr.
To L
ega
l C
ha
rge
s A
/c
Inte
rest
on
Cap
ita
l A
/c –
Dr.
To P
art
ne
rs C
ap
ita
l A
/c
P &
L A
pp
rop
ria
tio
n A
/c –
Dr.
To P
art
ne
rs C
ap
ita
l A
/c
Pa
rtne
rs C
ap.
A/c
– D
r.T
o P
& L
App
rop
ria
tion
A/c
(a)
Sho
w o
n c
red
it s
ide
of
Tra
din
g A
/c th
e tota
l lo
ss.
(b)
Sho
w o
n d
eb
it s
ide
of
P &
L A
/c t
he
actu
al
loss
i.e
. A
mt.
of
goo
ds
lo
st
by
fire
Le
ss
A
mt.
O
f cla
imA
dm
itte
d b
y t
he
In
sura
nce
Co
.
De
duct
fr
om
th
e
lega
le
xp
en
se
s o
n d
ebit
sid
e o
fP
& L
A/c
Sho
w o
n t
he
de
bit
sid
e o
fP
& L
Ap
pro
pria
tio
n A
/c.
Sho
w o
n t
he
de
bit
sid
e o
fP
& L
Ap
pro
pria
tio
n A
/c.
Sho
w o
n t
he
cre
dit s
ide
of
P &
L A
pp
rop
ria
tio
n A
/c
Sho
w o
n t
he
Asse
ts S
ide
the
a
mo
unt
o
f
cla
imA
dm
itte
d
by
th
eIn
sura
nce C
om
pan
y.
Add
to
th
e
Pro
pe
rty
acqu
ire
d o
n A
sse
ts S
ide
.
Add
to
C
ap
ita
l o
n th
eL
iabili
ty S
ide
.
Add
to
th
e C
ap
ita
l A
/c o
fth
e P
art
ne
r.
De
duct
fro
m t
he
Ca
pita
l.
13
24
. C
losin
g S
tock.
25
. C
om
mis
sio
n t
o M
an
age
r
a
s %
Ne
t P
rofit.
26
. G
oo
ds r
ece
ive
d a
s f
ree
sam
ple
, a
nd
in
clu
de
d in
C
losin
g S
tock.
(a)
Sto
ck o
f M
ate
ria
l A
/c –
Dr.
Work
In
Pro
gre
ss A
/c –
Dr.
To M
anu
factu
rin
g A
/c(b
) S
tock
o
f F
inis
hed
G
oo
ds
A/c
– D
r.T
o T
rad
ing
A/c
Ma
na
ge
rs C
om
mis
sio
n
A/c
– D
r.T
o O
uts
tand
ing C
om
m. A
/c
Tra
din
g A
/c –
Dr.
To P
& L
A/c
(a)S
tock
of
Ra
w M
ate
ria
lo
n
the
cre
dit
sid
e
of
Ma
nufa
ctu
rin
g A
/c(b
) of
Work
In
Pro
gre
ss a
sa
bove.
(c)
of
Fin
ishe
d G
oo
ds
on
cre
dit
sid
e o
f th
e T
rad
ing
A/c
.
Sho
w o
n t
he
de
bit
sid
e o
fP
& L
A/c
.
(a)
Sho
w o
n t
he
de
bit s
ide
of
Tra
din
g A
/c.
(b)
S
ho
w on
th
e cre
dit
sid
e o
f P
& L
A/c
.
On
Asse
ts S
ide.
On
Asse
ts S
ide.
On
Asse
ts S
ide.
Sho
w
on
th
e
Lia
bili
tyS
ide
a
s
Ou
tsta
nd
ing
Co
mm
issio
n -- --
14
2.2 REVALUATION ASSETS AND LIABILITIES ONADMISSION OR RETIREMENT OF PARTNER
• Increase in value of Assets.
Fixed Assets A/c Dr. To Revaluation A/c
• Decrease in value of fixed Assets
Revaluation A/c Dr. To Fixed Assets A/c
• Increase in liabilities ( unrecorded)
Revaluation A/c Dr. To Sundry Liabilities A/c
• Decrease in Liabilities
Sundry Liabilities A/c Dr. To Revaluation A/c
• Transferring Revaluation Profit to Old Partners in oldratio.
Revaluation A/c Dr. To Old Partners Capital A/c
• Transferring Loss on Revaluation to Old PartnersCapital A/c in old ratio
Old partners Capital A/c Dr. To Revaluation A/c
Note: i) Revaluation A/c is also known as profit & Loss Adjustment A/c.ii) Revaluation of Assets etc. may not be included in syllabus.
However not specially excluded also.
2.3 ADJUSTMENT RELATING TO RESERVES/ GOODWILL :
2.3.1 Reserves appearing in Balance Sheet. These reservebelongs to old partner therefore should be transferred to OldPartners Capital A/c.
General Reserve A/c Dr.
To Old Partners Capital A/c
15
Adjustment relating Goodwill.
Full value of Goodwill is raised and Appears in Balance Sheet.
Goodwill A/c Dr.
To old Partners Capital A/c [in Old Ratio]
2.3.2 Goodwill was raised and written off
(not appearing in Balance Sheet)
Incoming Partners Capital A/c Dr.
To Old Partners Capital A/c
(Credited in Sacrificing Ratio)
(Sacrificing Ratio = Old Ratio – New Ratio)
2.3.3 After admission of New Partner
Goodwill written off
All Partners Capital A/c ….. Dr. [In new P.S.R.] To Goodwill A/c
2.3.4 Incoming partner bring his share of Goodwill in cash.
a) Cash A/c – Dr.
To Goodwill A/c
b) Goodwill A/c – Dr.
To Old Partners Capital A/c [in sacrificing ratio]
2.3.5 Goodwill amount paid in Cash by new partner privately
No entry in book of Accounts.
2.4 HIDDEN ADJUSTMENTS :
Sometimes, details given in Trial Balance indicate amount ofexpenses or income are to be adjusted.
Trial Balance on 31.12.13 Adjustment effects Dr. Cr.
a) 10% Bank Loan 200000 a) Bank int. for 6 months [1st July 08] 10% on 200000= Bank Interest 5,000 200000 x10% 6/12=10000
Out Standing Interest = Rs. 5000 to be provided
16
b) Salaries (11 months) b) Per Month’s Salary 22,000 = 22000/11 = Rs. 2000
Provide OutstandingRs. 2000
c)12% Govt. Security 97,000 c) Amount of interest[Face Value =100000 X 12%Rs. 100000] = Rs. 12000Interest on Govt. 6,000 Accrued InterestSecurities =12000-6000
=Rs.6000 to be accounted.Interest on Investment isalways calculated or FaceValue.
D) Furniture 60000 d) Furniture sold at loss of(Opening Bal ance) of Rs. 7000(25000-18000)Sale of Furniture 18000 i) Deduct Rs.25000[W.D.V. Rs.25000] from Furniture
ii)Loss on sale of FurnitureRs. 7000 Debit to P & LA/c
2.5 PROFORMA OF FINAL ACCCOUNTS :
2.5.1
Dr. Trading A/c for the year ended…. Cr.
Particulars Rs. Particulars Rs.
To Opening tock
To Purchases X
Less Purchase Return X
To Carriage
To Wages
To Direct Expenses
To Gross Profit C/d
X
X
X
X
X
X
By Sales: Cash X
Credit X
Less: Sales Return (X)
By Goods Lost by
Fire etc : (at cost)
By Closing Stock
X
X
X
XX XX
17
2.5.2Profit & Loss A/c for the ended
Particulars Basis BeforeAdmission
AfterAdmission
Particulars Basis BeforeAdmission
AfterAdmission
To salaries
To Insurance
To
Administrative
Exp.
To
Depreciation
To
Commission
To Bad Debts
To Discount
To
Advertisement
To Travelling
Exp.
To N.P. C/d.
T
T
T
T
S
S
S
S
S
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
By Gross
Profit
By
Interest
By Rent
By
Discount
By Net
Loss C/d
S
T
T
S
X
X
X
X
X
X
X
X
X
X
2.5.3Profit and Loss Appropriation A/c
BeforeAdmission
AfterAdmission
BeforeAdmission
AfterAdmission
To Partner Salaries
Old Partner T
New Partner --
To Interest on
Capital Old T
New --
To Net Profit
Before Admi. Old Ratio x
After Admi. New Ratio x
X
--
X
--
X
X
X
X
X
X
By G.P.B/fd
By Interest on
Drawings
New Partner -
Old Partner T
X
--
--
X
X
--
X
X
XX XX XX XX
18
2.5.4 BALANCE SHEET AS ON
Liabilities Rs. Rs. Assets Rs. Rs.
Partners Capital A/c
X
Y
Z
Partners Current
Accounts X
Z
Bank Loans
Sundry Creditors
Bills Payable
Outstanding Expenses
Income Received in Advance
X
X
X
X
X
X
X
X
X
X
X
X
Fixed Assets
Goodwill
Other Fixed Assets
- Depreciation
Investment
Stock
S. Debtors
- New Bad debts
- New R.D.D.
Bills Receivable
Cash & Bank Balance
Y’s Current A/c
X
X
X
(X)
X
(x)
X
X
X
X
X
X
x
X
XX XX
2.6 ACCOUNTING PROCEDURE
1) When New Partner is admitted on 1st day of the year or onLast day of the year, usual final A/c should be prepared i.e.division in Profit & Loss A/c, Profit & Loss Appropriation A/cis not required.
2) Similarly in case of Retirement/Death of a partner on 1st dayor last day of the year, there is no need of preparing Profit &Loss A/c and Profit& Loss Appropriation A/c in columnarform before retirement and after retirement of partner.
3) In both of above cases, it is usual Partnership Final A/c.
4) In case of Admission on Retirement or Death of Partner inbetween the year - Either prepare Final Accounts on thatdate to find out Profit or Loss upto change in partnership i.e.Close the books of Accounts on that date.
5) However it may not be possible to close books of accountson the date of Admission or Retirement or Death of thePartner. Partners continue same books of accounts up to theend of the year. In such case Profit & Loss A/c as well asProfit and Loss Appropriation A/c are prepared in columnarform i.e. Before Change in Partnership and After Change inPartnership then following accounting procedure is followed.
• Prepare Trading A/c to ascertain Gross Profit.
• Ascertain Time Ratio i.e. number of months before admissionand after admission of partner.
19
• Simarly ascertain Sales Ratio.
These ratios are required to divide various Income andExpenses as follow :
• Income/Discount Earned/Gross Profit credit to P & L A/c inSales Ratio.
• Interest Earned divide in Time Ratio.
• Various Fixed Expenses divide in Time Ratio e.g. Salaries,Insurance, Rent, Interest paid, Depreciation etc.
• Various Variable Expenses related with Sales divide in SalesRatio e.g. Carriage Outwards, Bad Debts, written off,Advertisement, Commission, and Depreciation on Delivery Vanetc.
• If details about expenses/income are given for dividingexpenses/income should be considered on e.g. Plant waspurchased after admission, then Depreciation on New Plantshould be debited to II column only (i.e. After Admission] anddeducted from Plant in Balance Sheet.
• Ascertain Net Profit/Loss separately, (say Before Change andAfter Change) and transfer it to Profit and Loss AppropriationA/c.
• Interests on Capital if any ascertain before Admission/AfterAdmission of Partner. Debit it to appropriate column and creditto Partners Capital A/c [no interest is payable to new partnerbefore admission] same way any Salaries to Partner, etc.account in respective column.
• Net Profit before admission transfer to Old Partner in old ratio, aNet Profit after admission of partner transfer to All partner inNew Ratio.
• Transferee balance in Partner Capital Accounts to BalanceSheet.
• However in case of Retirement of partner same procedureshould be followed for division of expenses or income. Then NetProfit before retirement should be ascertained and transferred toOld Partners Capital Accounts. If Balance in Retiring PartnersCapital A/c transferred to Loan A/c, Retiring Partners Loan A/cmay carry interest. Calculate the Interest and debit it to P & LA/c in II column (i.e. After Retirement). Net Profit afterretirement should be transferred to Continuing Partners CapitalA/c in new profit sharing ratio. Same procedure should befollowed in case of death of partner. However balance inCapital A/c of Diseased Partner should be transferred toExecutors Loan A/c and shown in the Balance Sheet on LiabilitySide.
20
CHECK YOUR PROGRESS:
1. Fill in the Blanks
• Wages paid for installation of Machinery must be debitedto---------------------------------------------------------
• Reserves appearing in the Balance Sheet belongs to the-------------------------------------------------------------.
• If the Incoming Partner is bringing his share of Goodwill inCash the Journal Entries will be--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
• Variable expenses related to sales are to be divided in the-----------------------------------Ratio.
• Net Profit/Loss before admission should transferred to the--------------------Partners in their Old Profit Sharing Ratio.
State whether True or False
• Outstanding Insurance is to be shown on the Assets Side ofthe Balance Sheet.
• When New Partner is admitted on the 1st day of year,division in Profit and Loss A/c, Profit and Loss AppropriationA/c is required.
• No Interest is payable to a New Partner before Admission.
• Net Profit after admission of partner is transferred to Allpartner in Old Profit Sharing Ratio.
• If any Interest is allowed on Retiring Partners Loan A/c suchamount of Interest is to be debited it to P & L A/c in AfterRetirement column.
2. Show both the effects of following adjustments and give theJournal Entry.
• In the Trial Balance Legal Expenses are Rs. 10,000.LegalCharges Rs. 5,000 paid are included in the Legal Expenses.
• In the Trial Balance there are Purchases of Rs. 2,00,000which included purchase of Furniture of Rs. 20,000.
• Goods costing Rs. 10,000 are lost by fire and InsuranceCompany admitted a claim of Rs. 8,000.
• Trade Expenses accrued but not entered in the booksamounted Rs. 2,500.
• Bills Receivable includes a dishonored bill.
����������������
21
3
PARTNERSHIP FINAL ACCOUNTS III
Unit Structure
3.0 Objectives
3.1 Illustration
3.0 OBJECTIVES
After studying the unit students will be able to solve thepractical problems related to Partnership Final Accounts.
3.1 ILLUSTRATIONS
Illustration no.1 [Admission of Partner]
Trial balance as on 31st December, 2013
Particulars Rs.Dr. Rs. Cr.
Gross ProfitCreditorsBills PayableOutstanding ExpensesInterest ReceivedA’s CapitalB’s CapitalC’s Capital (admitted 1st May, 2013SalariesAdvertisementStockDebtorsRentBad DebtsCash & Bank Bal.Fixed Assets
24000 60000125000175000 36000 18000 96000
400000
300000 75000 35000 12000 12000
100000200000200000
934000 934000
A & B sharing ratio of 2:1 Admitted C on 1st May, 2013 and agreedto share P & L in a ratio of 2:1:1. Sales before C admission were100000 out of total for the year Rs. 500000.
22
Depreciate Fixed Assets @ 10% p.a.Provide interest on capital 6% p.a. You are required to prepare Final A/c of the firm.
Solution:Profit and Loss A/c
Dr. For the year ended 31st December, 2013 Cr.
Particulars 4 mths.Rs.
8 mths.Rs.
Particulars 4 mths.Rs.
8mths.Rs.
To SalariesTo AdvertisementTo Rent To Bad DebtsTo Dep. On Fixed AssetsTo Net Profit (Bal. C/d)
8,00012,00012,000
3,60013,333
15,067
16,00048,000
14,40026,667
1,18,933
By Gross ProfitBy Interest Received
60,0004,000
2,40,0008,000
64,000 2,48,000 64,000 2,48,000
Profit and Loss Appropriation A/c.For the year ended 31st December, 2013
Dr. Cr.
Particulars 4 mths. 8 mths. Particulars 4 mths. 8 mths.
To Interest on Capital A B C
To Net Profit transferred A & B In 2:1 ratio.
To New profit transferred to A,B & C in 2:1:1 ratio.
20004000--
9067
400080008000
98933
By Net profit b/d 15067 118933
15067 118933 15067 118933
Balance sheetas on 31st December, 2013
LiabilitiesRs. Rs. Assets Rs. Rs.
Capital A B C
Creditors
Bills PayableOutstanding Expenses
1,61,5112,39,7562,32,733 6,34,000
75,000
35,00012,000
Closing StockDebtorsFixed Assets
Less Dep.
Cash and BankBal.
4,00,000
40,000
1,25,0001,75,000
3,60,000
96,000
7,56,000 7,56,000
23
Working Note:Partners Capital A/c
Dr. Cr.Particulars A B C Particulars A B C
To Bal.C/d 161511 239756 232733
By Bal. B/d
By Interest on
Capital
By Net Profit (4 mths)
By Net Profit (8 Mths)
100000
6000
6044
49467
200000
12000
3023
24733
200000
8000
--
24733
161511 239756 232733 161511 239756 232733
Illustration-2 [Admission of Partner in between the year]
Trial Balance as on 31st December, 2013
Particulars Dr.Rs.
Cr.Rs.
Gross Profit
Salaries
Rent
Printing and Stationery
Bad Debts
Discount
Sales Commission
Sundry Debtors
Sundry Creditors
Bills Receivable and Bills Payable
Land and Building
Plant and Machinery
A’s Capital
B’s Capital
C’s Capital [1st July, 2013]
Advertisement
Bank Fixed Deposits
36000
12000
9000
18000
30000
210000
120000
200000
150000
24000
100000
3,60,000
24000
40000
35000
100000
150000
200000
909000 909000
24
Adjustments:-
1) A and B sharing profit & losses in the ratio of 2:1 admitted C on1st July, 2013 and agreed to share in the ratio of 2:1:2.
2) As per partnership deed (old and New) partners were entitled tointerest on capital @ 6% p.a. A’s remuneration Rs. 12000 p.a.and C Rs. 20000 p.a.w.e.f. 1st July 2013
3) Depreciate land and bldg by 5%. Plant and machinery by 20%p.a.
4) Plant includes, plant worth Rs. 50000 purchased on 1st July,2013
5) Fixed Deposits carry interest at 12% p.a. from 1st Oct 2013
6) Sales up 30th June, 2013 amounted to Rs. 200000 out of totalsales for the year 500000.
You are required to prepare P and L A/c, P and LAppropriation A/c for the year ended 31st December, 2013 andBalance Sheet as on 31st December, 2013.Solution:
Profit and Loss A/cDr. For the year ended 31st December, 2013 Cr.
Particulars 1 Jan to30 June
1 July to31 Dec.
Particulars 1 Jan to 30 June
1 July 31 Dec.
To Salaries
To Rent
To Printing &
Stationery
To Bad Debts
To Sales
Commission
To Advertisement
To Depreciation On:
Land & Bldg
Plant & Machinery
To Net Profit c/d
18000
6000
4500
7200
12000
9600
5000
10000
81300
18000
6000
4500
10800
18000
14400
5000
15000
141700
By Gross Profit
(2:3 ratio)
Bu Discount
By Interest on
F.D.
(from 1st Oct
2001)
144000
9600
__
216000
14400
3000
153600 233400 153600 233400
25
Profit & Loss Appropriation A/c Dr. For the year ended 31st December, 2013 Cr.
Particulars 1 Jan to 30 June
1 July to 31 Dec.
Particulars 1 Jan to 30 June
1 July 31 Dec.
To Interest on Capital
A
B
C
To Partners Salary
A
C
To net profit transferred to
Cap.
Upto 30th June A & B in 2:1
From 1st July A, B, C, in 2:1:2
3000
4500
--
6000
--
67800
3000
4500
6000
6000
10000
112200
By Net
Profit b/d
81300 141700
81300 141700 81300 141700
Balance Sheet
As on 31st December, 2013
Liabilities Rs. Rs. Assets Rs. Rs.
Partners Capital A/c
A
B
C
Sundry Creditors
Bills Payable
208080
204040
260880 673000
40000
35,000
Land & Building
Less: Depreciation
Plant and Machinery
Less: Depreciation
Sundry Debtors
Bills Receivable
Bank Fixed Deposits
Add: Interest Accrued
200000
10000 190000
125000
210000
120000
103000
150000
25000
10000
3000
748000 748000
26
Partners Capital A/c.
Dr. For the year ended 31st December, 2013 Cr.
A B C Particulars A B C
To Bal. carried to
Balance Sheet
208080 204040 260880
By Bal. B/d
By Cash & bank
By Interest on
Capital
By Salaries
By Net Profit
upto 30th June
2008
from 1st July
100000
--
6000
12000
45200
44880
150000
--
9000
--
22600
22440
200000
6000
10000
44080
208080 204040 260880 208080 204040 260880
Illustration 3 [Admission of Partner]
Rana and Balu were partners sharing profits and Losses in the ratioof 3:2 with effect from 1-10-2013 kaka joins as a third partner. The new profit sharing ratio was 2:2:1
The following is their trial balance as on 31-3-2014
Particulars DebitRs.
CreditRs.
Drawing & Capital - Rana
- Balu
- Kaka
Opening Stock (1-4-2013)
Purchases & Sales
Wages
Furniture
General Exp.
Selling Exp.
Debtors & Creditors
Cash & Bank Balance
Amount brought by kaka (for his share of Goodwill)
15,000
10,000
5,000
30,000
9,00,000
1,40,000
2,00,000
60,000
14,000
6,26,000
3,50,000
--
3,00,000
2,00,000
1,50,000
--
14,00,000
--
--
--
--
2,50,000
--
50,000
23,50,000 23,50,000
27
Other Information:
(a) Stock on 31-3-2014 was Rs. 180000
(b) Purchases from 1-4-2013 to 30-9-2013 were Rs. 4, 00,000.
(c) Sales from 1-4-2013 to 30-9-2013 were Rs. 6, 00,000
(d) Wages from 1-4-2013 to 30.09.2013 were 60,000.
(e) Stock on 30-9-2013 was Rs. 80,000.
(f) Furniture worth Rs. 1,00,000 was Purchased on 1-1-2014.
Write off depreciation on Furniture at 20% p.a.
(g) Interest on Partner’s Capital is to be provided at 12% p.a.
(h) No interest is to be charged on Partner’s Drawings.
You are required to prepare:-
(i) P & L A/c and P & L Appropriation A/c with columns for
(01-4-2013 to 30-9-2013) and (01.10.2013 to 31.03.2014).
(ii) Balance sheet as on 31-03-2014
[M.U. Apr., 03] and
Solution:(In the book of Rana, Balu & Kaka)
Trading and P & L Appropriation A/c.For the year ended 31-3-2014
Dr. Cr.
Particulars1-4-13
to
30-9-13
1-10-13
to
31-3-14
Particulars1-4-13
to30-9-13
1-10-13to
31-3-14
To Opening Stock
To Purchases
To Wages
To Gross profit
30,000
4,00,000
60,000
1,90,000
80,000
5,00,000
80,000
3,20,000
By Sales
By Closing stock
6,00,000
80,000
8,00,000
1,80,000
6,80,000 9,80,000 6,80,000 9,80,000
To General Exp. (2)
To Selling Exp. (2)
To Depre. Furniture (3)
To Net Profit c/d
30,000
6,000
10,000
1,44,000
30,000
8,000
15,000
2,67,000
By Gross Profit b/d 1,90,000 3,20,000
1,90,000 3,20,000 1,90,000 3,20,000
To Interest on Cap.12%
Rana
Balu
Kaka
To Partners Capital A/cs
Rana (3/5) (2/5) =1,59,600
Balu (2/5) (2/5) = 1,36,800
Kaka (-) (1/5) = 45,600
18,000
12,000
--
68,400
45,600
--
18,000
12,000
9,000
91,200
91,200
45,600
By Net Profit b/d 1,44,000 2,67,000
1,44,000 2,67,000 1,44,000 2,67,000
28
Dr. Partners Capital A/c Cr.Particulars Rana
Rs.BaluRs.
KakaRs.
Particulars Rana Balu Kaka
To Drawings
To Balance
C/d (Bal. fig)
15,000
5,30,600
10,000
3,50,800
5,000
1,99,600
By Balance b/d
By Bank (1)
By Interest (1)
(d)
By Goodwill
By P & L Appr.
3,00,000
--
36,000
50,000
1,59,600
2,00,000
--
24,000
--
1,36,800
--
1,50,000
9,000
--
45,600
5,45,600 3,60,800 2,04,600 5,45,600 3,60,800 2,04,600
Balance Sheet as on 31-3-2014
Liabilities Rs. Assets Rs.
Partners Capital
Rana 5,30,600
Balu 3,50,800
Kaka 1,99,600
Creditors
10,81,000
2,50,000
Furniture 2,00,000
Less: Dep. 25,000
Debtors
Stock
Cash & Bank
1,75,000
6,26,000
1,80,000
3,50,000
13,31,000 13,31,000
Note :- (1) Sacrifice Ratio (Old Partners) Profit-Share Ratio Rana Balu Kaka
(a) Old 3 : 2
i.e.3
5
2
5
(b) New 2 : 2 : 1
i.e.2
5
2
5
1
5
(c) Sacrifice = (a) – (b)1
5
1
5
(d) Therefore, Kaka has to pay Rana on account of Goodwill noentry is Passed, since Interest on Capital is calculated on Rs.1, 50,000 kaka for 6 months
(2) Allocation of Expenses Basis
(a) General Expenses TIME(b) Selling Expenses SALES
29
(3) Depreciation on FurnitureDepreciation @ 20% p.a.
Furniture A/c Rs Upto 1-10-13 After 1-10-13 Total
Opening Bal. (1-04-13) (Bal. fig) 1,00,000 10,000* 10,000* 20,000*
Addition 1-1-09 1,00,000 -- 5,000** 5,000**
Closing Bal. (31-3-14) 2,00,000 10,000* 15,000 25,000
Illustration : 4[Admission of Partner]
The following is the Trial Balance of a firm as on 31st December,2013.
Debit Rs. Credit Rs.
PurchasesReturn InwardStockDrawings:
Sonu Kalu Motu
SalaryOff. Exp.Bad DebtsCarriage InwardsCarriage OutwardsDebtorsBills ReceivablesBank BalanceCash BalanceInvestmentPremisesmachinery
1,56,0002,400
24,000
12,00012,00012,00027,00016,5002,1004,5006,750
1,00,0003,2508,000
2,500 25,000 50,000 36,000
Capital A/c: Sonu Kalu Motu
SalesReturn OutwardR.D.D.Bank LoanCreditorsBills payable
30,00030,00030,000
2,94,0002,0008,800
20,00076,5008,700
5,00,000 5,00,000
On 1st July 2013 Sonu retired and the following adjustments wereagreed upon:
a) Goodwill of Rs. 90,000/- was brought into the books ofaccounts.
b) Furniture worth Rs. 20,000/- was purchased on 31-3-2013 butthe invoice was not recorded in the books.
c) Balance in sonu account after making all adjustments was to betransferred to his Loan account carrying interest @ 16%.
30
d) Closing stock was valued at Rs. 42,000/-.
e) Depreciate Machinery by 10%, Premises by 5% and Furnitureby 5% p.a.
f) Provide interest on capital at 10% p.a. Prepare Trading andProfit and Loss Account for the year ended 31-12-2013 and aBalance sheet as on that date.
[Modified M.U. Apr.,05]
Solution : (In the Books of Sonu, Kalu, & Motu)
Trading, P & L and P & L Appropriation. A/c Dr. for the year ended 31st Dec. 2013 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock
To Purchases 1,56,000
Less: Returns (2,000)
To Carriage Inward
To GP c/d
To Salary
To Office Expenses
To Bad Debts
To Carriage Outward
To Deprecation
Machinery 3,600
Premises 2,500
Furniture 750
To Net Profit
24,000
1,54,000
4,500
1,51,100
3,33,600
27,000
16,500
2,100
6,750
6,850
91,900
By Sales 2,94,000
Less: Returns (2,400)
By Closing Stock
By Gross Profit
2,91,600
42,000
3,33,600
1,51,100
1,51,100 1,51,100
31
HY1Rs.
HY2Rs.
HY1Rs.
HY2Rs.
To Interest on Capital
Sonu 1,500=
Kalu 3,000=
Motu 3,000=
To Interest A’s Loan-
(63,317 x 16% x 6 mths)
To Net Profit
Transfer to Capital A/cs.
A 13,817=
B 32,758=
C 32,758=
1,500
1,500
1,500
13,818
13,816
13,816
--
1,500
1,500
5066
18,942
18,942
By Net Profit(91,900 X ½) 45,950 45,950
45,950 45,950 45,950 45,950
i) Half year, HY1 = 1st Jan. 2013 to 30 June 2013. HY2 = 1st July 13 to 31st December, 2013.
ii) It is assumed that monthly sales were uniform throughout theyear.
Balance Sheet As on 31st Dec., 2013
Liabilities Rs. Rs. Assets Rs. Rs.
Bank Loan
Creditors
Add: Purchase of Furniture
Bill payable
Sonu’s Loan A/cAdd: O/s Interest
Capitals:Kalu
Motu
76,500
20,000
63,318
5,066
83,758
83,758
20,000
96,500
8,700
68,384
1,67,516
CashBankDebtorsLess: R.D.DB/RClosing stockInvestmentPremisesLess:DepreciationMachineryLess:DepreciationFurnitureLess:Depreciation
Goodwill
1,00,0008,800
50,000
(2,500) 36,000
(3,600) 20,000
(750)
2,5008,000
91,2003,250
42,00025,000
47,500
32,400
19,250
90,000
3,61,100 3,61,100
Dr. Capitals A/c Cr.Particulars Sonu Balu Kaka Particulars Sonu Balu Kaka
To DrawingTo Loan A/c
12,00063,318
12,00083,758
12,00083,758
By Balance b/d
By Goodwill
By Int. oncapitalBy P/L A/c
30,000
30,000
1,500
13,818
30,000
30,000
3,000
32,758
30,000
30,000
3,000
32,758
75,318 95,758 95,758 75,318 95,758 95,758
32
Illustration – 5 [Admission of a partner]
A and B were partners in business sharing profit and losses,A two-third and B one-third. Interest on Fixed Capital was credited@ 5% p.a. No. interest was charged on drawings. Accounts weremade upto 31st March of each year.
On January 1, 2014 C was admitted as partner and from thatdate all P and L were to be shared, A six-tenth B three-tenth, Cone-tenth. Before ascertaining the partners shares of P and L Cwas to be credited with a salary at the rate of Rs. 6000 p.a.Provisions regarding interest on capital and drawings remainedunaltered.
It was agreed that C’s total share of profits including hissalary and interest on capital, should be guaranteed by A atminimum rate of Rs. 15000 p.a. Any apportionment of profit for aparticular period should be made as to gross profit on the basis ofsales and as to expenses, with the expectation of general expenseson the basis of time.
The Trial Balance extracted from the books on 31st March 14was as follows-
Particulars Dr. Cr.
Capital Account: A B
C (cash paid in Jan 1st, 2014)Current Account: A
B C
Delivery Van at costPro. For Dep. thereon at 31st March, 2014Furniture and Fittings at costPro. For Dep. thereon at 31st March, 2014Sales (Nine months, to Dec 31st) Rs. 2,40,000/-PurchasesStock March 31st 2013General Exp. (9 months To Dec. 2013 Rs. 4,550)SalariesHeating and Lighting Rent and RatesCreditorsDebtorsBalance at Bank
30,00015,0003,000
10,000
24,000
2,22,00048,00010,40024,0002,2009,600
20,00019,800
48,00024,0008,000
4,000
3,0003,36,000
15,000
4,38,000 4,38,000
On 31st March, 2014 the stock was valued at Rs. 47000,rates paid in advance amounted to Rs. 600; Rs. 800 is to beprovided for electricity consumed to that date.
33
Included in the sundry debtors was an amount of Rs. 6000for goods invoiced on sale or return on 1st February 2014 whichwere still unsold on 31st March 2014. The cost of these goodswhich were not included in the stock was Rs. 3000.
Depreciation is to be provided @ 20% p.a., on the cost of thedelivery van at 2 ½ % p.a., on the cost of furniture and fittings.
You are required to prepare:-
(a) Trading and P and L A/c for the year ended 31st March 2014and
(b) Balance Sheet as on that date: Ignore Taxation.
Solution:-M/s A, B and C
Trading and P and L Account for the year ended 31st March 2014
Dr. Cr.
Particulars Rs. Amt. Particulars Rs. Amt.
Rs. Amt.
To Opening Stock
To Purchases
To Gross Profit
c/d
48,000
2,22,000
1,10,000
By Sales
By Stock in
hand:
With Customer
47,000
3,000
3,30,000
50,000
3,80,000 3,80,000
UptoDec.
31st 2013
Rs.
1st Jan14
31st Mar.14
Rs.
UptoDec.
31st 2013
Rs.
1st Jan.14
31st
Mar. 14
Rs.
To Salaries
To General Exps.
To Heating and Lighting
To Rent and Rates
To Depreciation on:-
Delivery Van
Furniture & fixtures
To Net Profit c/d
18,000
4,550
2,250
6,750
1,500
450
46,500
6,000
5,850
750
2,250
500
150
14,500
By GrossProfit
(240:90)
80,000 30,000
80,000 30,000 80,000 30,000
34
To Interest on Capital:-
A
B
C
To Salary to artners C
To Profit:-
A 2/3 6/10
B 1/3 3/10
C - 1/10
1,800
900
29,200
14,600
600
300
100
1,500
7,200
3,600
1,200
By Net profit b/d
46,500 14,500
46,500 14,500 46,500 14,500
Note : Rs. 6000 goods with customer on approval basis have beendeducted both sales and debtors.
Balance Sheet as at 31st March, 2014
Liabilities Rs.
48,000
24,000
8,000
7,85
0
4,400
750
Rs. Assets Rs.
10,000
6,000
24,000
3,600
Rs.Capital Account:-
A
B
C
Current Account:-
A
B
C
Creditors
Expenses Unpaid
80,000
13,000
15,000
800
Fixed Assets:
Delivery Van cost
Less:
Depreciation
Furniture and
Fixtures cost
Less:
Depreciation
Current Assets:
Stock in hand
with customer
Debtor
Cash at Bank
Prepaid Rates
4,000
20,400
50,000
14,000
19,800
600
108800 108800
35
Partners Current Account
Dr. Cr.Particulars A B C Particulars A B C
To
Drawings
To Partner
c (to Make
up Rs.
3750 for
Mths)
To
Balance
C/d
30,000
950
7,850
15,000
4,400
3,000
750
By Interest
By Salary
By Net
Profit Upto
31-12-2014
By Net
Profit After
Jan 1st
By C/A’s
A/c
2,400
29,200
7,200
1,200
14,600
3,600
100
1,500
--
1,200
950
38,800 19,400 3,750 38,800 19,400 3,750
Illustration – 6 [final A/c of professional firm]
Dr. Gandhi and Dr Gujar were partners (sharing P and L in3:2 ratio). On 1-10-2013 they admitted Dr. Jani as a partner. Dr.Jani brings Rs. 40000 as Goodwill for his 1/5th share. The trial balance on 31-12-2013 was as follows:-
Particulars Dr. Cr.
Drawings and Capital Dr. GandhiDr. GujarJani (Goodwill brought on 1-10-2013)Client’s deposits receivedEquipments and furnitureOffice and administration expensesRent SalariesCash and BankFees earnedProvisions against out standings fees)1-1-2013)Outstanding Fees (on 31-12-2013)
15,00010,000
1,80,00072,00021,00040,000
1,02,000
60,000
60,00040,00040,00010,000
3,00,00050,000
5,00,000 5,00,000
36
Adjustments:-
1) Provide 10% depreciation on Equipment and Furniture.
2) The business has handled 50% more work in each of themonths of the last quarter compared with the previousmonths.
3) Outstanding Fees 31-12-2013 includes Rs. 45000 for fees tobe collected for the period in the last quarter of 2013. Alloutstanding fees should be provided.
4) Rent has been increased by Rs. 500 p.m. from 1-7-2013
5) A clerk was appointed at Rs. 1000 p.m. from 1-9-2013
Prepare Final accounts for the year ended 31st December 2013
Solution:-In the books of Dr. Gandhi, Dr. Gujar and Dr. Jani
Profit and Loss A/c.For the year ended 31st December 2013
Dr. Cr.Particulars Upto
30-9After 1-10
Particulars Upto 30-9
After 1-10
To Office and Administration
To Rent (Note 1)
To salaries (Note 2)
To Depreciation onequipments
And furniture
To Provision for outstanding fees
To Partners Capital A/c (profit) (bal. Fig.)
Dr. Gandhi (3/5 & 12/25)
Dr. Gujar (2/5 & 8/25)
Dr. Jani 5/25
54,000
15,000
28,000
13,500
74,700
49,800
18,000
6,000
12,000
4,500
45,000
6,960
4,640
2,900
By Fees earned(notes 3)
By Provision foroutstanding fees(1.1.2013 Rs.500000Less : (31-12-2012Rs. 15000 (15000=60000-45000)
2,00000
35,000
1,00,000
2,35,000 1,00,000 2,35,000 1,00,000
37
Balance Sheet as at 31st December, 2013
Liabilities Rs. Rs. Assets Rs. Rs.
CapitalAccount:-
Dr. Gandhi
Dr. Gujar
Dr. Jani
ClientDepositReceived
1,50,660
1,00,440
2,900 2,54,000
10,000
Equipment &Furniture
Less:Depreciation
Cash & Bank
OutstandingFees
Less:Provision
1,80,000
(18,000) 1,62,000
1,02,000
--60,000
(60,000)
2,64,000 2,64,000
Working Note:
Partners Capital A/cDr. Cr.Particulars Gandhi Gujar Jani Particulars Gandhi Gujar Jani
To Drawings
To Goodwill
To Balance
c/d
(bal. Fig.)
15000
150660
10000
100400
40000
2900
By Bal. B/d
By Goodwill
By Profit
60000
24000
81600
40000
16000
54440
40000
2990
165660 110440 42900 165660 110440 42990
(1) Rent 21,000Less: Increased (500 x 6 mths 3,000
----------Rent (without increase 18,000
======Therefore, Rent= 18000/12 Rs. 1500 per Mth.(a) Rent (from 1-1-2013 to 1-9-2008)
1-1-2008 to 30-6-2013 (1500 x 6 mths.) 9,0001-7-2013 to 30-9-2013 (2000 * 3 mths.) 6,000
-----------Total 15,000
=======(b) Rent (from 1-10-2013 to 31-12-2013
(2000* 3 mths.) 6,000=======
38
(2) SalariesSalaries 40,000Less: Clerk appointed (1000 x 4 mths.) 4,000Salaries (without appointment) 36,000
===== Therefore, Salaries = Rs. 36000/12=Rs. 3000 per mth.
(a) Salaries (from 1-1-2013 to 30-9-2013)1-1-2013 to 31-8-2013 (3000 x 8 mths.) 24,0001-9-2013 to 30-9-2013 (4000 x 1 mths.) 4,000
-----------Total 28,000
======
(b) Salaries (from 1-10-2013 to 31-12-2013) -----------1-10-2013 to 31-12-2013 (4000 x 3 mths.) 12,000
=======
(3) Fees EarnedLets assume, average monthly work in first three quartersbe 2x per month. Therefore, average monthly work in lastQuarter = 3x per months.Work (01-01-2013 to 30-9-2013) = 2x for 9 mths. = 18xWork (01-10-2013 to 31-12-2013) = 3x for 3 mths. = 9xTherefore, Work upto 30-9-2013 and after 01-10-2013 is in2:1.
(4) Goodwill AdjustmentAs the new profit sharing ratio is not specified, the sacrificeby old partners (Gandhi and Gujar) is in old profit sharingratio (i.e. 3:2). The entry passed isJani’s capital A/c……………Dr. 40,000
To Gandhi capital A/c 24,000To Gujar Capital A/c 16,000
(5) New profit sharing ratio(a) Partner Gandhi = 3/5 of (1-1/5) = 12/25(b) Partner Gujar = 2/5 of (1-1/5) = 8/25(c) Partner Jani = 1/5 = 5/25
Therefore, Gandhi : Gujar: Jani: 12:8:5
Illustration – 7 [Admission of A partner in between the year]
M/s Kunal & Co. having Deepak and Ram (sharing profitsand losses in 2:1) decided to admit Amit, as partner from 1-1-2014.The new profit-sharing of the partner was Deepak: six-tenth; Ram :three-tenth; and Amit: One-tenth.
According to the partnership deed, interest @ 10% p.a., ispayable on fixed capital: No interest was charged on drawings.
39
The capital should be prepared on 31st March each year Deepakand Ram admitted Amit on following terms and conditions:-
(1) Amit should get salary of Rs. 9000 p.a.
(2) Amit’s share of profits (including salary and interest oncapital should be guaranteed by Deepak at a minimum ofRs. 16000 p.a., from the date of admission.
(3) Apportionment of expenses should be made on the basisaverage sales, except from miscellaneous expenses andadministrative expenses.
(4) Goodwill of the firm was valued at Rs. 100000 and it shouldbe raised in the books.
The Trial balance on 31st March, 2014 was as follows:-
Particulars Dr. Rs.
Cr. Rs.
Current and Capital Accounts:
Deepak
Ram
Amit (Capital Brought on 14-2-2014)
Cost and Provision for Depreciation
On Office furniture
On Delivery Vans
Purchases and Sales
Debtors and Creditors
Stock on 1-4-2013
Miscellaneous expenses (upto 31st December Rs.
11900)
Rent, Rates and Taxes
Carriage outward
Cash & Bank
Goodwill
60000
30000
6000
20000
48000
400000
60000
90000
20000
44000
17000
11000
10000
96000
48000
16000
8000
18000
610000
20000
816000 816000
In addition following information is to be considered:-
1) Stock on 31-3-2014 Rs. 34000.
2) Rent, Rates and Taxes outstanding on 31-3-2014 Rs. 4000.
3) Carriage outward paid in advance on 31-3-2014 Rs. 2000.
40
4) Sales and Debtors includes goods sent on “sales or return”basis on 01-03-14 of Rs. 25000 (Cost Rs. 15000) On 31-3-14.
(i) 50% of goods accepted by customers.
(ii) 10% of goods no intimation from customer but period
of approval expired on 25th March 2014.
(iii) Balance goods, period of approval not expired.
5) Average monthly sales for the months of January, March, Mayto July, September to December were half, compared toaverage monthly sales of the remaining months.
6) On 31-3-2014 partners decided that partners fixed capitalshould be in 8 (Deepak); 4 (Ram); 1 (Amit). For this purpose,Amit’s capital should be considered as base. The shortfall incase on Ram, should be adjusted through introduction of cashby Ram. However shortfall of Deepak should be transferred tohis current a/c. The necessary cash was brought by Ram on31-3-2014 for which no entry was passed.
7) Provide 10% depreciation on Office furniture and on deliveryvans.Prepare Trading and Profit and Loss Account for the year ended31st March, 2014 and the Balance Sheet on that date.
Solution :
In the books of Kumar and Co. Trading Accountfor the year ended 31st March, 2014
Dr. Cr.
Particulars AMT. Particulars Amt.
To Opening Stock
To Purchases
To Gross Profit
(bal. Fig.)
90000
400000
150000
By Sales
Less: Sales or Return
By Closing Stock
Add: Sales or Return
at cost
610000
10000 600000
40000
34000
6000
640000 640000
41
Profit and Loss A/cDr. For the year ended 31st March 2014 Cr.
Particulars Upto 31-12
Rs.
After 1-1
Rs.
Particulars Upto 31-12
Rs.
After 1-1
Rs.
To Misc. Exp
To Rent, Rates &
Taxes
(44000 + 4000)
To Carriage
Outward
(170000-2000)
(sales)
To Dep. On
Furniture (time)
To Dep. On
Delivery Van
(sales)
To Net Profit
(bal. Fig.)
Total Rs.
To Salary
(9000*3/12)
To Interest on
Capital:
@ 10% on 96000
@ 10% on 48000
@ 10% on 16000
for 1.5 mths.
(from 14-2-2014)
To Partners
Capital A/c
(profit)
Deepak( 2/3 and
note 4)
Ram 1/3 and
3/10)
Amit (-) and
note 4
Total Rs.
11,900
36,000
11,000
900
2,200
48,000
8,100
12,000
4,000
300
800
14,800
By Gross Profit b/d
(sales)
By Net Profit b/d
1,10,000 40,000
1,10,000 40,000 1,10,000 40,000
--
7,200
3,600
--
24,800
12,400
--
2,250
2,400
1,200
200
4,575
2,625
1,550
48,000 14,800
48,000 14,800 48,000 14,800
42
Partners Current Accounts
Particulars Deepak Ram Amit Particulars Deepak Ram Amit
To Bal. B/d
To Deepak’s
Capital
Account
(note 5).
To Bal. C/d
Total Rs.
60000
32000
6975
30000
--
19825
6000
--
By Goodwill
(2:1) [note 6]
By Salary
By Interest
on Capital
By Profit
By Bal. C/d
Total Rs.
60000
9600
29375
30000
4800
15025
2250
200
1550
2000
98975 49825 6000 98975 49825 6000
Balance SheetAs on 31st March 2014
Liabilities AMT. AMT. Assets AMT. AMT.
Partners Capital
A/c
Deepak
Ram
Amit
Partners Current
A/c
Deepak
Ram
Creditors
Outstanding
Rent, Rates and
Taxes
128000
64000
16000 208000
26800
20000
4000
Office Furniture
Less: Pro. For Dep.
(note 3)
Delivery Vans
Less: Pro. For Dep.
(note 3)
Debtors
Less: Sales of
Return
Cash and Bank
Add: Brought by
Ram
Goodwill
Add: Raised
Stock
Add: sales or
Return
Carriage-outward
paid in adv.
Partners Current
A/c Amit
20000
9200 10800
27000
50000
27000
100000
40000
2000
2000
48000
21000
697519825
60000
10000
11000
16000
10000
90000
34000
6000
258800 258800
43
Working Note:-
1) Sale or Return Goods:
(a) 50% of the goods accepted by the customer and 10% of the
goods for which no intimation is received but period of
approval has expired should be considered as a sale. These
goods are already include in sales and debtors & therefore
no adjustment entry is required for 60% of the goods.
(b) Balance 40% (i.e. 100%-50%-10%) goods, for which period
of approval is not expired cannot be considered as sale.
Therefore
(i) Cancel sales (i.e. less from sales and less from
debtors) = 40% for Rs. 25000=Rs. 10000
(ii) Include in closing stock = 40% of 15000 (cost) = Rs.
6000 (i.e., at cost and market value, whichever is less).
2) Sales ratio:
Let us assume sales for remaining months=2x each.
Sales for specified months = x each.
Sales from 1-4-2008 to 31-12-2008 (9 months)
Apr May Jun July Aug Sep Oct Nov Dec Total
2x +x +x +2x +x +x +x +x +x =11x
Sales from 1-1-2009 to 31-3-2009 (3 months)
Jan Feb Mar Total
X +2x +x =4x
Therefore, Sales 9 months : months :11:4.
(3) Depreciation :
Method of depreciation is not specified and therefore dep. isprovided on reducing balance method.
Particulars Off.Fumit. Delivery van
Cost Less: Pro For Dep. (1-4-2013)
W.D.V.
Less: Depreciation @ 10%
W.D.V. on 31-3-2014
20,0008,000
48,00018,000
12,000
1,200
30,000
3,000
10,800 27,000
44
(4) Gurantee of Profit (by Deepak to Amit)
Gurantee (for 3 months i.e, 01-01-2013 to 31-03-2013)
Total amount receivable by Amit
Salary (9000 x 3/12) 2250
Add: Interest on capital (on Rs. 16000 @ 10% from
14.2.2009 200
Add: Profit [1/10 of (14800-6050)] 875
3325
Add: Shortfall to be borne by Deepak (Bal.Fig) 675
Total amount receivable by Amit 4000
Therefore, Total profit Amit=875+675=Rs. 1550.
Profit of Deepak:
Profits [6/10 of (14800-6050)] 5250
Less: Shortfall of Amit 675
Total profit of Deepak 4575
(5) Fixed capital adjustments:
Fixed capital of Amit 16000
Therefore, Fixed capital of Deepak (16000x8/1) 128000
Therefore, Fixed capital of Ram (16000x4/1) 64000
(a) Shortfall of Deepak
Shortfall of Rs. 32000 (i.e, 128000-96000) should be
debited to Deepak’s current account.
(b) Shortfall of Ram
Shortfall of Rs. 16000(i.e., 64000-48000) should be
brought in cash by Ram.
Therefore, cash balance increased by Rs. 16000
(6) The Journal Entry to raise Goodwill is
Goodwill A/c ------- Dr.
To Deepak’s Current A/c (⅔)
To Rams Current A/c (⅓)
90000
60000
30000
45
Illustration : 8
Following is the Trial Balance of a firm as on 31st Dec. 2013
Debit Rs. Credit Rs.
Drawing : X
Y
Z
Furniture
Purchases
Stock
General Expenses
Salary
Rent & Rates
Debtors
Bank
15,000
7,500
1,500
10,500
1,10,000
25,000
5,200
12,000
5,900
31,000
10,900
Capita’s X
Y
Z (including Goodwill)
Sales
Creditors
24,000
12,000
5,000
1,80,000
13,500
2,34,500 2,34,500
Adjustments:
1) X and Y were partners sharing profits and losses equally.
2) Mr. Z was admitted to the partnership on 1st July, 2013.
3) On 31st December, 2013 stock was valued at Rs. 23,500.
4) Rent & Taxes paid in advance Rs. 900.
5) General Exp. Were outstanding Rs. 750.
6) Depreciate Furniture @ 10% p.a.
7) Share of Goodwill of new partner was valued at Rs. 1,000 on
1st July, 2013 and is yet to be adjusted
8) Interest on capital to be charged at the rate of 10% p.a.
You are required to prepare Trading, Profit and Loss
Account for the year ended on 31st December, 2013 and
Balance sheet as of that date.
[Modified, M.U. Oct., 08]
46
Solution :
(In the Books of X, Y, Z)
Trading and Profit and Loss A/c.
For the year ended 31st Dec., 2013
Dr. Cr.
Particulars Rs. Particulars Rs.
To Opening Stock
To Purchases
To Gross Profit c/d
To General Expenses 5,200
Add: Outstanding 750
To Salary
To Rent & Taxes 5,900
Less: Prepaid 900
To Depreciate Furniture
@ 10% p.a
To Net Profit (full year)
25,000
1,10,000
68,500
By Sales
By Closing Stock
By Gross Profit
1,80,000
23,500
2,03,500 2,03,500
5,950
12,000
5,000
1,050
44,500
68,500
68,500 68,500
Dr. P & L Appropriation A/c (Year 2013) Cr.
Jan-June
Rs.
July-Dec
Rs.
Jan-June
Rs.
July-Dec
Rs.
To Interest on CapitalA/cs.
A (full year) B (full year) C (6 months)
To Balance Profit A B C
(b)
(a)+(b)
Interest + Profit A (11,425 + 7,950) B (10,825 + 7,350) C ( Nil + 6,950)
1,200 600
10,22510,225
--
1,200 600 200
6,7506,7506,750
By P & L(50% of 44,500 each)[N.P. B/d]
22,250
22,250
22,250
22,250
20,450 20,250
22,250
===
22,250
19,37518,175 6,950
44,500 44,500
47
Partners Capital A/c
Dr. Cr.
Particulars ARS.
BRs.
CRs.
Particulars ARs.
BRs.
CRs.
To Drawing
To Goodwill
To Balance C/d
15,000
--
28,875
7,500
--
23,175
1,500
1,000
9,450
By Balance b/d
By Goodwill
By P & L Appro.
24,000
500
19,375
12,000
500
18,175
5,000
--
6,950
43,875 30,675 11,950 43,875 30,675 11,950
Balance Sheet of A, B, & C
As at 31st Dec., 2013
Liabilities Rs. Assets Rs.
Capitals:
A 28,875
B 23,175
C 9,450
Outstanding Exp.
Sundry Creditors
61,500
750
13,500
Furniture 10,500
Less: Deprn. (1,050)
Prepaid Rent
Debtors
Bank
Closing Stock
9,450
900
31,000
10,900
23,500
75,750 75,750
Note :
In the absence of any information / Instruction, it is assumed
that
(a) Profit Sharing Ratio before and after Admission of C as a
partner is equal
(b) Interest on Drawings is to be ignored.
(c) Sales and other expenses were uniform throughout year.
48
ILLUSTRATIONS: 9 [Admission of partner, when stock on date of admission given]
A, B were sharing in the ratio of 3:2 admitted C as on 1st Oct. 2013 for 1/6 share
Trial Balance as on 31st March 2014 was as under.
Particulars Dr. Rs. Cr. Rs.
Capital A/c ABC (1.10.2013)Stock (01.04.13)Purchases (upto 30.09.13 Rs. 1,00,000]Sales (upto 30.09.13 Rs. 250000)Salaries Rent Insurance (for the year 30.06.14)Bills Receivable Sundry Debtors / Sundry CreditorsPlant and machineryWages [upto 30.13.08 Rs. 20,000]Commission [2% on sales]Land & Building Cash on bankGeneral Reserve (1.04.13)Bank overdraftOffice Expenses
40,000250,000
20,00030,00012,000
2,00,0001,10,0004,00,000
50,0006000
1,50,00028000
----
54000
2,00,0001,50,0002,00,000
595000
40,000
1,50,000
15,000
13,50,000 13,50,000
You are given following information
1) Stock as on 30th Sept. 13 Rs. 60,000 and as on 31.03.14 Rs.125000
2) Depreciate Land &Building @5% p.a. and Plant & Machinery@20% p.a.
3) Plant includes, Plant costing Rs. 2, 00,000 purchased on 1st
Jan. 2014.
4) Salaries to Partner A-Rs.24, 000 p.a. & C Rs. 1,000 p.m.
5) Rent was increased by Rs. 2,000 p.m. from 01.10.13.
6) C’s Capital includes Rs. 40,000 brought in as his share inGoodwill.
7) Fixed Capital of Partners should be Rs. 6,00,000 in theirProfit/Loss sharing ration.
Prepare final Accounts of the firm.
49
Solutions:In the books of M/s A, B, C, & Co.
Trading A/c Profit & Loss A/c for the year ended 31st March 2014Dr. Cr.
Particular 1.4.13 to30.9.13 (6
m) I
1.10.13to
31.3.14II (6 m)
Particulars 1.4.13to
30.9.13I
1.10.08to
31.3.14II (6 m)
To Opening stock
To Purchases
To Wages
To Gross profit
40000
1,00,000
20000
150000
60000
150000
30000
230000
By Sales
By closing stock
250000
60000
345000
125000
310000 470000 310000 470000
To Salaries
To Rent
To Insurance
To Commission
To Office
Expenses
To Depreciation
Land &Bldg.
plant & Machinery
To Net Profit b/d
10000
12000
3000
5000
27000
3750
20000
69250
10000
18000
6000
6900
27000
3750
30000
128350
By Gross Profit
B/d
150000 230000
150000 230000 150000 230000
Profit & Loss Appropriation A/c for the year ended 31st March 14
Dr.. Cr.
Particulars I II Particular I II
To Partners
Salaries A
C
To N.P. transfer
to A & B in 3:2
ratio
To N.P. transfer
to A,B,C in
3:2:1 ratio
12000
--
57250
-
12000
6000
-
110350
By N.P. B/fd. 69,250 128350
69250 128350 69250 128350
50
Partner’s Capital A/c
Dr.. Cr.
Particulars A B C Particulars A B C
To Goodwill
To Partners
Current A/c
(Bal. fig.)
To Bal C/fd
--
127525
300000
--
85683
200000
40000
84392
100000
By Bal. B/d
By Gen. Res.
By Salaries
By Goodwill
By N. Profit Upto
30/6/08
A, B in 3:2 from
1 Oct. to A, B, C
in 3:2:1
200000
90000
24000
24000
34350
55175
150000
60000
--
16000
22960
36783
200000
--
6000
--
--
18392
427525 285683 224392 427525 285683 224392
Working Notes:
1) New P.S. Ratio: C was admitted for 1/6 share
Bal. 1- 1/6 =6 1
6
−
= 5/6 to old partners
Partners in old ratio
A = 3/5 x 5/6 b= 2/5 x 5/6 C = 5/5 x 1/6
= 15 = 10 = 5
A: B: C = 3: 2: 1
Balance Sheet as on 31st March 2014
Liabilities Rs. Rs. Assets Rs. Rs.
Partners Capital
A
B
C
Partners C/A
A
B
C
Sundry creditors
Bank O.D.
Commission
Payable
300000
200000
100000
127525
85683
84392
600000
297600
40000
15000
5900
Land & Building
Dep.
Plant & Machinery
Less: Dep.
Sundry Debtors
Bills Receivable
Closing stock
Prepaid Insurance
Cash
150000
(7520)
400000
50000
142500
350000
110000
200000
125000
3000
28000
958500 958500
51
2) Rent Rs. 30,000 I II
Increase Rs. 2,000 p.m. from 01.01.13
2,000 x 3 -- 6000
Bal. Rent (30,000-6,000)
= 24000 in Time Ratio 6m, 6m, 12000 12000
12000 18000
3) Insurance Rs. 12,000 p.a. from 1st July 13 to 30th June 14. i.e.
Rs.1000 p.m.
I 01 July 13 to 30 Sept. 13 i.e 3 months = 1,000 x 3 = 3,000
II 10 Oct. 13 to 31st Mar. 14 i.e. 6 months = 1,000 x 6 = 6,000
9,000
Prepaid from 1st April to 30th June 14 3000
4) Commission on sales @ 2% Rs.
I Commission = 2,50,000 x 2% = 5,000
II Commission= 3,45,000 x 2% = 6,900
11,900
Less paid (given in Trial Balance) 6,000
Outstanding com. Payable 5,900
5) Dep. On plant machinery @ 20% p.a.
i) On new plant purchased on 1.10.13 I II
2,00,000 x 20% x 3/12 10,000
ii) Bal Plant [400000 – 200000]
200000 x 20% = 40000 in
Time Ratio 20,000 20,000
Total Depreciation 20,000 30,000
6) Closing Stock on 30/06/13 Rs. 60,000 becomes Opening Stock
on 01.07.13.
52
Illustration : 10 [ retirement of partner in between the year]
X, Y & Z sharing in the ratio of 5:3:2 X retired on 1st Oct. 2013 B &
C continue business sharing equally.
Following Balances are as on 31st Dec. 2013
Particulars Dr.Rs.
Cr.Rs.
Opening Stock
Sales
Discount
Purchases
Wages
Salaries
Rent
Bad Debts
Insurance
Sundry Expenses
Capiral’s AIC’s:
X’s
Y’s
Z’s
Land & Building
Plant & Machinery
Building Under construction
40000
260000
20000
24000
10000
15000
4000
10000
200000
150000
326000
600000
9000
200000
150000
100000
1059000 1059000
Adjustments:
1) Outstanding Salary Rs. 4000 & outstanding Rent Rs. 2000 to beprovided.
2) Sales upto X’s retirement amounted Rs. 400000.
3) As per Partnership deed:
a] Provide interest on capital @ 6% p.a
b] Partners salary x’s Rs. 20000 p.a. & z’s Rs. 500 per mth.
c] X was entitled for commission of 1% on net sales.
4) Closing Stock on 31st Dec. 13 valued at Rs. 50000.
53
5) Depreciate Land & Building by 5% & Plant & Machinery 10%p.a.
6) Balance due to Z on his retirement to be transferred to his loan
a/c carrying interest at 12% p.a.
Ascertain balance payable to Mr. A on 31 Dec. 2013.
Prepare Trading, P & L A/c for the year ended 31st Dec. 2013 &
Balance Sheet as on 31st Dec. 2013.
Trading a/cFor the year ended 31st Dec. 2013
Dr. Cr.
Particulars AMT. AMT. Particulars AMT. AMT.
To Opening Stock
To Purchases
To Wages
To Gross Profit c/d
40000
260000
20000
330000
By Sales
By Closing Stock
600000
50000
650000 650000
Profit & Loss A/C.For the year ended 31st Dec. 2013.
Dr. Cr.
Particulars 9 mth. 3 mth. Particulars 9 mth. 3 mth.
To Salaries (24000+
O/S-4000)
To Rent (10000+
O/S 2000)
To Bad Debts
To Insurance
To Sundry Expenses
To Depreciation on:
Building
Plant & Machinery
To Interest on Loan
(@ 12% p.a. on
Rs.284500) 3 mth.
To Net Profit c/d
21000
9000
10000
3000
7500
7500
11250
--
156750
7000
3000
5000
1000
2500
2500
3750
8535
79715
By Gross Profit o/d
(in sales ratio 2 1)
By Discount
220000
6000
110000
3000
2,26,000 1,13,000 2,26,000 1,13,000
54
Profit & Loss Appropriation A/c.
for the year ended 31st December, 2013
Dr. Cr.
Particulars 9 mth. 3 mth. Particulars 9 mth. 3 mth.
To Interest on Capital
X
Y
Z
To Partners Salary:
X
Z
To A’s Commission
To Net Profit Transferred to
A,B,C in 5:3:2 ratio
B & C equally
9000
6750
4500
15000
4500
--
2250
1500
--
1500
--
74465
By Net Profit bid 156750 79715
4000
113000
156750 79715 156750 79715
Balance Sheet
As on 31st Dec. 2013
Liabilities AMT AMT. Assets AMT. AMT.
Partners capital A/c:
Y
Z
Z’s loan :
Bal. transferred from capital
Add. O/s Interest for 3
months
O/s Rent
O/s Salary
230132
171833 401965
293035
2000
4000
Land & Bldg.
Less: Depreciation
Bldg. Under
construction
Plant & Machinery
Less: Depreciation
Closing Stock
200000
10000
150000
15000
190000
326000
135000
50000
284500
8535
701000 701000
55
Partners Capital A/c
Dr. Cr.
Particulars X Y Z Particulars X Y Z
To X Loan a/c
(Bal
Transferred)
To Bal. B/d
284500
--
--
230132 171833
By Bal. B/d
By Interest on
Capital
By Salaries
By Commission
By Net Profit
(Upto Sep)
By Net Profit
(1 Oct to 31
Dec.)
200000
9000
15000
4000
56500
--
150000
9000
33900
37232
100000
6000
6000
22600
37233
284500 230132 171833 284500 230132 171833
Working Notes:-
1] Time ratio ABC partners 1st Jan. 2013 to 31st Sep. 2013 = 9months.
B & C partners 1st Oct. to 31st Dec. 2013 = 3 months.
Therefore time ratio = 3:1.
2] Sales ratio from 1st Jan. 2013 to 30th Sep. 2013 Rs. 400000.
Sales from 1st Oct. 2013 to 31st Dec. 2013 Rs. 200000
Therefore Sales ratio = 2:1.
3] Salaries, rent, insurance, depreciation, sundry exp., areallocated on time basis as these are related with time.
4] Gross Profit, discount received, bad debts allocated on salesbasis as these are related with turnover.
Illustration: 11 [Death of a Partner]
The Partnership agreement of T & Z provides that (a) Profit & losses shall be shared equally.(b) Interest at 5% p.a., shall be allowed on capital but no interest
is to be charged on drawings.(c) On the death of one of the partner:
[1] The survivor shall pay out the interest of thedeceased partner & purchase his share.
[2] The value of the Goodwill shall be the profits of theproceeding three years.
[3] The assets are to be taken on the date of death attheir value. T died on 1st April 2014.
56
The stock on 31.3.13 was valued at Rs. 28740.The following trial balance was extracted from the books as on 31st March 2014.
Particulars Dr.Rs.
Cr.Rs.
T’s Capital Z’s CapitalT’s DrawingsZ’s DrawingsSalariesRent & RatesPurchasesStock (1.04.13)Traveler’s Commission & ExpensesWagesSalesSales ReturnSundry DebtorsCash at BankFurniture & FixturesSundry Creditors.General ExpensesDiscount Plant & Machinery
4500350075502630
11470027490
580016360
49026400
55202000
3750
21500
4000020000
163840
18000
350
2,42,190 2,42,190
The profits of the preceding three completed years to 30th Sep.were Rs. 15000. Rs. 20000 and Rs. 13000 respectively.
Prepare Trading & P & L A/c & Balance Sheet as at 31st
March 2014 & a statement showing the amount payable to theExecutors of T
57
Solution
M/s T & Z
Trading and P & L Account for the year ended 31st March 2014.
Dr. Cr.
Particulars AMT AMT. Particulars AMT. AMT.
To Opening Stock
To Purchases
To Wages
To Gross Profit c/d
To Salaries
To Rent & Rates
To General Expenses
To Traveler’s Commission
& Expenses
To Interest on Capital for 6
months
T
Z
To Net Profit transferred to
Capital A/c
T
Z
1000
500
27490
114700
16360
33540
By Sales
Less: Sales Return
By Closing Stock
By Gross Profit b/d
By Discount
163840
490 163350
28740
192090 192090
7550
2630
3750
5800
1500
12660
33540
350
6330
6330
33890 33890
Note: As Profit & Loss A/c is prepaid on date of death of partner T,Therefore there is no need of preparing Profit & Loss A/c in twocolumns i.e. Before Death and After Death of Partner
58
M/s T & ZBalance Sheet as at 31st March, 2014
Liabilities AMT. AMT. Assets AMT. AMT.
Capital: T
Add: Interest
Profit
Less: Drawings
Capital : Z
Add: Interest
Profit
Less : Drawings
Sundry Creditors
40,000
1,000
6,330
42,830
23,330
18,000
Plant & Machinery
Furniture & Fixtures
Stock
Debtors
Bank
21,500
2,000
28,740
26,400
5,520
47,330
4,500
20,000
500
6,330
26,830
3,500
84,160 84,160
Amount payable to Executor’s of T Rs.
Balance to his Capital A/c 42,830
His share in Goodwill 24,000
66,830
Note:-
Value of Goodwill 3 year’s profit
Total Value of Goodwill Rs. (15000+20000+13000)
Rs. 48,000
T’s share of Goodwill (1/2 x 48,000) Rs. 24,000
Because Z has to purchase the share of T The journal entry will be:
Z’s Capital A/c-------------------------Dr. 24,000
To T’s Capital A/c 24,000
59
Illustration: - 12 [Death of a Partner in between the year].
K, R & T were sharing in the ratio of 3:2:5 T died on 1st July 2013.Business was continued & K & R were sharing equally same booksof a/c were continued and following.
Trial balance was extracted as on 31st March, 2014.
Particulars Dr. Rs.
Cr.Rs.
Gross Profit
Salaries
Rent
Insurance
Plant & Machinery
Land & Building
12% Investment
Interest on Investment
K’s Capital
R’s Capital
T’s Capital
Sundry Debtors/Creditors
Bills Receivable/Payable.
Cash
Stock
18000
15000
9000
260000
300000
100000
200000
75000
15000
404000
360000
6000
200000
270000
350000
150000
60000
1396000 1396000
Additional Information:
1] Provide outstanding salary Rs. 2,000
2] Rent was paid Rs. 1,000 per month for the premisesacquired on 1st Oct. 2013.
3] Depreciate Land & Building @ 5% & Plant & Machinery 10%p.a.
4] Plant includes Plant costing Rs. 1, 00,000 acquired on 1st
Jan. 2014.
5] As per partnership deed:a] Retiring partners or in case of death of partners
balance should be transferred to loan, CarryingInterest 18% p.a.
60
b] Goodwill valued Rs. 120000.c] Provide interest on capital @ of 6% p.a.
6] Sales were Rs. 300000 upto 1st July out of total sales for theyear Rs. 1500000, Prepare P & L A/c, P & L AppropriationA/c for the year ended 31st March 2014 & Balance Sheet ason that date.
Solution:-
Profit and Loss A/cfor the year ended 31st March 2014
Dr. Cr.
Particulars 3 mth. 9 mth. Particulars 3 mth. 9 mth.
To Salaries (8000+ o/s 2000)
To Rent
To insurance
To Depreciation
Land & Building
Plant
To Int. on T’s executors loan A/c
To Net Profit C/d
5000
2250
3750
4000
--
60000
15,000
6000
6750
11250
14500
59279
184221
By-Gross Profit b/d
(in sales ratio 1:4)
By income from
Investment
72000
3000
288000
9000
75000 2,97,000 75000 297000
Profit & Loss Appropriation A/C.for the year ended 31st March 2014
Dr. Cr.
Particulars 3 mth. 9 mth. Particulars 3 mth. 9 mth.
To Interest on Capital
K’s
R’s
T’s
To Net Profit Transferred to
Capital
A,B,C in 3:2:5
A & B equally 1:1
3000
4050
5250
47700
9000
12150
--
163071
By Net Profit b/d 60000 184221
60000 184221 60000 184221
61
Balance Sheet
As on 31st March 2014
Liabilities AMT. AMT. Assets AMT. AMT.
Partners Capital Bal.
K’s
R’s
Outstanding Salaries
Creditors
Bills Payable
T’s executor
Add: Interest at 18%
p.a. for 9 mths.
343845
401276 745121
2000
150000
60000
498379
Goodwill
Land & Building
Less: Depreciation
Plant & Machinery
Less: Depreciation
Prepaid rent
12% Investment
Interest Accrued On
Investment
Sundry Debtors
Bills Receivable
Cash
stock
300000
15000
120000
285000
241500
9000
100000
6000
200000
75000
15000
404000
439100
59279
260000
18500
1455500 1455500
Partners Capital A/C.
Dr. Cr.
Particulars K R T Particulars K R T
To T’s
executor loan
A/c (bal.
Transferred)
To Bal. C/d
--
343845
--
401276
439100
By Bal B/d
By Goodwill
By Interest on
Capital
By Net Profit
(upto 30 June)
By Net Profit
(upto 31
March)
200000
36000
12000
14310
81535
270000
24000
16200
9540
81536
350000
60000
5250
23850
--
343845 401276 439100 343845 401276 439100
Note:- In case of death/Retirement of partner.
I) P & L A/c, P & L app. A/c should be closed upto date ofdeath of Partner, N.P. should be transferred to old partner intheir old ratio.
II) Balance in Retiring / deceased partner should be transferredto Loan A/c. Interest on loan A/c required to calculate &debit to Profit & Loss A/c. Then duly net profit shouldcalculated and transfer to continuing partner’s capital A/c. intheir new Ratio.
62
Illustration 13 :
Jinal and Sameer were in partnership in a wholesale
business sharing profits in the proportion of 3:2. As from 1st April
2013 they admitted Jatin into partnership giving him one-sixth of the
profits. Jatin brought in Rs. 80,000 in cash of which Rs. 30,000
were considered as being in payment for his share of goodwill and
remainder as his capital.
The following Trial Balance was extracted from the books
as on 31st March, 2014
Debit Rs. Credit Rs.
Sales 2,15,725
Purchases 1,25,730
Discount Received 2,150
Discount Allowed 3,125
Reserve for doubtful debts 1,200
Sundry debtors 40,200
Sundry creditors 32,540
Stock (1st April 2013) 42,820
Carriage inward 3,250
Sundry expenses 7,840
Motor vehicles 50,000
Land and Building 80,000
Cash in hand 5,040
Telephone expenses 3,240
Postage and Stationary 2,690
Rent, rates and insurance 3,200
Bad debts 400
Investments 60,000
Capital accounts Jinal 65,000
Sameer 35,000
Cash paid by Jatin on 1st April 2013 80,000
Jinal 5,000
Sameer 4,000
Jatin 2,000
Bank overdraft 6,920
Total 4,38,535 4,38,535
63
You are required to prepare the firm’s trading and Profit and Loss
Account for the year ending 31st March, 2014 and Balance Sheet as
on that date having regard to the following information :
1. Stock on 31st March 2014 was Rs. 42,250.
2. Sundry debtors include item of Rs. 1,200 due from a customer
on account of sales, who has become insolvent.
3. Depreciate Land & Building and Motor vehicles at 5% p.a. and
20% p.a. respectively.
4. Reserve for doubtful debts is to be maintained at 5% on the
sundry debtors.
5. Goods of to the value of Rs. 800 have been destroyed by fire
and the insurance company has admitted the claim for Rs. 600
only.
64
Bo
ok
s o
f Jin
al, S
am
ir a
nd
Jati
n
Tra
din
g A
/c f
or
the
ye
ar
en
de
d 3
1 -
03 -
20
14
Rs.
Rs.
Rs
. R
s.
To o
pe
nin
g S
tock
42,8
20
By S
ale
s
2,1
5,7
25
To P
urc
ha
se
s
1,2
5,7
30
By G
oo
ds d
estr
oye
dby f
ire
80
0
To C
arr
iage
in
wa
rds
3,2
50
To G
ross P
rofit
86,9
75
By c
losin
g S
tock
42
,25
0
2,5
8,7
75
2,5
8,7
75
Pro
fit
an
d L
oss
Ac
co
un
t
Rs
. R
s.
Rs
. R
s.
To d
iscou
nt
Allo
we
d
3,1
25
By G
ross P
rofit
86
,97
5
To o
ld B
ad
Deb
ts
40
0B
y D
isco
unt
Re
ce
ive
d
2,1
50
Ad
d :
Ne
w B
.D.
1,2
00
Ad
d :
Ne
w R
DD
1,9
50
Le
ss : O
ld R
DD
(1,2
00
)2,3
50
To S
undry
Expe
nse
s
7,8
40
To T
ele
ph
on
e E
xp
an
se
s
3,2
40
To P
osta
ge
& S
tatio
nery
2,6
90
To R
ent,
ra
tes &
In
su
ran
ce
3,2
00
65
To D
epre
cia
tio
n
La
nd
& B
uild
ing
4,0
00
Mo
tor
Ve
hic
le
10,0
00
14
,000
To lo
ss b
y f
ire
2
00
To N
et P
rofit
Jin
al
26,2
40
Sa
me
er
17,4
93
Jatin
8,7
47
52
,480
89
,125
89
,12
5
Ca
pit
al
Ac
co
un
t
Jin
al
Sam
ee
r J
ati
n
Jin
al
Sam
ee
r J
ati
n
Rs
.R
s.
Rs
.R
s.
Rs
.R
s.
To G
oo
dw
ill
30
,00
0B
y B
ala
nce
b/d
65,0
00
35
,00
080
,00
0
To D
raw
ings
5,0
00
4,0
00
2,0
00
By G
oo
dw
ill
18,0
00
12
,00
0
To B
ala
nce c
/d1,0
4,2
40
60
,49
35
6,7
47
By N
et
Pro
fit
26,2
40
17
,49
38,7
47
1,0
9,2
40
64
,49
38
8,7
47
1,0
9,2
40
64
,49
388
,74
7
66
Ba
lan
ce
Sh
ee
t as
on
31
- 0
3 -
201
4
Lia
bil
itie
s
Rs
. R
s.
As
se
ts
Rs
. R
s.
Cap
ita
l La
nd
& B
uild
ing
80,0
00
Jin
al
1,0
4,2
40
Le
ss D
ep
recia
tion
5%
(4,0
00
)76
,00
0
Sa
me
er
60,4
93
Mo
tor
Ve
hic
les
50,0
00
Jatin
5
6,7
47
2,2
1,4
80
Le
ss D
ep
recia
tion
20%
(10
,00
0)
40
,00
0
Inve
stm
en
ts
60
,00
0
Clo
sin
g S
tock
42
,25
0
Deb
tors
4
0,2
00
Tra
de
Cre
dito
rs
32
,540
Ba
d D
eb
ts
1,2
00
39,0
00
Ba
nk O
ve
rdra
ft
6,9
20
Le
ss : R
DD
1,9
50
37
,05
0
Ca
sh
Ba
lan
ce
5
,040
Insu
ran
ce
Cla
im
60
0
2,6
0,9
40
2,6
0,9
40
67
Illustration 14 :
Bhavana, Ravina and Kangana carried on a retail businessin partnership, sharing profits and losses in the ratio 2:1:2.
The following Trial Balance was extracted from the books as on 31st March, 2014
Particulars Debit Rs. Credit Rs.
Capital A/c Bhavana 90,000
Ravina 52,000
Kangana 66,000
Plant & Machinery 1,50,000
Investments in govt. securities 50,000
Sales Returns 5,000
Sales 5,65,000
Furniture & Fittings 47,000
Motor Vehicles 60,000
Land & Building 1,00,000
Purchases 2,80,000
Stock as on (1st April 2013) 46,000
Salaries and Wages 62,000
Office and Trade Expenses 40,200
Rent, Rates and Insurance 15,500
Professional charges 3,500
Debtors / Creditors 51,600 87,000
Provision for Doubtful Debts 500
Balance at Bank 43,700
Drawings : Bhavana 12,000
Ravina 6,000
Kangana 19,000
Bills receivables / Bills payable 18,300 36,200
Printing & Stationery 6,900
Loan from bank 1,20,000
10,16,700 10,16,700
68
You are given the following additional information :
1. Stock on 31st March 2014 was valued at Rs. 66,500.
2. A debtor of Rs. 1,600 is to be written off and provision againstthe remaining debtors should be made at 5%.
3. Provide for the following outstanding expenses as on 31st
March, 2014 : Printing & Stationary Rs. 2,400 Salaries andWages Rs. 8,000.
4. Insurance prepaid as on 31st March, 2014 Rs. 2,500.
5. Depreciate Land & Building by 5%, Furniture and Fittings by10%, Plant & Machinery & Motor Vehicles by 20%.
You are required to prepare :
1. The Trading and Profit and Loss A/c. for the year ended 31st
March, 2014.
2. The Balance Sheet as on that date.
69
In t
he
Bo
ok
s o
f B
ha
va
na
, R
avin
a &
Kan
ga
na
Tra
din
g A
/c f
or
the
ye
ar
en
ded
31
st M
arc
h, 2
01
4
Rs.
Rs.
Rs
. R
s.
To o
pe
nin
g S
tock
46,0
00
By S
ale
s
5,6
5,0
00
To P
urc
ha
se
s
2,8
0,0
00
Le
ss : R
etu
rns
5,0
00
5,6
0,0
00
To G
ross P
rofit
3,0
0,5
00
By c
losin
g S
tock
66
,50
0
6,2
6,5
00
6,2
6,5
00
Pro
fit
an
d L
os
s A
cc
ou
nt
for
the
ye
ar
en
de
d 3
1st M
arc
h,
201
4
Pa
rtic
ula
rs
Rs
. R
s.
Pa
rtic
ula
rs
Rs
. R
s.
To O
ld B
ad D
ebts
B
y G
ross P
rofit
b/d
3,0
0,5
00
+N
ew
bad d
eb
ts1,6
00
+N
ew
RD
D2,5
00
-N
ew
RD
D(5
00
)3,6
00
To S
ala
ries
62,0
00
Ad
d :
o/s
8,0
00
70
,000
To R
ent,
Ra
tes,
Insu
ran
ce
1
5,5
00
Le
ss : P
repa
id
(2,5
00
)1
3,0
00
To
Off
ice
&T
rade
40
,200
70
Exp
en
se
s
To P
rofe
ssio
na
l C
ha
rge
s
3,5
00
To P
rin
ting
& S
tatio
na
ry
6,9
00
Ad
d :
o/s
2,4
00
9,3
00
To D
ep
Bu
ildin
g
5,0
00
Pla
nt
30,0
00
Mo
tor
Ve
hic
les
12,0
00
Fu
rnitu
re
4,7
00
51
,700
To N
et P
rofit
Bh
ava
na
4
3,6
80
Ravin
a
21,8
40
Ka
nga
na
4
3,6
80
1,0
9,2
00
3,0
0,5
00
3,0
0,5
00
71
Part
ne
rs C
ap
ital
Ac
co
un
t
Pa
rtic
ula
rs
Bh
ava
na
Ra
vin
a
Ka
ng
an
aP
art
icu
lars
B
ha
va
na
Ra
vin
a
Ka
ng
an
a
Rs
.R
s.
Rs
.R
s.
Rs
.R
s.
To D
raw
ings
12,0
00
6,0
00
19
,00
0B
y B
ala
nce
b/d
90,0
00
52
,00
066
,00
0
To B
ala
nce c
/d1,2
1,6
80
67
,84
090
,68
0B
y N
et
Pro
fit
43,6
80
21
,84
043
,68
0
1,3
3,6
80
73
,84
01
,09
,68
01,3
3,6
80
73
,84
01,0
9,6
80
Ba
lan
ce
Sh
ee
t as
on
31
st M
arc
h,
201
4
Lia
bil
itie
s
Rs
. R
s.
As
se
ts
Rs
. R
s.
Cap
ita
l A
/c’s
La
nd
& B
uild
ing
1,0
0,0
00
Bh
ava
na
1,2
1,6
80
Le
ss : D
ep
5,0
00
95
,00
0
Ravin
a
67,8
40
Pla
nt
& M
ach
ine
ry
1,5
0,0
00
Ka
nga
na
9
0,6
80
2,8
0,2
00
Le
ss : D
ep
3
0,0
00
1,2
0,0
00
Fu
rnitu
re
47,0
00
Ba
nk lo
an
1,2
0,0
00
Le
ss : D
ep
4,7
00
42
,30
0
72
Cre
dito
rs
87
,000
Mo
tor
Ve
hic
les
60,0
00
Bill
s p
ayab
le
36
,200
Le
ss : D
ep
12,0
00
48
,00
0
O/s
Exp
en
se
s
Inve
stm
en
ts
50
,00
0
Printin
g &
Sta
tio
ne
ry2,4
00
Deb
tors
5
1,6
00
Sa
larie
s &
Wage
s
8,0
00
10
,400
Le
ss : N
ew
BD
1,6
00
50,0
00
Le
ss : N
ew
RD
D2,5
00
47
,50
0
Ba
lan
ce
at b
an
k43
,70
0
Bill
s R
eceiv
ab
le
18
,30
0
Sto
ck
66
,50
0
Pre
pa
id in
su
ran
ce
2
,500
5,3
3,8
00
5,3
3,8
00
73
Illustration 15 :
Karan and Aditya were in a partnership in a retail businesssharing profits in the proportion of 3:2. As from 1st April 2013 theyadmitted Ashish into partnership giving him one - fifth of the profits.Ashish brought in Rs. 32,000 in cash of which Rs. 6,000 wereconsidered as being in payment for his share of goodwill andremainder as his capital.
The following Trial Balance was extracted from the books as on 31st March, 2014
DebitRs.
Credit Rs.
Purchases 27,160
Sales 41,265
Sales Returns 525
Purchases Returns 410
Reserve for doubtful debts 1,520
Sundry Debtors 44,020
Sundry Creditors 12,553
Bills Receivable 12,007
Bills Payable 1,195
Stock (1st April 2013) 3,972
Carriage inward 1,718
Office Salaries 980
Furniture 2,050
Postage, stationery and insurance 1,393
Rent, rates and taxes 420
Bad debts 40
Prepaid insurance 24
Outstanding wages 120
Rent accrued but not paid 90
74
Capital accounts (1st April 2013)
Karan 21,500
Aditya 21,000
Cash paid by Ashish on 1st April 2013 32,000
Current accounts :
Karan 5,500
Aditya 5,200
Ashish 6,200
Cash in hand 20,444
Total 1,31,653 1,31,653
You are required to prepare the firm’s Trading and Profit andLoss Account for the year ending 31st March, 2014 and BalanceSheet as on that date having regard to the following information :
1. Stock at the end was Rs. 20,000.
2. Sundry debtors include item of Rs. 500 for goods supplied toKaran and item of Rs. 100 due from customer on account ofsales, who was become insolvent.
3. Depreciation on furniture is to be changed at 10% per annum.
4. Reserve for doubtful debts is to be maintained at 5% on thesundry debtors.
5. Goods to the value of Rs. 500 have been destroyed by fire andthe insurance company has admitted the claim for Rs. 200 only.
6. Bills receivable include a dishonored bill of Rs. 500.
75
In t
he
Bo
ok
s o
f K
ara
n a
nd
Ad
itya
Tra
din
g A
/c f
or
the
ye
ar
en
ded
31
st M
arc
h, 2
01
4
Pu
rch
ase
R
s.
Rs.
Part
icu
lars
R
s.
Rs
.
To o
pe
nin
g S
tock
3,9
72
By S
ale
s
41
,265
To P
urc
ha
se
s
27
,16
0Le
ss : R
etu
rns
525
40
,74
0
Le
ss R
etu
rns
41
02
6,7
50
To C
arr
iage
In
wa
rds
1,7
18
By G
oo
ds lo
st
by f
ire
50
0
To G
ross P
rofit
28,8
00
By c
losin
g S
tock
20
,00
0
61,2
40
61
,24
0
Pro
fit
an
d L
os
s A
cc
ou
nt
for
the
ye
ar
en
de
d 3
1st M
arc
h,
201
4
Pa
rtic
ula
rs
Rs
. R
s.
Pa
rtic
ula
rs
Rs
. R
s.
To O
ld B
ad D
ebts
64
By G
ross P
rofit
b/d
28
,80
0
+N
ew
bad d
eb
ts10
0
+N
ew
RD
D2,1
96
-N
ew
RD
D1,5
20
840
To S
ala
ries
980
To
P
osta
ge,
sta
tio
na
ryIn
su
ran
ce
1,3
93
76
To R
ent
420
To d
ep
on
Fu
rnitu
re
205
To lo
ss b
y F
ire
3
00
To N
et P
rofit
Ka
ran
1
1,8
38
Ad
itya
7,8
92
Ash
ish
4,9
32
24
,662
28
,800
28
,80
0
Pa
rtn
ers
Cu
rre
nt
Ac
co
un
t
Pa
rtic
ula
rs
Ka
ran
A
dit
ya
A
sh
ish
P
art
icu
lars
K
ara
n
Ad
itya
A
sh
ish
To B
ala
nce b
/d5
,50
05,2
00
12
,20
0B
y G
ood
will
3,6
00
2,4
00
To G
oo
ds ta
ken
50
0B
y N
et
Pro
fit
11,8
38
7,8
92
4,9
32
To B
ala
nce c
/d9
,43
85,0
92
By B
ala
nce
c/d
7
,268
15
,43
81
0,2
92
12
,20
01
5,4
38
10
,29
212
,20
0
77
Ba
lan
ce
Sh
ee
t as
on
31
st M
arc
h,
201
4
Lia
bil
itie
s
Rs
. R
s.
As
se
ts
Rs
. R
s.
Cap
ita
l A
/c’s
F
urn
itu
re
2,0
50
Ka
ran
2
1,5
00
Le
ss : D
ep
20
51
,845
Ad
itya
2
1,0
00
Insu
ran
ce
cla
im
20
0
Ash
ish
3
2,0
00
74
,500
Su
nd
ry D
eb
tors
4
4,0
20
Le
ss : K
ara
n
50
0
Curr
ent
Acco
un
ts
Le
ss : N
ew
ba
d d
eb
ts10
0
Ka
ran
9,4
38
Ad
d : B
R D
isho
un
r50
0
Ad
itya
5,0
92
14
,530
Le
ss n
ew
RD
D2,1
96
41
,72
4
Bill
s R
eceiv
ab
le
12,0
07
Su
nd
ry C
red
ito
rs
12
,553
Le
ss : D
isho
no
red
50
011
,50
7
Bill
s P
aya
ble
1,1
95
Ca
sh
20
,44
4
O/s
Wa
ges
120
Clo
sin
g S
tock
20
,00
0
O/s
Ren
t 90
Cu
rre
nt
A/c
of A
ash
ish
7
,268
1,0
2,9
88
1,0
2,9
88
Wo
rkin
g N
ote
s :
1.
Ne
w P
rofit
Sha
rin
g R
atio
Kara
nA
dit
ya
As
his
hO
ld R
atio
3/5
2/5
New
Pa
rtn
er
1/5
Rem
ain
ing
in
old
3/5
× 4
/52/5
× 4
/5N
ew
Ratio
12
/25
8/2
55
/25
78
EXERCISES
Theory Questions
1. Define partnership. what are the main features of partnership?
2. Write short note on Profit & Loss Appropriation A/c of a firm.
3. Explain the adjustments in accounts when a new partner isadmitted.
4. Explain division of expenses based on Time Ratio
5. Distinguish between Fixed Capitals and fluctuating Capitals.
6. Write short notes
a) Fixed capital accounts of the partners.
b) Interest on Drawings by the partners.
c) Salary or commission payable to partners.
d) Calculation of new profit sharing ratio on admission ofpartner.
7. What are rules applicable in the absence of partnership Deed.
a) Interest on Drawings
b) Profit sharing ratio.
c) Interest on partners loan
d) Salary to partner
e) Interest on capital
8. OBJECTIVE:
A) Choose the appropriate word .
i) Partnership is a legal relationship between persons accordingthe ------------------------a) Contract Actb) Companies Actc) The Indian partnership Act, 1932d) Income Tax Act 1961.
ii) The profit sharing ratio among the partner may be --------------from the ratio to share losses.a) Equalb) Samec) In the Capital ratiod) Different
79
iii) The maximum number of persons permitted to form apartnership for Banking business are ------------ partners.
a) 7 b) 15 c) 10 d) 20
iv) The partnership can not be formed to share ------------------ only.a) profit b) losses c) profit & loss d) Non of the above.
v) The persons who have agreed to carry on the partnershipbusiness are individually known as ---------------a) firm b) partners c) Directors d) Creditors
vi) It is a ----------------- relationship between persons createdthrough the partnership Act, 1932.
a) Natural b) Legal c) oral d) Faithfull.
vii) The partnership agreement can be ------------- or written.a) Oral b) Written as well as oral c) Registeredd) un registered.
viii) In the partnership business the partner’s are collectively calledas ------------------
a) Company b) Association c) Firm d) Partners
ix) To admit a new partner with consent to --------------- partners.a) Existing b) Majority c) Newly admitted d) One partner
x) In absence of agreement, partners share profit on loss in --------a) capital ratio b) Equally c) Current Account ratiod) Time devoted for business.
xi) --------- number of partners allowed in case of Retail businessa) maximum 10 b) maximum 20 c) minimum 50 d) minimum 10
xii) The minor partner cannot be personally liable to share -------- ofthe firm
a) commission b) profits c) losses d) none of above
xiii) In absence of agreement Interest on Loan, at ---------- % p.a. ispayable by the firm
a) 12% p.a. b) Nil c) 6% d) As per Bank rate.
xiv) Partners can contribute capital either in Cash/Bank or------------a) only cash b) in kind c) cash plus in kind d) by cheque
[Ans. I-c, ii-d, iii-c, iv-b, v-b, vi-b, vii-a, viii-c, ix-a, x-b, xi-c, xii-c, xiii-c, xiv- b]
80
B) Fill in the Blanks.
I. The persons who have agreed to carry on partnershipbusiness are -----------known as partners and ----------- calledas a ------------
II. The partnership can not be formed to do --------------business.
III. The partners may share profit and Loss of the firm --------ratio.
IV. It is not necessary that partners should contribute ---------- inprofit sharing ratio.
V. A ----------- partner is not personally liable to share the lossesof the firm.
VI. In the absence of a partnership agreement interest on--------should not be paid to partners.
VII. It is not necessary that partners should contribute --------------in profit sharing ratio.
VIII. Maximum numbers of partners in insurance business--------persons.
IX. A particular partner may not share ---------- of firm at all.
X. In the ----------- of a partnership Deed, each partner have freeaccess of all partnership records, Books and Accounts.
[Ans. I) Individual ii) illegal iii) different iv) capital v) minor vi) capital vii) capital viii) Ten ix) losses x) absence].
C) Substitute the following in a single WORD/Term.
I. Written Agreement of partners.
II. Credit balance in Trading A/c
III. A partner not taking part of in partnership business.
IV. A statement showing financial status of a business.
V. Debit balance in profit & Loss A/c
VI. Part of sundry Debtors irrecoverable.
VII. Expenses accrued but not paid
VIII. Expenses paid in advance.
IX. Any remuneration paid or payable to partner’s, then it isnecessary to prepare a special A/c.
X. A partner draws a fixed amount at the end of each month,interest is calculated for months.
81
XI. Policy on the lives of the Partner is to insure againstchanges of disturbance in the business due to death of anypartner
XII. A method in which Partner’s Current Accounts are opened
XIII. A partner who only lends his name to the firm.
XIV. In the absence of partnership Deed, which provisions /ratesare applicable.
[Ans. I-Partnership Deed, ii) Gross profit iii) Dormant partner, iv) Balancesheet, v) net loss, vi) Bad debts vii) outstanding expenses. Viii) prepaidexpenses ix) profit & loss appropriation x) 5.5 month xi) joint life policy xii)fixed capital xiii) nominal partner xiv) the Indian partnership Act 1932.
D) Match the following items in column A and column B.
I)
Column A Column B
i) Opening stock ii) Carriage paid on plant purchasediii) carriage paid on goods sold iv) partnership Act
a) Trading A/c credit sideb) carriage outwards.c) 1932d) 1956e) Trading A/c debit sidef ) plant & machinery
[Ans. I-e, ii-f, iii-b, iv- 1932]
II)
Column A Column B
i) Partnershipii) Active Partneriii) Outstanding Expenses iv) Salaries & Wagesv) Goodwill
a) Liability sideb) Trading A/cc) Unlimited Liabilityd) Working partnere) Profit & Loss A/cf ) Intangible assets
[Ans. I-c, ii- d, iii-a, iv- e, v-f]
82
III)
Column A Column B
i) Return Inwardsii) Fixed Assetsiii) Reserve for Bad Debtsiv) Fluctuating Capital method
a) Land & Buildingb) No need of current A/cs.c) Sales Returnd) Sundry debtorse) Liability side.
[Ans. I-c, ii-a, iii-d, iv-b]
IV)
Column A Column B
i) Closing stockii) Trading A/ciii) Partnership Agreement silentiv) Partners Salariesv) Dormant Partner
a) Gross Profitb) Profit / Losses shares equallyc) Assetsd) Profit & loss AppropriationA/ce) Nominal Partnerf ) Sleeping Partner
[Ans. I-e, ii-a, iii-b, iv-d, v-f]
V)
Column A Column B
i) Retirement of Partnerii) Goodwill
iii) Partnership Agreementiv) Interest on Capitalv) Doubtful of bad debts
a) Executor’s Loan A/cb) Profit & Loss Appropriation
A/cc) Sales Ledger Balances.d) Retiring partners loan A/ce) Intangible Assets.f) Partnership Deed.
g) Tangible Assets.
[Ans. I-d, ii-e, iii-f, iv-b, v-c]
83
9. PROBLEMSFinal Accounts
EX.1Shraddha and Sneha carried on business sharing profits and
losses in the proportion of 1:9. The partnership agreement provided:
a) Interest be allowed at 15% p.a on capital.
b) Shraddha is entitled to get salary Rs.5000 per quarter of ayear.
c) Ignore interest on drawings and current account.
Trial Balance as on 31st Dec, 2013
Particulars Dr. Particulars Cr.
Salaries to employees
Partner’s Salary
Rent
Furniture
Motor Car
(Balance on 1.1.13
Rs.1,20,000)
Depreciation at 10% p.a.
upto 30.9.13
Insurance
Bad Debts
Bills Receivable
Sundry Debtors
Stock on 31st December 13
Bank Balance
Cash on Hand
Shraddha’s Current
Account
Sneha’s Current Account
Interest on Capital
Total
72,000
15,000
12,000
74,000
1,11,000
15,000
10,000
3,000
30,000
25,000
2,10,000
6,500
3,500
7,200
7,800
18,000
Gross Profit for the year
Carriage Inward Payable
Bills Payable
Sundry Creditors
Interest free loan from
Reema
Shraddha’s Fixed Capital
Account
Sneha’s Fixed Capital
account
Total
2,17,000
3,000
20,000
35,000
145,000
20,000
1,80,000
6,20,000 6,20,000
84
Other Information:-
A. Partner’s current accounts were as under-
Particulars Shraddha Sneha
Opening BalanceAdd: Interest credited for 9 months at 12% p.a.Add: Salary for 9 months
Less: Withdrawals
Balance as per Trial Balance
--1800
15,000
--16,200
--
16,800
(24,000)
16,200
(24,000)
7,200 7,800
B. Fixed Assets are depreciated at the rate of 10% p.a. Providebalance of depreciation for the year.
C. Through oversight interest on Fixed Capital was provided atthe rate of 12% instead of 15% p.a. as per partnershipagreement.
You are required to prepare:-
a) Profit and loss account and Profit and Loss AppropriationAccount for the year ended 31st December, 2013.
b) Balance Sheet as on 31st December, 2013.
Ex.2
A and B are partners sharing profits and losses in the ratio3:2. On 1st October, 2013 they admitted C as a partner onthe following terms:-
a) The new profit ratio to be A-60%; B-30%; C-10%
b) Goodwill of the firm is to be valued at Rs. 27,000/- on 30th
September 2013. No account for goodwill should be openedin the books of the firms, adjustments, if any, for the sameshould be carried out in the capital accounts of the partners.
c) C’s share to be guaranteed by A at the minimum rate of Rs.36,000 p.a.
d) Apportion gross profit on the basis of sales, Expenses on thebasis of time.
e) No interest is to be credited or charged on partners capital orcurrent account. The trial balance of the firm as on 31st
March, 2014 was as follows before adjusting goodwill.
85
Particulars Dr. Rs. Particulars Cr. Rs.
PurchasesSalariesDebtorsDrawingsAB
CBalance with Bank
Electricity DepositSelling ExpensesOffice ExpensesDelivery Van(Purchased on 30-6-13)Furniture at cost(Purchased on 1-4-13)Rent & RatesElectricity officeTotal Rs.
1,77,66063,00051,180
15,0007,500
7,20033,360
4505,400
900
33,750
9,00018,000
3,600
CreditorsCapital Accounts:ABCSales (upto 30-9-13 Rs.1,20,000)Loan from Edulji ( at 12% p.a. taken on 31-1-14)
15,000
30,00030,0006,000
3,06,000
39,000
4,26,000 4,26,000
You are required to prepare a Balance Sheet as on 31st
March, 2014 and Trading and Profit and Loss Account for the year
ended on that date after considering the following
i) Stock on 31-3-14 was Rs. 60,000.
ii) Accrued expenses but not yet paid: Rent Rs. 5500/-, Selling
expenses Rs. 1750/-, Office expenses Rs. 1500/-
iii) Sales & Debtors include goods sent on sale or approval
basis Rs. 12000 but not yet approved as on 31.3.14 These
goods were invoiced at a profit of 100% on cost price.
iv) Depreciation is to be provided: Delivery van @ 20% p.a.,
Furniture @ 10% p.a.
Ex. No.3
Prepare Trading, Profit and Loss Account for the year ended
31st March, 2014 and the Balance Sheet as on that date from the
following information available from the books of HR & Co.
86
a) Trial Balance as on 31st March 2014
Debit Rs. Credit Rs.
Premises
Machinery & Equipment
Bank Balance
Bills Receivable
Current A/c ‘R’
Sales Returns
Purchases
Sundry debtors
Stock in Trade
Salaries
Distribution Expenses
Sundry Expenses.
10% Bonds
Total Rs.
2,00,000
1,50,000
35,000
40,000
15,000
25,000
6,90,000
3,40,000
80,000
40,000
64,000
76,000
37,000
Capital A/c ‘H’
‘R’
Current A/c ‘H’
Sales
Commission
Bills Payable
Sundry Creditors
‘C’s A/c
1,20,000
1,00,000
20,000
11,12,000
35,000
45,000
2,85,000
75,000
17,92,000 17,92,000
b) Additional Information:
1. Stock in trade on 31st March, 2014 was Rs. 75,000
2. Outstanding salaries as on 31st March 2014 was Rs. 4,.300 andprepaid insurance included in office expenses was Rs. 2,000.
3. Depreciate premises @ 5% and Machinery & Equipment @10%
4. Sales include Rs. 20,000 being goods sent on sale or returnbasis, the cost of which was Rs. 15,000. Approval was receivedfor 50% of the goods sent. Sales also include Rs. 10,000 beingsale proceeds of equipment of the book value of Rs. 8,000realized on 1-4-2013.
5. Sundry Debtors include Rs. 20,000 on account of dishonoure ofa Bill Receivable accepted by a customer. Only 50% of theamount is likely to be recovered. On the balance debtors 5%provision for doubtful debts is to be created.
6. H and R shared Profits and Losses in the ratio 2:1.
7. C was admitted as a partner on 1-10-2014 and deposited Rs.75,000 with the firm as his capital. ‘C’s is entitled to share 25%,of the Profit/Losses of the firm. The net profit between the preadmission and post-admission period is to be on time basis.
87
Ex. 4Ashok and Ketan are equal partners. Their trial balance as on 31st Mar., 2014 is as follows:
Particulars Dr.Rs. Cr. Rs.
Ashok CapitalKetan’s CapitalOpening StockOffice Rent (Rs.2000 per month)Purchase and SalesProvident Fund and Provident Fund InvestmentsDebtors and CreditorsDiscount FurnitureDrawings : Ashok 15,000
Ketan 15,000Returns OutwardDead Stock DemurrageFreight and DutyAdvertisementsBad Debts ReserveSalaries and WagesCash and BankSunil’s Loan (1-10-2013)Plant and MachineryLand and BuildingsDepreciation on Plant & MachineryContribution to Provident FundInsurance Premium (incl. Rs. 3,600 paid for the year ended 30-9-2014)Bills Payable
43,80023,100
1,19,40024,00084,000
1,8006,000
30,000
1,500600
3,00010,000
25,20012,000
83,2502,10,000
6,7501,8009,000
2,16,00066,000
2,16,00025,00048,000
1,200
3,000
6,000
58,80030,000
25,200
6,95,200 6,95,200
you are required to prepare final accounts for the year ended 31st
March, 2014 after taking into account the following adjustments:
(1) The closing stock was valued at Rs. 110,000
(2) Provide Depreciation on furniture at 10% p.a.
(3) Of the Sundry Debtors Rs. 1,800 are bad and should
be written off. Also maintain a reserve for doubtful debts at5% on debtors.
(4) Goods of the value Rs. 6,000 had been received on 25th
March, 2014 but the purchase invoice was omitted to berecorded in the purchase book.
(5) Goods valued at Rs. 4,300, withdrawn for personal use byKetan, were recorded as credit sales in the sales book asRs. 6000.
Ex.5Ram and Bharat were in partnership in a business sharing
profits in proportion of 2:3. As from 1st January 2014 they admittedKran in to partnership giving him one-fifth of the profits. Kranbrought in Rs. 30,000 in cash of which Rs. 10000 were consideredas being in payment for his share of goodwill and remainder as hiscapital.
88
The following Trail Balance was extracted from the books as on 31st March 2014.
Particulars Dr. Rs. Cr. Rs.
Purchases and sales
Returns
Customer and Creditors
Bills Receivable & Bills Payables
Carriage Inward
Carriage Outward
Stock (01.04.13)
Outstanding Carriage Inward
Bad debts
Salaries
Furniture
Shop Fittings
Postage and Insurance
Trade Expenses
Rent, Rates and Taxes
Loan to Vishnu (from 01-01-2014) @ 15% p.a.
Prepaid Insurance
Rent [from 1.10.13 to 31.03.14]
Cash in hand
Current A/c
Ram
Bharat
Kran
Capital A/c
Ram
Bharat
Cash paid by Kran
Computer
Loan I.C.I.C.I. Bank @ 12% p.a.
1,71,625
5,250
90,200
20,070
15,000
2,175
39,725
--
400
9,795
5,000
15,500
3,240
2,690
4,200
56,000
240
--
4,440
5,000
4,000
2,000
--
--
40,000
--
3,62,650
4,125
25,525
11,950
--
--
--
1,200
--
--
--
--
--
--
--
--
--
6100
--
--
--
--
15,000
10,000
30,000
30,000
4,96,550 4,96,550
89
You are required to prepare the firm’s Trading and Profit andLoss Account for the year ending 31st March, 2014 and BalanceSheet as on that date having regard to the following information.
1) Stock at the end was Rs. 35000.
2) Depreciation on Computer and Furniture is to be charged 10%p.a.
3) One-fifth of the Shop fittings to be written off.
4) Goods worth Rs. 2800 have been destroyed fire and theInsurance Co. has admitted the claim for Rs. 1,600 only.
5) Bills receivable include a dishonoured bill for Rs. 4,000/-
6) Debtors include Rs. 3,000 for goods costing Rs. 2,000, suppliedto Bharat and item of Rs. 3,000 due from Customer on accountof sales, who has become insolvent.
7) Net Sales upto 31.12.2013 were Rs. 2, 83,520.
Hint :
[Net sale = 362650 – Sales Return 5250 – Goods taken by
Bharat Rs. 3,000.
= Rs. 3, 54,400
∴ Sales Ratio = 2, 83,520: 70,880
= 4:1]
90
Example 12 :
Siddhanth and Sankalp were in a partnership in a retailbusiness sharing profits in the proportion of 3:1. as from 1st April2013 they admitted Ved into partnership giving him one-fifth of theprofits. Ved brought in Rs. 50,000 in cash of which Rs. 20,000 wereconsidered as being in payment for his share of goodwill andremainder as his capital.
The following Trial Balance was extracted from the books as on 31st March, 2014
Debit Rs. Credit Rs.
Purchase and Sales 1,01,620 2,02,650
Discount allowed and received 5,250 4,120
Reserve for doubtful debts 5,200
Sundry debtors and creditors 40,200 17,630
Bills receivable and bills payable 20,070 11,950
Stock (1st April 2013) 39,720
Carriage inward 17,180
Sundry Expenses 9,800
Motor vehicles 5,000
Land and Building 15,500
Telephone expenses 3,240
Postage and stationary 2,690
Rent, rates and insurance 4,440
Bad debts 400
Investments 76,000
Capital accounts
Sankalp 35,000
Siddhanth 30,000
Cash paid by Ved on 1st April 2013 50,000
Drawings
Sankalp 5,000
Siddhanth 4,000
Ved 2,000
Cash in hand 4,440
Total 3,56,550 3,56,550
91
You are required to prepare the firm’s trading and Profit andLoss Account for the year ending 31st March, 2014 and BalanceSheet as on that date having regard to the following information :
1. Stock at the end was Rs. 20,000.
2. Sundry debtors include item of Rs. 300 for goods supplied toVed and item of Rs. 1,000 due from customer on account ofsales, who has become insolvent.
3. Depreciation on Motor vehicles is to be changed at 20% p.a.and Land and Building at 5% p.a.
4. Reserve for doubtful debts is to be maintained at 5% on thesundry debtors.
5. Goods to the value of Rs. 1,000 have been destroyed by fireand the insurance company has admitted the claim for Rs. 600only.
6. Bills receivable include a dishonored bill of Rs. 1,100.
7. Land and Building to be depreciated by 5%.
Example 13 :
Hardik and Yatish carried on a retail business in partnershipunder the name Yatrik Associates sharing profits and losses in theratio 5:3.
Trial Balance of Yatrik Associates as on 31st March, 2014
Particulars Debit Rs. Credit Rs.
R.D.D. 1,980
Loan taken 3,20,000
Sales 9,50,000
Opening Stock 87,585
Purchase 2,99,745
Wages 27,465
Goodwill 1,20,000
Sundry Expenses 16,340
Discount allowed 3,275
Hardik Drawings 4,200
Yatish Drawings 10,170
Debtors 87,765
Bills Receivable 23,395
92
Hardiks Capital 60,000
Yatish Capital 1,30,000
Creditors 76,775
Bills Payable 32,225
Outstanding Expenses 3,475
Plant and Machinery 4,55,375
Land and Building 2,57,735
Furniture 44,730
Carriage Inwards 16,235
Carriage Outwards 18,325
Office rent 27,525
Salaries 65,565
Repairs 2,355
Bad debts 3,225
Free Sample 18,375
Prepaid Expenses 2,310
Cash in hand 9,120
Salesman Commission 23,200
Discount Received 6,345
Commission Received 13,215
Bank Balance 30,000
16,24,015 16,24,015
You are required to prepare the firm’s trading and Profit andLoss Account for the year ending 31st March, 2014 and BalanceSheet as on that date having regard to the following information :
1. Stock on 31st March 2014 was Rs. 1,42,250.
2. Sundry debtors include item of Rs. 2,765 due from a customeron account of sales, who has become insolvent.
3. Depreciate Land & Building and Plant and Machinery andFurniture at 5% p.a., 10% p.a. and 20% p.a. respectively.
4. Reserve for doubtful debts is to be maintained at 5% on thesundry debtors.
5. Goods to the value of Rs. 1,845 have been destroyed by fireand the insurance company has admitted the claim for Rs.1,000 only.
93
Example 14 :Teena, Meena and Beena carried on a retail business in
partnership, sharing profits and losses in the ratio 5:3:2.
The Trial Balance of the firm as at 31st December 2013 was asfollows
Particulars Debit Rs. Credit Rs.
Capital A/c’s Teena 80,000
Meena 50,000
Beena 30,000
Current A/c’s Teena 16,000
Meena 12,000
Beena 8,000
Sales 4,65,000
Trade Creditors 37,000
Furniture & fittings 22,000
Freehold Premises (Purchased duringthe year)
60,000
Leasehold Premises 45,000
Addition and Alterations to leaseholdpremises
25,000
Purchase 2,80,000
Stock as on (1st January 2013) 42,000
Salaries and Wages 64,000
Office and Trade Expenses 45,200
Rent, Rates and Insurance 10,500
Professional charges 3,500
Debtors 20,600
Provision for Doubtful Debts 500
Balance at Bank 43,700
Drawings : Teena 17,000
Meena 11,000
Beena 9,000
Bills payable 15,200
Bills receivables 18,300
Printing & Stationary 6,900
Loan from bank 10,000
7,23,700 7,23,700
94
You are given the following additional information :
1. Stock on 31st December, 2013 was valued at Rs. 46,000
2. A debtor of Rs. 600 is to be written off and provision against theremaining debtors should be made at 5%.
3. Provide for the following outstanding expenses as on 31st
December 2013 :
a) Office and Trade Expenses Rs. 2,400 Salaries and WagesRs. 6,000.
b) Rates prepaid as on 31st December 2013 Rs. 2,500.
4. Depreciate furniture and fittings by 10%.
5. Professional charges include Rs. 2,500 fees paid in respect ofthe acquisition of the leasehold premises, which are to thecapitalized.
You are required to prepare :
1. The Trading and Profit and Loss A/c. for the year ended 31st
December, 2013.
2. The Balance Sheet as on that date.
3. Partners Current Accounts.
����������������
95
4
PIECEMEAL DISTRIBUTION
Unit Structure :
4.0 Objective
4.1 Introduction
4.2 Classification of Liabilities
4.3 Order of Payment of Cash to Partners
4.4 Important Points
4.5 Illustrations on Piecemeal Distribution
4.6 Exercise
4.0 OBJECTIVE
After studying the unit the student will be able to:
• Classify the Liabilities of the business.
• Describe the methods of allocation of cash among thepartners.
• Solve the practical problems.
4.1 INTRODUCTION
In the previous chapter we have studied Dissolution ofPartnership Firm. On dissolution of the firm business of the firm isclosed, all the assets of the firm are sold and all the liabilities of thefirm are paid off. The surplus remaining thereafter is paid to thepartners against their loan account and their capital accountbalances. Here we assume that all these transactions take placeon the same day. But in practice it takes time to dispose off all theassets. The payment of liabilities has to be done as and when thecash is available. It has to be in a specific order. This recovery ofassets in installments and payment of liabilities in installments iscalled as PIECEMEAL DISTRIBUTION OF CASH.
4.2 CLASSIFICATION OF LIABILITIES
1. External Liabilities2. Internal Liabilities3. Partner’s Capital Accounts
96
4.2.1 External Liabilities
These are amounts payable to outside parties. These arefurther classified into
a. Preferential Liabilities:
These include amounts payable in priority to all liabilities.These are Government dues like Income Tax, Sales Tax, ExciseDuties etc. Employees’ Dues like outstanding wages, outstandingsalaries, provident fund dues, etc.
Dissolution expenses : These are the expenses incurred for thepurpose of successful carrying out of dissolution like payment forpreparation of dissolution deed, advertisement and brokerage fordisposal of assets.
b. Other Liabilities :
These are further classified into :
Secured liabilities : These are liabilities / loans secured againstsome or all the assets of the firm. If it is secured by a charge on aspecific asset then amount realized by sell of that particular assetshall be utilized for payment of these liabilities. For example bankoverdraft secured against stock, mortgage loan against land andbuildings. If these liabilities are not secured against a specific assetbut on all the assets in general then amount realized shall be firstutilized to pay off these liabilities.
Unsecured Liabilities : These are liabilities incurred during thenormal course of business for which no security is given. Forexample sundry creditors, bills payable, loan from spouse ofpartner, etc. these liabilities are paid when all above liabilities arepaid in full. If the amount available with the firm is not sufficient topay all these liabilities, then the amount is paid in the ratio of theirout standings.
4.2.2 Internal liabilities
Partners loans: If a partner has given any loan to the firm then itwill be paid after all the above liabilities have been paid in full butbefore anything is paid to partners against their capital accounts. Iftwo or more partners have given loans to the firm and cashavailable is insufficient to pay these loans in full then the amountwill be paid in the ratio of outstanding balance of the loan.
97
4.2.3 Partners Capital Account
After all the above liabilities are paid the cash available ispaid to partners against their capital account by adopting any oneof the following two methods.
Excess Capital Method (Highest Relative Capital Method/QuotientMethod) Maximum Loss Method (Not in the syllabus)
4.2.3.1 Excess Capital Methods / Proportionate Capital Method-
This method is applied where the partners have notcontributed their capitals in the profit sharing ratio. Some partnerhave contributed more capitals than other partners. Hence it isrequired to pay such partners before other partners are paid. Themethod of calculating surplus capitals is as follows –
Step No. Particulars
I Computation of Adjusted Capital: Take capital account balances as per Balance Sheet
Add: General Reserve/Reserve funds/Profit and Loss A/c Credit Balance in Profit Sharing Ratio Less: Profit and Loss A/c Debit Balance
II Write Profit Sharing Ratio
III Find Capital Contribution per unit of profit i.e. Step I / Step II
IV Find out the partners with lowest capital contribution per unitof profit. Taking his capital as base find out ProportionateCapital of all the partners.
V Find out the Excess Capital – Step I - Step IV (AdjustedCapital – Proportionate Capital)
If there’re more than two partners then do the same processagain
VI Write Profit Sharing Ratio
VII Find capital contribution per unit of profit – Step V / Step VI
VIII Find out the partners with lowest capital contribution per unitof profit. Taking this capital as base find out proportionatecapital of all the partners.
IX Find out the Excess Capital – Step V -- Step VIII
98
4.3 ORDER OF PAYMENT OF CASH TO PARTNERS:
After cash is paid for all internal and external liabilities cash shouldbe paid to partners against their capital accounts as follows : (StepNo. IX, Step No. VIII, Step No. IV)
a) Pay to the partner who is having ultimate excess. (Step No.IX)
b) Pay out the excess amount of other partners in their ProfitSharing Ratio. (Step No. VIII)
c) After the payment of excess capital, the capitals of thepartners will be in their profit sharing ratio. (Step No. IV) Allthe available cash should be paid in Profit sharing ratio.
d) If any partner is taken over any asset then it should beassumed that he brings necessary cash in the firm. It shouldbe added in the cash available and then total available cashshould be distributed among the partners as above.
e) The balance left unpaid represents loss on realization.Payment more than the dues represents profit on realization.
4.4 IMPORTANT POINTS
a) If any reserve is to be created for dissolution / realizationexpenses, it should be created by setting aside cash afterpayment of Government and Employees’ dues. If finallyactual expenses are less than the reserve, the excessshould be distributed among the partners.
b) If there is any contingent liability (like bill discounted with thebank not yet matured) cash should be set aside afterpayment of all external liabilities, but before making anypayments to the partners. If the liability arises it should bepaid from the cash reserved. If the liability does not arise, thecash kept in reserve will be distributed among the partnerswhen it becomes certain that the liability is not to be paid.
c) If nothing is mentioned about security of a liability the sameshould be treated as unsecured.
d) In case of a secured liability, payment should be made forsuch liability only if the asset charged for that liability isrealized. However if any other asset is realized then thesecured liability should be treated at par with other
99
unsecured liabilities and payment should be madeproportionately.
CHECK YOUR PROGRESS
1. Define the following terms:
• Preferential liabilities
• Adjusted Capital
• Piecemeal Distribution of Cash
• Internal Liabilities 2. Fill in the blanks:
• In Piecemeal Distribution amounts realized from assets aredistributed in the order ---------------------
• Excess capital Method is applied where the partners havenot contributed there capitals in the ------------------
• Preferential Liabilities include Government dueslike----------------------------------------------.
• If two or more partners have given loans to the firm and thecash is in sufficient for full payment then the loans will bepaid in the ----------------------------------ratio
3. Calculate the Adjusted Capital from the following:X,Y and Z are sharing profits and losses in the ratio 3:2:1.TheCapital Account is showing credit balances of Rs. 60,000, 20,000and 30,000 respectively ,General Reserve is Rs. 60,000 and P&LA/c Debit Balance Rs. 12,000.
4.5 ILLUSTRATIONS ON PIECEMEAL DISTRIBUTION
Illustration 1:
P, Q, R are partners sharing profits and losses in the ratio of 4:2:1.they decided to dissolve the partnership as on 31st March 2014when their Balance Sheet was as follows:
Balance Sheet
Liabilities Rs. Assets Rs.
CreditorsGeneral ReserveBank OverdraftCapital : P Q R
23,20037,80065,000
1,60,0003,20,0002,60,000
Cash in handInvestmentStock DebtorsMachineryFurnitureBuilding
68060,000
2,56,60090,80065,200
9,8003,82,920
8,66,000 8,66,000
100
All creditors have to be paid off Rs.4800/- have to beprovided for realization expenses. Thereafter all cash receivedshould be distributed among the partners. The amounts wererealized in installments as follows –
Rs.
1st
2nd
3rd
4th
60,00032,320
4,60,0001,83,680
The actual realization expenses were Rs.2400/-. Prepare astatement showing distribution of cash as per Excess CapitalMethod.
Solution :
(In the books of P, Q & R a Partnership Firm)
Statement of Excess Capital
PRs.
QRs.
RRs.
TotalRs.
Order
Capital 1,60,000 3,20,000 2,60,000
Add : GeneralReserve
21,600 10,800 5,400 2,65,500
A. AdjustedCapital(TotalRs.777800)
1,81,600 3,30,800 2,65,400
B. Profit SharingRatio
4 2 1
C. (A/B) = CapitalPer Unit
45,400 1,65,400 2,65,400
D. ProportionateCapital(P’s capital asBase)
(1,81,600) (90,800) (45,400) 3,17,800 III
E. Excess Capital(A-D)
NIL 2,40,000 2,20,000
F. Excess Capitalper Profit Unit
1,20,000 2,20,000
G. ProportionateExcess Capital
2,40,000 1,20,000 3,60,000 II
H. Final ExcessCapital
NIL 1,00,000 1,00,000 I
(E-G)
Total 7,77,800
101
Payment order:
(1) Pay 1st Rs.100000/- to R.
(2) Then Rs.240000 and Rs.120000 to Q and R respectively.
(3) Then to P, Q and R in their profit sharing ratio 4:2:1.
Statement showing Piecemeal Distribution of Cash
Particulars CashRs.
BankO/D
CreditorsRs.
PRs.
QRs.
RRs.
Balance 1st RealisationRealisation Exp.Prov.
Paid O/D &CreditorsProportionately
680
60,000
(4,800)55,880
(55,880)
65,000
(41,180)
23,200
(14,700)
1,81,600 2,30,800 2,65,400
Balance due IInd Realisation Paid O/D & Creditors
----
32,320
(32,320)
23,820
(23,820)
8,500
(8,500)
1,81,600 23,080 26,540
Balance dueIIIrd Realization-Paid to C Final Excess
-4,60,000
(1,00,000)
- - 1,81,600 2,30,800
(1,00,000)
2,65,400
Balance(-) Paid to B and C (2:1)
3,60,000(3,60,000)
- - - 2,30,800(2,40,000)
1,65,400(1,20,000)
BalanceIVth RealizationAdd : RealizationExp. Prov not required
Paid to all (4:2:1)
-
1,83,680
2,400
1,81,600
(1,06,330)
90,800
(53,166)
45,400
(27,964)
1,86,080
1,86,080
Balance (Loss onRealisation)=131720
-
75,270 37,634 18,816
102
Illustration 2:-
ABC dissolved their firm on 31st Dec 2013 when their BalanceSheet as follows :-
Liabilities Rs. Assets Rs.
Capital A 60000B 48000C 40000
Partner’s Loan:A 20000B 16000Sundry Creditors
148000
3600080000
Sundry Assets 264000
264000 264000
Partners shared Profit and Loss in the ratio 2:1:1Assets were realized as follows.1st = 50,000, 2nd = 98,000, 3rd = 80,000Show Piecemeal Distribution of Cash.
Working Note – Statement showing Excess Capital
Step No. Particulars Formula A B C
I Balance b/d 60000 48000 40000
II Profit Sharing Ratio - 2 1 1
III Unit Value(Capital contribution / Profit)
I ÷ II 30000 48000 40000
IV Proportionate Capital X II 60000 30000 30000
V Excess Cap I - IV - 18000 10000
VI Profit Sharing Ratio 1 1
VII Unit Value V ÷ VI - 18000 10,000
VIII Proportionate Capital X VI 10000 10000
IX Excess Capital V -VIII - 8000 -
Payment Chart
A B C
I (9)II (8)III (4)
--
60000
80001000030000
-1000030000
60000 48000 40000
103
So
luti
on
:
Sta
tem
en
t sh
ow
ing
Pie
ce
me
al D
istr
ibu
tio
n o
f C
as
h
Da
teP
art
icu
lars
Ca
sh
Tota
l C
laim
sS
un
dry
Cr.
Pa
rtne
rs L
oan
Pa
rtne
rs C
ap
ita
l
AB
AB
C
01
/01
/09
1st
Ba
lan
ce
b/d
Ca
sh
Rea
lised
Le
ss : P
aid
to
C
red
ito
rs
-50
000
(50
000
)
26
40
00
(50
00
0)
80
00
0
(50
00
0)
200
00
-
16
00
0
-
60
00
0
-
48
00
0
-
40
00
0
-
2nd
Ba
lan
ce
Ca
sh
Rea
lised
Le
ss : P
aid
to
C
red
ito
rs
-98
000
(30
000
)
21
40
00
(30
00
0)
30
00
0
(30
00
0)
200
00
-
16
00
0
-
60
00
0
-
48
00
0
-
40
00
0
-
Ba
lan
ce
Le
ss: P
aid
to
Pa
rtn
ers
Lo
an
68
000
(36
000
)1
840
00
36
00
0- -
200
00
200
00
16
00
016
00
06
000
0-
48
00
0-
40
00
0-
Ba
lan
ce
Le
ss : P
aid
to
B32
000
(80
00
)1
480
00
(800
0)
- -- -
- -6
000
0-
48
00
0(8
000
)4
000
0-
Ba
lan
ce
Le
ss : P
aid
to
B &
C24
000
(20
000
)1
400
00
(20
00
0)
- -- -
- -6
000
0-
40
00
0(1
000
0)
40
00
0(1
000
0)
Ba
lan
ce
Le
ss : P
aid
to
A,B
& C
40
00
(40
00
)1
200
00
(400
0)
- -- -
- -6
000
0(2
00
0)
30
00
0(1
000
)3
000
0(1
000
)
Ba
lan
ce
Ca
sh
Rea
lize
dL
ess : P
aid
to
all
in
Pro
fit
Sh
arin
g R
atio
-80
000
(80
000
)
11
60
00
(80
00
0)
58
00
0
40
00
0
29
00
0
20
00
0
29
00
0
20
00
0
Lo
ss o
n r
ea
liza
tio
n-
36
00
01
800
09
000
90
00
10
4
PDF processed with CutePDF evaluation edition www.CutePDF.com
Illustration 3:-
ABC were in partnership sharing profits and losses equally. Theyagreed to dissolve their partnership on 30th June 2013. When theirbalance sheet was as under.
Liabilities Rs. Assets Rs.
CreditorsCapital A 60000B 45000C 30000
38000
135000
BankDebtorsStockPlant & Machinery
3600690007540025000
173000 173000
The realizations were as follows :-
Debtors Plant Stock Expenses
July 30000 10000 37000 3000
Aug 20000 8500 23000 2000
Sept 10000 - 1000 -
On 30th Sept remaining debtors amounting to Rs.9000/- were takenover by B at 50% of book value.Prepare statement showing Piecemeal Distribution of Cash.
105
Sta
tem
en
t sh
ow
ing
Pie
ce
me
al D
istr
ibu
tio
n o
f C
as
h
Date
Part
icu
lars
Cash
To
tal cla
imC
red
ito
rsC
ap
ital
AB
C
01/0
7/1
3B
ala
nce
b/d
Less : P
aid
to C
reditors
3600
(3600)
17300
0(3
600)
38
00
0(3
600)
60
00
0-
45
00
0-
3000
0-
Bala
nce
Cash
Less : P
aid
to C
reditors
-74
00
0(3
4400)
16940
0-
(3440
0)
3440
00
-(3
440
0)
60
00
0- -
45
00
0- -
3000
0- -
Bala
nce
Less: P
aid
to
A39
60
0(1
5000)
13550
0(1
500
0)
- -60
00
0(1
5000)
45
00
0-
3000
0-
Bala
nce
Less : P
aid
to B
& C
24
60
0(2
4600)
12000
0(2
460
0)
- -45
00
0(1
2300)
45
00
0(1
230
0)
3000
0-
Aug
Bala
nce
Cash
realiz
ed
Less : P
aid
to A
& B
-49
50
0(5
400)
95
400
-(5
400)
- - -
32
70
0-
(2700)
32
70
0-
(2700)
3000
0- -
Sep
Bala
nce
Less : P
aid
to a
ll pa
rtn
ers
44
10
0(4
4100)
90
000
(4410
0)
- -30
00
0(1
4700)
30
00
0(1
470
0)
3000
0(1
470
0)
Bala
nce
Cash
Realiz
ed
Add
:-
Debto
rs t
aken o
ver
by B
-11
00
04500
45
900
- -
- - -
15
30
0- -
15
30
0- -
1500
0- -
Bala
nce
Less :-
Paid
to a
ll in
PS
R15
50
015
50
0-
(1550
0)
- --
(5166)
-(5
167)
-(5
167
)
Loss o
n R
ealis
ation
-30
400
-10
13
410
13
31013
3
10
6
Working Note – Statement showing Excess Capital
Step No. Particulars Formula A B C
I Balance b/d 60000 45000 30000
II Profit Sharing Ratio
1 1 1
III Unit Value I ÷ II 60000 45000 30,000
IV Proportionate Capital
X II 30000 30000 30000
V Excess Cap I - IV 30000 15000 -
VI Profit Sharing Ratio
1 1 -
VII Unit Value V ÷ VI 30000 15000 -
VIII Proportionate Capital
X VI 15000 15000 -
IX Excess Capital V-VIII 15000 - -
Payment Chart
A B C
I Steps : 9 II Steps : 8 III Steps : 4
150001500030000
-1500030000
--
30000
Total 60000 45000 30000
Illustration 4:-
A, B, C were in business sharing profits and losses 3:4:5 theydecided to dissolve their firm 1st July 2013. Following is theBalance Sheet as on 1st July 2013.
Liabilities Rs. Assets Rs.
Capital A 12000B 8000C 4000Sundry CreditorsA’s Loan
24000100002000
Sundry Assets 36000
36000 36000
The amt realized were as follows.
15/7 5000
31/7 10000
15/8 5000
31/8 2000
6/9 6000
30/9 5000
Show a detail statement of piecemeal distribution of cash.
107
Sta
tem
ent
sho
win
g P
iece
me
al D
istr
ibu
tion
of
Ca
sh
Date
Parti
cu
lars
Ca
sh
To
tal
Cre
dit
ors
A’s
Lo
an
AB
C
1/7
15
/7B
ala
nce
b/d
Ca
sh
Re
alis
ed
Le
ss :
Pa
id t
o C
red
ito
rs
-50
00
(50
00
)
36
00
0
(50
00
)
10
00
0
(50
00
)
20
00
- -
12
00
0- -
80
00
- -
40
00
- -
31
/7B
ala
nce
Ca
sh
Re
alis
ed
Le
ss :
Pa
id t
o C
red
ito
rs
-(1
000
0)
(50
00
)
31
00
0-
(50
00
)
50
00
-(5
00
0)
20
00
- -
12
00
0- -
80
00
- -
40
00
- -
Bala
nce
Le
ss:
Pa
id to
A’s
Lo
an
50
00
(20
00
)26
00
0(2
000
)- -
20
00
(20
00
)12
00
0-
80
00
-4
000
-
Bala
nce
Le
ss :
Pa
id t
o A
30
00
(30
00
)24
00
0(3
000
)- -
- -12
00
0(3
000
)80
00
-4
000
-
15
/8
Bala
nce
Ca
sh
rea
lize
d
Le
ss :
Pa
id t
o A
-50
00
(30
00
)
21
00
0-
(30
00
)
- - -
- - -
90
00
-(3
000
)
80
00
- -
40
00
- -
Bala
nce
Le
ss :
Pa
id t
o A
& B
in
3:4
20
00
(20
00
)18
00
0(2
000
)- -
- -60
00
(85
7)
80
00
(11
43
)4
000
-
10
8
31
/8
Bala
nce
Ca
sh
Re
aliz
ed
Le
ss :
Pa
id t
o A
& B
-20
00
(20
00
)
16
00
0
(20
00
)
51
43
(85
7)
68
57
(11
43
)
40
00
-
6/9
Bala
nce
Ca
sh
Re
aliz
ed
Le
ss :
Pa
id t
o A
& B
-60
00
(44
00
)
14
00
0
(44
00
)
42
86
(18
86
)
57
14
(25
14
)
40
00
-
Bala
nce
Le
ss :
Pa
id t
o a
ll in
PS
R16
00
(16
00
)96
00
(16
00
)24
00
(40
0)
32
00
(53
3)
40
00
(66
7)
30
/9
Bala
nce
Ca
sh
Re
aliz
ed
Le
ss :
Pa
id t
o a
ll in
PS
R
-50
00
(50
00
)
80
00
(50
00
)
20
00
(12
50
)
26
67
(16
67
)
33
33
(20
83
)
Bala
nce
– L
oss o
n
Rea
lisa
tio
n-
30
00
75
010
00
12
50
10
9
Working Notes 1. Step Excess Capital
Step No. Particulars Formula A B C
I Opening bal 12000 8000 4000
II Profit Sharing Ratio
3 4 5
III Unit Value I ÷ II 4000 2000 800
IV Proportionate Capital
X II 2400 3200 4000
V Excess Cap I - IV 9600 4800 -
VI Profit Sharing Ratio
3 4 -
VII Unit Value V ÷ VI 3200 1200 -
VIII Proportionate Capital
X VI 3600 4800 -
IX Excess Capital V-VIII 6000 - -
Payment Chart
A B C
Steps : 9 8 4
600036002400
-48003200
--
4000
Total 12000 8000 4000
Illustration 5:-
A, B & C are partners, profit sharing ratio 1:1:2. Balance sheet ason 31st March 2014.
Liabilities Rs. Assets Rs.
Capital A 12000B 9000C 6000A’s LoanB’s LoanCreditorsGovt tax
270003750250030001500
BuildingsPlant & MachineryStock
1975011750
6250
37750 37750
110
It was mutually agreed that the realization of the asset should bedistributed at the end of each month. Month by realization ofassets and expenses were as follows –
Month Asset Expenses
30th April31st May30th June31st July
7360910078004780
360850300280
All the assets were fully realized by 31st July 2014.
Working Note – Statement showing Excess Capital
Step No. Particulars Formula A B C
I Opening bal 12000 9000 6000
II Profit Sharing Ratio
1 1 2
III Unit Value I ÷ II 12000 9000 3000
IV Proportionate Capital
X II 3000 3000 6000
V Excess Cap I -IV 9000 6000 -
VI Profit Sharing Ratio
1 1
VII Unit Value V ÷ VI 9000 6000 -
VIII Proportionate Capital
X VI 6000 6000 -
IX Excess Capital V-VIII 3000 - -
Payment Chart
A B C
Steps : 9 8 4
300060003000
-60003000
--
6000
Total 12000 9000 6000
111
Sta
tem
ent
sho
win
g P
iece
me
al D
istr
ibu
tion
of
Ca
sh
Da
teP
art
icu
lars
Ca
sh
Ava
ilab
leT
ota
lC
laim
Go
vt
Cre
dit
ors
A’s
Lo
an
B’s
Lo
an
Cap
ita
ls
AB
C
1/4
30
/6B
ala
nce b
/dC
ash
Rea
lised
Less :
Exp
-73
60
36
0
37
75
01
500
30
00
37
50
250
012
00
090
00
60
00
Ca
sh
Less :
Pa
id to
Go
vt
70
00
(15
00
)(1
500
)(1
500
)-
--
--
-
Ba
lan
ce C
red
ito
rsL
ess:
Paid
to
G55
00
(30
00
)36
25
0(3
000
)-
30
00
(30
00
)37
50
-2
50
0-
12
00
0-
90
00
-60
00
-
Ba
lan
ce
Less :
Pa
id to
A &
B
loa
n
25
00
(25
00
)33
25
0(2
500
)-
-37
50
(15
00
)2
50
0(1
00
0)
12
00
0-
90
00
-60
00
-
31
/5B
ala
nce
Ca
sh
A/c
(9
10
0-3
00
)L
ess :
Pa
id to
A &
B
loa
n
-87
50
(37
50
)
30
27
0
(37
50
)
- - -
- - -
22
50
(22
50
)
150
0
(150
0)
12
00
0- -
90
00
- -
60
00
- -
Ba
lan
ce
Less :
Pa
id to
A’s
C
ap
ital
50
00
(30
00
)27
00
0(3
000
)- -
- -- -
- -12
00
0(3
000
)90
00
-60
00
-
11
2
Ba
lan
ce
Less :
Pa
id to
A &
B
Ca
pital
20
00
(20
00
)2
40
00
(20
00
)- -
- -- -
- -9
000
(10
00
)90
00
(10
00
)60
00
-
30
/6B
ala
nce
Ca
sh
A/c
(7
80
0-3
00
)L
ess :
Pa
id to
A &
B
-7
500
(75
00
)
220
00
-(7
50
0)
- -- -
- - -
- - -
80
00
-(3
750
)
80
00
-(3
75
0)
60
00
- -
31
/7B
ala
nce
Ca
sh
L
ess :
Pa
id to
A &
B
-4
500
(25
00
)
145
00
-(2
50
0)
--
42
50
(12
50
)42
50
(12
50
)-
Ba
lan
ce
Less :
Pa
id to
all
in
PS
R
20
00
(20
00
)1
20
00
(20
00
)3
000
(50
0)
30
00
(50
0)
60
00
(10
00
)
Loss o
n R
ea
lisa
tio
n-
100
00
25
00
25
00
50
00
11
3
Illustration 6:-
Ajay, Vijay & Vishal were in partnership in profit sharing ration5:3:2.Balance sheet as on 31st March 2014.
Liabilities Rs. Assets Rs.
Capital Ajay 40000Vijay NILAjay’s LoanSunil’s LoanBank LoanCreditors
400001400016000
400030000
Cash DebtorsStockVishal Capital
500440004950010000
104000 104000
Realizations were –
15/04/2014 19500
31/05/2014 10000
31/07/2014 20000
31/08/2014 6000
30/09/2014 8000
Vishal brought necessary cash at the time of last realization. ShowPiecemeal Distribution of Cash.
114
Sta
tem
en
t s
ho
win
g P
iece
mea
l D
istr
ibu
tio
n o
f C
as
h
Da
teP
art
icu
lars
Cash
Tota
lC
laim
sC
red
ito
rsB
an
k L
oa
nS
un
ilA
jay
Aja
yV
ijay
Vis
hal
1/4
15
/4B
ala
nce b
/dC
ash
Rea
lised
50
01
950
094
00
03
00
00
40
00
16
00
01
400
040
00
0-
(10
00
0)
Ca
sh
Less :
Pa
id to
C
red
ito
rs, B
ank L
oa
n,
Sun
il
20
00
0(2
000
0)
(20
00
0)
(120
00
)(1
600
)(6
400
)- -
- -- -
- -
31
/5B
ala
nce
Ca
sh
Rea
lize
dL
ess:
Paid
to
C
red
ito
rs, B
ank L
oa
n,
Sun
il
-1
000
0(1
000
0)
74
00
0
(10
00
0)
180
00
(600
0)
24
00
(80
0)
96
00
(32
00
)
14
00
0
-
40
00
-
- -
(10
00
0)
-
31
/6B
ala
nce
Ca
sh
Rea
lize
dL
ess:
Paid
to
C
red
ito
rs, B
ank L
oa
n,
Sun
il
-3
000
0(2
000
0)
64
00
0
(20
00
0)
120
00
(120
00
)
16
00
(16
00
)
64
00
(64
00
)
14
00
0
-
40
00
-
- -
(10
00
0)
-
Ba
lan
ce
Less :
Pa
id to
Aja
y
Loa
n B
ala
nce
10
00
0(1
000
0)
-
44
00
0(1
000
0)
34
00
0
- - -
- - -
- - -
14
00
0(1
000
0)
40
00
40
00
0-
40
00
0
- - -
(10
00
0)
-(1
000
0)
11
5
PDF processed with CutePDF evaluation edition www.CutePDF.com
31
/7C
ash
Rea
lised
Less :
Pa
id to
Aja
y
Loa
n
20
00
0(4
000
)(4
00
0)
- -- -
- -(4
000
)-
--
Ba
lan
ce
Less :
Pa
id to
Aja
y
Ca
p
16
00
0(1
600
0)
30
00
0(1
600
0)
- -- -
- -- -
40
00
0(1
600
0)
- -(1
000
0)
-
31
/8B
ala
nce
Ca
sh
Rea
lised
Less :
Pa
id to
Aja
y
-6
000
(60
00
)
14
00
0
(60
00
)
- - -
- - -
- -- -
24
00
0
(60
00
)
- -
(10
00
0)
-
30
/9B
ala
nce
Ca
sh
Rea
lised
Add
: C
ash
Re
ce
ive
d
fro
m V
isha
l
-8
000
10
00
0
80
00
10
00
0
- - -
- - -
- - -
- - -
18
00
0- -
- - -
(10
00
0)
10
00
0
Ba
lan
ce
Less :
Pa
id to
Aja
y1
800
0(1
800
0)
18
00
0(1
800
0)
- -- -
- -- -
18
00
0(1
800
0)
- -- -
--
--
--
--
-
No
te -
Sin
ce o
nly
Aja
y h
as
Cre
dit
Ba
lan
ce
in
Ca
pit
al
Sta
tem
en
t o
f e
xce
ss
Ca
pit
al
ca
n n
ot
be
pro
rate
d.
11
6
Illustration 7:-
Following is the Balance Sheet of A, B & C who share P&L in theratio 4:3:1 on 31st March 2013 on which date they dissolve theirpartnership. Balance Sheet as on 31st March 2013.
Liabilities Rs. Assets Rs.
Sundry CreditorsBank O/DCapital A/cA 70000B 30000C 50000
262508750
150000
BldgMachineryStockDebtors
50000550002000060000
185000 185000
1. Bank O/D is secured against stock.2. The assets realized following amounts which were
immediately distributed.May 31 – Debtors Rs.20000/-July 31 – Stock Rs.15000/-Sep 30 – Debtors Rs.25000/-Oct 31 – Machinery Rs.40000/-Dec 31 – Bldg Rs.65000/-
No further sums could be realized. Show PiecemealDistribution.
Working Note – Statement showing Excess Capital
Step No. Particulars Formula A B C
I Opening bal 70000 30000 50000
II Profit Sharing Ratio
4 3 1
III Unit Value I ÷ II 17500 10,000 50000
IV Proportionate Capital
X II 40000 30000 10000
V Excess Cap I - IV 30000 - 40000
VI Profit Sharing Ratio
4 - 1
VII Unit Value V ÷ VI 7,500 - 40000
VIII Proportionate Capital
X VI 30000 - 7500
IX Excess Capital V-VIII - - 32500
Payment Chart
A B C
Steps : 9 8 4
-3000040000
--
30000
32500750010000
Total 70000 30000 50000
117
Sta
tem
en
t sh
ow
ing
Pie
ce
me
al D
istr
ibu
tio
n o
f C
as
h
Da
teP
art
icu
lars
Ca
sh
To
tal
Cre
dito
rsB
ank O
/DA
BC
1/0
4/1
33
1 J
uly
Ba
lance
b/d
Ca
sh
Re
alis
ed
Le
ss :
Pa
id t
o C
red
ito
rs &
Ban
k O
/D
-2
00
00
(20
00
0)
18
50
00
(20
00
0)
26
25
0
(15
00
0)
87
50
(50
00
)
70
00
0
-
30
00
0
-
500
00
-
31
Ju
lyB
ala
nce
Ca
sh
Re
alis
ed
Le
ss :
Pa
id t
o B
ank O
/D
-1
50
00
(37
50
)
16
50
00
(37
50
)
11
25
0
-
37
50
(37
50
)
70
00
0
-
30
00
0
-
50
00
0
-
Ba
lance
Le
ss:
Pa
id t
o C
red
ito
rs1
12
50
(11
25
0)
16
12
50
(11
25
0)
11
25
0(1
12
50
)N
IL -7
00
00
-3
00
00
-5
00
00
-
30
Se
pB
ala
nce
Ca
sh
Re
aliz
ed
Le
ss:
Pa
id t
o C
red
ito
rs
-2
50
00
(25
00
0)
15
00
00
(25
00
0)
- - -
- - -
70
00
0
-
30
00
0
-
500
00
(25
00
0)
31
Oct
Ba
lance
Ca
sh
Re
alis
ed
Le
ss :
Pa
id t
o C
red
ito
rs
-4
00
00
(75
00
)
12
50
00
(75
00
)
- -- -
70
00
0-
30
00
0-
250
00
(75
00
)
Ba
lance
Le
ss :
Pa
id t
o A
& C
32
50
0(3
25
00)
11
75
00
(32
50
0)
- - -
- - -
70
00
0(2
60
00
)3
00
00
-1
75
00
(65
00
)
31
De
cB
ala
nce
Ca
sh
Re
alis
ed
Le
ss :
Pa
id t
o A
& C
-6
50
00
(50
00
)
85
00
0
(50
00
)
- -- -
44
00
0
(40
00
)
30
00
0
-
110
00
(10
00
)
Ba
lance
Le
ss :
Pa
id t
o a
ll in
PS
R6
00
00
(60
00
0)
80
00
0
(60
00
0)
- - -
- - -
40
00
0(3
00
00
)3
00
00
(22
50
0)
100
00
(75
00
)
Lo
ss
-2
00
00
- -- -
10
00
07
50
02
50
0
11
8
Illustration 8:-
A, B & C are partners sharing profits and losses equally. TheirBalance Sheet as on date of dissolution was follows.
Liabilities Rs. Assets Rs.
Sundry CreditorsGeneral ReservesDue to BankCapital A/cA 80000B 160000C 130000
110001800033000
370000
CashInvestmentStationarySundry debtorsBankFurnitureLand & Building
14030000
1283004540032600
4120191440
432000 432000
All the sundry creditors have to be paid away. A sum of Rs.2400/-has to be provided for expenses of realization and subject to this allcash received should be immediately distributed among partnersthe amount realized were :-
1 32260
2 36000
3 212000
4 92600
Expenses of realization Rs.3000/-.
Prepare statement showing Piecemeal Distribution of Cash.
Working Note – Statement showing Excess Capital
Step No. Particulars Formula A B C
I Balance b/d 86000 166000 136000
II Profit Sharing Ratio 1 1 1
III Unit Value I ÷ II 86000 166000 136000
IV Proportionate Capital
X II 86000 86000 86000
V Excess Cap I - IV - 80000 50000
VI Profit Sharing Ratio - 1 1
VII Unit Value V ÷ VI - 80000 50000
VIII Proportionate Capital
X VI - 50000 50000
IX Excess Capital V-VIII - 30000 -
Payment Chart
A B C
Steps : 9 8 4
--
86000
300005000086000
-5000086000
Total 86000 166000 136000
119
Sta
tem
ent
sho
win
g P
iece
me
al D
istr
ibu
tion
of
Ca
sh
Date
Part
icu
lars
Cash
Tota
lC
reditors
Bank O
/DA
BC
1B
ala
nce
b/d
Add
: C
ash
Less : D
istr
ibution
Exp
Less : P
aid
to C
reditors
& B
ank (
1:3
)
14
03226
0(2
400)
(3000
0)
43200
0
(3000
0)
11000
(7500)
3300
0
(2250
0)
8600
0
-
16600
0
-
1360
00
-
2B
ala
nce
Cash
Realis
ed
Less : P
aid
to C
reditors
& B
ank O
/D
-3600
0(1
400
0)
40200
0
(1400
0)
3500
(3500)
1050
0
(1050
0)
8600
016600
01360
00
Bala
nce
Less: P
aid
to
Bank
2200
0(2
200
0)
38800
0(2
200
0)
NIL -
NIL -
8600
0-
16600
0(2
200
0)
1360
00
-
3B
ala
nce
Cash
Realis
ed
Less: P
aid
to
Bank
-2120
00
(8000)
36600
0
(8000
)
- - -
- - -
8600
0
-
14400
0
(8000)
1360
00
-
Bala
nce
Less: P
aid
to
Bank &
Cre
ditors
2040
00
(1000
00)
35800
0(1
000
00)
- -- -
8600
0-
13600
0(5
000
0)
1360
00
(5000
0)
Bala
nce
Less : P
aid
to a
ll1040
00
(1040
00)
25800
0(1
040
00)
- -- -
8600
0(3
466
6)
86
000
(3466
7)
86
00
0(3
466
7)
4B
ala
nce
Cash
Realis
ed
Less : E
xp
-9260
0(6
00)
15400
0- -
- -5133
451
333
51
33
3
Bala
nce
Less : P
aid
to a
ll9200
0(9
200
0)
15400
0(9
200
0)
- -- -
5133
4(3
066
7)
51
333
(3066
7)
51
33
3(3
066
6)
Loss o
n r
ealiz
ation
-6200
0-
-2066
620
666
20
66
7
12
0
Illustration 9:-
P, Q & R were in Partnership sharing Profits & Losses in the ratio of4:5:1. Their Balance Sheet as on 31st December 2013 is as under:-
Liabilities Rs. Assets Rs.
Capital A/cPQRSundry CreditorsLoansPQReserves
75000600001500050000
300001500050000
Cash in handOther Assets
15000280000
295000 295000
The Partnership is dissolved and the assets were realized asunder:-1st Realisation: Rs.50000/-2nd Realisation: Rs.100000/-3rd Realisation: Rs.85000/-
On the date of the dissolution there was a contingent liability ofRs.5000/- against the firm which was settled at Rs.3500/- at thetime of 2nd realization. Realisation expenses were estimated atRs.10000/- but those actually amounted to Rs.7500/-. R took overstock worth Rs.2500/- at the time of 3rd realization. The firm wasforced to pay Rs.3000 to sales tax authorities as fine out of the 3rd
realization for which no provision was made prepare a statementshowing distribution under Excess Capital Method.
Working Note – Statement showing Excess Capital
Particulars P Q R
Capitals (as given) 75,000 60,000 15,000
Add Reserves 20,000 25,000 5,000
Actual Capitals 95,000 85,000 20,000
PSR 4 5 1
Capitals per unit of PSR 23,750 17,000 20,000
Capitals in PSR 68,000 85,000 17,000
Excess Capital 27,000 NIL 3,000
PSR 4 1
Excess Capital p.u. of PSR 6,750 3,000
Excess Capital in PSR 12,000 3,000
Extra Excess Capital 15,000 NIL
First pay Extra Excess Capital to P Rs. 15,000 Next pay Excess Capital to P and R Rs. 15,000 in the ratio 4:1Next pay P, Q and R in PSR 4:5:1
121
Sta
tem
en
t sh
ow
ing
Pie
ce
me
al D
istr
ibu
tio
n o
f C
as
h
Date
Part
icula
rsC
ash R
s.
Cre
ditors
Lo
an P
Rs.
Lo
an Q
Rs.
Capital P
Rs.
Capital Q
Rs.
Capital R
Rs.
1O
penin
g B
ala
nces
15,0
00
50,0
00
30,0
00
15,0
00
95,0
00
85,0
00
20,0
00
Ad
d :
First R
ealis
ation
50,0
00
65,0
00
Le
ss:
Cash
Kept asid
e f
or
continge
nt
Lia
b.
Rs.
5,0
00 e
stim
ate
d r
ealiz
ation
exp
. R
s.
10,0
00
15,0
00
50,0
00
Le
ss: P
aid
to c
reditors
50,0
00
50,0
00
NIL
NIL
Se
cond R
ealis
ation
1,0
0,0
00
Ad
d:
Surp
lus a
vaila
ble
fro
m a
mount
Ke
pt
asid
e f
or
conting
ent lia
b.
(5000-3
500)
1,5
00
10,1
500
Le
ss:
Paid
to P
& Q
loan
45,0
00
30,0
00
15,0
00
56,5
00
NIL
NIL
Le
ss:
Extr
a E
xcess C
ap. P
aid
to P
15,0
00
15,0
00
41,5
00
80,0
00
12
2
Le
ss:
Excess C
ap. T
o P
& Q
in the
Ratio
4:1
15,0
00
12,0
00
3,0
00
26,5
00
68,0
00
17,0
00
Le
ss: P
aid
to P
,Q &
R in P
SR
4:5
:126,5
00
10,6
00
13,2
50
2,6
50
NIL
57,4
00
71,7
50
14,3
50
Third R
ealis
ation
85,0
00
Ad
d:
Surp
lus a
vaila
ble
fro
m a
mount
kept asid
e f
or
estim
ate
d r
ea
lization
Exp
en
ses (
10,0
00 -
7,5
00
)2,5
00
87,5
00
Le
ss:
Sale
s T
ax f
ine p
aid
3,0
00
84,5
00
Le
ss:
Sto
ck taken O
ver
by R
2,5
00
11,8
50
Le
ss:
Padi to
P &
Q f
or
sto
ck taken
over
by R
22,5
00
10,0
00
12,5
00
-
62,0
00
47,4
00
59,2
50
11,8
50
Le
ss:
paid
to P
, Q
& R
in
PS
R 4
:5:1
62,0
00
24,8
00
31,0
00
6,2
00
Lo
ss o
n R
ealis
ation
-22,6
00
28,2
50
5,6
50
12
3
Note: 1) Keep aside cash for estimated realization expenses andcontingent liability at the beginning.
2) Excess amount of RS. 1500 kept aside for contingentliability has been added to the 2nd realization.
3) Excess amount of Rs. 2500 kept a side for realizationexpenses has been added to the third realization.
4) Sales tax fine of Rs. 3000 has to be paid first from thethird realization being preferential creditor.
5) Stock taken over by R Rs. 2500 has been deducted fromhis capital balance Rs. 10,000 has been paid to P & Rs.12,500 to Q for stock taken over by R.
PSR P Q R
Cash paid 4 5 1250
(Proportionately in PSR)
Illustration 10:-
The partners X,Y & Z have called upon you to assist them inwinding up the affairs of their partnership on 30th June 2013. TheirBalance Sheet as on that date is given below:
Liabilities Rs. Assets Rs.
Sundry CreditorsCapital AccountsXYZ
34,000
1,34,00090,00063,000
Cash at BankSundry DebtorsStock in tradePlant & EquipmentLoan – X Loan – Y
12,00044,00028,000
1,98,00024,00015,000
3,21,000 3,21,000
1. The partners share profit and losses in the ratio of 5:3:22. Cash is distributed to the partners at the end of each month3. A summary of liquidation transactions are as follows:
July 2013Rs. 33,000 – Collected from Debtors balance is uncollectibleRs. 20,000 – Received from sale of entire Stock.Rs. 2,000 – Liquidation expenses paidRs. 16,000 – Cash retained in the business at the end of monthAugust 2013Rs. 3000 – Liquidation expenses paid as part payment of hiscapital, Z accepted a piece of equipment for Rs. 20,000 (bookvalue Rs. 8,000)
124
Rs. 5,000 – Cash retained in the business at the end of themonth September – 2013Rs. 1,50,000 – received on sale of remaining plant & equipmentRs. 2,000 – liquidation expenses paid. No cash retained in thebusiness.Prepare a statement showing distribution of cash by applyingproportionate capital method.
Solution: – Statement of Excess Capital
X
Rs.
Y
Rs.
Z
Rs.
Balance 1,34,000 90,000 63,000
Less: Loans 24,000 15,000 -
1,10,000 75,000 63,000
Profit sharing Ratio 5 3 2
Taking X’s capital as the (22,000) (25,000) (31,500)
Basis (1=22,000) 1,10,000 66,000 44,000
9,000 19,000
Profit sharing Ration 3 2
Unit value (3000) (9500)
Taking Y’s Capital as the 9,000 6,000
basis (1= 3000)
- 13,000
Calculation of proportionate Capital after take over of equipment
X
Rs.
Y
Rs.
Z
Rs.
Balance on 1.9.2013 1,10,000 67,000 30,000
Profit Sharing Ratio 5 3 2
Unit value (22,000) (22,334) (15,000)
Taking Z’s capital as the basis 1 = 15,000 75,000 45,000 30,000
35,000 22,000 -
Note: If the share of partner in that realisation less than the value ofasset the asset is given to the partner concerned but it disturbs theearlier calculation of surplus capital. Hence Surplus capital ofpartners is decided again.
125
Sta
tem
en
t sh
ow
ing
Dis
trib
uti
on
of
Ca
sh
Date
Part
icula
rsC
ash R
s.
Tota
l R
s.
Cre
ditors
Rs.
X R
s.
Y R
s.
Z R
s.
Ba
lances
34,0
00
1,3
4,0
00
90,0
00
63,0
00
Le
ss :
Loans taken
24,0
00
15,0
00
2,8
2,0
00
34,0
00
1,1
0,0
00
75,0
00
63,0
00
June 2
013
Ca
sh B
ala
nce
12,0
00
Pa
id to C
reditors
12,0
00
12,0
00
12,0
00
2,7
0,0
00
22,0
00
July
2013
1st R
ealis
ation
53,0
00
Le
ss:
Expenses
2,0
00
51,0
00
Le
ss:
Cash R
eta
ined
16,0
00
35,0
00
Pa
id to c
reditors
22,0
00
22,0
00
22,0
00
13,0
00
2,4
8,0
00
-
Pa
id to Z
13,0
00
13,0
00
13,0
00
Ba
lance d
ue
-2,3
5,0
00
-1,1
0,0
00
75,0
00
50,0
00
12
6
Aug
2013
Se
cond R
ealis
ation
July
Bala
nce r
eta
ined
16,0
00
Le
ss:
Expenses
3,0
00
13,0
00
Le
ss:
Cash r
eta
ined
5,0
00
8,0
00
Pa
id to Y
8,0
00
8,0
00
-8,0
00
Eq
uip
ment g
iven
to Z
-20,0
00
-20,0
00
-2,0
7,0
00
1,1
0,0
00
67,0
00
30,0
00
Se
p 2
013
Fin
al R
ealisati
on
Aug
ust B
ala
nce
reta
ined
5,0
00
Sa
le o
f p
lant
1,5
0,0
00
1,5
5,0
00
Le
ss:
Expenses
2,0
00
1,5
3,0
00
Le
ss:
Paid
to X
& Y
57,0
00
57,0
00
35,0
00
22,0
00
96,0
00
1,5
0,0
00
75,0
00
45,0
00
30,0
00
Pa
id to X
, Y
& Z
In 5
: 3
: 2
96,0
00
96,0
00
48,0
00
2880
019
200
54,0
00
27,0
00
16,2
00
10,8
00
12
7
Illustration No. 11
Partnership of L, M & N was dissolved on 31st October 2013on which date their Balance Sheet stood as under:
Liabilities Rs. Assets Rs.
Capital A/cs: Goodwill 80,000
L 1,20,000 Buildings 52,500
M 1,30,000 Furniture 10,000
N 90,000 3,40,000 Stocks 1,52,000
Reserve 60,000 Debtors 1,35,500
Creditors 40,000 Cash 10,000
4,40,000 4,40,000
The partners were sharing profits & loss in the ratio of 3:2:1respectively. They decided to distribute the cash as and when itwas received L agreed to work as receiver on a remuneration ofRs. 5,000 and to bear all expenses of realization when it wascompleted be found that he had spent Rs. 1050 towards theexpenses. Following details of realization were available:
December 2013January 2014February 2014
Rs. 45,000Rs. 1,20,000Rs. 1,14,000
There was some stock of the book value of Rs. 9,000 lying unsoldand it was taken over by N at an agreed value of Rs. 5,000.You are required to prepare the following (using excess capitalmethod)
1. Statement of Surplus Capital2. Statement showing monthly distribution of cash available.
128
Solution:
Statement showing surplus capital:
StepNo.
Particulars Formula L
Rs.
M
Rs.
N
Rs.
Capital Balances 1,20,000 1,30,000 90,000
Add: Reserve 30,000 20,000 10,000
I Adjusted Capitals 1,50,000 1,50,000 1,00,000
II Profit sharing Ratio 3 2 1
III Unit values 50,000 75,000 1,00,000
IV Proportionate Capital (Base L)
1,50,000 1,00,000 50,000
V Surplus Capital - 50,000 50,000
VI Profit sharing ratio 2 1
VII Unit values 25,000 50,000
VIII Proportionate Capital (Base M)
50,000 25,000
IX Absolute surplus - 25,000
Payment chart (IX, VIII, IV)
I - - 25,000
II - 50,000 25,000
III 1,50,000 1,00,000 50,000
1,50,000 1,50,000 1,00,000
129
Sta
tem
en
t sh
ow
ing
Pie
ce
me
al D
istr
ibu
tio
n o
f C
as
h
Da
teP
art
icu
lars
Cas
hT
ota
l C
laim
sC
red
ito
rsC
ap
ital
Ac
co
un
ts (
Ad
jus
ted
)
LM
N
1/1
1/1
3B
ala
nce d
ue
4,4
0,0
00
40,0
00
1,5
0,0
00
1,5
0,0
00
1,0
0,0
00
Ca
sh
Ba
lan
ce
10
,00
0
Le
ss
: R
em
un
era
tion
to
L(5
,000
)
5,0
00
Le
ss
: P
aid
to
cre
dito
rs(5
,000
)(5
,00
0)
(5,0
00
)
-4,3
5,0
00
35,0
00
De
c 1
3R
ea
lisa
tion
in
Dec 2
01
345
,00
0
Le
ss
: P
aid
to
cre
dito
rs(3
5,0
00
)(3
5,0
00
)(3
5,0
00
)
10
,00
04,0
0,0
00
-
Le
ss
: P
aid
to
M(1
0,0
00
)(1
0,0
00
)(1
0,0
00
)
-3,9
0,0
00
1,5
0,0
00
1,5
0,0
00
90,0
00
Ja
n 1
4R
ea
lisa
tion
in
Ja
n 2
014
1,2
0,0
00
Le
ss
: P
aid
to
M &
N to
cle
ar
Su
rplu
s c
ap
ita
l9
0,0
00
(90
,000
)(5
0,0
00
)(4
0,0
00
)
30
,00
03,0
0,0
00
1,5
0,0
00
1,0
0,0
00
50,0
00
13
0
Le
ss
: P
aid
to
all
pa
rtne
rs in
P
SR
30
,00
0(3
0,0
00
)(1
5,0
00
)(1
0,0
00
)(5
,00
0)
-2,7
0,0
00
1,3
5,0
00
90
,000
45,0
00
Fe
b 1
4C
ash
Rea
lised
11
,40
0
Le
ss
: P
aid
to
all
in P
SR
11
,40
01,1
4,0
00
57
,00
03
8,0
00
19,0
00
-1,5
6,0
00
78
,00
05
2,0
00
26,0
00
Fe
b 1
4C
ash
6,0
00
Le
ss
: P
aid
to
All
in P
SR
(6,0
00
)(6
,00
0)
3,0
00
2,0
00
1,0
00
Lo
ss
on
Reali
sa
tio
n75
,00
05
0,0
00
25,0
00
13
1
Illustration 12 :
Avani, Binal and Cindy are partners sharing profits andlosses in the ratio of 4:2:1. They decided to dissolve the partnershipas on 31st March 2013 when their Balance Sheet was as follows :
Balance Sheet as on 31st March, 2013
Liabilities Rs. Assets Rs.
Creditors 16,820 Cash in hand 500
General Reserve 9,780 Investment 16,000
Capital : Avani 16,000 Machinery 38,740
Binal 32,000 Debtors 6,520
Cindy 26,000 Building 980
Furniture 37,860
1,00,600 1,00,600
All creditors have to be paid off. Rs. 300 has to be providedfor realization expenses.
Thereafter all cash received should be distributed among thepartners.
The amounts were realized in installments as follows :
Rs.
1st 20,000
2nd 3,500
3rd 46,000
4th 24,000
The actual realization expenses were Rs. 500. Prepare astatement showing piecemeal distribution of cash as per ExcessCapital Method.
132
Solution :
Statement of Excess Capital :
Sr. Particulars Avani Banal Cindy
Balance B/f 16,000 32,000 26,000
Add : General Reserve 5,600 2,800 1,400
Total 21,600 34,800 27,400
Profit Sharing Ratio 4 2 1
Unit Value 5,400 17,400 27,400
Proportionate capital taking Aas base
21,600 10,800 5,400
Excess Capital -- 24,000 22,000
Profit Sharing Ratio 2 1
Unit Value 12,000 22,000
Proportionate capital taking Bas base
24,000 12,000
Ultimate Surplus 10,000
Sr.No.
Particulars CashAvailable
Totalclaims
Creditors Avani Binal Cindy
Balance B/f 500 1,00,600 16,800 21,600 34,800 27,400
Less : reservefor Expenses
300
Balance 200
Less : paid to Creditors
200 200 200
Balance 0 1,00,400 16,600 21,600 34,800 27,400
Add 1st Realisation
20,000
Less : paid to Creditors
16,600 16,600 16,600
Balance 3,400 83,800 0 21,600 34,800 27,400
Less : Paid to Cindy
3,400 3,400 3,400
Balance 0 80,400 21,600 34,800 24,000
2nd realization 3,500
Less : Paid to 3,500 3,500 3,500
133
Cindy
Balance 0 76,900 21,600 34,800 20,500
3rd realization 46,000
Less : paid to Cindy
3,100 3,100 3,100
Balance 42,900 73,800 21,600 34,800 17,400
Less paid to Binal & Cindy
36,000 36,000 24,000 12,000
Balance 6,900 37,800 21,600 10,800 5,400
Less paid to all in PSR
6,900 6,900 3,943 1,971 986
Balance 0 30,900 17,657 8,829 4,414
4th Realisation 24,000
Less : realization expenses
200
Balance 23,800
Less : paid to all in PSR
23,800 23,800 13,600 6,800 3,400
Loss on Realisation
7,100 4,057 2,029 1,014
Illustration 13 :
Jam, Bread and Butter are partners sharing profits andlosses in the ratio of 2 : 2 : 1. They decided to dissolve thepartnership as on 31st March 2013 when their Balance Sheet wasas follows :
Balance Sheet as on 31st December, 2013
Liabilities Rs. Assets Rs.
Creditors 15,000 Cash in hand 9,000
Income tax Payable 4,000 Investment 7,500
Bank loan (secured onstock)
30,000 Machinery 17,800
Jams loan 11,000 Debtors 66,400
Capital Jam 40,000 Building 60,000
Bread 40,000 Furniture 9,300
Butter 30,000
1,70,000 1,70,000
134
Bank took over Stock and could realize Rs. 25,000 only. Rs. 3,000were paid for repairing furniture to get better price.
Thereafter all cash received was distributed among all otherliabilities and the partners.
The amounts realized and expenses incurred were ininstallments as follows.
Month Cash realized Rs. Expenses Rs.
January 2014 13,400 1,400
February 2014 17,200 2,200
March 2014 11,500 1,500
April 2014 32,750 2,750
May 2014 36,640 1,640
Solution :
Statement of Excess Capital :
Sr. Particulars Jam Bread Butter
Balance B/f 40,000 40,000 30,000
Profit Sharing Ratio 2 1 1
Unit Value 20,000 40,000 30,000
Proportionate capital takingJam as base
40,000 20,000 20,000
Excess Capital 20,000 10,000
Profit Sharing Ratio 1 1
Unit Value 20,000 10,000
Proportionate capital takingButter as base
10,000 10,000
Ultimate Surplus 10,000
135
Sta
tem
en
t S
ho
win
g P
iece
me
al
dis
trib
uti
on
of
Ca
sh
Sr.
No
.P
art
icu
lars
Cash
Ava
ilab
leT
ota
lcla
ims
I.T
.p
aya
ble
*Ban
klo
an
Cre
dit
ors
Jam
slo
an
Jam
B
read
Bu
tter
Bala
nce B
/f
9,0
00
1,4
5,0
00
4,0
00
5,0
00
15,0
00
11,0
00
40,0
00
40,0
00
30,0
00
Less :
Furn
iture
E
xpenses
3,0
00
Bala
nce
6,0
00
4,0
00
5,0
00
15,0
00
11,0
00
40,0
00
40,0
00
30,0
00
Less : p
aid
to
I.T
. 4,0
00
4,0
00
4,0
00
Bala
nce
2,0
00
1,4
1,0
00
--5,0
00
15,0
00
11,0
00
40,0
00
40,0
00
30,0
00
Less : p
aid
to
bank &
cre
ditors
2,0
00
2,0
00
500
1,5
00
Bala
nce
--1,3
9,0
00
--4,5
00
13,5
00
11,0
00
40,0
00
40,0
00
30,0
00
Jan
Add 1
st
Realis
ation
12,0
00
Less : P
aid
to
Bank &
C
reditors
12,0
00
12,0
00
3,0
00
9,0
00
Bala
nce
--1,2
7,0
00
--1,5
00
4,5
00
11,0
00
40,0
00
40,0
00
30,0
00
13
6
Fe
b2
nd
realiz
ation
15,0
00
Less : P
aid
to
Bank &
C
reditors
6,0
00
6,0
00
--1,5
00
4,5
00
Bala
nce
9,0
00
1,2
1,0
00
----
--11,0
00
40,0
00
40,0
00
30,0
00
Less : p
aid
to
Jam
loan
9,0
00
9,0
00
9,0
00
Bala
nce
--1,1
2,0
00
----
--2,0
00
40,0
00
40,0
00
30,0
00
Mar
3rd
realiz
ation
10,0
00
Less : p
aid
to
Jam
loan
2,0
00
2,0
00
2,0
00
Bala
nce
8,0
00
1,1
0,0
00
----
----
40,0
00
40,0
00
30,0
00
Less p
aid
to
bre
ad
8,0
00
8,0
00
8,0
00
Bala
nce
--1,0
2,0
00
----
----
40,0
00
32,0
00
30,0
00
13
7
Apr
4th
Realis
ation
30,0
00
Less : p
aid
to
bre
ad
2,0
00
2,0
00
2,0
00
Bala
nce
28,0
00
1,0
0,0
00
----
----
40,0
00
30,0
00
30,0
00
Less : p
aid
to
bre
ad &
butt
er
20,0
00
20,0
00
10,0
00
10,0
00
Bala
nce
8,0
00
80,0
00
----
----
40,0
00
20,0
00
20,0
00
Less : p
aid
to
all
in p
er
8,0
00
8,0
00
4,0
00
2,0
00
2,0
00
Bala
nce
--72,0
00
----
----
36,0
00
18,0
00
18,0
00
May
5th
Realiz
ation
35,0
00
Paid
to a
ll in
PS
R35,0
00
35,0
00
17,5
00
8,7
50
8,7
50
Loss o
n
Realis
ation
--37,0
00
18,5
00
9,2
50
9,2
50
*aft
er
paym
en
t of
Rs.
25
,00
0 r
eco
ve
red
fro
m S
tock
13
8
Illustration 14 :
Sonam, Nidhi and Pooja are partners sharing profits andlosses in the ratio of 4:2:1. They decided to dissolve the partnershipas on 31st March 2013 when their Balance Sheet was as follows :
Balance Sheet as on 31st March, 2013
Liabilities Rs. Assets Rs.
Capital : Sonam 1,00,000 Land & Building 50,000
Nidhi 60,000 Machinery 1,50,000
Pooja 20,000 Debtors 45,000
10% Bank Loan(unsecured)
40,000 Stock 34,500
Bills Payable 30,000 Cash and Bank 500
Creditors 30,000
2,80,000 2,80,000
Rs. 800 has to be provided for realization expenses.
Thereafter all cash received should be distributed among thepartners.
The amounts were realized in installments as follows :
Rs.
1st 60,300
2nd 50,000
3rd 79,000
4th 27,700
The actual realization expenses were Rs. 500. Prepare astatement showing piecemeal distribution of cash as per ExcessCapital Method.
139
Solution :
Statement of Excess Capital :
Sr. Particulars Sonam Nidhi Pooja
Balance B/f 1,00,000 60,000 20,000
Profit Sharing Ratio 4 2 1
Unit Value 25,000 30,000 20,000
Proportionate capital takingPooja as base
80,000 40,000 20,000
Excess Capital 20,000 20,000 --
Profit Sharing Ratio 4 2
Unit Value 5,000 10,000
Proportionate capital takingSonam as base
20,000 10,000
Ultimate Surplus 10,000
140
Part
icu
lars
C
ash
Ava
ilab
leT
ota
lcla
ims
BK
Lo
an
B.P
.C
red
ito
rsS
on
am
N
idh
i P
oo
ja
Ba
lan
ce B
/f
50
02,8
0,0
00
40,0
00
30,0
00
30,0
00
1,0
0,0
00
60,0
00
20,0
00
Ad
d :
Cash r
eal
60,3
00
Le
ss : r
eserv
e f
or
Exp
en
ses
80
0
Ba
lan
ce
60,0
00
Le
ss : p
aid
to
Cre
ditors
60,0
00
60,0
00
24,0
00
18,0
00
18,0
00
Ba
lan
ce
--2,2
0,0
00
16,0
00
12,0
00
12,0
00
1,0
0,0
00
60,0
00
20,0
00
Ad
d 2
nd R
ea
lisation
50,0
00
Le
ss : p
aid
to
Cre
dit, lo
an, bs
40,0
00
40,0
00
16,0
00
12,0
00
12,0
00
Ba
lan
ce
10,0
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14
1
4.6 EXERCISE
Pr.1 A, B, and C carrying on business is partnership decided todissolve it on and from 30th Sept. 2013. The following was theirBalance sheet on that date:
Liabilities Rs. Assets Rs.
Capital Accounts: Sundry Assets 8,000
A 2,800 Cash & Bank 1,000
B 200 AdvertisementSuspense A/c
900
C 1,000 4,000
Profit & Loss 3,900
Loan from A 2,000
9,900 9,900
As per the arrangements with the bank, the partners wereallowed to withdraw an amount of Rs.500 only at present and thebalance amount of Rs.500 could be withdrawn only after 1st
December,2009
It was decided that after keeping aside an amount ofRs. 2,000 for estimated realization expenses the available cashshould be distributed between the partners immediately.
The following were the realisation.
Fixed AssetsRs.
Current AssetsRs.
31st October, 2013 1,000 1,900
25th November, 2013 2,600 2,000
20th December, 2013 (Final) 1,000 900
Actual realisation expenses amounted to Rs. 1,100 only. Preparethe statement showing the distribution of cash between thepartners. under excess capital method.
Pr. 2 On 31st December, 2013 the Balance Sheet of the partners X,Y and Z (sharing Profit and Losses in the ratio of 2:4:6(respectively) is as follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Sundry Assets 16,000
A 3,600 Cash 2,000
B 2,400 AdvertisementSuspense A/c
1,800
C 2,000 8,000
Profit & Loss 7,800
Loan from A 4,000
19,800 19,800
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On Jan 1, 2014 the partners decide to dissolve the firm anddistribute the proceeds as and when realised.
Prepare a statement showing the distribution according toexcess capital Method. The realisations are as below:
GrossRealisation
Rs.
RealisationExpenses
Rs.
March 1, 2014 4,450 150
April 15, 2014 6,850 250
April 30, 2014 2,250 250
Pr. 3 Lamb, Deer and Peacock were in partnership, their respectiveshares being 1:2:2. The following was their Balance Sheet on 31st
December, 2013. On which date they decided to dissolve the firm.
Liabilities Rs. Assets Rs.
Creditors 30,000 Cash 18,000
Income-Tax payable 8,000 Stock 80,000
Loan from bank(Secured by pledgeof stock
60,000 Debtors 1,20,000
Deer’s Loan 22,000 Furniture 72,000
Partner’s Capital: Motor car 50,000
Lamb 80,000
Deer 80,000
Peacock 60,000 2,20,000
3,40,000 3,40,000
1. The bank could realize only Rs. 50,000 on disposal of stock2. A sum of Rs. 6,000 was spent for furniture on getting a better
price.3. Other assets were realised as follows
In January, 2014 Rs. 24,000In February, 2014 Rs. 30,000In March, 2014 Rs. 20,000In April, 2014 Rs. 60,000In May, 2014 Rs. 70,000
The partners distributed the cash at and when available. Showthe distribution of cash on the basis of ‘Highest relative capital’.
143
Pr. 4 Gunen, Dinen, and Biren who were partners sharing profit andlosses in the ratio of 3:2:1 decided to dissolve their firm as on 1st
January, 2014 on the basis of the following balance sheet:
Liabilities Rs. Assets Rs.
Creditors 50,000 Cash at Bank 10,000
Capital A/cs Debtors 1,10,000
Gunen 40,000 Stock 30,000
Dinen 35,000
Biren 25,000 1,00,000
1,50,000 1,50,000
It was agreed that Dinen will be in charge of realisation atcommission of 5% on Realisations and after meeting expenses andhis commission the net amount would be distributed piecemeal asand when realised. The following schedule of realisation isavailable.
Month (2014)
RealisationRs.
ExpensesRs.
January 30,000 1,000
February 20,250 1,100
March 35,100 900
April 25,000 1,250
May (Final) 30,250 750
1,40,600 5,000
Prepare a statement to show how the amount will bedistributed amongst the partners.
Pr.5 Partnership of Urmila, Manisha, and Karishma was dissolvedon 31st October, 2013 on which date their Balance Sheet stood asunder:
Liabilities Rs. Assets Rs.
Capital A/cs Goodwill 80,000
Urmila 1,20,000 Building 53,000
Manisha 1,30,000 Furniture 10,000
Karishma 90,000 3,40,000 Stock 1,52,000
Reserve 60,000 Debtors 1,35,000
Creditors 40,000 Cash 10,000
4,40,000 4,40,000
The partnership were sharing profits and losses in the ratioof 3:2:1 respectively. They decide to distribute the cash as and
144
when it was received. Urmila agreed to work as receiver on aremuneration of Rs. 20,000/- and to bear all expenses ofrealisation. When it was completed, he found that he had spent Rs.4,200/- towards the expenses. Following details of realisation wereavailable:
December 2013 Rs. 32,000January 2014 Rs. 2,42,000February 2014 Rs. 1,40,000There was some stock of the book value of R. 36,000 lying
unsold and it was taken over by Karishma an agreed value of Rs.20,000.
You are required to prepare the following (Using ExcessCapital Method)(a) Statement of surplus capital(b) Statement showing monthly distribution of cash available.
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145
5
AMALMAGATION OF FIRMS I
UNIT STRUCTURE
5.0 Objectives
5.1 Introduction
5.2 Meaning and Objectives of Amalgamation
5.3 Accounting procedures for closing books of old firm(amalgamating firm):
5.4 Accounting Entries in the Books of the New Firm[Amalgamated Firm]:
5.0 OBJECTIVES
After studying the unit the students will be able to:
• Define the term Amalgamation.
• Calculate the amount of Purchase Consideration
• Understand the accounting procedure for amalgamation.
5.1 INTRODUCTION
Business firms grow and expand through businesscombinations. Such combinations also help firms to secureoperating efficiencies, avoid competition among them andeconomies of scale.
Amalgamation means merger or combination of two or moreexisting firms. Two or more existing business entities mergedthemselves into one entity, is known as amalgamation. Afteramalgamation of firms, amalgamating firms [existing/old firms] getdissolved, lose their existences and new firm is formed which iscalled as amalgamated firm.
146
5.2 MEANING AND OBJECTIVES OFAMALGAMATION
Meaning A partnership firm is formed with two or more persons. But it
can also be formed in any of the following ways.
A) When two or more sole proprietors form new partnership firm,
B) When one existing partnership firm absorbs a soleproprietorship.
C) When one existing partnership firm absorbs another partnershipfirm.
D) When two or more existing partnership firm from newpartnership firm.
The ICAI has issued Accounting Standard A.S. 14. Accountingfor amalgamation. It is mandatory in nature. The standard classifiesthe amalgamation into two categories, namely. a) Amalgamation in nature of merger.b) Amalgamation in nature of purchase.
According to Accounting Standard A.S14, the termamalgamation includes absorptions. [Acquisitions]
There are two methods of accounting for Amalgamations, asper A.S.14.1. Pooling of interest method [confined to amalgamation of
companies only]2. Purchase method.
Objectives of Amalgamation
1. To enlarge the size of the firm.
2. To reduce overhead or expenses.
3. To avoid cut throat competition among the firms carrying onsimilar / complementary business
4. To achieve both external and internal economies of large scalei.e. purchasing bulk quantities, saving in transportationexpenses etc.
5. To increase productivity and profitably of the firm.
6. To expand the business operations by having more resourceslike broader capital base, more man power.
147
Consequences Primarily the following consequences take place uponamalgamation.
1. Dissolution of existing amalgamating firms.
2. Formation of a new firm [called amalgamated firm] to take overbusiness of existing / old firms.
There are given the following points in the practical problem:
1. Balance sheet of two existing firms / sole Proprietary concernson date of amalgamation, which enables to close books of oldfirms, transferee capitals balances to new firm.
2. Terms and conditions of amalgamations i.e. revaluation ofvarious asset and liabilities of both the firms, valuation ofGoodwill, disposal of assets or liabilities not taken over by newfirm, certain more transaction before or after amalgamation.
The students are required to :
1. Ascertain purchase consideration.
2. Close books of old firms.
3. Accounting entries in books of new firm.
a. For recording Purchase Consideration.
b. Goodwill treatment.
c. Capital adjustment upon amalgamation.
d. Elimination of inter firm Owings, (if any)
4. Preparation of Balance Sheet of the New Firm.
Purchase Consideration:
Purchase consideration is the agreed amount to be paid bythe purchasing firm to old firm. It can be calculated as follows:
A) Net asset method - Under this method, purchase considerationis equal to net asset taken over by the New firm at agreed values.Net asset means all assets taken over at agreed values / other wiseat book values less liabilities taken over by the purchasing firm.
148
The purchase consideration is calculated as under:
` `
A. Agreed values of assets taken overGoodwill XLand & Building XStock XSundry Debtors XCash & Bank X XX
Less: B. Agreed values of liabilitiesassumedSundry Creditors XBill Payable XBank Loan XOutstanding Expenses X [XX]
Purchase consideration [A-B] XXXX
You are required to take care about the following terms :
i) Business is taken over, implies all assets & Liabilities are taken over at agreed value unless mentioned that particular asset or liability is not taken.
ii) Cash / Bank balance should be included in Purchase Consideration, only to the extent taken over by the new firm & that much balance should be transferred to Realisation a/c.
iii) If it is mentioned that only trade liabilities are taken over, then creditors and bills payable are taken over by the by new firm, not any other liabilities.
B) Lump sum method - under this method amount of purchaseconsideration is given in lump sum. There is no need to calculatepurchase consideration as it is directly given in the sum i.e. in theproblem.
However, difference in Purchase consideration and netassets taken over, may be Goodwill or Capital Reserve.
Goodwill = Purchase consideration less Net Assets taken overCapital Reserve = Net Assets less Purchase consideration.
149
5.3 ACCOUNTING PROCEDURES FOR CLOSINGBOOKS OF OLD FIRM (AMALGAMATING FIRM):
Accounting entries in the books of existing firm / soleproprietor :
Open following ledger accounts:1. Realisation account.2. Partner’s Capital Account (columnar)3. New firm account.4. Cash / Bank account.
Journal Entries in the books of old firm [Amalgamating firm]
STEP I
A] for transferring Balance Sheet items at book value:
1. For transferring sundry assets:Realization a/c Dr.
To Sundry Assets [individually]
Notes : All the assets should be transferred at book values.
� Cash/Bank bal. should be transferred to the extent it is takenover.
� Debtors should be transferred at gross amount; R.D.D shouldbe credited to Realization a/c.
� Provision for depreciation should be credited to Realization a/c.
� Fictitious assets and accumulated losses should not betransferred to Realisation a/c.
� All the assets should be transferred whether taken over or notby the new firm.
2. For transferring accumulated losses:Partner Capital a/c Dr.
To Profit & Losses a/c
[In old profit sharing Ratio]
3. For transferring Liabilities:Sundry Liabilities a/c Dr.
To Realization a/c
4. For transferring Reserves :Reserves a/c Dr.
To Partners’ Capital a/c [old ratio]
150
STEP II
1. For recording Purchase consideration:
New Firm a/c Dr.
To Realization a/c
2. For Assets taken over by partner:
Partners Capital a/c Dr.
To Realisation a/c
3. For sale of Asset:
Cash/Bank a/c Dr.
To Realisation a/c
4. For liabilities taken over by partner:
Realisation a/c Dr.
To. Partner Capital a/c
5. For payment of liabilities not taken over:
Realisation a/c Dr.
To Cash / Bank a/c
6. For realization expenses:
Realisation a/c Dr.
To Cash a/c, or,
To Partners Capital a/c [if, paid by
the partner]
7. For asset taken over by creditor in settlement of liabilities:No entry, as both accountants are already transferred toRealisation a/c. & their accounts are already closed.
8. For transferring profit on Realisation:
Realization a/c Dr.
To Partners Capital a/c [old p.s.r.]
9. For transferring loss on Realisation:
Partners Capital a/c [old p.s.r.] Dr.
To Realisation a/c
10. For transferring Partners Capital Bal:
Partners Capital A/c [individually] Dr.
To New Firm a/c
151
11. For final settlement:
Partners Capital a/c Dr.
To Cash a/c
After passing above entries new firms a/c is automaticallyclosed and books of old. firm [amalgamating firm[ are closed.
5.4 ACCOUNTING ENTRIES IN THE BOOKS OF THENEW FIRM [AMALGAMATED FIRM]:
• For recording various Assets & liabilities taken over,
A. If net acquired assets is equal to purchase consideration.[If it is calculated by the Net Asset method]
Sundry Assets a/c Dr.
To Liabilities a/cTo A Capital a/cTo B Capital a/cTo R.D.D.A/C [if any]
B. If net acquired assets is more than purchase consideration:
Sundry Assets a/c Dr.To Liabilities a/cTo A Capital a/cTo B Capital a/c.To R.D.D.A/C [if any]To Capital Reserve a/c
C. If net acquired assets is less than the amount of purchaseconsideration: [P.C]
Sundry Assets a/c Dr.Goodwill a/c Dr.*
To Liabilities a/cTo A Capital a/cTo B Capital a/cTo R.D.D. A/C [if any]
Note :
� In case p.c. is taken by lump sum method, GOODWILL ORCAPITAL RESERVE may be bal. fig.
� Partner’s capital accounts shall be credited by the amountstransferred from old firm.
� Similar entry should be passed for recording various Assets &liabilities taken over from other firm.
152
• Goodwill treatment
For writing off Goodwill in new profit sharing ratio.
All Partners Capital A/c Dr.(In New Profit Sharing Ratio)
To Goodwill a/c(Total Goodwill)
• For elimination inter firm debts:
Before amalgamation one firm might have sold goods to anotherfirm, which may have remained unpaid, e.g. A sold goods worth `25,000 on credit to B..IF A & B are amalgamated as AB & CO.,sundry Debtors of A includes B ` 25,000 & sundry creditors of Bincludes A ` 25,000, after merger, AB & co. have to cancel / reduce/ eliminate S. Debtors as well as S. Creditors by ` 25,000.
Sundry Creditors a/c/Loan a /c[taken] Dr. To Sundry Debtors a/c/Loan a/c [given]
Capital Balance transferred from old firm may not be in their newP.S.R., Total Capital of the new firm may fixed & to be maintainedfor individual capital contribution of the partners working should beas under:
• For Capital adjustment in new P.S.R.
Partner A B C D
Capital bal. transferred from old firm x x x x
Less: Goodwill written off [x] [x] [x] [x]
Balance left x x x x
Fixed Capital in new P.S.R ……………… [x] [x] [x] [x]
Surplus or [shortage] in capital to beadjusted
x x x [x]
Entry:fortransferring excesscapital:
Partner’s capital a/c Dr
To Partner’s Current a/c / Cash a/c, or To Partner’s Loan a/c
Entry for adjustingshortage in capital:
Partner’s Current a/c / Cash a/c /Partners Loan a/c
Dr.
To Partner’s Capital a/c
153
• Preparation of Balance Sheet of the New Firm:
Add up all individual assets of both firms taken over by thenew firm at agreed value, show on the Asset side of the BalanceSheet, R.D.D should be deducted from S. Debtors on assets side ofthe Balance Sheet.
Add up all individual liabilities of both firms taken over by thenew firm at assumed value, show on the liability side of the BalanceSheet.
All the above figures should be taken from purchaseconsideration, after considering additional entries passed in thebooks of new firm.
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154
6
AMALGAMATION OF FIRM II
Unit Structure6.0 Objectives6.1 Solved Problems6.2 Exercises
6.0 OBJECTIVES
After studying the unit the students will be able to solve thepractical problems on amalgamation.
6.1 SOLVED PROBLEMS
Illustrations : 1A and B carrying on independent business and their position
on 31.03.2013 is reflected in the Balance Sheet given below:
Liabilities
A
`̀̀̀
B
`̀̀̀ Assets
A
`̀̀̀
B
`̀̀̀
SundryCreditors
2,20,000 94,000 Stock-in-trade
3,40,000 1,96,000
OutstandingExpenses
1,500 4,000 SundryDebtors
1,78,000 74,000
Bills Payable 25,000 --- Cash 2,000 400
Capital 3,06,000 1,91,000 Bank 26,000 15.000
Furniture 5,500 3.600
Investments 1,000 ---
5,52,500 2,89,000 5,52,500 2,89,000
Both of them to form a partnership firm from 1.04.2013 in thestyle of AB & CO. on the following terms:
a] The capital of the partnership firm would be ` 4,80,000 and tobe contributed by them in the ratio of 2:1.
b] The assets of individual business to be revalued as under:
Assets of A : Stock to be written - down by 15% doubtfuldebtors estimated ` 16,526 furniture to berevaluated at `4,000, market value ofinvestments at `2,000.
155
Assets of B : Stock to be written - up by 10%, provision fordoubtful debt required at ` 7,100, rest theassets are the be taken over at book-value.
c] The firm takes over only trade liabilities.
You are required to pass necessary Journal Entries in thebooks of A and B. also prepare the opening Balance Sheet of thefirm as on 1.04.2013.
Solution:In the books of A
Date Particulars L.F. `̀̀̀ Dr. `̀̀̀ Cr.
1.04.13 Realisation a/c Dr. 5,51,000
To Stock a/c 3,40,000
To Sundry Debtors a/c 1,78,000
To Cash a/c 500
To Bank a/c 26,000
To Furniture a/c 5,500
To investment a/c 1,000
[being transfer of assets at bookvalue]
Creditors Dr. 2,20,000
Outstanding Expenses a/c Dr. 1,500
Bills Payable a/c Dr. 25,000
Realisation a/c 2,46,500
[being transfer of liabilities atbook value]
Realisation a/c Dr. 1,500
To Cash 1,500
[being outstanding expensespaid]
AB & Co. a/c Dr. 2,37,974
To Realisation a/c 2,37,974
[being Purchase considerationdue]
A’s capital a/c Dr. 68,026
To Realisation a/c 68,026
[being realization losstransferred to Capital a/c]
A’s capital a/c Dr. 2,37,974
To AB & Co. a/c 2,37,974
[being balance in capital a/ctransferred to close the bookson account]
156
In the books of B
Date Particulars L.F. Amount Amount
1.04.13 Realisation a/c Dr. 2,85,000
To Stock a/c 1,96,000
To Sundry Debtors a/c 74,000
To Cash a/c 400
To Bank a/c 11,000
To Furniture a/c 3,600
[being transfer of assets at bookvalue]
Realisation a/c Dr. 4,000
To Bank a/c
[being outstanding expensespaid]
4,000
Creditors Dr. 94,000
Outstanding Expenses a/c Dr. 4,000
To Realisation a/c 98,000
[being transfer of liabilities atbook value]
AB & Co. a/c Dr. 2,03,500
To Realisation a/c 2,03,500
[being Purchase considerationdue]
B’s capital a/c Dr. 12,500 12,500
To Realisation a/c
[being realization losstransferred to Capital a/c]
A’s capital a/c Dr. 2,03,500
To AB & Co. a/c 2,03,500
[being balance in capital a/ctransferred to close the books ofaccount]
157
Balance Sheet of AB & Co. as on April, 1st 2013.
Liabilities
`̀̀̀ `̀̀̀ Assets `̀̀̀ `̀̀̀
PartnersCapital
Furniture 7,600
A 3,20,000 Investment 2,000
B 1,60,000 4,80,000 Stock 5,04,600
SundryCreditors
3,14,000 SundryDebtors
2,52,000
BillsPayable
25,000 RDD (23,626) 2,28,374
Bank 37,000
Cash 90
brought inby A
82,026
82,926
Less: Paidto B
(43,500) 39,426
8,19,000 8,19,000
Calculation of purchase consideration :
Particulars A ` ` ` ` B `̀̀̀ Total `̀̀̀
A) Assets taken over.
Furniture 4,000 3,600 7,600
Investments 2,000 - 2,000
Stock 2,89,000 2,15,600 5,04,600
Sundry debtors 1,78,000 74,000 2,52,000
Bank 26,000 11,000 37,000
Cash 500 400 900
A 4,99,500 3,04,600 8,04,100
B Less: Liabilities assumed
Sundry Creditors 2,20,000 94,000 3,14,000
Bills Payable 25,000 - 25,000
R.D.D 16,526 7,100 23,626
B 2,61,526 1,01,100 3,62,626
Net Assets taken over by the AB& Co Purchase consideration(A-B)
2,37,974 2,03,500 4,41,474
158
A B
Fixed Capital as per agreement ` 3,20,000 1,60,000
Less : Capital balance transferred ` (2,37,974) (2,03,500)
Cash to be introduced + / withdrawn [-] 82,026 (43,500)
Illustration 2Two partnership firm, carrying on business under the style of
Anand & Co. [partners N & C] and Ashok & Co. [partners K & P]respectively, decided to amalgamate into 2 A & Co. with effect from01st April 2014. the respective Balance Sheet of the both the firmsas on 31st March 2014 are a below:
Liabilities Anand &Co `̀̀̀
Ashok &Co `̀̀̀
Assets Anand &Co `̀̀̀
Ashok &Co `̀̀̀
Capital : C 1,90,000 Goodwill 50,000
K 1,00,000 Land &Building
1,00,000 -
P 20,000 Stock 2,00,000 50,000
Bank Loan 1,50,000 SundryDebtors
1,00,000 1,00,000
Creditors 1,00,000 95,000 Cash inhand
- 15,000
Capital N 40,000
Total ` 4,40,000 2,15,000 Total ` 4,40,000 2,15,000
Profit sharing ratio are N & C = 1 :2, K & P = 1 : 1. Agreed termsare :
A) Land & Building to be devalued by 20%.
B) All stocks are to be appreciated by 50%.
C) Anand & Co owes `50,000 to AK & Co. as on 31st March 2014.This is settled at ` 20,000.
D) Goodwill to ignored for the purpose of amalgamation.
E) The fixed capitals in the new firm 2A & co. are to be N ` 20,000,C ` 30,000, K `10,000 & P ` 40,000.
F) C take over the Bank loan of Anand & Co., & gifted to N theamount of money to be brought in by N to make up his capitalcontribution.
G) K is paid off in cash from AK & Co. P bring in sufficient cash tomake up his required capital contribution. Pass necessaryJournal entries to close the books of both firms.
Give Balance Sheet of 2A & Co, as on 01st April, 2014.
159
Solution:In the book of Anand & Co.
Date Particulars L.F. Dr. `̀̀̀ Cr. `̀̀̀
31.03.14 Realisation a/c 4,00,000
To land & Building a/c 1,00,000
To stock a/c 2,00,000
To Sundry Debtorsa/c
1,00,000
[being various assetstransferred at bookvalue]
Sundry Creditors a/c 1,00,000
Bank Loan a/c 1,50,000
To Realisation a/c 2,50,000
[being various liabilitiestransferred at bookvalue]
2A & co. a/c 4,10,000
To Realisation a/c 4,10,000
[being purchaseconsideration due]
Realisation a/c Dr. 1,50,000
To C’s Capital a/c 1,50,000
[being Bank loan takenover by C]
Realisation a/c Dr. 1,10,000
To N’s capital a/c 36,667
To C’s Capital a/c 73,333
[profit on realizationtransferred to partner’scapital]
C’s capital a/c. Dr. 23,333
To N’s capital a/c 23,333
[being Deficit in N’scapital gifted by C]
N’s capital a/c Dr. 20,000
C’s capital a/c 3,90,000
To 2A & co. 4,10,000
[balanced in capitalaccounts of the partnerstransferred to 2A & Co.]
160
In the Books of Ashok & Co.
Date Particulars L.F. Dr. Cr.
31.03.14 Realisation a/c 2,00,000
To Goodwill a/c 50,000
To stock a/c 50,000
To Sundry Debtors a/c 1,00,000
[being various assetstransferred at book value]
Sundry Creditors a/c 95,000
To Realisation a/c 95,000
[being creditors transferredat book value]
2A & co. a/c 50,000
To Realisation a/c 50,000
[being purchaseconsideration due]
K’s capital a/c 27,500
P’s capital a/c 27,500
To Realisation a/c 55,000
[being loss on realizationtransferred to partnersequally]
Bank a/c 47,500
To P’s capital a/c 47,500
[being necessary amountbrought in by P to make uphis required capitalcontribution]
K’s capital a/c. 62,500
To Bank a/c 62,500
[Being excess capitalrefunded]
K’s capital a/c 10,000
P’s capital a/c 40,000
To 2A & co. 50,000
[balance in capital accountsof the partners transferredto 2A & Co.]
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Calculation of Purchase Consideration
Assets Taken Over Anand & Co. `̀̀̀ AK & Co. `̀̀̀ Total `,`,`,`,
Land & Building 80,000 --- 80,000
Stock 3,00,000 75,000 3,75,000
Sundry Debtors 1,00,000 70,000 1,70,000
(A) 4,80,000 1,45,000 6,25,000
Liabilities taken over
Sundry Creditors (B) 70,000 95,000 1,65,000
PurchaseConsideration [A-B]
4,10,000 50,000 4,60,000
Balance Sheet of 2A & Co. 1 April 2014
Liabilities `̀̀̀ Assets `̀̀̀
Partner’s Capital : Land & Building
80,000
N 20,000 Stock 3,75,000
C 30,000 Sundry Debtors
K 10,000 [1,70,000-20,000]
1,50,000
P 40,000
1,00,000
Sundry Creditors 1,65,000
Less : Inter-co.
Owing 20,000 1,45,000
C’s Loan 3,60,000
Total ` ` ` ` 6,05,000 Total `̀̀̀ 6,05,000
After adjustment of reduction in inter company owing by`30,000.
C’s capital balance transferred 3,90,000 however bal.required was 30,000. Hence excess capital transferred to c’s loana/c [3,90,000 30,000].
Sundry creditors A/c Dr. 20,000To Sundry Debtors A/c 20,000
Inter firm owing eliminated in the books to firm Z A & Co., asboth firms are magead into one.
162
Illustrations : 3
A and B and C and D are Partner’s in A & Co and C & Co.respectively. A & B are sharing in the ratio 3,2 and C & D aresharing in equal proportion. Their balance sheets as on 31st
December 2014 were as under.
Balance Sheet of A & Co as on 31st December, 2014.
Liabilities `̀̀̀ Assets `̀̀̀
Capital Accounts Machinery 60,000
A 75,000 Furniture 5,000
B 50,000 Stock 50,000
Reserves 40,000 Debtors 75,000
Loan from UTI 20,000 Bank 7,000
Bank
Creditors 15,000 Cash 3,000
Total ` 2,00,000 Total ` 2,00,000
Balance Sheet of C.D & Co. on 31st December 2014
Liabilities `̀̀̀ Assets `̀̀̀
Capital Accounts Goodwill 25,000
C 60,000 Furniture 5,000
D 55,000 Stock 70,000
Reserves 25,000 Debtors 45,000
Loan from IDBI 10,000 Bank 3,000
Cash 2,000
Total ` 1,50,000 Total ` 1,50,000
They decided to amalgamate and form a new firm ABCD &Co. on 1st January 2015.
Terms of amalgamation :
1) The new firm shall take over all the assets and liabilities of boththe firms.
2) Provision for doubtful debts shall be made at 5% on debtors.
3) Goodwill is to be valued at 2 years purchase of the last 4 yearsaverage profits.
163
4. The profits of the firms are.
Year A & Co. ` ` ` ` C & Co. ` ` ` `
2011 30,000 20,000
2012 45,000 30,000
2013 35,000 40,000
2014 54,000 30,000
5. Machinery of A & Co. is undervalued by ` 15,000. This valueis now to be adjusted property.
You are required to give :
1) Ledger Accounts in the books of both the firms. 2) Balance Sheet of ABCD & Co.
Solution : In the books of A & Co.
Realisation A/c Dr. Cr.
Particulars `̀̀̀ `̀̀̀ Particulars `̀̀̀ `̀̀̀
To Machinery 60,000 By Creditors 15,000
To Furniture 5,000 By UTI Loan 20,000
To Stock 50,000 By ABCD & Co 2,58,250
To Debtors 75,000
To Bank 7,000
To Cash 3,000
To Profit on
Realisation
Transferred to
A 55,950
B 37,300 93,250
Total ` 2,93,250 Total ` 2,93,250
Partner’s Capital A/cDr. Cr.
Particulars A B Particulars A B
To ABCD &Co.
1,54,950 1,03,300 By Balanceb/d
75,000 50,000
By Reserve 24,000 16,000
ByRealisationProfit
55,950 37,300
1,54,950 1,03,300 1,54,950 1,03,300
164
ABCD & Co. A/cDr. Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation A/c 2,58,250 By Partner’s CapitalA/c A
1,54,950
B 1,03,300
2,58,250 2,58,250
In the Books of C & Co.Realisation A/c.
Dr. Cr.
Particulars `̀̀̀ `̀̀̀ Particulars `̀̀̀ `̀̀̀
To Goodwill 25,000 By IDBI Loan 10,000
To Furniture 5,000 By ABCD &Co.
1,72,750
To Stock 70,000
To Debtors 45,000
To Bank 3,000
To Cash 2,000
To Profit onRealisationtransferred to
C 16,375
D 16,375 32,750
Total ` 1,82,750 Total `̀̀̀ 1,82,750
Partner’s Capital A/c.Dr. Cr.
Particulars `̀̀̀ `̀̀̀ Particulars `̀̀̀ `̀̀̀
To ABCD & Co. 88,875 83,875 By Balance b/d 60,000 55,000
By Reserves 12,500 12,500
By Realisation 16,375 16,375
88,875 83,875 88,875 83,875
ABCD & Co. A/c.Dr. Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation A/c 1,72,750 By Partner’s Capital 88,875
C
D 83,875
1,72,750 1,72,750
165
Balance Sheet of ABCD & Co. as on 1st Jan. 2015
Particulars `̀̀̀ `̀̀̀ Assets `̀̀̀ `̀̀̀
Capital A/c’s Goodwill 1,42,000
A 1,54,950 Furniture 10,000
B 1,03,300 Machinery 75,000
C 88,875 Stock 1,20,000
d 83,875 4,31,000 Debtors 75,000
Creditors 15,000 45,000
Uti Bank Loan 20,000 1,20,000
IDBI Loan 10,000 Less :RDD
6,000 1,14,000
Bank 10,000
Cash 5,000
Total ` 4,76,000 Total ` 4,76,000
Working Notes :
a) Goodwill Valuation Average Profit Method.
Year A & Co C & Co
2010 30,000 20,000
2011 45,000 30,000
2012 35,000 40,000
2013 54,000 30,000
1,64,000 1,20,000
∴ Average Profit = 1.64,000 / 4 1,20,000 / 4 = 41,000 = 30,000
Goodwill = 2 year purchase of Average profit = 41,000 x 2 = 30,000 x 2
= 82,000 = 60,000
166
Working Note Number : 2
Purchase Consideration :
Particulars A & Co. `̀̀̀ C & Co. `̀̀̀ Total `,`,`,`,
Assets taken over at agreedvalues
Goodwill 82,000 60,000 1,42,000
Machinery 75,000 - 75,000
Furniture 5,000 5,000 10,000
Stock 50,000 70,000 1,20,000
Debtors 75,000 45,000 1,20,000
Bank 7,000 3,000 10,000
Cash 3,000 2,000 5,000
A 2,97,000 1,85,000 4,82,000
Less : Liabilities taken overat agreed values
UTI Bank Loan 20,000 - 20,000
IDBI Bank Loan - 10,000 10,000
Creditors 15,000 - 15,000
RDD 5% 3,750 2,250 6,000
B 38,750 12,250 51,000
Purchase Consideration (A-B) `̀̀̀
2,58,250 1,72,750 4,31,000
Total columns is useful for preparing Balance Sheet of the newfirm.
Illustration : 4.
Two independent firms of Partner’s ship carrying onbusiness under the name and style of XY and sons and ABAssociates agreed to amalgamate their business in to one firm from31st December, 2013 XY & Sons had two Partner’s X and Ywhereas AB & Associates has two Partner’s A and B The partner’sshared the profits and losses in ratio of their capitals. Their balancesheets as on 31st December, 2013 were as under.
167
XY & Sons
Liabilities `̀̀̀ Assets `̀̀̀
Capital A/c’s Furniture 5,600
X 56,000 Building 56,000
Y 28,000 Stock 28,560
Creditors 20,000 Debtors 21,000
Bills Payable 8,000 Bank 7,840
Mortgage Loan 7,000
Total ` 1,19,000 Total ` 1,19,000
AB & Associates
Liabilities `̀̀̀ Assets `̀̀̀
Capital A/c’s Furniture 7,000
A 33,600 Stock 25,620
B 22,400 Debtors 28,000
Creditors 28,000 Investments
21,000
Bills Payable 7,000 Bank 9,380
Total ` 91,000 Total ` 91,000
Terms of amalgamations were as under:-
a) The new firm shall carry on business under the name and styleAXBY & Associates
b) Mortgage Loan of XY and Sons and investments of AB &Associates shall not be taken over by the new firm.
c) Goodwill of XY & Sons was valued at ` 10,200/- and that of AB& Associates at ` 12,000/-.
d) Building of XY and sons was taken as undervalued by `14,000/-.
e) Stock of XY and Sons to be depreciated by ` 5,600/- and that ofAB and Associates to be appreciated of ` 2,800/-.
f) 5% may be provided as Bad Debts Reserve of both the firms.
g) The capital of the new firm shall be ` 1,12,000/- which will becontributed by each partner in the profit sharing ratio i.e. x-3, Y-2, A-3, B-2 to be adjusted through current accounts.
You are required to close the books of both the firms bymeans of journal entries and also give necessary journal entries inthe books of new firm. Also prepare the balance sheet of the newfirm after the amalgamation.
168
SolutionJournal entries in the books of XY & Sons.
Sr. Particulars Dr. `̀̀̀ Cr. `̀̀̀
1. Relisation A/c. Dr. 1,11,560
To Furniture 5,600
To Building 56,000
To Stock 28,560
To Debtors
(Being Sundry Assetstransferred at Book Value)
21.000
2. Creditors A/c. Dr. 20,000
Bills Payable A/c. Dr. 8,000
To Realisation A/c 28,000
(Being sundry liabilitiestransferred at Book Value)
3. Mortgage Loan A/c. Dr. 7,000
To Bank A/c. 7,000
(Being Mortgage Loan repaid)
4. Realisation A/c. Dr. 840
To Bank A/c 840
(Being remaining bank balancetransferred to Realisation)
5. New Firm A/c. Dr. 1,01,550
To Realisation A/c. 1,01,550
(Being sale of businessrecorded)
6. Realisation A/c. Dr. 17,550
To X’s Capital A/c 11,700
To Y’s Capital A/c 5,850
(Being profit on Realisationtransferred to Partner’s capitalin profit sharing ratio.)
7. X’s Capital A/c. Dr. 67,700
Y’s Capital A/c. Dr. 33,850
To New Firm A/c 1,01,550
(Being Capital Accounts of boththe Partner’s transferred to newfirm account)
169
Dr. Realisation A/c. Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Furniture 5,600 By Creditors 20,000
To Building 56,000 By BillsPayable
8,000
To Stock 28,560 By AX By A/c 1,01,550
To Debtors 21,000
To Bank 840
To ProfitTransferred toporter’s capital
X : 11,700
Y : 5,850 17,550
Total `̀̀̀ 1,29,550 Total `̀̀̀ 1,29,550
Dr. AXBY A/c. Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation 1,01,550 By X Capital 67,700
By Y Capital 33,850
1,01,550 1,01,550
Dr. Partner’s Capital A.c. Cr.
Particulars XXXX YYYY Particulars XXXX YYYY
To AXB y.s A/c 67,700 33,850 By BalanceB/d
56,000 28,000
ByRealisationA/c
11,700 5,850
67,700 33,850 67,700 33,850
170
Journal Entries in the books of AB & Associates.
Sr. Particulars Dr. `̀̀̀ Cr. `̀̀̀
1. Realisation A/c. Dr. 91,000
To Furniture 7,000
To Stock 25,620
To Debtors 28,000
To Investment 21,000
To Bank 9,380
(Being Sundry assetstransferred to Realisation)
2. Creditors A/c. Dr. 28,000
Bills Payable A/c. Dr. 7,000
To Realisation A/c 35,000
(Being sundry liabilitiestransferred to Realisation)
3. New Firm A/c. Dr. 48,400
To Realisation A/c 48,400
(Being sale of businessrecorded)
4. A’s Capital A/c Dr. 12,600
B’s Capital A/c Dr. 8,400
To Realisation A/c 21,000
(Being investments distributedamongst Partner’s
5. Realisation A/c Dr. 13,400
To A’s Capital 8,040
To B’s Capital 5,360
(Being profit on Realisationtransferred to Partner’s capital.)
6. A’s Capital A/c Dr. 29,040
B’s Capital A/c Dr. 19,360
To New Firm A/c 48,400
(Being A & B’s Capitaltransferred to new firm)
171
Dr. Realisation A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Furniture 7,000 By Creditors 28,000
To Stock 25,620 By Bills Payable 7,000
To Debtors 28,000 By New Firm 48,400
To Investments 21,000 By Partner’s Capital 21,000
To Bank 9,380
To Profit transferred
To Capital A/c
A 8,040
B 5,360 13,400
Total ` 1,04,400 Total ` 1,04,400
Dr. Partner’s Capital A/c Cr.
Particulars AAAA B Particulars AAAA BBBB
To Realisation 12,600 8,400 By Balance b/d 33,600 22,400
To New Firm 29,040 19,360 By Realisation 8,040 5,360
41,640 27,760 41,640 27,760
Dr. A X B Y is A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation 48,400 By Partner’s Capital
A 29,040
B 19,360
Total ` 48,400 Total ` 48,400
In the books of AXBY (New Firm)
Journal Entries :
Sr. Particulars Debit. `̀̀̀ Credit. `̀̀̀
1. Furniture A/c Dr. 5,600
Building A/c Dr. 70,000
Stock A/c. Dr. 22,960
Debtors A/c Dr. 21,000
Bank A/c. Dr. 840
Goodwill A/c Dr. 10,200
To Creditors A/c 20000
172
To Bills Payable A/c 8,000
To RDD A/c 1,050
To X’s Capital A/c 67,700
To Y’s Capital A/c 33,850
(Being assets and liabilities ofXY & Sons taken over)
2. Furniture A/c. Dr. 7,000
Stock A/c. Dr. 28,420
Debtors A/c. Dr. 28,000
Bank A/c. Dr. 9,380
Goodwill A/c. Dr. 12,000
To Creditors A/c 28,000
To Bills Payable A/c 7,000
To RDD A/c 1,400
To A’s capital A/c 29,040
To B’s capital A/c 19,360
(Being assets and liabilities ofAB & Associates taken over)
3. X Capital A/c. Dr. 6,660
Y Capital A/c. Dr. 4,440
A Capital A/c. Dr. 6,660
B Capital A/c. Dr. 4,440
To Goodwill A/c. 22,200
(Being Goodwill written of innew P.S.R.)
4. X Capital A/c. Dr. 27,440
Y Capital A/c. Dr. 7,010
To X Current A/c 27,440
To Y Current A/c 7,010
(Being excess in capital accountof X & Y transferred to currentaccount)
5. A’s Current A/c. Dr. 11,220
B’s Current A/c. Dr. 7,480
To A’s Capital A/c 11,220
To B’s Capital A/c 7,480
(Being deficit of capital accountadjusted through currentaccount.)
173
Partner’s Capital A/c
Particulars
X Y A B Particulars X Y A B
ToGoodwill
6,660 4,440 6,660 4,440 By Old Firm 67,700 33,850 29,040 19,360
To CurrentA/c
27,440 7,010 - - By CurrentA/c
- - 11,220 7,480
ToBalanceC/d
33,600 22,400 33,600 22,400
Total 67,700 33,850 40,260 26,840 67,700 33,850 40,260 26,840
Balance Sheet of AXBY & Co as on 1st January, 2014
Liabilities `̀̀̀ Assets `̀̀̀
Capital A/c’s Furniture 12,600
X 33,600 Building 70,000
Y 22,400 Stock 51,380
A 33,600 Debtors 49,000
B 22,400 1,12,000 Less:Rdd (2,450) 46,550
Creditors 48,000 Bank 10,220
Bills Payable 15,000 Current A/c’s
Current A/c
X 27,440 A 11,220
Y 7,010 34,450 B 7,480 18,700
Total ` 2,09,450 Total ` 2,09,450
Working Notes
Purchase Consideration:
Particulars XY & Sons AB & Associates
Assets taken over at agreed valuesFurniture 5,600 7,000Building 70,000 -Stock 22,960 28,420Debtors 21,000 28,000Bank 840 9,380Goodwill 10,200 12,000
Total A 1,30,600 84,800
Less: Liabilities taken over atagreed valuesCreditors 20,000 28,000Bills Payable 8,000 7,000RDD 1,050 1,400
B 29,050 36,400
Purchase Consideration: (A - B) 1,01,550 48,400
174
Illustration : 5R & Y were partners in O & Co. decided to amalgamate with I
& Co, where D & K, partner : New firm called as AK & Co.
As on 31st December 2013 the balance sheets of the firmswere as follows.
O & Co.
Liabilities `̀̀̀ Assets `̀̀̀
Capital A/c’s Freehold Property 74,000
R 1,53,000 Furniture & Fixtures 18,000
Y 1,10,000 Motor Vehicles 30,000
Creditors 52,000 Stocks 83,000
Investments 8,000
Debtors 68,000
Bank Balance 34,000
Total 3,15,000 Total 3,15,000
I & Co.
Liabilities `̀̀̀ Assets `̀̀̀
Capital A/c’s Property 1,00,000
D 1,13,000 Furniture & Fixture 14,000
K 74,000 Vehicles 18,000
Creditors 60,000 Stock 66,000
Bank Overdraft 9,000 Debtors 58,000
Total 2,56,000 Total 2,56,000
The terms and conditions of amalgamation were as follows. A. Provision for doubtful debts @ 5% to be made in respect of
debtors and a provision for discount receivable @ 2.5 % to bemade in respect of creditors.
B. A. K. & Co. to take over the old Partner ship assets @following values.
O & Co. `̀̀̀ Id Co. ` ` ` `
Stock 84,500 63,900
Motor Vehicles 28,000 13,000
Furniture & fixtures 16,000 -
Property 1,00,000 -
Goodwill 63,000 45,000
175
C. The property and fixtures of I & Co. not to be taken over by AK& Co. (these assets were sold for ` 1,35,000 cash on 1st
January, 2013)
D. Y to take over her firm’s investments at a valuation of ` 7,600.
E. The capital of AK & Co. to be ` 5,40,000 and to be contributedby the Partner’s in profit sharing rations 6:5 : 4:3 anyadjustment to be made in cash.
F. R. Y were sharing in 4:3, D K were sharing in 3:2 ratio.
You are required to give ledger accounts closing the books of oldPartner ship firms and also prepare the balance sheet of AK & Co.
Solution:In the books of O & Co.
Dr. Realisation A/c Cr.
To Property 74,000 By Creditors 52,000
To Fixtures 18,000 By New Co 3,05,400
To Vehicles 30,000 By Capital 7,600
To Stock 83,000
To Investments 8,000
To Debtors 68,000
To Profit transferredto
R Capital A/c 48,000
Y Capital A/c 36,000 84,000
3,65,000 3,65,000
Dr. Partner’s Capital A/c Cr.
Particulars R Y Particulars R Y
To RealisationA/c
7,600 By balanceB/d
1,53,000 1,10,000
To Cash A/c 19,430 14,570 ByRealisationA/c
48,000 36,000
To A.K. & Co 1,81,570 1,23,830
2,01,000 1,46,000 2,01,000 1,46,000
176
Dr. A.K & Co. A/c Cr.
To Realisation A/c 3,05,400 By Partner’s Capital
R 1,81,570
Y 1,23,830
3,05,400 3,05,400
In the books of I & Co.
Dr. Realisation A/c Cr.
To Property A/c 1,00,000 By Creditors A/c 60,000
To Fixtures A/c 14,000 By AK & Co. 1,18,500
To Vehicles 18,000 By Cash 1,35,000
To Stocks 66,000
To Debtors 58,000
To Profit transferred to
D 34,500
K 23,000 57,500
3,13,500 3,13,500
Dr. Partner’s Capital A/c Cr.
Particulars D K Particulars D K
To Cash 75,600 50,400 By balanceB/d
1,13,000 74,000
To AK & Co. 71,900 46,600 ByRealisation
34,500 23,000
1,47,500 97,000 1,47,500 97,000
Dr. AK & Co. Cr.
To Realisation A/c 1,18,500 By Partner’s Capital
D 71,900
K 46,600
1,18,500 1,18,500
177
Dr. Cash A/c Cr.
To Realisation A/c 1,35,000 By Balance B/d 9,000
By D Capital A/c 75,600
By K Capital A/c 50,400
1,35,000 1,35,000
In the books of AK & Co.
Dr. Cash A/c Cr.
To Y Capital A/c 26,170 By R Capital A/c 1,570
To D Capital A/c 48,100 By Balance C/d 1,16,100
To K Capital A/c 43,400
1,17,670 1,17,670
Dr. Partner’ Capital A/c Cr.
Particulars
R Y D K Particular
s
R Y D K
ToCash
1,570 - - - ByOldFirm
1,81,570 1,23,830 71,900 46,600
ToBalanceC/d
1,80,000 1,50,000 1,20,000 90,000 ByCash
26,170 48,100 43,400
Total 1,81,570 1,50,000 1,20,000 90,000 1,81,570 1,50,000 1,20,000 90,000
Balance Sheet of AK & Co.
As On 1st January 2014
Liabilities `̀̀̀ `̀̀̀ Assets `̀̀̀ `̀̀̀
CapitalA/c’s
Stock 1,48,400
R 1,80,000 Vehicles 41,000
Y 1,50,000 Fixtures 16,000
D 1,20,000 Property 1,00,000
K 90,000 5,40,000 Goodwill 1,08,000
Creditors 1,12,000 Debtors 1,26,000
Less:Prov 2,800 1,09,200 Less:R.D.D
(6,300) 1,19,700
Cash 1,16,100
Total `̀̀̀ 6,49,200 Total `̀̀̀ 6,49,200
178
Working Notes
1. Purchase Consideration
Particulars O & Co. I & Co Total
Assets taken over at agreed valuesStock
84,500 63,900 1,48,400
Vehicles 28,000 13,000 41,000
Fixtures 16,000 - 16,000
Property 1,00,000 - 1,00,000
Goodwill 63,000 45,000 1,08,000
Debtors 68,000 58,000 1,26,000
Prov. For discount on creditors 1,300 1,500 2,800
3,60,800 1,81,400 5,42,200
Less: Liabilities taken over at agreedvalues
Creditors 52,000 60,000 1,12,000
Reserve for Doubtful Debts 3,400 2,900 6,300
Purchase Consideration 3,05,400 1,18,500 4,23,400
Illustration : 6
Amin & Naman were in business on their own account asbusiness. They decided to amalgamate as on 31st December 2013,the new business to be known as Navamin and associates. Thembalance sheets as on that date were as follows:
Amin & Co.
Liabilities `̀̀̀ Assets `̀̀̀
Amin’s Capital 22,000 Freehold Premises 37,000
Sundry Creditors 10,000 Plant 4,000
Bank overdraft 11,000 Stock 1,000
Debtors 1,000
Total 43,000 Total 43,000
Naman & Co.
Liabilities `̀̀̀ Assets `̀̀̀
Naman’s Capital 12,000 Leasehold Premises 15,000
Debtors 4,000
Bank 2,500
Trade Creditors 15,000 Plant 5,000
Stock 500
Total 27,000 Total 27,000
179
The terms and conditions of a amalgamation were as follows:
A) Profits and losses to be shared in the ratio 2:3.
B) Goodwill to be valued at one years purchase of average profitsof previous three years profits.
C) Goodwill to be written off immediately.
D) Freehold property of Amin is not taken over by the firm, whichis sold by him for ` 32,000 on 1.01.2014 and the proceeds eredeposited in the firm’s bank account.
E) Certain assets to be revalued as follows.
Amin & Co `̀̀̀ Naman & Co `̀̀̀
Leasehold premises - 20,000
Debtors - 3,000
Plant 5,000 -
The profits & losses of the two businesses for the past three yearswere as following.
Year Amin & Co Naman & Co
2011 Loss (2,000) 10,000
2012 21,000 15,000
2013 14,600 17,000
You are required to prepare:1. Ledger accounts to close the books of both Amin & Co and
Naman & Co.2. Balance Sheet of the new firin as on 31st December 2013.
Solution In The Books of Amin & Co.
Dr. Realisation Account Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Freehold premises 37,000 By Creditors 10,000
To Plant 4,000 By Bank overdraft 11,000
To Stock 1,000 By Navamin of Ass. 29,200
To Debtors 1,000 By Bank (Sale offreehold premises)
32,000
To bank 32,000
To Profit transferred 7,200
To Amins cap. a/c
82,200 82,200
180
Dr. Amin’s Capital A/c. Cr.
To New Firm A/c. 29,200 By Balance b/d 22,000
By Realisation A/c 7,200
29,200 29,200
Dr. Bank A/c. Cr.
To Realisation 32,000 By Realisation 32,000
32,000 32,000
Dr. Navamin & Associates Cr.
To Realisation 29,200 By Amin’s Capital A/c 29,200
29,200 29,200
In the Books of Naman & Co.
Dr. Realisation A/c Cr.
To Leasehold premises 15,000 By Creditors 15,000
To Plant 5,000 By Navamin &Associates A/c
30,000
To Stock 500
To Debtors 4,000
To Bank 2,500
To Profit transferred toNaman’s Capital A/c
18,000
45,000 45,000
Dr. Naman’s Capital A/c Cr.
To New firm A/c 30,000 By Balance B/d 12,000
By Realisation A/c 18,000
30,000 30,000
Dr. Navamin & Associates A/c Cr.
To Realisation A/c 30,000 By Naman’s CapitalA/c
30,000
30,000 30,000
181
Balance Sheet of Navamin & Associates A/c as on 01st January2014
Liabilities `̀̀̀ Assets `̀̀̀
Capital A/c’s Leasehold Premises 20,000
Amin 29,200 Plant 10,000
Less Goodwill (10,080) Stock 1,500
19,120 Debtors 4,000
Naman 30,000 Bank 34,500
Less Goodwill (15,120)
14,880
Creditors 25,000
Bank overdraft 11,000
Total ` 70,000 Total ` 70,000
Working notes:
I. Goodwill valuation
YEAR AMIN & CO. `̀̀̀ NAMAN & CO `̀̀̀
2011 (2,000) 10,000
2012 21,000 15,000
2013 14,600 17,000
Total Profit 33,600 42,000
Average Profit = 33,600 / 3
= 11,200
42,000 / 3
= 14,000
II. Purchase consideration
Assets taken over atagreed values
AMIN & CO. `̀̀̀ NAMAN & CO `̀̀̀ Total
Goodwill 11,200 14,000 25,200
Leashold premises - 20,000 20,000
Plant 5,000 5,000 10,000
Stock 1,000 500 1,500
Debtors 1,000 3,000 4,000
Bank 32,000 2,500 34,500
A 50,200 45,000 95,200
Liabilities Taken overat agreed values
Creditors 10,000 15,000 25,000
Bank overdraft 11,000 - 11,000
B 21,000 15,000 36,000
Purchase Consideration (A - B)
29,200 30,000 59,200
182
Illustration : 7
Mr. Bill and Mr. Will are partners in BW & Co. In a similar type ofbusiness Mr. Mill & Mr. Gill are partners in MG & Co. It was agreedthat on 1st April, 2013 the old firms be amalgamated into one newfirm BMW Group.
The respective Balance Sheets of the Old firms as on 31st March,2013 were as follows:
Liabilities BW &CO. ` ` ` `
MG &CO. ` ` ` `
Assets BW &CO. ` ` ` `
MG &CO. ` ` ` `
Capitals Land andBuilding
29,600 40,000
- Bill 61,200 - Furniture 7,200 5,600
- Will 44,000 - Vehicles 12,000 7,200
- Mill - 45,200 Stock 33,200 26,400
- Gill - 29,600 Investments 3,200 -
Creditors 20,800 24,000 Debtors 27,200 23,200
BankOverdraft
- 3,600 Bank 13,600 -
1,26,000 1,02,400 1,26,000 1,02,400
Profit Sharing Ratio :
Bill Will Mill Gill
Old Firms 4 3 3 2
New Firm 6 5 4 3
Terms and Conditions of amalgamation:1) Provision for doubtful debts @ 5% to be made on Debtors. 2) Rebate on the liabilities of creditors to be provided @ 2%.3) New Firm to take over the assets of old firms as under:
Assets BW & CO. ` ` ` ` MG & CO. ` ` ` `
Stock … … … … 33,800 25,560
Vehicles … … … … 11,200 5,200
Furniture … … … … 6,400 -
Land & Building … … … … 40,000 -
Goodwill … … … … 25,200 18,000
4) Furniture and Land & Building not taken over by New Firm were sold for ` 54,000 on 1st April, 2013 by MG & Co.
5) Mr. Bill to take over investments for ` 3,040.6) The Capitals of the Partners in the New Firm were to be `
2,16,000 to be contributed in profit sharing ratio; any adjustment to be made in cash.
183
You are required to close the books of the Old Firms and preparethe Opening Balance Sheet of the New Firm. (IDE, Oct. 2003,adapted)
Solution:
Calculation of Purchase Consideration
Particulars BW & CO.`̀̀̀
MG & CO.`̀̀̀
Total `̀̀̀
Assets takenover:
Land &Building
… … … … 40,000 - 40,000
Furniture … … … … 6,400 - 6,400
Vehicles … … … … 11,200 5,200 16,400
Stock … … … … 33,800 25,560 59.360
Goodwill … … … … 25,200 18,000 43,200
Debtors … … … … 27,200 23,200 50,400
Bank … … … … 13,600 - 13,600
Rebate onCreditors
… … … … 416 480 896
(A) 1,57,816 72,440
Less :Liabilitiestaken overCreditors
… … … … 20,800 24,000 44,000
BankOverdraft
… … … … - 3,600 3,600
R.D.D. 1,360 1,160 2,520
(B) 22,160 28,760
PurchasesConsideration (=Capitalstfd.)
(A) - (B) 1,35,656 43,680
184
IN THE BOOKS OF BW & CO.
Dr. Realisation Account Cr.
Particulars `̀̀̀ Particulars ` ` ` `
To Land & Building 29,600 By Creditors 20,800
To Furniture 7,200 By BMW Group A/c(P.C)
1,35,656
To Vehicles 12,000 By Bill’s Capital(Investments)
3,040
To Stock 33,200
To Investments 3,200
To Debtors 27,200
To Bank 13,600
To Partners Capital
Bill (4/7) 19,141
Will (3/7) 14,355 33,496
1,59,496 1,59,496
Dr. Partners’ Capital Accounts Cr.
Particulars Bill `̀̀̀ Will `̀̀̀ Particulars Bill `̀̀̀ Will `̀̀̀
To RealisationA/c
3,040 - By Balanceb/d
61,200 44,000
To BMW Group 77,301 58,355 ByRealisationA/c (Profit)
19,141 14,355
80,341 58,355 80,341 58,355
Dr. BMW Group Account Cr.
Particulars `̀̀̀ Particulars ` ` ` `
To Realisation A/c 1,35,656 By Bill’s Capital A/c 77,301
By Will’s Capital A/c 58,355
1,35,656 1,35,656
185
IN THE BOOKS OF MG & CO.
Dr. Realisation Account Cr.
Particulars `̀̀̀ Particulars ` ` ` `
To Land & Building 40,000 By Creditors 24,000
To Furniture 5,600 By Bank Overdraft 3,600
To Vehicles 7,200 By Bank A/c (Land &Building)
54,000
To Stock 26,400 By BMW Group A/c(P.C.)
43,680
To Debtors 23,200
To Partners Capital
Mill (3/5) 13,728
Gill (2/5) 9,152 22,880
1,25,280 1,25,280
Dr. Partners’ Capital Accounts Cr.
Particulars Mill `̀̀̀ Gill `̀̀̀ Particulars Mill `̀̀̀ Gill `̀̀̀
To Bank A/c 32,400 21,600 By Balanceb/d
45,200 29,600
To BMWGroup
26,528 17,152 ByRealisationA/c (Profit)
13,728 9,152
58,928 38,752 58,928 38,752
Dr. BMW Group Account Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation A/c(P.C.)
43,680 By Mill’s Capital A/c 26,528
By Gill’s Capital A/c 17,152
43,680 43,680
Dr. Bank Account Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation A/c(Land & Building)
54,000 By Mill’s Capital A/c(3/5)
32,400
By Gill’s Capital A/c 21,600
54,000 54,000
186
BALANCE SHEET OF BMW GROUP ON 1-4-2013
Particulars `̀̀̀ Assets `̀̀̀
Partners Capital Goodwill 43,200
- Bill 72,000 Land &Building
40,000
- Will 60,000 Furniture 6,400
- Mill 48,000 Vehicles 16,400
- Gill 36,000 2,16,000 Stock 59,360
Creditors 44,800 Debtors 50,400
Less : Rebate onCreditors
896 43,904 Less : Prove.for D. Debts
2,520 47,880
Bank Overdraft 3,600 Bank 13,600
Add : Receivedfrom
Will 1,645
Mill 21,472
Gill 18,848
55,565
Less : Paid toBill
5,301 50,264
2,63,504 2,63,504
Working Notes:
1) Calculation of Excess / Shortage of Capital
In the books of BMW Group
Particulars Bill
`̀̀̀
Will
`̀̀̀
Mill
`̀̀̀
Gill
`̀̀̀
Capitals 77,301 58,355 26,528 17,152
Required Capital (` 2,16,000in 6 : 5 : 4 : 3)
72,000 60,000 48,000 36,000
Excess/(Shortage) of Capital 5,301 (1,645) (21,472) (18,848)
2) Cash received on Sale of assets not taken over by new firm isdistributed amongst partners in P. S. R.
Illustration : 8
A and B were partners sharing profits and losses in the ratio of 3 : 1and C and D were partners sharing equally. Following were their Balance Sheet as on 31st March 2014.
187
Liabilities `̀̀̀ `̀̀̀ Assets `̀̀̀ `̀̀̀
Capital Accounts: Goodwill 4,000 -
A 30,000 - Plant andMachinery
20,000 27,000
B 30,000 - Furniture 8,000 9,000
C - 25,000 Stock 20,000 24,000
D - 32,000 Debtors 19,000 17,000
Creditors 10,000 15,000 Fixtures 1,600 1,200
Bills Payable 4,000 8,000 Cash 3,400 3,300
Qutstanding Rent 2,000 1,500
76,000 81,500 76,000 81,500
The firms are amalgamated on the following terms :
1. Outstanding rent was paid in full by the respective firms.
2. Creditors of both the firms were taken by the new firm at a discount of 5%.
3. Plant and Machinery is subject to 5% depreciation of both the firms.
4. Furniture of ‘C’ and ‘D’ was sold in the market for ` 8,000 and furniture ‘A’ and ‘B’ was not taken over by the new firm.
5. Fixtures were not taken over by the new firm.
6. Stock of ‘A’ and ‘B’ was valued at ` 22,100 and that of ‘C’ and ‘D’ was valued at ` 21,000.
7. Goodwill of M/s A and B is valued at ` 6,000 and that of M/s C and D at ` 8,000. Goodwill account is not be retained in the books of the new firm.
8. Capital of each partner in the new firm is to be maintained at ` 25,000 by bringing cash or paying cash, as the case may be.
You are required to prepare :
1. Realisation A/c.2. Partner’s Capital A/c in the books of both the firms and 3. Amalgamated Balance Sheet of the new firm.
(IDE, Apr. 2011, adapted)
188
Solution:
Calculation of Purchase Consideration (PC)
Particulars A & B
` ` ` `
C & D
`̀̀̀
Total
`̀̀̀
Assets taken over:
Goodwill … … … … 6,000 8,000 14,000
Plant and Machinery … … … … 19,000 25,650 44,650
Stock … … … … 22,100 21,000 43,100
Debtors … … … … 19,000 17,000 36,000
Cash … … … … 1,400 9,800 11,200
(AB: 3,400 - 2,000,CD: 3,300 + 8,000 -1,500)
… … … …
(A) 67,500 81,450
Less : Liabilitiestaken over
Creditors … … … … 9,500 14,250 23,750
Bills Payable … … … … 4,000 8,000 12,000
(B) 13,500 22,250
PurchaseConsideration
(A) - (B) 54,000 59,200
In the Books of AB Enterprises
Dr. Realisation A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Goodwill 4,000 By Sundry Liabilities:
To Plant and Machinery 20,000 - Sundry Creditors 10,000
To Furniture 8,000 - Bills Payable 4,000
To Stock 20,000 - Partner’s Capital(8,000 + 1,600)
9,600
To Debtors 19,000 - ABCD from A/c (PC) 54,000
To Fixtures 1,600
To Cash (3,400-2,000) 1,400
To Profit tfd. to
A’s Capital 2,700
B’s Capital 900 3,600
77,600 77,600
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Capital A/c
Particulars A A A A
`̀̀̀
B
`̀̀̀
Particulars AAAA
`̀̀̀
B
`̀̀̀
To RealisationA/c
7,200 2,400 By Balanceb/d
30,000 30,000
To New Firm A/c 25,500 28,500 ByRealisationA/c
2,700 900
32,700 30,900 32,700 30,900
New Firm A/c
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation A/c 54,000 By Capital A/c
A 25,500
B 28,500 54,000
54,000 54,000
In the Books of CD Enterprises
Dr. Realisation A/c Cr.
Liabilities `̀̀̀ Assets `̀̀̀
To Sundry Assets By Sundry Liabilities
- Plant and Machinery 27,000 - Creditors 15,000
- Furniture 9,000 - Bills Payable 8,000 23,000
- Stock 24,000 By Cash (Furniture) 8,000
- Debtors 17,000 By C’s Capital A/c(Fixtures)
600
- Fixtures 1,200 By D’s Capital A/c(Fixtures)
600
- Cash 9,800 88,000 By New Firm (PC) 59,200
(3,300 + 8,800 - 1, 500)
To Capital A/c
C 1,700
D 1,700 3,400
91,400 91,400
Capital A/c
Particulars C C C C
`̀̀̀
D
`̀̀̀
Particulars CCCC
`̀̀̀
D
`̀̀̀
To RealisationA/c
600 600 By Balanceb/d
25,000 32,000
To New Firm A/c 26,100 33,100 ByRealisationA/c
1,700 1,700
26,700 33,700 26,700 33,700
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New Firm A/c
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation A/c 59,200 By Capital A/c
C 26,100
D 33,100 59,200
59,200 59,200
Balance Sheet as on 31st March 2014
Liabilities `̀̀̀ Assets `̀̀̀
Capital A/cs Goodwill 14,000
A 25,000 Plant andMachinery
44,650
B 25,000 Stock 43,100
C 25,000 Debtors 36,000
D 25,000 1,00,000
Creditors 23,750
Bills Payable 12,000
Bank O/D
(13,200 - 11,200)
2,000
1,37,750 1,37,750
Capital A/c
Particulars A
` ` ` `
B
`̀̀̀
C
`̀̀̀
D
`̀̀̀
B/f from Old Firm … … … … 25,500 28,500 26,100 33,100
Less : ClosingCapital
… … … … 25,000 25,000 25,000 25,000
Balance … … … … 500 3,500 1,100 8,100
Cash to be paid back = 13,200.
Illustration 9 :
X and Y are two sole traders. Their Balance Sheets as on 1st
January, 2014 are given below:
191
A’s Balance Sheet as at 1st January, 2014
Liabilities `̀̀̀ Assets `̀̀̀
Sundry Creditors 10,000 Plant & Machinery 7,500
Das Bank Ltd. 5,000 Stock in Trade 10,000
Capital Account 15,000 Sundry Debtors 12,500
30,000 30,000
B’s Balance Sheet as at 1st January, 2014
Liabilities `̀̀̀ Assets `̀̀̀
Sundry Creditors 8,500 Plant & Machinery 10,500
Capital Account 20,000 Stock in Trade 5,000
Sundry Debtors 11,000
Cash at Bank 2,000
28,500 28,500
They agree to amargamate their business as on 1st January,2014. The following revaluations were to be made :
1) Plant and Machinery were to be reduced by 10%.2) Stock in Trade was to be reduced in case of A by 20% and in
case of B by 10%.
3) A reserve of 12 %2 is to be raised against Sundry Debtors.
4) Each partner is to be credited with Goodwill of ` 5,000.5) The bank overdraft of A is to be paid off by him.
You are required to give the journal entries for recording the abovetransactions in the books of A and B give also the amalgamatedbalance sheet of the New Firm as on 1st January, 2014.
(IDE, April 2000, adapted)
192
Solution:
IN THE BOOKS OF AJournal
No Particulars Debit. `̀̀̀ Credit. `̀̀̀
1. Realisation A/c Dr. 30,000
To Plant & Machinery 7,500
To Stock in Trade 10,000
To Sundry Debtors 12,500
(Being Assets transferred toRealisation Account)
2. Sundry Creditors Dr. 10,000
To Realisation A/c 10,000
(Being Liabilities transferred toRealisation Account)
3. M/s A & B A/c Dr. 21,937
To Realisation A/c 21,937
(Being Purchase ConsiderationDue)
4. Realisation A/c Dr. 1,937
To A’s Capital A/c 1,937
(Being Profit on realization)
5. Das Bank Ltd. Dr. 5,000
To B’s Capital A/c 5,000
(Being Bank Overdraft takenover by X personally)
6. A’s Capital A/c Dr. 21,937
To M/s A & B A/c 21,937
(Being Capital account settled)
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IN THE BOOKS OF B
No Particulars Debit. `̀̀̀ Credit. `̀̀̀
1. Realisation A/c Dr. 28,500
To Plant & Machinery 10,500
To Stock in Trade 5,000
To Sundry Debtors 11,000
To Cash at Bank 2,000
(Being Assets transferred toRealisation Account)
2. Sundry Creditors Dr. 8,500
To Realisation A/c 8,500
(Being Liabilities transferred toRealisation Account)
3. M/s A & B A/c Dr. 23,175
To Realisation A/c 23,176
(Being Purchase ConsiderationDue)
4. Realisation A/c Dr. 3,175
To B’s Capital A/c 3,175
(Being Profit on realization)
5. B’s Capital A/c Dr. 23,175
To M/s A & B A/c 23,175
(Being Capital Account Settled)
M/s A B & Co.
Balance Sheet As At 1-1-2014
Liabilities `̀̀̀ `̀̀̀ Assets `̀̀̀ `̀̀̀
CapitalAccounts:
Goodwill 10,000
- A 21,937 Plant andMachinery
16,200
- B 23,175 45,112 Stock 12,500
SundryCreditors
18,500 Debtors 23,500
Less : Prov. forBad Debts
588 22,912
Cash at bank 2,000
63,612 63,612
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Working Note :
Calculation of PurchaseConsideration:
A
` ` ` `
B
`̀̀̀
A & B
`̀̀̀
Cash at Bank … … … … - 2,000 2,000
Plant & Machinery (90% ofbook value)
… … … … 6,750 9,450 16,200
Stock in Trade (Agreedvalue)
… … … … 8,000 4,500 12,500
Debtors (book value) … … … … 12,500 11,000 23,500
Goodwill (agreed value) … … … … 5,000 5,000 10,000
… … … … 32,250 31,950
Less:
RDD ( 12 %2
of debtors)… … … … (313) (275) 588
Creditors (book value) … … … … (10,000) (8,500) 18,500
Purchase Consideration(= Capitals tfd.)
… … … … 21,937 23,175
Illustration : 10
Vijay and Sanjay were carrying on business of supply ofhardware as sole traders. Their balance sheets as on 31st March,2014 are given below:
Liabilities Vijay Vijay Vijay Vijay
`̀̀̀
Sanjay
`̀̀̀
Assets Vijay `Vijay `Vijay `Vijay ` Sanjay
`̀̀̀
Bills Payable 50,000 40,000 Fixed Assets 40,000 50,000
Bank Overdraft 25,000 - Stock 50,000 25,000
Capital A/c 75,000 1,00,000 Book Debts 60,000 55,000
Cash Balance - 10,000
1,50,000 1,40,000 1,50,000 1,40,000
Both the parties decided to amalgamate their business andform a new partnership firm under the name of M/s Jay on 1st April,2014. The terms of amalgamation were as follows:
1) Fixed assets were to be reduced by 10%.2) Stock of Mr. Vijay to be reduced by 20% and that of Sanjay
increased by 10%.3) A reserve for 2.5% to be created against book debts.4) Both the parties to be credited with goodwill of ` 25,000 each.5) The bank overdraft of Mr.Vijay is to be paid by him.
You are required to prepare necessary Ledger Accounts inthe books of Vijay and Sanjay.
(IDE, Oct.2004, adapted)
195
Solution:
Calculation of Purchase Consideration
Particulars Vijay
` ` ` `
Sanjay
`̀̀̀
Assets taken over :
Fixed Assets (90%) … … … … … 36,000 45,000
Stock (80%) (110%) … … … … … 40,000 27,500
Book Debts … … … … … 60,000 55,000
Cash … … … … … - 10,000
Goodwill … … … … … 25,000 25,000
[A] 1,61,000 1,62,500
Less: Liabilities taken
Bills Payable … … … … … 50,000 40,000
RDD (2.5% of Debtors) … … … … … 1,500 1,375
[B] 51,500 41,375
Purchase Consideration(=Capitals tfd.)
[A] - [B] 1,09,500 1,21,125
IN THE BOOKS OF VIJAY
Dr. Realisation A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Fixed Assets 40,000 By Bills Payable 50,000
To Stock 50,000 By Bank Overdraft 25,000
To debtors 60,000 By M/s Jay P.C.) 1,09,500
To Vijay Capital(Overdraft)
25,000
To Vijay’s Capital(Profit)
9,500
1,84,500 1,84,500
Dr. Vijay’s Capital Account Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To M/s Jay )P.C.) 1,09,500 By Balance b/d 75,000
By Realisation A/c(Overdraft)
25,000
By Realisation A/c(Profit)
9,500
1,09,500 1,09,500
196
Dr. M/s Jay Account Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation A/c(P.C.)
1,09,500 By Vijay’s CapitalA/c
1,09,500
1,09,500 1,09,500
IN THE BOOKS OF SANJAY
Dr. Realisation A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Fixed Assets 50,000 By Bills Payable 40,000
To Stock 25,000 By M/s Jay (P.C.) 1,21,125
To Debtors 55,000
To Cash 10,000
To Sanjay’s Capital(Profit)
21,125,
1,61,125 1,61,125
Dr. Sanjay’s Capital Account Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To M/s Jay (P.C.) 1,21,125 By Balance b/d 1,00,000
By Realisation A/c(Profit)
21,125
1,21,125 1,21,125
M/s Jay Account
Particulars `̀̀̀ Particulars `̀̀̀
To Realisation A/cC.P.C
1,21,125 By Sanjay CapitalA/c
1,21,125
1,21,125 1,21,125
6.2 EXERCISES
A. Fill in the blanks:
1. The new firm formed after amalgamation is called as ----Firm.
2. The existing firms getting merged together to from new entityare called as -------.
197
3. For calculating Purchase consideration, it is necessary to get Assets ------.
4. If, one of the firm continues in future with taking the other firm’s business is called ------.
5. Excess of Assets taken over liabilities is --------.
6. Economies of large-scale combined operations will ------ Fixed cost per unit.
7. Excess of Net Assets over Purchase Consideration is transferred to --------.
8. Purchase Consideration less Net Assets == ------
9. For transferring R.D.D. in the books of old firm ------ a/c is credited.
10. On amalgamation, Reserve Fund of vendor firm are transferred to ------- Accounts.
11. -------- is the amount payable by the purchasing firm to the vendor firm for taking over it’s business.
12. On amalgamation, assets and liabilities of vendor firm transferred to -------- a/c at book values.
Ans. 1. Amalgamated Firm 2. Amalgamating firm3. Revalued 4. Absoration5. Net assets / or Purchase Consideration, 6. Reduce 7. Capital Reserve8. Goodwill 9. Realisation a/c10. Partner’s Capital A/c 11. Purchase Consideration12. Realisation a/c.
B. Chosse the appropriate word [Multiple Choice]
1. The New firm formed after amalgamation is called as -
a] partnership firm, b] amalgamated firm
c] amalgamating firm d] old firm
2. ----- A/c is opened to find profit / loss on closing of the old firm.
a] profit & loss a/c
b] Realisation a/c
c] profit & loss supense a/c
d] profit & loss adjustment a/c
3. The firms which decide to merge together to from ------ entity are called as Amalgamating Firms.
a] old firm, b] New
c] dormant firm d] non of the above.
198
4. Provision for depreciation on fixed assets appearing in the Balance Sheet of vendor firm is credited to ------ a/c.
a] new firm a/c b] partner’s capital a/c
c] Realisation a/c d] profit & loss a/c
5. On amalgamation of firms, unrecorded assets taken over by partner is debited ------- to a/c.
a] Assets a/c b] partner’s capital a/c
c] Realisation a/c d] new firm a/c
6. On amalgamation of firm, accumulated losses of old firm are transferred to.
a] credited to old partner’ in old PSR
b] debited to old partner’s in new PSR
c] debited to old partner’s in old PSR
d] none of the above.
7. On amalgamation of firm unrecorded liabilities taken over by the partner is credited to
a] new firm a/c b] partner’s capital a/c
c] Realisation a/c d] profit & loss a/c
8. Debit balance in Realisation a/c indicates -
a] loss on realisation, b] profit on realization
c] net assets, d] all of the above
9. On amalgamation, expenses on dissolution of vendor firm paidby partner is to be credited to ------ a/c.
a] new firm a/c, b] partner’s capital a/c,
c] Realisation a/c, d] profit & loss a/c
10. Good will of amalgamated firm written off:
a] credited to old partners in old is PSR,
b] Debited to all new partners in new ratio
c] Goodwill a/c.
d] none of the above.
11. In case of amalgamation.
a] Goodwill of both firms valued,
b] valued goodwill is included in Purchase Consideration
c] both of the above,
d] none of the above.
199
12. On amalgamation of firms, assets shown in the Balance Sheetof vendor firm transferred to Realisation a/c at.
a] market value b] Agreed value,
c] Book Value, d] none of the above.
Ans. 1-b, 2-b, 3-b, 4-c, 5-b, 6-c, 7-b, 8-a, 9-b, 10-b, 11-b, 12-c,
C. Match the following columns:(I)
COLUMN A COLUMA B
A. Liabilities of vendor firmpaid firm, on Amalgamation
1. No entry.
B. Assets of vendor firm takenover by creditors of vendorfirm
2. Credit to realization a/c.
C. Reserve fund appearing inbalance sheet of vendorfirm.
3. Credit to Partner’s capitala/c
4. Debit to realization a/c
(II)
COLUMN A COLUMA B
A. Deferred Revenue exp.appearing on as on dateof amalgamation
1. Debit to Goodwill a/c in thebooks of purchasing firm.
B. Realisation exp. of vendorfirm paid by purchasingfirm a/c
2. Credit to New firm’s a/c
C. Liabilities of vendor firmtaken over by new firm
3. No entry
4. Debit to its partners
5. Debit to old partners in oldPSR
(III)
COLUMN A COLUMA B
A. Profit on realization onamalgamation
1. Credit to old partner’s capitala/c
B. Debit balance onRealisation a/c
2. Debit to all to partner’s capitala/c in new PSR
C. Goodwill written off bynew firm.
3. Net Assets
D. Purchase Consideration 4. Loss due dissolution of oldfirm.
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(IV)
COLUMN A COLUMA B
A. Purchase Consideration 1. Amalgamating firm
B. The firms decided tomerge
2. Amalgamated firm
C. Repayment of partner’sloan
3. Debit new firm a/c
D. Amalgamation of firm 4. Credit to cash a/c
5. Eliminates competition
Ans. I: a-4, b-1, c-3, II: a-5, b-1, c-4, III:a-1, b-4, c-2, d-3, IV: a-3, b-1, c-4, d-5
D. Substitute the following in a single WORD / Term / Phrase.
1. The new firm formed after amalgamation.
2. The account opened by old firm to find profit or loss due todissolution.
3. Excess of net assets over purchase consideration.
4. Combination of two or more firm coming together to secureeconomies of large scale production.
5. The amount payable by purchasing firm to the vendor firm fortaking over its business.
Ans. 1-amalgamated firm, 2-Realisation a/c, 3-Capital Reserve, 4-Amalgamation of firm, 5-Purchase Consideration.
E. State whether True of False, giving reasons in brief.
1. If creditors took over stock in full settlement of liabilities onamalgamation, Realisation a/c is credited.
2. On amalgamation of firms, unrecorded assets taken over bynew firm, new firm a/c is debited.
3. On amalgamation of firms, fictitious assets are transferred tothe partner’s capital a/c in their old ratio.
4. On amalgamation of firms, sundry debtors transferred toRealisation a/c at net amount [after deducting R.D.D]
5. On amalgamation of firms, Profit & Loss a/c is opened to findout profit or loss due to dissolution of firm.
6. On amalgamation of firms, Goodwill of amalgamated firm iswritten off in new profit sharing ratio.
7. The new firm records assets & liabilities taken over at bookvalue, which were appearing in the books of old firms.
8. On amalgamation of firms, old firms may continue their oldbusiness.
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9. On amalgamation of firms, old partners continue to shareprofits or losses in their old ratio.
10.On amalgamation of firms, unrecorded liabilities taken over bypartner, partner’s capital a/c is credited.
11.On amalgamation of firms, Realisation a/c is opened in thebooks of Amalgamated firm.
12.On amalgamation of firms, Assets realized credited torealization a/c.
Ans: True : 3, 6, 10, and 12.False: 1, 2, 4, 5, 7, 8, 9, 11.
F. Theoretical
1. What is amalgamation of firms?
2. What do you understand by the word PurchaseConsideration?
3. What are the basic objectives of amalgamation of firm?
4. What are the consequences of amalgamation of the firm?
5. Explain the term ‘Net Asset’
6. How you account for Goodwill in the books of the new firm?
7. What do you mean by the term ‘Trade Liabilities’?
G. Practical Problems:
1. Following are Balance Sheet of two firms M/s AB & CO. and CD& Co. as on 31st March, 2014.
Liabilities AB & CO
`̀̀̀
CD & CO
`̀̀̀
Assets AB & CO`̀̀̀
CD & CO
`̀̀̀
Capital : A 100,000 Building 80,000 -
B 100,000 Plant &Machinery
100,000 70,000
C 54,000 Fixtures andPatterns
20,000 14,000
D 54,000 Furniture 12,000 20,000
Creditors 1,20,000 60,000 Debtors 60,000 50,000
BillsPayable
42,000 36,000 Stock intrade
88,000 42,000
Cash onHand
2,000 8,000
3,62,000 2,04,000 3,62,000 2,04,000
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A & B sharing profits & losses equally and C, D were sharingin the ratio of 3:2. The two firm were amalgamated on that date,AB, C & D decided to shares in the ratio of 3:2:3:2 and assets andliabilities were revalued as follows :
1. Building was appreciated by 20% but Plant and Machinery ofboth the firms were to be depreciated by 12.5%.
2. 5% R.D.D should be provided on debtors of both the firms.
3. Fixtures and patterns of AB & CO. were revalued at ` 20,000that of CD & CO. ` 18,000.
4. Reserve 2% for discount on creditors of both firms.
5. Furniture of both the firms taken at 120% of book value.
6. Other assets and liabilities were taken over at Book Value.
7. Goodwill of AB & CO. valued at ` 25,000 that of CD & CO. at `50,000.
Pass necessary Journal Entries in the books of AB & CO.,Ledger Accounts in the books of CD & CO. and prepare theBalance Sheet of the amalgamated firm.
2. A & CO and C & CO. decided to amalgamate on the followingterms and conditions on 1st January, 2014, when their BalanceSheets were as follows:
Liabilities A & CO
`̀̀̀
C & CO
`̀̀̀
Assets A & CO ` C & CO
`̀̀̀
A’s capital 1,20,000 - Building 2,00,000 -
B’s capital 60,000 - Furniture 12,000 20,000
C’s capital -- 66,000 Investments 60,000 40,000
D’s capital 44,000 Stocks 40,000 50,000
Creditors 20,000 30,000 Debtors 28,000 50,000
BillsPayable
40,000 50,000 Cash at bank -- 30,000
Bank Loan 100,000 --
Total ` 3,40,000 1,90,000 Total ` 3,40,000 1,90,000
Terms of amalgamation:A. In case of A & Co.
1. Goodwill was valued at ` 25,000.2. A & Co. should pay its bank loan.3. Building was taken to be worth ` 2,50,0004. Stock to be valued at ` 55,000.5. Provision for doubtful debts to be created at 4% on debtors.
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B. In case of C & CO.1. Goodwill was valued at ` 30,000.2. Investments were not taken over by the firm. 3. Stock was valued at ` 45,000.4. Provision for doubtful debts to be created at 5% on debtors.
C. It was further decided that the total capital of the new firms
shall be ` 2,00,000 and the capital of each shall be in profit sharing partner shall be in profit sharing ratio i.e. ` 3:2:3:2. the difference to be transferred to the current accounts.
3. P & K were in partnership as PK & CO., S and T were inpartnership as ST & CO. They decided to amalgamate on 1st
April, 2014 into the firm, PK & CO. The profit sharing ratio wasas under:
P : K C S : T
Old Firm 4 : 1 : 3 : 2
New Firm 6 : 5 : 4 : 3
Balance Sheet as on 31st March 2014
Liabilities PK & CO
`̀̀̀
ST & CO
`̀̀̀
Assets PK & CO`̀̀̀
ST & CO
`̀̀̀
Capital : P 30,000 - Property 15,000 20,000
K 22,000 - Fixtures 3,500 2,500
S 25,000 Vehicles 16,500 4,000
T 15,200 Investment 2,000 15,000
Sundry Creditors 11,000 12,000 Debtors 12,000
Bank Overdraft 2,000 Bank bal. 7,200 12,700
Profit & lossa/c
6,800
63,000 54,200 63,000 54,200
Terms of amalgamation were :A] Provision for doubtful debts at 5% to be made on debtors andprovision for discount on creditors @ 2% on creditors is to made.
B] New firm to take over assets of old firms at the following values :
Assets PK & CO `̀̀̀ ST & CO `̀̀̀
Stock 17,000 12,000
Vehicles 20,000 2,500
Fixtures 1,000 ---
Property 20,000 ---
Goodwill 30,000 12,000
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C] Property and fixtures of PK & CO. not to taken over by PK &CO. These assets were sold for ` 35,000 cash on 1st April 2014.
D] Kis to take over his firm’s investment at ` 2,500/-
E] The capital of PK & CO. to be ` 100,000 and to be contributedby the partners in profit sharing Ratio, any adjustment to bemade in cash.
Close the books of old firms, and prepare Balance Sheet of theNew Firm.
4. The Balance Sheet of the two firms as on 31st December, 2013were as follows:
Liabilities P & Q
`̀̀̀
R & S
`̀̀̀
Assets P & Q
`̀̀̀
R & S
`̀̀̀
Creditors 10,000 5,000 Cash 2,700 1,500
Outstanding 1,000 500 Investments 3,300 -
Expenses
Loan - 10,000 Debtors 8,000 6,000
Reserve 4,000 2,000 Stock 30,000 24,000
Capital A/c Furniture 6,000 4,000
P 30,000 - Machinery 20,000 22,000
Q 25,000 -
R - 24,000
S - 16,000
70,000 57,500 70,000 57,500
Partner’s in both the firms share profits and losses equally.
The two firms decided to amalgamate as from 1st January2014 on the following terms and conditions.
a) Goodwill of P & Q was valued at ` 20,000 and that of R & S `10,000.
b) The new firm would not take over the Investment of P & Q &the Loan of R & S.
c) A provision for doubtful debts at 5% on Debtors of both thefirms and also a provision for discount at 2% on Creditors ofboth the firms be made.
d) An unrecorded Typewriter with R & S. valued at ` 1,000 wasnot taken over by the new firm.
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e) Other assets valued as under:
Particulars P & Q ` ` ` ` R & S `̀̀̀
Stock 36,000 29,000
Furniture 5,000 2,000
Machinery 17,000 20,000
Your are required to.i. Accounts to close the books of the old firms; and ii. Opening Balance Sheet of the new firm. Hints:
Hints :
i. Investment not taken over by the new firm should be transferred to Capital A/c’s in P.S.R
ii. Loan and R & S not taken over by the new firm should be taken over by the Partner’s as the cash is not sufficient to play it.
iii. Typewriter worth ` 1,000 not taken by the new firm. It may be assumed that it is sold by the old firm.
5. The following were the balance sheets of the two firms as on31st December, 2013.
Liabilities K & L
`̀̀̀
M & N
`̀̀̀
Assets K & L
`̀̀̀
M & N
`̀̀̀
Creditors 25,000 15,000 Bank Balance 21,000 5,000
Bills Payable 5,000 4,000 Investments 10,000 -
Bank Loan 4,000 3,000 Debtors 20,000 15,000
Ks Loan 1,000 - Less: 1,000 19,000
Prov.
Outstanding 2,000 1,000 Due from M &N
4,000
Salary
Due to K & L 4,000 Stock 29,000 34,000
Employees 5,000 - Furniture 8,000 5,000
ProvidentFund
Investment 3,000 Machinery 20,000 18,000
Fluctuation
Fund
Capital A/c’s Patent Rights 6,000
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K 50,000 Advertisement
L 30,000 Suspense 5,000
M 30,000 Goodwill 9,000
N 20,000
CurrentAccounts
K 5,000
L 1,000
1,31,000 77,000 1,31,000 77,000
Partner’s in both firms share profits and losses equally.
The two firms decided to amalgamate as from 1st Jan 2014 onthe following terms
a) The new firm shall not take over the furniture of both the firms. b) The new firm shall take over only the trade liabilities of both
the firms. c) Goodwill of each firm was valued at two years purchase of the
average profits of the last three years. The profits were:
2011 2012 2013
K & L 7,000 8,000 9,000
M & N 2,000 4,000 6,000
d) Advertising Suspense to be written off by the concerned firm. e) Current account to be eliminated. f) Mutual dues between the two firms to be treated as book
adjustments. g) Assets to be revealed as follows:
K & L
`̀̀̀
M & N
`̀̀̀
Debtors 18,000 13,000
Investments 9,000 -
Stock 40,000 40,000
Machinery 18,000 16,000
Patent Rights 4,000 -
h) The cash required for working of the new firm was estimated at ` 60,000 to be provided by the Partner’s in their new profit-
sharing proportions which was : 3 3 2 2, , ,10 10 10 10
K L M N
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Pass:
i. Closing Entries in the books of old firms; and
ii. Opening entries and Balance Sheet of the new firm.
Hints:
i. Goodwill = Av. Profit x 2
ii. Employee’s PF is a liability.
iii. Investment Fluctuation Fund is a provision against loss oninvestment. After adjustment of loss, it should be shared bythe Partner’s.
iv. Trade Liabilities are creditors & B.P only.
����������������
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7 ACCOUNTING WITH THE USE OF
ACCOUNTING SOFTWARE
Unit Structure
7.0 Objectives
7.1 Inventory Accounting and Control Using Tally Erp9
7.2 Procedure Of Using Tally Erp9 7.3 Standard Vouchers Created in Tally Erp9 for Accounting of The
Inventory
7.4 Batch Wise Management In Tallyerp9
7.5 Summary
7.6 Exercise
7.0 OBJECTIVES
After studying the unit the students will be able to know the importance of Accounting Software in making the accounting procedure easy.
7.1 INVENTORY ACCOUNTING AND CONTROL USING TALLY ERP9
Inventory is the total amount of goods TallyERP9-and/ or materials contained in a store or factory at any given time. It is possible to manage, track and optimise inventory using Tally ERP9. Tally ERP9 Software enables businesses to efficiently manage and track inventory. .Inventory accounting includes recording of stock details like the purchase of stock, sale of stock, stock movement between locations or godowns and providing information on stock availability. Tally ERP9 makes it possible to integrate the inventory and accounting systems so that the financial statements reflect the closing stock value from the inventory system. Tally ERP9 is a complete business software for accounting, finance, inventory, sales, purchase, point of sales, manufacturing, costing, job costing,
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payroll and branch management. Tally ERP9 has accounting with inventory module for inventory management.
Some of the important features available in the inventory module are-
Multi-location stock control-To keep track of stock at single or multiple locations
Comprehensive recording of stock movements-All stock movements are fully recorded.
Management reports-Movement analysis report gives the party-wise details of goods bought and sold and helps identify good and bad business partners. Stock query is a single sheet report that gives information on stocks at different locations as well as total stock in hand.
Aging stock analysis-The report helps identify the old stock and take appropriate decision regarding its disposal.
Batch-wise or lot-wise inventory with expiry- It is possible to maintain batch-wise details and keep a track on the date of manufacturing and the date of expiry
Reorder levels- It is possible to specify the reorder levels and minimum reorder quantity based on past consumption. This will ensure better inventory management.
Stock categories- Stock categories can be created and altered.
Create multiple godowns – Creating multiple godowns help to monitor the location-wise movement of stock.
Multiple units of measure- Tally offers different units of measure like no( number) kg( kilogram),m(metre), dozen to record the quantity of stock
Multiple stock valuation methods -Tally. ERP 9 shows the effects of different stock valuation methods on the closing stock value. A columnar display of different stock valuations can also be viewed, and each stock item can be set up to have a different stock valuation method. In some instances, a particular method of valuation may be required, for example to assess the replacement value or saleable value of stock. Tally. ERP 9 displays stocks in any or all the valuation methods dynamically
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and simultaneously, without any complicated procedure. Some of the stock valuation methods available in Tally are-At Zero cost, Average cost, First-in-first-out, Last purchase cost, Last-in-first-out annual, Last –in- first-out perpetual, Standard cost, Monthly average cost, Market valuation method.
Movement analysis-Movement analysis shows the analysis ofonly those inventory transactions which are integrated with theaccounts, i.e. inventories which are also recorded in the booksof accounts. This is used for comparative studies and to give aninsight into the flow characteristics of stock in an organisation.
Price lists-Price lists are useful for orders and invoices. Pricelists are available only for inventory items and hence the featureis available only if inventory and invoicing are activated for thecompany. Tally ERP9 also helps to have more than one pricelist for different groups of customers.
Sales and purchase order processing-The delivery of thegoods to customer can be tracked either in the delivery note orin the sales invoice. Similarly, receipt of goods from supplier istracked for the order details from the receipt note or purchaseinvoice.
Bill of Materials: A Bill of Materials is a list of constituent itemsalong with quantity details that can be allotted for themanufacture of a certain product, by-product or equivalent. Thisfacilitates the automatic reduction in stock of the item. Thisprocess of listing the items that make up another item is madepossible in Tally by enabling the Bill of Materials facility. Bill ofMaterials (BOM) is created only for those items that areassembled in-house. Therefore, it needs to be specified at thetime of creating a Stock Item or when altering its master.
7.2 PROCEDURE OF USING TALLY ERP9
Using Tally-Tally ERP9 is user- friendly software. Create a company selecting accounts with inventory option. Select the inventory info. Inventory info menu comprises of four types of Masters-
Stock group Stock items Units of Measure Voucher Types.
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To enable cost centre and cost category for a company
Go to Gateway of Tally------ F11 Features------ F1
Accounting features-----Maintain Cost centre? Set Yes--------
More than one payroll or cost category? Set Yes
A cost centre is any unit of an organisation to which transactions can be allocated. When only costs or expenses are allocated to these units, they are referred to as cost centres.
Create cost centre
Gateway of Tally------accounts info------cost centre------single------create
Cost categories allows allocation of a transaction to several setsof cost centres across the organisation
Create cost category
Gateway of Tally----accounts info-----cost category-------single-----The cost category or cost centre can be displayed, altered anddeleted. The cost category or cost centre can be created inmultiple mode and altered.
Create stock groups
Gateway of Tally----Inventory info-----stock categories-----single----create
Create stock categories
Gateway of Tally----Inventory info-----stock categories -----single-----create
Create stock item
Gateway of Tally-----Inventory info----stock categories-----single-----create
Create Godown
Gateway of Tally-----Inventory info----Godown-----single----create
Creating unit of Measure
Gateway of Tally-----Inventory info----units of measure---- create
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The unit of measure once created can be altered.
Accounting vouchers will update only accounts but inventory vouchers will update both accounts and inventory. Inventory vouchers record the receipt and issue of goods / stock (movement of goods) and the transfer of stock between locations and physical stock adjustments.
7.3 STANDARD VOUCHERS CREATED IN TALLY ERP9 FOR ACCOUNTINF OF THE INVENTORY
Tally ERP9 is preprogrammed with a variety of inventory vouchers, each designed to perform a different job.
Types of inventory vouchers-
1. Receipt note voucher-(F9 Rcpt Note): Receipt note voucher isused to record receipts of new stock in case the bill is notreceived.
2. Rejections in voucher-(F6 Rej In): Rejections in voucher isused to keep a record of the goods returned by a customer
3. Delivery note voucher-( F8 Dely Note): Delivery note voucheris used to record the delivery of goods to customers
4. Rejections out voucher-(F6 Rej Out): Rejections out voucheris used to record return of rejected goods to supplier.
5. Stock journal voucher- (F7 Stk Jrnl): Stock journal voucher isused to record the transfer of stock from one location to anotherwithout affecting the books of accounts
6. Physical stock voucher-(F10 Phys Stk): Physical stockvoucher records the physical stock or stock in hand.
7. Manufacturing journal voucher – If a company is involved inmanufacturing process, in which raw materials are consumedand finished goods are produced then manufacturing journalvoucher is to be created.
8. Purchase orders- For placing order to the vendor for purchaseof materials.
9. Sales order-for accepting orders from customers for sales
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7.4 BATCH WISE MANAGEMENT IN TALLYERP9
It is necessary to maintain batch wise details and to keep a
track of the date of manufacture and the expiry dates. This is necessary in case of perishables, food items and medicines.
To activate batchwise details in TallyERP9- 1. Enabling maintain batchwise details and set expiry date for
batches in F11 inventory features 2. Enable the following options related to batches in the stock
item master to Yes Maintain in batches Track date of manufacture Use Expiry date.
Batch vouchers and Batch summary reports-
It is a list of all vouchers for a particular stock item of the same batch for the given period. The report comprises of both inward and outward transactions along with quantity, rate and closing value details for the selected batches. The configuration in batch vouchers report is as follows:
Show narration also- By default this option will be set to No
Select vouchers to show- By default all vouchers will be displayed for the batches selected
Show quantities- By default this option will be set to Yes
Show rates- By default this option will be set to No
Show values- By default this option will be set to Yes
Show goods inwards- By default this option will be set to Yes and will show details like quantity, rate and value of inwards
Show goods outwards- By default this option will be set to Yes and will show details like quantity, rate and value of outwards
Show closing balance- By default this option will be set to Yes and will show details like quantity, rate and value of closing stock.
Show using alternate units-By default this option will be set to No
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Show tail units of compound units- By default this option will be set to No.
Use default valuation for closing values- By default this option will be set to Yes.
Show consumption and gross profit for outwards- By default this option will be set to No.
Sorting method- This will help the user sort the report alphabetical wise.
7.5 SUMMARY
Tally ERP9 is a complete solution for problem of inventory management. The software is user friendly and has a host of features which makes inventory accounting simple, flexible and accurate.
7.6 EXERCISE
A. Fill in the blanks 1. Stock group, Stock items, Units of Measure and Voucher Types
these four types of Masters arre comprised in -----------------------. 2. to record receipts of new stock in case the bill is not received----
voucher is used. 3. Delivery note voucher is used to record the --------------------------. 4. ----------------- voucher is used to record return of rejected goods
to supplier. 5. To record the transfer of stock from one location to another
without affecting the books of accounts ----------------------- voucher is used.
6. ------------- Voucher records the physical stock or stock in hand. 7. If a company is involved in manufacturing process then -----------
---------- voucher is to be created. 8. For placing order to the vendor for purchase of materials----------
----------voucher is used. 9. Sales order voucher is used for------------------------.
8
FIRE INSURANCE CLAIMS
Unit Structure
8.0 Objectives
8.1 Introduction
8.2 A Claim for loss of stock
8.3 Important points related to Memorandum Trading Account
8.4 Illustrations
8.5 Exercise
8.0 OBJECTIVE:
After studying the unit the students will be able:
• To introduce the topic
• To know about the term fire insurance claim
• To understand the meaning of Average Clause
• To make ready for calculating the claim amount
• To illustrate the practical problems
8.1 INTRODUCTION:
A business concern has always to face a danger of heavyloss due to fire It is so great that if it occurs it destroys partly orwholly the business assets as well as paralyses its day-to-dayactives. Besides it becomes very difficult for the business to replacethe lost assets due to the limited working capital. Therefore as asafety measure a prudent businessman covers his risks by insuringhis business against loss by fire.
Losses due to fire are of two types:
• Loss of assets and
• Loss of profit
Loss of assets affects so badly on business activities whichultimately affects profits of the business. Therefore the businessconcerns take a fire insurance policy in respect of,
• Loss of stock only,
• Loss of profit only, OR
• A comprehensive or Package Policy which covers loss of allthe items i.e. stock, other assets, profit, expenses etc.
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8.2 A CLAIM FOR LOSS OF STOCK :
For making the claim for loss of sock it is necessary tocalculate the value of stock on the date of fire. In case if there isperpetual inventory system it is possible to get record of stockduring the year and it becomes possible to decide the value ofstock lost if fire occurs during the year as under.
Opening Stock of the year ***Add : Purchases made up to the date of fire ***
Total stock on the date of fire Less : Cost of goods sold up to the date of fire ***
Stock on the date of fire Less : Stock Salvaged
Loss of stock due to fire ***
Instead of making the statement one can prepare theTrading Account up to the date of fire.
But generally yearly stock taking system has been adoptedby various concerns. At the end of the year the stock on hand ofvarious items is actually counted, valued and recorded therefore itis impossible to know about the real value of stock during the year iffire occurs during the year. Therefore, the value of stock on thedate of fire is required to be estimate.
For calculating the estimated value of stock it is presumedthat the percentage of gross profit on sales generally remainsconstant every year, unless there are some special reasons todisturb this percentage. In this case the calculate the amount ofclaim as under:
• Calculate the Gross Profit for the last year: If the GrossProfit for the last year has not been given prepare the TradingAccount for the last year to calculate the G/P. If the informationis available for number of past years prepare the TradingAccount in the columnar form for all the years.
• Percentage of Gross Profit: Calculate the percentage of G/Pto Sales. If the Gross Profit for number of past years isavailable then calculate the percentage of G/P to Sale for eachyear and then calculate the average percentage. If there iscontinuous fall in the percentage then instead of taking theaverage percentage, it is the general practice to take theestimated reduced percentage for the year of fire. However it isnot hard and fast rule, in such cases also, average percentagecan be taken. This percentage is the base for determining theGross Profit for the year in which the fire occurs. The formula isas under:
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Percentage of G/P = Gross Profit X 100 Sales
• Memorandum Trading Account : This account is preparedfrom the opening date of the financial year to the date of fire totrace out the value of stock on the date of fire. Here the GrossProfit is calculated taking the above calculated percentage asbase for e.g. suppose the percentage of G/P to Sale is 25%(calculated as above) and Sales up to the date of fire are Rs.25,000 then it is assumed that the G/P for the year of fire willbe 25% of Rs. 25000 i.e. Rs. 6,250. The proforma ofMemorandum Trading Accounting is as under :
Memorandum Trading Account Dr.. Up to the date of fire Cr.
Particulars Rs. Particulars Rs.
To StockTo PurchasesTo Gross Profit (on the basis of the Gross Profit Ratio)
By SalesBy Stock on the date of fire(Balancing figure)
8.3 IMPORTANT POINTS RELATED TO MEMORANDUM TRADING ACCOUNT :
• The Gross Profit figure is estimated on the basis of the GrossProfit Ratio which is already calculated or if given in theproblem.
Gross Profit Ratio = G.P/ Sales * 100 . It is always calculated onsales. If the rate of profit on cost is given in the problem then it isnecessary to convert the rate of profit on cost into the rate of profiton sales. For e.g. suppose it is stated that Gross Profit is 25% oncost it
• Means Gross Profit on sales is 20% ( cost +profit =sales. If costis Rs. 100 and profits are Rs. 25 i.e sales are Rs 125. Thereforeratio of Gross Profit to Sales is 100 * 25 / 125 = 20% )
• Normal rate of Gross Profit : To ascertain the normal rate ofGross Profit it is necessary to ignore the abnormal items in thelast years Trading Account. Generally the items are as follow:
1) Valuation of stock : If the stock figures given in theproblem are not at cost price if they are below or above thecost , it is necessary to convert them to cost price beforeascertaining the percentage of Gross Profit. For e.g. It is thepractice of the company to value stocks at 10% above cost.
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The value of opening stock is Rs. 30,800 and of closingstock is Rs. 44,000 here the cost price of stock is calculatedas under :
Value of opening stock- It means the stock of Rs 100 is valued at Rs. 110 as per thepractice (as the valuation is 10% above cost). Therefore The value of Opening stock = 30,800 * 100 /110 = 28000The value of Closing stock = 44,000 * 100 /110 = 40,000
2) Goods of irregular line, or slow moving or abnormal items:These are the items generally disposed of at a loss andthere is wide fluctuation in the rate of loss or profit of theseitems. If these goods are included in the stocks, purchasesand sales the percentage of Gross Profit affectsconsiderably. Hence the value of such goods included invarious items must be deducted from the respective items toget the value of regular line. The Trading Account should beprepared having two amount columns on each side on e fornormal items and another for abnormal items.
• Loss of stock due to fire : If there is no ‘Average Clause’ in thepolicy then it is calculated as under :Stock on the date of fire ***Less: Stock Salvaged ***Loss of stock due to fire ***
• Stock Salvaged: It means stock saved from fire. It is to bededucted from stock on the date of fire.
• Average Clause: There is a tendency in some businessmen tounder-insurance of stock in order to save some amount ofpremium. Under-insurance means taking insurance for a lesservalue than actual. This policy is resorted to because the insuredknows from the experience that there will not be total loss whenfire occurs therefore even there is under-insurance thebusinessman can recover his loss.
For example suppose stock of Rs.2, 00,000 may be insured sayfor Rs. 1, 50,000. So if fire occurs and the actual loss isRs. 1, 30,000 the insured can recover the amount of loss if thereis no ‘average clause’ in the policy.To discourage such tendency of under-insurance and preventthe misuse of insurance there is an ‘Average Clause’ included inthe policy.
The effect of this clause is that the insured does notget the full amount of loss, even though the policy amount ismore than the loss. The insured gets only proportionate amountof loss. The base of this principle is that in case of under-
219
insurance the owner of the property himself acts as an insurer tothe extent the property has not been insured with the insurancecompany. In the above example insured is self responsible forthe amount of the stock
Rs. 50,000(Rs. 2, 00,000 – Rs. 1, 50,000) as he has under-insured the stock. The formula for calculating the amount ofclaim if there is Average Clause:
Amount of claim = Sum Insured (amount of claim) X Actual loss Total stock on the date of fire
CHECK YOUR PROGRESS :
1) The cost of the stock on the date of fire is Rs.35,000. GoodsRs. 1,000 had been purchased but had remained unrecorded.The value of goods salvaged from the premises was Rs.3,000.Compute the mount of loss.
2) The stock on the date of fire is Rs. 18,000. The stock salvagedis worth Rs. 1,200. The sum insured is Rs. 15,000. There is theaverage clause in the policy. Calculate the amount of claim.
3) It is the practice of the company that the stocks are awayvalued at 90% of the cost. Suppose the value of the opening isRs 30,600 and the value of closing stock is 27,000 determinethe cost of the stocks
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8.4 ILLUSTRATIONS :
A fire occurred in the business premises of M/S Black on 15th
October ,2008. From the following particulars ascertain the loss ofstock and prepare a claim for insurance.
Particulars Rs.
Stock on 1-1-2007Purchases from 1-1-2007 to 31-12-2007Sales from 1-1-2007 to 31-12-2007Stock on 31-12-2007Purchases from 1-1-2008 to 14-10-08Sales from 1-1-2008 to 14-10-08
30,6001,22,0001,80,000
27,0001,47,0001,50,000
The stocks were always valued at 90% of cost. The stocksaved was worth Rs. 18,000. The amount of the policy was Rs.63,000. There was an average clause in the policy.
Solution: Trading Account
Dr. For the year ending 31-12-07 Cr.
Particulars Rs. Particulars Rs.
To Stock( W.N.1)To PurchasesTo Gross Profit
34,0001,22,000
54,000
By SalesBy Stock (W.N. 2)
1,80,00030,000
2,10,000 2,10,000
Ratio of Gross Profit to Sales = Gross Profit /Sales *100 = 54,000 /1, 80,000 *100 = 30%
Memorandum Trading Account Dr. Up to 15-10-08 Cr.
Particulars Rs. Particulars Rs.
To StockTo PurchasesTo Gross Profit (on the basis of the Gross Profit Ratio)
30,0001,47,000
45,000
By SalesBy Stock on the date of fire(Balancing figure)
1,50,00072,000
2,22,000 2,22,000
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Calculation of Loss of Stock:
Stock on the date of fire Less: Stock Salvaged
Loss of stock due to fire
72,00018,000
54,000
As there is an Average Clause in the policy :
Amount of claim = Sum Insured (amount of claim) X Actual loss Total stock on the date of fire
= 63,000 X 54,000 72,000
= Rs. 47,250
Working Notes:
As the stocks are valued at 90% of the cost it means:1. The cost of Opening Stock is
30,600 * 100 /90 = Rs. 34,000
2. The cost of Closing Stock is27,000 * 100 / 90 = Rs.30,000
Illustration 2
A fire occurred in the business premises of BonfireEnterprises on 30th September, 2002. They close their books on30th June every year. Following information could be gathered fromtheir books:
Particulars Rs.
Stock on 30th June 2002Purchases from 1-7-2002 to 30-9-2002Sales from 1-7-2002 to 30-9-2002Wages 1-7-2002 to 30-9-2002Carriage inward for the above periodCarriage outward for the above period
3,60,0006,00,000
10,00,0002,30,000
10,00015,000
Average percentage of G.P. to cost is 33 1/3. Stock of the value ofRs. 75,000 could be salvaged. Policy was for Rs.2, 50,000. Claimwas subject to average clause.
Following further information is available:1. Stock in the beginning was calculated at 10% less than cost.2. Purchases include purchase of furniture Rs. 25,000.
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3. Amount spent for bringing and setting up the furniture in theoffice was Rs. 5,000 which was include in Carriage inward.You are required to calculate the amount of claim.
(Adapted I.D.E.)
Solution : Memorandum Trading Account
Dr. Up to 30th September 2002. Cr.
Particulars Rs. Particulars Rs.
To Stock (W.N.1)To Purchases (W.N.2)To WagesTo Carriage inward(W.N.3)To Gross Profit (33 1/3 on cost it means 1/4 on Salesi.e.1/4 on10,00,000.)
4,00,0005,75,0002,30,000
5,000
2,50,000
14,60,000
By SalesBy Stock on the dateof fire(Balancing figure)
10,00,0004,60,000
14,60,000
Calculation of Loss of Stock :
Stock on the date of fire Less: Stock Salvaged
Loss of stock due to fire
4,60,00075,000
3,85,000
As there is an Average Clause in the policy :
Amount of claim = Sum Insured (amount of claim) X Actual loss Total stock on the date of fire
= 2, 50,000 X 3, 85,000 4, 60,000
= Rs. 2, 09,239
Working Notes:
1. The cost of Opening Stock is 360,000 * 100 /90 = Rs. 4,00,000.
2. Purchase of furniture was included in Purchases thereforePurchases = 6, 00,000 – 25,000 (purchases of furniture)
= 5, 75,000
3. Amount of carriage inward have included the amount forbringing and setting up the furniture thereforeCarriage Inward = 10,000 – 5,000 =5,000
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4. Carriage Outward is not to be recorded in the TradingAccount. It is debited to the Profit and Loss Account.
Illustration 3A fire occurs in the godown of M/s. Blackday Enterprises on
20th July, 2008. Goods saved were Rs. 32,000. The proprietorinforms you that the Stock Insurance Policy is in force forRs. 1, 00,000.There is an Average Clause in the policy. Most of thebooks of accounts were destroyed in the fire. He wants your help incomputing the claim for Loss of Stock due to fire. He informs thatGross Profit ratio is evenly maintained and submits the followinginformation:
Particulars Rs. On 01-01-2007 Rs. On 01-01-2008 Rs. On 20-07-2008
DebtorsCreditorsStock
68,00081,50084,000
74,50078,50098,000
81,50092,000
?
Transaction during the period 01/01/2007 to31/12/2007
01/01/2008 to20/07/2008
Amount Received from DebtorsDiscount allowed to DebtorsAmount paid to CreditorsDiscount Received from SuppliersCash SalesCash PurchasesWagesManufacturing Expenses
1,41,000540
1,16,5001,1501,9601,600
17,50015,250
1,13,000450
81,500650
1,050800
9,50012,000
In the books of M/s. Black day Enterprises Trading Account A/c
Dr. For the year ending 31-12-07 Cr.
Particulars Rs. Particulars Rs.
To StockTo PurchasesCashCredit(W.N.2)To WagesTo Manufacturing Exp.To Gross Profit
84,000
1,6001,14,650
17,50015,25015,000
By SalesCashCredit(W.N.1)By Stock
1,9601,48,040
98,000
2,48,000 2,48,000
Ratio of Gross Profit to Sales = Gross Profit /Sales *100 = 15,000/ 1, 50,000*100 = 10%
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Memorandum Trading Account Dr. Up to 20-07-08 Cr.
Particulars Rs. Particulars Rs.
To StockTo PurchasesCashCredit(W.N.4)To WagesTo Manufacturing Exp.To Gross Profit (on the basis of the GrossProfit Ratio10%on Total Sales)
98,000
80095,6509,500
12,00012,150
By Sales CashCredit(W.N.3)By Stock on the date offire(Balancing figure)
1,0501,20,450
1,06,600
2,28,100 2,28,100
Working Notes:
1) Dr. Sundry Debtors A/c (2007) Cr.
Particulars Rs. Particulars Rs.
To Balance b/dTo Credit Sales (Balancing Figure)
68,0001,48,040
By Cash/BankBy Discount AllowedBy Balance c/d
1,41,000540
74,500
2,16,040 2,16,040
2) Dr. Sundry Creditors A/c(2007) Cr.
Particulars Rs. Particulars Rs.
To Cash/BankTo Discount ReceivedTo Balance c/d
1,16,5001,150
78,500
By Balance b/dBy Credit Purchases(Balancing figure)
81,5001,14,650
2,48,000 2,48,000
3) Dr. Sundry Debtors A/c (2008) Cr.
Particulars Rs. Particulars Rs.
To Balance b/dTo Credit Sales (Balancing Figure)
74,5001,20,450
By Cash/BankBy Discount AllowedBy Balance c/d
1,13,000450
81,500
1,94,950 1,94,950
4) Dr. Sundry Creditors A/c(2008) Cr.
Particulars Rs. Particulars Rs.
To Cash/BankTo Discount ReceivedTo Balance c/d
81,500650
92,000
By Balance b/dBy Credit Purchases(Balancing figure)
78,50095,650
1,74,150 1,74,150
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Calculation of Loss of Stock:
Stock on the date of fire Less: Stock Salvaged
Loss of stock due to fire
1,06,60032,000
74,600
There is an Average Clause in the policy. Stock on the date of firewas Rs. 1, 06,600 and Insurance Policy is of Rs. 1, 00,000:
Amount of Insurance Claim = Sum Insured (amount of claim) X Actual loss Total stock on the date of fire
=1,00,000/1,06,600*74,600
=Rs.69,981
Illustration 4 On 15th September, 2006 the premises of Lecmic Ltd. weredestroyed by fire and stock of Rs.1,500 was Salvaged and retainedby the insured. The business books and records were saved fromwhich the following information was obtained.
Particulars Rs.Stock on 1st Jan. 2005 12,500Stock on 31st Dec 2005 17,500Purchases for the year ended 31-12-05 1, 18,500Sales for the year ended 31-12-05 1, 50,000Purchases from 1st Jan. 2006 to 15th Sept. 2006 37,500Sales for the above period 51,250
In valuing the stock as on 31st Dec. 2005 Rs.1,000 had been writtenoff, certain stock having cost of Rs.2,250.
Half of these goods were sold in July, 2006 for Rs.1,250. Thebalance is estimated to be worth the original cost. Subject to theabove exception, gross profit had remained at the uniform rate.
On 14th Sept. 2006, goods worth Rs.1,000 had been received bythe godown keeper but had not been entered in Purchase A/c.Show the amount of claim. (P.U. April, 1995)
Solution:Trading Account
For the year ended 31st Dec., 2005 Dr. Cr.
Particulars Rs. Particulars Rs.
To Stock To Purchases To G.P. (@25% on Sales)
12,5001,18,500
37,500
By Sales By Stock 17,500 Add : Amount Written off 1,000
1,50,000
18,500
1,68,500 1,68,500
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Estimated Trading AccountFor 1-1-2006 to 15-9-2006
Dr. Cr.
Particulars Rs. Particulars Rs.
To Stock To Purchases To G.P. (@25% on
Sales)
17,50037,500
12,500
By Sales 51,250 Less :Sale of Goods of Irregular Line 1,250 By Stock
50,00017,500
67,500 67,500
Claim for Loss of StockEstimated Stock of Regular Line = 17,500Stock of Goods of Irregular Line = 1,125
18,625Add: Goods Purchased but not Recorded 1,000Claim for Loss of Stock 19,625
8.5 EXERCISE:
Illustration 1 :
On 1st April, 2007 there was a fire in the godown of ABCManufacturing Ltd., which completely destroyed the stock and alsoother books and records. However, they are able to obtain thefollowing information from their Income-Tax and Sales TaxConsultants:
Rs.
Sales : For the year to 31-12-2006 8,00,000
For January and February 2007 80,000
Purchases : For the year to 31-12-2006 3,65,000
For January and February 2007 24,000
Stocks (At cost)
As at 01-01-2006 1,00,000
As at 31-12-2006 45,000
Wages for the year ending to 31-12-2006 1,08,000
Other direct expenses for the year to 31-12-2003 72,000
Further Information :
1) The Sales and Purchases for March 2007 may be assumedas having been made at the same rate as in past twomonths.
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2) In January 2007 a theft had taken place as a result of whichgoods of the value of Rs.6, 000 were lost.
3) Wages and other direct expenses may be taken after 31-12-2006 at the same rate as in the year 2006.
4) Insurance policy was taken for Rs.22, 500. There was anaverage clause in the policy.
You are required to prepare a statement showing the claim tobe lodged with the Insurance Company, taking the value ofSalvage at Rs.5, 000. All workings should form part of youranswer.
[Ans: Insurance Claim – Rs.18,929]
Illustration 2 :
A fire occurred in the godown of Maruti Ltd. on 31st March,1998 destroying the major portion of the stock. The followingparticulars were, however, available.
Particulars Rs.
Stock on 1st Jan. 1997 31,400
Stock on 31st Dec. 1997 35,600
Sales for the year 1997 1, 00,500
Sales from 1st Jan 1998 to 31st March 1998 40,250
Purchases for the year 1997 80,000
Purchases from 1st Jan 1998 to 31st March 1998 12,600
Included in the Stock of 31st Dec. 1996 were some shop-soiled goods which originally cost Rs.2,000 but were valued atRs.1,400. Half of this Stock was sold for Rs.500 in the year 1997and the remaining stock was valued at Rs.600 on 31st Dec. 1997.Half of this was sold for Rs.250 in March, 1998. The unsold portionwas considered to be worth 80% of its original cost. Subject to thisthe rate of gross profit was uniform.
The sum insured was Rs.15,000 and there was an averageclause in the policy. The stock salvaged was worth Rs.1,200.
Find out the amount of claim to be lodged with the InsuranceCompany, for loss of stock. (S. U. Oct., 2000)
(Ans.: G/P Rs.25,000, Stock on the date of Fire Rs.17,600, Amount of ClaimRs.14,000)
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Illustration 3 :
A fire occurred in the premises of Bhaskar on 31st August2008 and stock of the value of Rs.1,01,000 was salvaged.However, books and records were saved. The following informationwas available.
Rs.Purchases for the year ended 31-3-2008 6, 80,000Sales for the year ended 31-03-2008 11, 00,000Purchases from 01-04-2008 to 31-08-2008 2, 50,000Sales from 01-04-2008 to 31-08-2008 3, 60,000Stock on 31-3-2008 3, 00,000Stock on 31-3-2008 3, 40,000Further Information is given
1) The Stock on 31-03-2008 was overvalued by Rs.20,000.
2) The Sales and Purchases for the year ended 31-03-2008were spread evenly during the year.
3) From April, 2008, selling price was lowered by 10%.
4) The stock was insured for Rs.3, 00,000 and there wasAverage Clause in the policy.
Calculate the amount of the claim.
[Ans : Insurance Claim – Rs.2,08,182]
Illustration 4:
A Fire broke out in the premises of Megha Company on 1st July,1995 and stock of the value of Rs.1,57,500 was salvaged and thebooks and records were saved.
The Following information was obtained : Rs.
Stock on 31st March, 1994 4,20,000Stock on 31st March, 1995 4,20,000Sales from 1st April to 30th June 1995 5,10,000Purchases from 1st April to 30th June 1995 3,15,000Sales for the year ended 31st March, 1995 15,00,000Purchases for the year ended 31st March, 1995 9,00,000
Calculate the amount of claim to be submitted to the InsuranceCompany in respect of Loss of stock. (P.U. April, 1997)
(Ans.: G/P Rs.6,00,000, Stock on the date of fire Rs.4,29,000,Claim AmountRs.2,71,500.)
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Illustration 5:
A fire Occurred in the factory of M/s Badmanners on 1st
November 2007 and destroyed the stock of goods in their godown.The following figures are available.
Rs.
Opening Stock on 01-01-2006 31,570
Sales during the year of 2006 3,50,000
Purchase during the year of 2006 1,83,200
Purchases from 1-1-2007 to 01-11-2007 1,63,300
Sales from 1-1-2007 to 01-11-2003 2,69,350
Closing Stock on 31-12-2006 40,590
Other details are as follows:
a) A theft took place in September 2007 and goods of salevalue of Rs.19,040 were stolen and lost but were notrecorded in the books.
b) Goods costing Rs.5,205 were given away as free samplesbut no entries were passed.
c) The goods saved from fire were subsequently sold by thefirm of Rs.17, 600 at a loss of Rs.1, 200.
d) The gross profit remained constant throughout.
e) The stock of goods was insured by the firm for Rs.38, 100and there was an average clause in the policy.
f) The firm, as a practice, valued the stock of goods at 10%above cost.
Calculate the amount of claim.
[Ans : Insurance Claim – Rs.24,900]
Illustration 6 :
The premises of M/s. Thin and Company were destroyed byfire on 1st September 2004 and some stock was found badlydamaged. The accounts of the firm are closed on 31st Decembereach year. On 31st December 2003, stock was valued at costRs.26,544 against Rs.19,228 as at 31st December 2002.Purchases and sales were as follow:
Particulars Rs.
Purchases for the year 2003 90,516
Sales for the year 2003 1, 04,000
Purchases from 01/01/2004 to 01/09/2004 69,654
Sales from 01/01/2004 to 01/09/2004 98,340
230
In addition to the above following additional information is collected:
i) Sometime in May 2004 goods costing Rs.10,000 weredistributed as part of advertisement campaign in supportwhereof no entry appears to have been passed in the books.
ii) During 2004, cash sales of Rs.1,190 were misappropriated andthese were not recorded in the books.
Ascertain the estimated value of Stock on the date of theassuming that the rate of gross profit has been constant.
[Ans : Amount of Claim Rs.6,574]
Illustration 7 :
The premises of M/s Weakend were destroyed by fire on30-06-2008. Following figures were collected from availablesources. Prepare statement of claim, showing the amount of claim.The firm closes its books on 31st December every year.
Details 2005Rs.
2006Rs.
2007Rs.
2008Rs.
30/06/08
Opening Stock Sales Purchases Freight Outward Freight Inward Return Inward Closing Stock
20,0002,22,0001,60,000
6,0005,000
22,00022,000
22,0002,02,5001,45,000
7,0003,0004,000
11,800
11,8001,93,5001,70,000
3,0005,0006,000
34,020
34,02028,00035,000
2,5001,0002,000
?
Further Information:
1) In 2005, while valuing closing stock, a slow moving itemcosting Rs.5,000 was valued at Rs.4,000 and this was soldin 2006, for Rs.4,500.
2) In 2006, while valuing closing stock, an item costingRs.6,000 was wrongly valued at Rs.7,000 and was sold in2007 for Rs.5,500.
3) In 2007 while valuing closing stock, goods costing Rs.12,000were valued at Rs.10,000. 50% of these goods were soldbefore 30-06-2008 for Rs.6,000.
4) The goods salvaged were Rs.10, 000.
[Ans : Insurance Claim – Rs.40,020]
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Illustration 8:
On 21st June, 2004 the premises of X Ltd. were destroyed by firebut sufficient records were saved from which the followingparticulars were ascertained.
Rs.Stock at cost on 1-1-2003 73,500Stock at cost on 31-12-2003 79,600Purchases during the year 2003 3,98,000Sales during the year 2003 4,87,000Purchases from 1-1-2004 to 21-6-2004 1,62,000Sales from 1-1-2004 to 21-6-2004 2,31,200
In valuing the stock for the Balance Sheet at 31st December2003 Rs.2,300 had been written off from certain stock which was apoor selling line, having cost Rs.6,900. A portion of these goodswas sold in April 2004 at a loss of Rs.250 on the original cost ofRs.3,450. The remainder of this stock now estimated to be worththe original cost. Subject to above exception, gross profit hadremained at a uniform rate throughout.
The stock salvaged was Rs.5,800.Show the amount of claim.
[Ans : Insurance Claim – Rs.52,250]
Illustration 9:
A fire occurred in the godown of X Ltd. on 9th March, 2004,destroying the entire Stock. The books and records were salvagedfrom salvaged from which the following particulars wereascertained :
Rs.Sales for the year, 2003 10,01,000Sales for the period 1-1-2004 to 8-3-2004 3,00,000Purchases for the year, 2003 8,00,000Purchases for the period 1-1-2004 to 8-3-2004 1,25,000Stock on 1-1-2003 3,31,100Stock on 31-12-2003 3,85,000
The company has been following the practice of valuing theStock of goods at actual cost plus 10%. Included in the Stock on 1-1-2003 were some shop-soiled goods which originally costRs.2,000, but were valued at Rs.1,100. These goods were soldduring the year 2003 for Rs.1000. Subject to these, the rate ofGross Profit on the basis of valuation of Stock was uniform.
You are required to ascertain the value of the Stock destroyed.
[Ans : Rs.2,50,000]
232
Illustration 10:
On 31st May, 2004, the premises and stock of a firm weretotally destroyed by fire. The books of accounts, however, weresaved. In order to make a claim on their fire policy, they asked youradvice and you are able to obtain the following information. Thestock on hand has always been valued at 5 per cent below cost.
Details 2001Rs.
2002Rs.
2003Rs.
2004Rs.
Opening Stock as Valued
Purchases Less Returns
Sales Less Returns
Wages
Closing Stock
22,800
91,000
1,40,000
28,400
30,400
30,400
1,10,000
1,70,000
31,200
36,100
36,100
1,20,000
1,86,000
34,200
39,900
39,900
41,000
75,000
12,000
-
Prepare a statement for submission to the Insurance Company insupport of your claim for loss of stock.
(B.U.) (Ans : Claim Rs.35,000)
Illustration 11:
The premises of Mumbai Sports House caught fire on 1st April,2004 and its stocks was damaged. The firm had made up accountsto 31st May each year. The following information is available.
1st June, 2002 to31st May, 2003
Rs.
1st June, 2002 to1st April, 2003
Rs.
Stock at commencementconventionally valued at 10 per cent above costPurchasesSales
1,05,7544,52,5805,20,000
1,45,9923,48,2704,91,700
In December, 2003 goods which can cost Rs.10,000 were givenaway to Gymkhana Secretaries of various colleges foradvertisement purpose; no entry was made in the books. Duringthe same month salesman had misappropriated unrecorded cashsales of Rs.4,000. The rate of gross profit is constant. From theabove, make an estimate of stock on hand on the date of fire.
(B.U.) (Ans : Stock Rs.74,430)
233
Illustration 12 :
There was a fire in the godown of M/s Fire FightingEquipments Ltd. on 1st July, 20 04. The entire stock was burnt withan exception of some goods costing Rs.18,000. The followinginformation could be gathered from the records saved.
(a) The Company’s average gross profit arrived at in accordancewith its method of valuation of stocks was 25% on sales.
(b) The stock as on 31st December, 2003, valued at 10% abovecost as per the practice of the company, was Rs.55,000.
(c) The purchases and sales from 1st January, 2004 to the date offire were Rs.75,000 and Rs.1,70,000 respectively.
(d) The wages for that period amounted to Rs.36,000.
Prepare a Statement of fire Insurance claim.
(Ans : Claim Rs.17,000)
Illustration 13 :
B & Co. suffered loss of stock due to fire on May 16, 1999. Fromthe following information prepare a statement showing the claim tobe lodged.
Rs.
Stock on 1-1-98 38,400
Purchase during 1998 1,60,000
Sales during 1998 2,02,600
Closing Stock on 31-12-98 31,800
Purchases from 1-1 to 15-5-1999 54,000
Sales from 1-1 to 15-5-1999 61,400
An item of stock purchased in 1997 at a cost of Rs.10,000was valued at Rs.6,000 on 31-12-97. Half of this stock was sold on1998 for Rs.2,600, the remaining was valued at Rs.2,400 on 31-12-97. One fourth of the original stock was sold in March, 1999 forRs.1,400 and the remaining stock was considered to be worth 60%of the original cost. Salvage was Rs.12,000, the amount of thePolicy was Rs.30,000 and there was an Average clause in thepolicy.
(S.U.) (Ans : Claim Rs.20,000)
Illustration 14 :
The factory Building of H. Ltd. caught fire on 22nd October,1998 and the stock was damaged. The Company had made upAccounts to 31st Dec. each year. On 31st Dec. 97 the stock at costwas Rs.26,544 as against Rs.19,228 as on 31st Dec. 1996.
234
Purchases from January, 1996 to the date of fire were Rs.69,654as against Rs.90,516 for the full year 1997 and correspondingfigures of Sales were Rs.98,340 and Rs.1,04,000 respectively. Youare given following further information.
(i) In April, 1996 goods which cost Rs.2, 000 were given awayfor advertising purpose, no entries bring made in the books.
(ii) During 1996 a clerk had misappropriated unrecorded cashsales. It is estimated that the defalcation averaged Rs.20per week from 1st Jan. 1996 to 21st May, 1996 when the clerkwas dismissed.
(iii) The rate of Gross Profit is constant.
From the foregoing information prepare a statement of claim forloss of stock on the date of fire.
(S.U.) (P.U.) (Ans : Claim 19,181)
Illustration 15 :
A fire occurred in the godown of Pratap & Co. on 31st Dec.1990. Godown was situated behind their office premises. Aconsiderable part of the stock of readymade garments wasdestroyed by fire, The salvaged stock realized Rs.1,520. The stockand premises were fully insured against fire risks. Considering thefollowing particulars, prepare a statement showing the amount ofclaim to be lodged by M/s Pratap & Co. with the New India GeneralInsurance Co. Ltd. for the loss of stock only.
Rs.Purchases Less returns for the year ending 31-3-1990 1, 56,940Sales Less returns for the year ending 31-3-1990 1, 96,000Stock on 1-4-1990 68,480Stock on 31-3-1990 58,820Sales for the period ending 31-12-1990 1, 09,200Trade creditors on 31-3-1990 24,608Trade creditors on 31-12-1990 22,121Amount paid to the creditors during the period ending31-12-1990 88,016Goods returned to the creditors during the periodending 31-12-1990 6,390(Note : Working shall be treated as part of your answer)
(S.U.) (Ans. : Claim Rs.56,390)
����������������
235
9
REDEMPTION OF PREFERENCE SHARESPART I
Unit Structure
9.0 Objectives
9.1 Introduction
9.2 Legal provision
9.3 Sources of Redemption
9.4 Capital Redemption Reserve (C.R.R.)
9.5 Methods of Redemption
9.6 Accounting Procedure
9.7 Exercise
9.0 OBJECTIVES:
After studying this unit students will be able to:
• Know the Concept of Redemption and purpose of issuingredeemable Preference Shares.
• Understand various provision of the Companies Act regardingredemption of Preference Shares.
• Know the sources of redemption including divisible profits andproceeds of fresh issue of shares
• Understand the concept of Premium on Redemption & CapitalRedemption Reserve.
• Know to prepare Capital Redemption Reserve Account and use.
• Know the Methods of redemption of Preference Shares andunderstand the concept of
• Understand the Accounting procedure of redemption ofPreference Shares.
• Prepare the Balance Sheet (Revised Schedule VI) of theCompany after redemption of Preference Shares.
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9.1 INTRODUCTION:
Any company can issue two types & shares-viz. EquityShares and Preference Shares. An Equity Share is defined as ashare which is not a Preference Share. Sec 85 of the CompaniesAct, 1956 defines Preference Share Capital as that part of theShare Capital of a Company, limited by shares, which carries apreferential rights as to payment of fixed rate of dividend andrepayment of capital before any payment is made to the Equityshareholders.
To redeem means to repay. Redemption is the process ofrepaying an obligation as per predetermined terms and conditions.All the Preference Shares issued after 15th June 1988 have to beredeemable Preference Shares. The Preference Shares issuedprior to that date were required to be redeemed within Ten yearsfrom the 15th June 1988.
At present, any Preference Share issued by any company isrequired to be redeemable within maximum period of ten yearsfrom date of issue.
The dividend at specified rate is payable only if the companyearn profits as Sec.205 of Companies Act. Thus dividend is notpayable in event of losses suffered by company. This class ofshares provide funds to the company period which it needs fundsand therefore repay the same.
9.2 LEGAL PROVISIONS:
9.2.1 PURPOSE OF ISSUING PREFERENCE SHARES:
A company may raise finance required for the medium termproject or additional capital required, by issue of redeemablePreference Shares, at the option of the company.
The purpose of issue of Preference Shares is providingfunds in following situation.
(a) There is uncertainly of earning adequate profits for some period.(b) To funds are required for specific period not more than ten
years.
9.2.2 LEGAL PROVISIONS:
Section 80 of “The companies Act, 1956” lays down theProvisions relating to issue & redemption of preference shares.Accordingly, A company limited by shares if so authorized by its
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articles, may issue Preference Shares. However, the redemptioncan be effect only if the following conditions are fulfilled.
1. Only full paid Preference shares can be redeemed.
Thus partly paid up OR partly called up shares cannot beredeemed. In case shares which are partly called up; final callshould be made. After receiving final call money, thepreference shares are fully paid up, and then only PreferenceShares can be redeemed. If there are shares on which calls arein arrears either call should be received or these shares must beforfeited and then only the remaining shares can be redeemed.
2. The Preference shares can redeemed either out of
a) Proceeds of fresh issue of shares.AND/OR
b) Divisible Profits.
3. In case redemption out of accumulated Divisible Profit, it isnecessary to transfer amount equal to face value of PreferenceShare redeemed out of divisible profits to the CapitalRedemption Reserve Account.
4. If the shares are redeemable at a premium then the premiumon redemption must be provided for either out of the profitsof the company or its Securities Premium Account.
5. The redemption may be in full or in parts as per terms ofissue. The redemption may be
1. Payment by cheque2. Conversion into Equity or Preference Share3. Conversion into Debentures.
After the amendment of the Companies Act in 1988, acompany can not issue any Preference Share which areirredeemable or is redeemable after the expiry of a period of Tenyears from the date of its issue.
9.3 SOURCES OF REDEMPTION:
9.3.1 REDEMPTION OUT OF PROCEEDS OF FRESH ISSUE OFSHARES.
The proceeds of fresh issue of shares (Equity Share and/orPreference Share) would basically mean the cash realized by wayof issue of these shares on Capital. The fresh issue of sharesmay be at par or at premium or at discount.
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• If fresh issue of shares is at par or premium, only facevalue of the fresh issue share is to be taken as theproceeds of fresh issue.
• If shares are issued at discount, net amount received isconsidered as proceeds of fresh issue of shares.
e.g. A share of Rs.100/- (face value) is issued,i) at par orii) at 20% premium oriii) at 5% discount,
Proceeds of issue of share in respect of (i) and (ii) above will be equal to Rs.100/- only.
But in iii) it is net amount received on account of issue of sharewhich is (Rs100-5%) discount = Rs.95/- only.
The time lag between the fresh issue and redemption shouldnot be more than one month.
However conversion of Preference Share / outstandingDebentures into new Equity Shares can be considered on proceedsfrom fresh issue of share.
Making of a call on partly paid up shares cannot beconsidered as proceeds of fresh issue of shares. Debentures maybe issued for raising funds, but the proceeds from issue ofDebentures cannot be considered as part of the proceeds of freshissue of shares.
9.3.2 REDEMPTION OUT OF DIVISIBLE PROFITS:
Divisible Profits means and include those profits, which areavailable for distribution by way of dividends among theshareholders.
a) The following are Divisible Profits.
i. Accumulated credit balance in Profit and Loss A/c
ii. Revenue Reserve/General Reserve.
iii. Dividend Equalization Reserve.
iv. Voluntary, Debenture Redemption Fund/Sinking Fund.
v. Investment Fluctuation Reserves.
vi. Workmen's Compensation Fund (only to extent, of FreeReserve)
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vii. Development Rebate Reserve or Investment AllowanceReserve (Not to be utilized in future);
viii. Export Profits Reserve, [no longer required to carry forwardas per income tax provisions.]
Transfer to Capital Redemption Reserve Account is allowedfrom these profits. Capital Redemption Reserve A/c can be created,to the extent redemption out of divisible profits.
b) The following are not divisible profits.
i. Securities Premium Account.
ii. Profits Prior to Incorporation.
iii. Share Forfeited Account.
iv. Capital Reserve.
v. Revaluation Reserve.
vi. Capital Redemption Reserve.(Previous Balance)
vii. Debenture Redemption Reserve.
viii. Investment Allowance Reserve (before the expiry of theperiod as required under the Income Tax Act 1961).Transfer to C.R.R. A/c is not allowed from above profits.
ix. Development Rebate Reserve
9.4 CAPITAL REDEMPTION RESERVE [C.R.R.]
Section 80 of the Companies Act ensures that there is noreduction in shareholders' funds due to redemption and the interestof outsiders is not impaired. Redemption of Preference Sharerequires that either fresh issue of share is made or distributableprofits are retained and transferred to Capital Redemption ReserveAccount. As capital Redemption Reserve can be used only forissue of fully paid up Bonus Shares, profits retained in thebusiness ultimately get converted into Share Capital henceeffectively there is no reduction in the capital of the company.
Nominal Value of Preference Proceeds of FreshC.R.R. = Less Shares Capital issue of shares
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9.5 METHODS OF REDEMPTION:
Redemption of shares
Capital Amount Premium Amount
Proceeds of fresh Divisible profits Security premium A/c Other ReserveIssue or shares (Divisible profits)
Receive Funds Transfer to Capital Redemption Reserve
9.5.1 OUT OF PROCEEDS OF FRESH ISSUE OF SHARES.
One of the methods of redemption of Preference Shares isto use the proceeds of a fresh issue of shares. New shares may beissued at par or at premium or at discount.
• Find out premium payable on redemption of Preference Sharewhether sufficient balance available in Securities Premium A/cplus premium received on new issue; otherwise new issuerequires to increase to the extent of balance premium required.
• Ascertain the maximum amount of reserve and surplus availablefor redemption from given balance sheet before redemption andthe additional information provided in the problem.
Proceeds from Fresh Issue =
a) Nominal value of Preference Shares to be redeemedLess
b) Maximum amount of reserve and surplus available forredemption
• Determination of Minimum Amount of Fresh Issue
Sometimes, problem does not specify the minimum numberof shares to be issued for the purpose of redemption of PreferenceShare and to ensure compliance of section 80 of the CompaniesAct, 1956.
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• Minimum number of shares
= Minimum proceeds to comply with sec. 80
Proceeds of one share
Proceeds of one share mean the face value of a shareissued, if it is issued at par or premium. In case of issue of share ata discount, it refers to the discounted value [Face Value – Discounton issue].
Minimum number of shares calculated above should not bein fractions. In case fractional shares should be rounded up to thenext higher figure. Minimum number of shares ascertained aboveshould be a multiplied by face value of share, i.e. Rs.10/- or Rs.50/-or Rs.100/- as the case may be
Illustration 1
The Board of Directors of KM Ltd. decide to issue minimumnumber of Equity Shares of Rs.10/- each to redeem Rs.6,00,000/-Preference Shares at 10% premium. It has a General Reserve ofRs.1,20,000/- and Securities Premium Rs.1,00,000/-. Calculate theminimum number of Equity Share issued in each of the followingcases:
Case I: If the new Equity Shares are issued at parII: If the new Equity Shares are issued Rs.20/-III. If the new Equity Shares are issued at Rs.9.50
Solution:Redemption of Preference share capital Rs.6,00,000/-Premium payable on redemption = 6,00,000×10% = Rs.60,000/-can be provided out of Securities Premium balance available.
Minimum proceeds of new issue of Equity shares Rs.
Nominal value of Preference share to be redeemed 6,00,000Less: Maximum amount of Reserve available for (1,20,000)Redemption proceeds of new issue of Equity share 4,80,000
Case I: When new issue Equity shares at par
Minimum no. of shares = Minimum proceeds require
Proceeds of one share
, ,,=
4 80 00048 000
10 Equity shares of Rs.10/- each at par
New Issue of Share Capital = 48,000 Equity shares ofRs.10.
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Case II: When the new issue of Equity share of Rs.10/- @ Rs.20/-
Minimum No. of shares = , ,
,=4 80 000
48 00010
Equity shares
of Rs. @ Rs.20/-
New Issue of Share Capital = 48,000 Equity shares ofRs.10/- @ Rs.10/- premium.
Case III: When the new issue of Equity share of Rs.10/- @ Rs.9.50
Minimum no. of share = , ,
..
4 80 00050,526 32
9 50=
New Issue of Share Capital = 50,527 Equity Share to beissued of Rs.10/- each @ Rs.0.50 discounts per share.
Illustration 2:
M.R. Ltd. decided to redeem 2,000 Preference Shares ofRs.100/- each at 10% premium on date of redemption the companyhad the General Reserve stood at Rs.50,000/- the Profit and LossAccount credit balance of Rs.40,000/- and Securities PremiumRs.10,000/-. Calculate the minimum number of Equity Share ofRs.50/- each issued in each of the following cases.
Case I If the new Equity Shares are issued Rs.48.00II If the new Equity Shares are issued at parIII If the new Equity Shares are issued at Rs.55.00
Solution:
In the above problem Securities Premium is less than thepremium payable on redemption of Preference Share. Thereforeremaining premium payable on redemption of Preference Sharesrequired to be provided out of Divisible Profit as new issue of EquityShare is at discount.
Rs.Nominal value of Preference Share to be redeemed 2,00,000
Less maximum amount of reserve availablefor redemption balance in General Reserve 50,000Cr. Balance in Profit & Loss A/c 40,000
90,000Less premium payable to be provided [20,000-10,000] (10,000)
80,000Proceeds of new issue of Equity Share 1, 20,000
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Case I: When new issue of Equity Shares of Rs.50/- each @Rs.48/-
Minimum no. of shares issue = Minimum porceeds require
Proceeds of one share
= , ,
,=120 000
2 50048
Shares
∴2500 Equity Shares of Rs.50/- each to be issued @
Rs.48/- per share.
CRR = Nominal value of Preference redeemed Less Proceeds of new issue
= 200,000 – 120000(2500* 48) = 80000.
Case II: Premium redemption = Sec. Premium + Rs. 10,000 Bal.from divisible profits.
Proceeds of new issue of Equity Share= 1, 20,000
Minimum No. Of shares = , ,
,=1 20 000
2 40050
∴2,400 Equity Shares to be issued at par
Case III : The new Equity Share of Rs.50/- each issued at Rs.55/-i.e. Rs.5/- premium.
In case III premium payable on redemption can be providedout of balance in Securities A/c Premium A/c plus provisionreceived on new issued of shares
Nominal value of Preference share 2, 00,000Less: Divisible profit available - 90,000
For redemption (P & L A/c + General ReserveProceeds of new issue of Equity shares 1,10,000
Minimum No. of share to be issue
= Minimum proceeds required
Proceeds of one share, ,
,110 000
= = 2 20050
Equity share of Rs.50/- each @ Rs.55/-
C.R.R. = 2, 00,000 -1,10,000 = 90,000 (out of divisible profit)
Premium payable on redemption = 10% on Rs.2.00,000 =Rs.20,000
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Provided out of Securities Premium
BAL B/d Rs. 10,000Add Received on new issue(2,200 x 5) 11,000 = 21,000premium payable on redemption = Rs.20,000/- can beprovided out of Rs.21,000/- balance in Securities PremiumA/c
9.5.2 REDEMPTION OUT OF DIVISIBLE PROFIT:
A company may use the distributable profits (profits orreserves available to company for distribution to shareholders asdividends or otherwise as per provisions of laws applicable) inplace of issuing new shares. To the extent redemption ofPreference shares out of divisible profit, an amount equal to facevalue of shares redeemed is transferred to Capital RedemptionReserve A/c by debiting the distributable profits.
When Preference shares are redeemed out of divisible profit,there is no change in the percentage of share holding of thecompany and also future earnings are not diluted. Howeverpayment to percentage share holders results in reducing workingcapital. This is possible, if company has bank balance available torepay capital since repayment of redemption needs actual bankbalance.
9.5.3 COMBINATION OF 2.4.1 & 2.4.2
A company may redeem the Preference shares partly fromthe new issued and partly out of divisible profits. In such case,divisible profits transfer to capital redemption reserve A/c to theextent redemption out of profit.
Generally redemption is carried out in combinationdepending upon availability of reserves and bank balances withcompany and its respected needs of funds.
9.6 ACCOUNTING PROCEDURE:
Accounting procedure, depends on the transaction effectedby company these steps may be
a) If shares are not fully paid up convert into fully paid up byreceiving required amount or such share to be forfeited.
b) Measures to receive funds by sale of assets/Investments.c) Receive money on fresh issue of sharesd) Ascertain amount payable to shareholderse) Pay amount due
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f) Transfer reserves to capital redemption reserve and securitypremium.
g) Issue of Bonus shares to Equity shareholders of so decided.
Following journal entries are passed for redemption ofPreference shares along with other transaction given
a) For making call on partly paidPreference share.
Share final call A/c Dr. To Preference share capital A/c
b. For receipt of final call dueBank A/c Dr.
To Share final call A/c
X
X
X
X
a. Forfeiture of sharesShare Capital A/c[called up amount] Dr. To calls in Arrears To Forfeited shares A/c
XXX
• For reissue of forfeited sharesBank A/c (amount received) Dr. XForfeited shares A/c[Bal Fig.] Dr. X
To Share Capital A/c X[Amount credited as paid up]
• For transferring balance in forfeited shares A/cForfeited shares A/c Dr. X
To Capital Reserve A/c X
• For sale of Investment
a. At costBank A/c Dr.
To Investment A/c
b. At ProfitBank A/c Dr.
To Investment A/c To Profit & Loss A/c
c. At LossBank A/c Dr.Profit & Loss A/c Dr.
To Investment A/c
Dr. (Rs.) Cr. (Rs.)
X
X
XX
X
XX
X
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• For issue of share
a. At par Bank A/c Dr. To Share Capital A/c
b. At Premium Bank A/c Dr. To share capital A/c To Securities Premium
c. At Discount Bank A/c Dr. Discount on issue of shares A/c Dr. To Share Capital A/c
X
X
XX
X
XX
X
• For redemption of Preference shares
a. for transferring the claim of Preference shareholders. [TowardsCapital, premium and dividends unpaid]
Preference Share Capital A/c Dr. X Premium on Redemption of Preference Capital A/c Dr. X Dividend Preference Share A/c (if any) Dr. X
To Preference shareholders A/c X
b. For providing premium on redemption Securities Premium A/c Dr. X Capital Reserve A/c Dr. X Profit and loss A/c Dr. X
To premium on redemption ofPreference share A/c X
Note: It is prudent to use first Securities Premium then CapitalReserve realized in cash, balance if any required from divisibleprofits.
c. For creating capital redemption reserve Profit and Loss A/c Dr. X And/or General Reserve A/c Dr. X Any other divisible Profit/Reserve A/c Dr. X
To Capital Redemption Reserve A/c X
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Note:
Nominal Value of Preference Proceeds of FreshC.R.R. = Less Shares redeemed issue of shares
d. For payment to Preference shareholderPreference shareholders A/c Dr. X
To Bank A/c X
Note: In case any amount remains unpaid, the entry should bepassed for the amount actually paid, and unpaid amount should beshown as current liability as "due to Preference shareholders"
• For making partly paid up Equity shares into fully paid up,without asking shareholders to pay for call dues.
a. For providing bonus issueProfit and Loss A/c Dr. X
And/orRevenue Reserves A/c Dr. X
To Bonus to shareholders A/c X
b. For making call money dueEquity share final call A/c Dr. X
To Equity share capital A/c X
c. For adjusting bonus issueBonus to shareholders A/c Dr. X
To Equity share final call X
• For issue for fully paid Bonus shares.
a. For providing bonusCapital redemption reserve A/c Dr. XSecurities Premium A/c Dr. X[If required]
To Bonus to shareholders A/c X
b. For issue of bonus sharesBonus to shareholders A/c Dr. X
To Equity share capital X
Note:For any other transaction given in examination problem;usual accounting entry should be passed.
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9.7 EXERCISE
A. Give the items which are not divisible profits.
B. How to calculate Minimum proceeds from new (fresh) issue ofshares.
C. Give the journal entry for reissue of forfeited shares.
D. Fill in the blanks
1. The Preference shares can redeemed either out of Proceedsof fresh issue of shares or-------------------------------------------.
2. In case redemption out of accumulated Divisible Profit, it isnecessary to transfer amount equal ------------------to the CapitalRedemption Reserve Account.
3. Section ------------------of the Companies Act ensures that thereis no reduction in shareholders' funds due to redemption andthe interest of outsiders is not impaired.
4. Preference shares redeemable within _____________ yearscan be issued.
5. Profit on forfeiture of redeemable preference shares is creditedto_________________
6. ____________paid preference shares cannot be redeemed.
����������������
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10
REDEMPTION OF PREFERENCE SHARESPART II
Unit Structure
10.0 Objectives
10.1 Illustration (Simple Problem)
10.2 Key Points / Key Terms
10.3 Exercise
10.0 OBJECTIVES
After studying the unit the students will be able to solve thepractical problems of redemption of preference shares
10.1 ILLUSTRATIONS (SIMPLE PROBLEM)
Illustration 1
Ketan Ltd. had 6000, 9% redeemable Preference Shares ofRs.50/- each fully paid. The company decides to redeem theshares at a premium of 10%. The company makes the followingissues for the purpose of redemption.
a) 25,000 Equity Shares of Rs.10/- each at a premium of 10%.b) 3,000, 9% Debenture of Rs.100/- each at a premium of Rs.10/-
each.
The company has a General Reserve of Rs.3,75,000/- andSecurities Premium of Rs.50,000/-. Pass journal entries to recordabove transactions.
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Solution: Ketan Ltd.
Particulars Dr. (Rs.) Cr.(Rs.)
1. Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 25000 Equity share at Rs.10/-each, issued at 10% premium]
2,75,000
2,50,000
25,000
2. Bank A/c Dr.
To 9% Debentures A/c
To Securities Premium A/c
[Being 3,000, 9% Debentures ofRs.100/- each, issued at 10%premium]
3,30,000
3,00,000
30,000
3. 9% Preference Share Capital A/c Dr.
Premium on Redemption of Preference Share A/c Dr.
To Preference Shareholders A/c
[Being the claim of transferredPreference shareholders to theiraccounts]
3,00,000
30,000
3,30,000
4. Securities Premium A/c Dr.
To Premium on Redemption ofPreference Shares A/c
[Being premium on redemption ofPreference share provided]
30,000
30,000
5. General Reserves A/c Dr.
To Capital Redemption ReserveA/c
[Being capital redemption reservecreated to the extend redemption ofprofit]
50,000
50,000
6. Preference Shareholders A/c
To Bank A/c
[Being claim of Preference shareholders paid]
3,30,000
3,30,000
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Note:
Face Value of Preference Proceeds of NewC.R.R. = Less Share to be redeemed issue of shares
= 3, 00,000 - 2, 50,000= 50,000
Illustration 2:
[Calculation of issue minimum number of shares]
N.Ltd. decided to redeem their Preference shares 10 premium ason 31st March 2012. On that date their position was as under:
Balance sheet as on 31st March 2012
Liabilities Rs. Assets Rs.
Issued Share Capital 10,000, 9% redeemablePreference Share of Rs.10/- each fully paid20,000 Equity Share of Rs.10/- each fully paidProfit & Loss A/cDividend Equalization Reserve10% Debentures Sundry Creditors
1,00,000
2,00,00050,000
20,0001,00,0003,50000
Fixed AssetsCurrent AssetsInvestmentBank Bal.
2,10,0001,45,0001,00,000
50,000
5,05,000 5,05,000
In order to facilitate the redemption of Preference share itwas decided.
a) Part of Investment to be sold at 10% profit for Rs.55,000/-
b) To finance part of the redemption from company funds,subject to leaving a balance on Profit and Loss A/c ofRs.40,000/- and
c) To issue sufficient numbers of Equity Share of Rs.10/- eachat a premium of Rs.2.50 per share to raise the balance fundrequired.
The Preference shares were redeemed on the due date andissue of Equity shares was fully subscribed.
You are requiring (i) the necessary journal entries to recordabove transactions (including cash) and (ii) The Balance Sheetafter redemption.
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Solution:
Working Notes: Rs.
(a) Nominal value of Preference
Capital to be redeemed 1, 00,000
Less: Divisible Profit available
Profit and Loss A/c 50,000
Add: Profit on sale of Investment 5,000
Less: Bal. requires to 55,000
P & Loss A/c Balance - 40,000
15,000
Dividend Equalization Fund 20,000 (35,000)
(b) Proceeds of new issue of shares 65,000
(c) Minimum no. of shares to
= Minimum proceeds require be issued
Proceeds of one share65,000
= = 6,50010
Shares.
∴6,500 Equity Shares of Rs.10/- each to be issued @
premium of Rs.2.50
Premium on redemption of Preference Shares can beprovided out of premium received on new issue.
N. Ltd.Journal (31st March 2012)
No. Particulars Dr. (Rs.) Cr.(Rs.)
1. Bank A/c Dr.
To Investment A/c
To Profit & Loss A/c
(Being part of Investment sold at 10%profit)
cost of Investment sold 100
= 55,000 × 110
5,5000
50,000
5,000
2. Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 6500 Equity shares of Rs.10each issued @ 2.50 premium]
81,250
65,000
16,250
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3. 9% Preference Share Capital A/c Dr.
Premium on Redemption of Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(Being the claim of Preference shareholders transferred to their accounts)
1,00,000
10,000
1,10,000
4. Securities Premium A/c Dr.
To Premium on Redemption ofPreference Shares Capital A/c
10,000
10,000
5. Profit & Loss A/c Dr.Dividend Equalization Reserve A/c Dr. To Capital Redemption Reserve A/c[Being Capital Redemption Reservecreated to the redemption out ofprofit]
15,000
20,000
35,000
6. Preference Shareholders A/c Dr.
To Bank A/c[Being claim of Preference shareholders paid]
1,10,000
1,10,000
Bank A/c Dr. Cr.
To Bal b/fd.
To Investment A/c
To Equity Share Capital
To Securities Premium A/c
50,000
55,000
65,000
16,250
Bank PreferenceShareholders A/c
Bank Bal c/fd
1,10,000
76,250
1,86,250 1,86,250
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N Ltd.Balance Sheet as at 31st March 2012
Particulars Note Amount Amount
EQUITYAND LIABILITIES
1. Shareholder’s Funds
a. Share Capital
b. Reserves and Surplus
2. Non-Current Liabilities
Long Term Borrowings
3. Current Liabilities
a. Trade Payables
Total
ASSETS
1. Non Current Assets
a. Fixed Assets
- Tangible Assets
b. Non Current Investments
2. Current Assets
a. Cash and cashequivalents
b. Other Current Assets.
Total
1
2
3
4
2,65,00081,250
76,250
1,45,000
3,46,250
1,00,000
35,000
4,81,250
2,10,000
50,000
2,21,250
4,81,250
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Notes to Accounts
Note Particulars Number Amount Amount
1.
2.
Share CapitalEquity share capitalAuthorised, shares of(Rs.10) each
Issued, Subscribed and fullypaid shares (Rs.10)
Reserves and Surpluses a. Capital Redemption
ReserveTransfer fromDividend EqualisationReserveTransfer from P&LA/c
b. Securities PremiumAdd: on fresh issueLess: premium on
Redemption
c. Surplus/(Deficit)Balance in Statementof P & LAdd: Profit on sale ofInvestment
Less: Transfer toCapital RedemptionReserve
Total
Long Term Borrowings10% Debentures
Trade Payablesa. Sundry creditors
26500
20,000
15,000
16,25010,000
50,000
5,000
15,000
2,65,000
2,65,000
35,000
6,250
40,000
81,250
1,00,000
35000
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Illustration 3: [Computation of C.R.R. and bonus shares]The Preference Shares of T T Ltd. is to be redeemed on 1st
April 2012, at a premium of Rs.2/- per share. Part of Investmentwere sold @ 10% loss for Rs.7,20,000/- and issued 60,000 EquityShares of Rs.10/- each at premium of Rs.10/- per share forredemption. The company redeemed the Preference shares on 1st
April 12 except in case of one shareholder holding 500 PreferenceShares who could not be traced Subsequently the company issuedbonus share in the ratio of one Equity Share for every four EquityShares held including the new issued.
The following is the balance sheet of T T Ltd. as at 31 March 2012
Liabilities Rs. Assets Rs.
Share capital
90,000,10% Preference share of Rs.10/- each fully paid
40,000 Equity Share ofRs.10/- each fully paid
Reserve and surplus
Securities Premium
Profit & Loss A/c
Current Liabilities
Sundry Creditors
9,00,000
4,00,000
60,000
4,00,000
2,00,000
Fixed Assets
Investment
Current Asset
[Including BankBal. Rs.1,20,000]
6,00,000
8,50,000
5,10,000
19,60,000 19,60,000
You are required to pass journal entries and prepare balancesheet after above transactions.
Solution:
Working Notes:1. Amount due and paid to Preference Shareholder Rs.
Preference Share Capital 9,00,000Premium payable on redemption (90000 x 2) 1,80,000Preference shareholder claim 10,80,000Less : unpaid amount on 500 shares @ Rs.12/- (6,000)Amount paid to Preference shareholders 10,74,000
2. Redemption out of Divisible Profit Rs.Nominal value of Preference Share Capital 9,00,000RedeemedLess: Proceeds of new issue of Equity Shares (6,00,000)[60,000 X 10]Redemption out of profit [C.R.R.] 3,00,000
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3. Cost of Investment sold 100
= 7,20,000 × = 8,00,00090
Investment costing Rs.8,00,000/- sold for Rs.7,20,000/-
4. Bonus shares to be issued No. Rs.Old Equity Share Capital 40,000 4,00,000Add new issue of Equity Shares 60,000 6,00,000
1,00,000 10,00,000Add Bonus(1:4)
1= 100,000 ×
4 (Out of C.R.R.) = 25,000 2,50,000
Total Equity capital 1,25,000 12,50,000
Bank A/c Dr. Cr.
To Bal. b/fdTo Investment A/cTo Equity Share Capital A/cTo Securities Premium
A/c
Rs.By Preference Shareholders A/cBy Bal. c/fd
Rs.
1,20,0007,20,000
6,00,000
6,00,000
10,74,000
9,66,000
20,40,000 20,40,000
T.T.Ltd.Journal
Particulars Dr. Rs. Cr. Rs.
1. Bank A/c Dr.
Profit & Loss A/c Dr.
To Investment A/c
[Being Investment sold at loss]
7,20,000
80,000
8,00,000
2. Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 60,000 Equity shares of Rs.10 each issued @ Rs.20 per shares]
12,00,000
6,00,000
6,00,000
3. 10% Preference Share Capital A/c Dr.
Premium of Redemption of Preference Share Capital A/c Dr.
To Preference Shareholder A/c
[Being Preference shareholdersclaim transferred]
9,00,000
1,80,000
10,80,000
258
4. Securities Premium A/c Dr.
To Premium on Redemption of
Preference Share Capital A/c
[Being Premium on Redemption ofPreference Share Capital adjusted]
1,80,000
1,80,000
5. Profit & Loss A/c Dr.
To Capital Redemption ReserveA/c
[Being C.R.R. created to extendredemption out of profit]
3,00,000
300,000
6. Preference Shareholders A/c Dr.
To Bank A/c
[Being Preference share holdersclaim paid except on 500 shares]
10,74,000
10,74,000
7. Capital Redemption Reserve A/c Dr.
To Bonus to Shareholders A/c
[Being bonus provided in the ratio ofone share for every four Equityshares]
2,50,000
2,50,000
8. Bonus to Shareholders A/c Dr.
To Equity Share Capital A/c
[Being 25000 Equity shares issuedas fully paid Bonus share]
2,50,000
2,50,000
T.T .Ltd.Balance Sheet as on 31st March 2012
Particulars Note Amount Amount
EQUITYAND LIABILITIES1.Shareholder’s Funds
a. Share Capitalb. Reserves and Surplus
2.Current Liabilitiesa. Trade Payablesb. Preference shareholders
Total
12
12,50,0005,50,000 18,00,000
2,00,0006,000
20,06,000
259
ASSETS3. Non Current Assets
a. Fixed Assets- Tangible Assets
b. Non Current Investmentsc. Current Assetsc. Cash and cash
equivalentsd. Other Current Assets.
Total
9,66,0003,90,000
6,00,00050,000
13,56,000
20,06,000
T.T. Ltd.
Notes to Financial Statements for the year ended 31 March, 2012
As at 31 March 2012
Number Rs
Note "1" : SHARE CAPITAL
Authorised Shares
Equity Shares of `10 each
Issued, Subscribed & Fully Paid up Shares
Equity Shares of `10 each 1,25,000 12, 50,000
[Included 25000 Equity shares of Rs. 10 each issued on fully paid bonus share by capitaling C.R.R.]
Total 1,25,000 12,50,000
Note "2" : RESERVES & SURPLUS
As at 31March2012
Surplus
Reserves & Surplus
Securities Premium 60,000
Add: Received on new issue 6,00,000
Less : used for premium on redemption 1,80,000 4,80,000
Capital Redemption Reserve 3,00,000
less: Issue of Bonus shares 2,50,000 50,000
Profit & Loss Account (Surplus/Deficit) 4,00,000
(-)Transferred to capital redemption reserve 3,00,000
(-)Sale of investment at loss 80,000 20,000
Total 5,50,00
0
260
Illustration 4
[Forfeiture and reissue of forfeiture shares]The following were the balance of Z ltd. as on 31st December, 0910,000 Equity shares of Rs. 100 each 10, 00,000100,000, 10% Preference share of Rs. each Fully called-up 10, 00,000Less: calls in arrear [on 1500 shares] (6000) 9, 94,000Securities Premium 1, 20,000Profit & Loss A/c 6, 40,000Revenue Reserves 2, 60,000Bank Balance 5, 60,000
Preference shares were redeemable on 1 July 2010 at a premiumof 10%.
On getting a reminder about payment of calls-in-arrears,shareholders holding 1000 shares paid their dues on 1 April 09along with interest Rs. 200 on calls-in-arrears. The shareholdingthe remaining share on which calls were due was not tracbleconsequently, the directors forfeited those shares and re-issuedthem as fully paid on 1 May 2010 on receiving Rs. 9 per share
On 15 June 10, 5000 Equity share of Rs. 100 were issued @Rs. 120 per share for the purpose of redemption.
Repayments were compiled on 1 July 2010 except in thecase of one shareholder, holding 1000 shares, who was expired.
Your are required to show the journal entries,
Solution: In the books of Z Ltd.
Date Particulars Dr. Rs. Cr. Rs.
1 April 10 Bank A/c Dr.
To Calls in Arrears A/c
To Interest on Calls in Arrear A/c
[Being call dues as interest onarrears received]
4,200
4,000
200
1 April 10 10% Preference Share Capital A/c Dr.
To Calls in Arrear A/c
To Share Forfeited A/c
[Being 500 Preference shares of Rs.10 forfeited for non-payment of calldue]
5,000
2,000
3,000
261
1 May 10 Bank A/c Dr.
Share Forfeited A/c Dr.
To 10% Preference Share CapitalA/c
[Being 500 forfeited Preferenceshares reissued as fully paid at Rs.9 per shares]
4,500
500
5,000
1 May 10 Share Forfeited A/c Dr.
To Capital Reserve A/c
[Being balance in Share ForfeitedA/c transferred to Capital Reserve]
2,500
2,500
15 June 10 Bank A/c Dr.
To Equity Share Capital
To Securities Premium A/c
[Being 5,000 Equity shares of Rs.100 issued at premium of Rs. 20 pershares]
6,00,000
5,00,000
1,00,000
1 July 10 Profit & Loss A/c Dr.
To Preference Dividend A/c
[Being Preference dividend @ 10%on Rs.10,00,000 provided for 6month]
50,000
50,000
1 July 10 10% Preference Share Capital A/cDr.
Premium on Redemption of
Preference Share Capital A/c Dr.
Preference Dividend A/c Dr.
To Preference Shareholder's A/c
[Being Preference shareholdersclaim transferred a long as itsPreference dividend due for sixmonths]
10,00,000
1,00,000
50,000
11,50,000
1 July 10 Securities Premium A/c Dr.
To Premium on Redemption ofPreference Share Capital A/c
[Being Premium Redemption ofPreference Share Capital provided]
1,00,000
1,00,000
262
1 July 10 Profit and Loss A/c Dr.
To capital Redemption ReserveA/c
[Being C.R.R. created to the extendas redemption out of profit]
Note: CRR = Face value ofPreference share redeemed -proceeds of new issue of shares
= 10, 00,000 - 500,000
5,00,000
5,00,000
1 July 10 Preference Shareholders A/c Dr.
To Bank A/c
[Being Preference shareholdersclaim paid except on 1000 shares]
11,38,500
11,38,500
Total Claim 1150,000
Less: Pref. share capital
1000 X 10 (10,000)
Premium on redemption
10,000 X 10% (1000)
Pref. dividend for 6 month
10000 X 10% X 6
12 (500)
Amount paid 11,38,500
Illustration 5: [Fully & partly paid Preference shares given]
The balance sheet of K Ltd. on date of redemption ofPreference share is as follows.
Liabilities Rs. Assets Rs.
10% Preference share capital [Rs.50/- each fully paid]12% Preference share capital[Rs.100/- each Rs.75/- paid]Equity share capital Rs.10/- eachCapital Redemption ReserveSecurities PremiumProfit & Loss A/cOther Liabilities
2,00,000
1,50,0004,00,0001,00,000
75,0003,00,0002,75,000
Fixed AssetsInvestments [face value Rs.2,50,000/-]Other Current AssetsBank
6,40,0003,00,000
4,50,000110,000
15,00,000 15,00,000
263
To redeem Preference share following resolution is passed.a) Preference shares are to be redeemed at a premium of 10%b) Investment are to be sold at a profit of 10%c) 5,000 Equity shares of Rs. 10 each are to be issued of 50%
premium, for the purpose of redemption of Preferenceshares. Pass journal entries to record the above transactionsand also prepare balance sheet after redemption ofPreference shares.
Solution:K Ltd.Journal
Date/
No.
Particulars L/F Dr. Rs. Cr. Rs.
1. Bank A/c Dr.
To Investment A/c
To Profit & Loss A/c
[Being sale of Investment at profit]
3,30,000
3,00,000
30,000
2. Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 5000 Equity shares of Rs. 10 each issued at 50% premium]
75,000
50,000
25,000
3. 10% Preference Share Capital A/c Dr.
Premium on Redemption of Preference Share Capital A/c Dr.
To Preference Shareholders A/c
[Being claims of Preferenceshareholders transferred]
2,00,000
20,000
2,20,000
4. Securities Premium A/c Dr.
To Premium on Redemption ofPreference Capital A/c
[Being premium on redemption of Preference shares of written off]
20,000
20,000
5. Profit & Loss A/c Dr.
To Capital Redemption Reserve A/c
[Being C.R.R. created to the extend redemption of Preference share capital out of profit.
1,50,000
1,50,000
6. Preference Shareholder's A/c Dr.
To Bank A/c
[Being Preference shareholders claimpaid]
2,20,000
2,20,000
264
Note:
1. Only fully paid Preference shares can be redeemed as persec. 80 companies Act.
2. As the call on 12% Preference share capital is not madesome cannot be repaid.
3. C.R.R. = Nominal value of proceeds of new Preferenceshare less issue of shares capital
= 200,000 - 50,000
= 150,000K Ltd.
Balance sheet (after redemption)
ParticularsNotes As on _____
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share capital 1 6,00,000
(b) Reserves and surplus 2 5,10,000
11,10,000
3 Current liabilities
(c) Other current liabilities 2,75,000
TOTAL 13,85,000
II ASSETS
1 Non-current assets
(a) Fixed assets
Tangible assets 6,40,000
2 Current assets
(a) Cash and Bank Balances 2,95,000
(b) Other current assets 4,50,000
TOTAL 13,85,000
265
K Ltd.
Notes to Financial Statements for the year ended ______
As at __________
Number Rs
Note "1" : SHARE CAPITAL
Authorised Shares
Equity Shares of `10 each -
12% Cum Pref Shares of `100 each
Issued, Subscribed & Fully Paid up Shares
Equity Shares of `10 each 45,000 4,50,000
Issued, Subscribed &Partly Paid up Shares
12% Cum Pref Shares of `100 each(Rs. 75 called) 2,000 1,50,000
Total 47,000 6,00,000
Note "2" : RESERVES & SURPLUS
As at ________
Surplus
Reserves & Surplus
Securities Premium 75,000
Add:Received on new issue 25,000
Less : used for premium on redemption 20,000 80000
Capital Redemption Reserve 1,00,000
Transfer from Profit & Loss Account 1,50,000 2,50,000
Profit & Loss Account (Surplus/Deficit) 3,00,000
(-)Transferred to captal redemption reserve 1,50,000
(+)Sale of investment atProfit 30,000 1,80,000
Total 510000
Illustration 6: [Fresh Issue of shares at discount]The Preference shares of RK Ltd. are due for redemption on 1 April08 at a premium of Rs. 5 per shares. For the purpose ofredemption, a minimum number of Equity shares of Rs. 10 each at10% discount are issued by the company part of Investment costingRs.1,00,000/- sold for Rs.1,05,000/-.
266
Pass necessary journal entries affecting redemption ofPreference shares.
The Balance Sheet of RK Ltd. as on 31.3.12
Liabilities Rs. Assets Rs.
3,000 9% Pref. Shares of Rs.100/- each 3,00,000(-) Call-in Arrears @ Rs.20/- (10,000)Equity Share Capital [Rs.10]Profit and Loss A/c10% Debentures [Rs.100]Fixed DepositsSundry Creditors
2,90,0006,00,000
75,0002,00,0001,75,000
60,000
Land and BuildingPlant InvestmentStockDebtorsBank
7,00,0003,50,0001,20,000
40,00092,00098,000
14,00,000 14,00,000
Solution: 1) Calculation of minimum number of shares.
As minimum number of shares is to be issued, totalPreference share capital is taken into consideration: so party paidshare can be redeeming as soon as calls in arrears received.
Nominal Value of Preference share capital 300000Add: premium on redemption (3000 X 5) + 15000 315000Less: i) Profit available for redemption
Profit and loss A/c bal. 75000II) Profit on sale of Investment 5000
III) Minimum proceeds of fresh issue (80000) 235000
Equity share of Rs.10 each to be issued @10% discount.Therefore proceed of one Equity share = 10-10% = Rs.9 per share
Minimum number of shares = Minimum proceeds of new share
Proceed of one share
= , ,2 35 000
9 = 26111.11 = 26112 Equity shares of Rs. 10 each @ 10% discount.
Proceeds of fresh issue = 26112 X 9 = 2, 35,008
Capital redemption Reserve = Nominal value of Preference share To be redeemed
Less Proceeds of fresh issue of shares. = 2, 50,000 - 235008
= Rs. 14992
267
R.K. Ltd.Journal
Date Particulars LF Dr. Rs. Cr. Rs.
1.4.08
1
Bank A/c Dr.
To Investment A/c
To Profit & Loss A/c
[Being Investment realized at profit]
1,05,000
1,00,000
5,000
2 Bank A/c Dr.
Discount on issue of shares A/c Dr.
To Equity Share Capital A/c
[Being 26112 Equity shares of Rs. 10 each issued of 10 discount]
2,35,008
26,112
2,61,120
3 9% Preference Share Capital A/c Dr.
Premium on Redemption on Preference Share Capital A/c Dr.
To Preference Shareholders A/c
[Being 2500 Preference shareholder transferred at 10% premium.]
2,50,000
12,500
2,62,500
4 Profit and loss A/c Dr.
To Premium on Redemption of Preference Share Capital A/c
[Being premium on Redemption of Preference Share Capital provided]
12,500
12,500
5 Profit and Loss A/c Dr.
To Capital Redemption Reserve A/c
[Being C.R.R. created out of Profit and Loss A/c to the extend redemption out of profit]
14,992
14,992
6 Preference Shareholders A/c Dr.
To Bank A/c
[Being Preference shareholder claim paid]
2,62,500
2,62,500
Illustration 7: [Redemption by conversion] The Preference Shares of H. Ltd. are redeemable (5%
premium and Debentures are redeemable @ 10% premium). Forredemption of Preference Shares and the Debentures the companyoffered to the redeemable Preference shareholders and theDebenture holders the options to convert their holdings into EquityShares, which are to be treated as worth Rs.12.50 each.
1/3rd of the Preference shareholders and 1/2 of thedebenture holders agreed to do this. The company issued 40,000Equity Shares of Rs.10/- each Rs.12.50 to the public for cash andwith funds available paid off the bank loan and redeemed theremaining redeemable Preference Shares and Debentures.
268
The summarized Balance Sheet of H Ltd. as at 31st March 2012was as follows
Liabilities Rs. Assets Rs.
Share Capital9% Redeemable PreferenceShare of Rs.100/-Equity Shares of Rs.10/- eachProfit & Loss A/c7% Debentures.Bank LoanCreditors
3,00,0004,00,0003,50,0004,00,000
50,00096,000
Fixed AssetsGoodwill Other Fixed AssetsStockSundry DebtorsBill ReceivableAdvance TaxDiscount on issue of Debentures
1,00,0007,11,0003,50,0002,45,000
50,0001,25,000
15,000
15,96,000 15,96,000
Journalize the above transactions and prepare the Balance Sheetafter redemption.Solution:
H. Ltd.Journal
Date1.4.09
Particulars LF Dr. Rs. Cr. Rs.
1. Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 40,000 Equity shares of Rs.10/-each issued @ Rs.2.50 premium pershare]
5,00,000
4,00,000
1,00,000
2. 9% Preference Share Capital A/c Dr.
Premium on Redemption of PreferenceShare A/c Dr.
To Preference Shareholders A/c
[Being Preference shareholders claimtransferred]
3,00,000
15,000
3,15,000
3. Securities Premium A/c Dr.
To Premium on Redemption ofPreference Shares A/c
[Being premium on redemption provided]
15,000
15,000
4. Preference Shareholders A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 8,400 Equity shares of Rs.10/-each issued @ Rs.12.50 as per option by1,000 Preference shareholders]
1,05,000
84,000
21,000
5. Preference Shareholders A/c Dr.
To Bank A/c
[Being balance Preference shareredeemed in cash]
2,10,000
2,10,000
269
6. 7% Debentures A/c Dr.
Premium on Redemption of Debentures A/c
To 7% Debentures holders A/c
[Being debenture holders claimtransferred]
4,00,000
40,000
4,40,000
7. Securities Premium A/c Dr.
To Premium on Redemption ofDebentures A/c
To Discount on issue of Debentures A/c
[Being premium on redemption ofDebentures and discount on Debentureswritten off]
55,000
40,000
15,000
8. Debenture holder's A/c Dr.
To Equity Share Capital A/c
To Security Premium A/c
[Being half of debenture holders claimdischarged by issuing Equity shares of Rs.10 each @ Rs. 12.50]
2,20,000
1,76,000
44,000
9. Debenture holders A/c Dr.
To Bank A/c
[Being remaining debenture holders claimsettled in cash]
2,20,000
2,20,000
10. Bank Loan A/c Dr.
To Bank A/c
[Being bank loan repaid]
50,000
50,000
Working Notes:
1. No. of shares issued on conversion =Amount payable
Issue price per share
∴No. of Equity Shares issued to Preference shareholders
=1,05,000
12.50 = 8,400 Equity shares of Rs.10/- each @ Rs.12.50
No. of shares issued to debenture =,
.
2 20,000
12 50 = 17,600 Equity
shareholders of Rs.10/- each @ Rs.12.50
2. Preference capital - redeemed - 3,00,000
Fresh issue on conversion - 84,000
To debenture holder 1,76,000
For cash consideration 4,00,000
C.R.R. required NIL
270
H Ltd.Balance sheet as on 1 April 2012
ParticularsNotes As on _____
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share capital 1 10,60,
000
(b) Reserves and surplus 2 4,45,000
Total 15,05,
000
2 Current liabilities
(c) Other current liabilities
96,000
TOTAL 16,01,000
II ASSETS
1 Non-current assets
(a) Fixed assets
Tangible assets 7,11,0
00
Intangible assets 1,00,000
2 Current assets
(a) Inventories 3,50,0
00
(b) Short Term Advances
Advance Tax 1,25,000
(c) Trade Receivables
Debtors 2,45,000
Bills Receivable 50,000
(d) Cash and Cash Equivalents 20,000
TOTAL 16,01,000
H Ltd.
Notes to Financial Statements for the year ended ______
As at ________
Number Rs
Note "1" : SHARE CAPITAL
Authorised Shares
Equity Shares of `10 each -
Issued, Subscribed & Fully Paid up Shares
Equity Shares of `10 each 1,06,000 10,60,000 [In dues 66,000 Equity shares of Rs.10/- each issued on conversion to Preference shareholders and debenture holders]
Total 1,06,000 10,60,000
271
Note "2" : RESERVES & SURPLUS
As at ____
Surplus
Reserves & Surplus
Securities Premium
Add: Received on new issue 1,00,000
Less : used for premium on redemption 15000
Less : used for premium on redemption 40,000
Add: Received on conversion of deb 44,000
Add: Received on conversion of pref sh 21,000
Less : used for Discount on debentures 15,00095,000
Profit & Loss A/c 3,50,000
Total 4,45,000
Illustration 8 [Computation of number of share for redemption]
M Ltd. has an issued share capital of 1000, 7% redeemablePreference shares of Rs. 100 each and 5000 Equity shares of Rs.100 each. The Preference share redeemable at a premium of Rs.5per share was redeemed on 1st April 2012.
Balance sheet of M Ltd. as on 31st March 2012
Particulars Rs. Rs.
Sources of FundsShare CapitalIssued and paid up1,000 7% Preference shares of Rs.100/- fully paid 5000 Equity Shares of Rs.100/- each fully paidProfit and Loss A/c12% DebenturesTotalApplication of fundsFixed AssetsInvestmentsCurrent assetsBank balanceLess: Current LiabilitiesTrade Creditors
1,00,0005,00,000
60,000
42,000
6,00,00062,000
2,00,0008,62,000
8,04,00040,000
18,000
8,62,000
In order to facilitate the redemption of the Preference shares,the company decided:
a) To sell all the Investment for Rs.45,000/-
b) To finance part of the redemption from company funds,subject to leave a balance of Rs.27,000/- in the profit andloss A/c
272
c) To issue sufficient Equity shares of Rs.100/- each at apremium of Rs.25/- per share to raise the balance fundsrequired.
The Preference shares were redeemed on the due date andissue of Equity fully subscribed.
You are required to i. The necessary journal entries to record above transactions.ii. Balance Sheet after Redemption of Preference Shares
SolutionM Ltd.
Journal
Date Particulars LF Dr. Rs. Cr. Rs.
1. Bank A/c Dr.
To Investment A/c
To Profit and Loss A/c
[Being Investments sold at profit]
45,000
40,000
5,000
2. Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 600 Equity shares of Rs.100 eachissued at Rs.25 premium per share]
75,000
60,000
15,000
3. 7% Preference Share Capital A/c Dr.
Premium on Redemption of PreferenceShares A/c Dr.
To Preference Shareholders A/c
[Being 1000 Preference share capital andpremium on redemption at 5% transfer]
1,00,000
5,000
1,05,000
4. Securities Premium A/c Dr.
To Premium on Redemption of
Preference Share Capital A/c
[Being premium on redemption ofPreference shares provided]
5000
5,000
5. Profit & Loss A/c Dr.
To Capital Redemption Reserve A/c
[Being CRR created to the extendredemption out of profit]
40,000
40,000
6. Preference Shareholders A/c Dr.
To Bank A/c
[Being Preference shareholders claim paid]
1,05,000
1,05,000
273
Balance sheet of M Ltd. as on 1/4/12
Particulars Note Amount Amount
EQUITY AND LIABILITIES1. Shareholder’s Funds
a. Share Capitalb. Reserves and Surplus
2. Non-Current LiabilitiesLong Term Borrowings
3. Current LiabilitiesTrade Payables
Total
ASSETS1.Non Current Assets
a. Fixed Assets- Tangible Assets
2. Current Assetsa. Cash and cash
equivalents
Total
12
5,60,00077,000 6,37,000
2,00,000
42,000
8,79,000
8,04,000
75,000
8,79,000
M Ltd.
Notes to Financial Statements for the year ended ______
As at __________
Number Rs
Note "1" : SHARE CAPITAL
Authorised Shares
Equity Shares of `10 each -
Issued, Subscribed & Fully Paid up Shares
Equity Shares of `10 each 5,600
5,60,000
Total 5,600 5,60,000
274
Note "2" : RESERVES & SURPLUS
As at ____
Surplus
Reserves & Surplus
Securities Premium
Add: Received on new issue 15,000
Less : used for premium on redemption 5000 10,000
Capital redemption reserve
Add: Tr. From Profit & Loss A/c 40,000
Profit & Loss A/c
Opg. Bal 62,000
Less: Tr to Capital redemption reserve 40,000
Add : Profit on Investment 5,000 27,000
Total 77,000
Working Note:
1) Minimum no. of shares to be issued Rs. Rs.
Preference shares to be redeemed 1,00,000
(-) Profit available balance 62,000
Profit on sale of Investment 5,000
67,000
(-) Profit to be retained (27,000) (40,000)
Proceed of fresh issue 60,000
600 Equity shares of Rs.100/- each to be issued at premium ofRs.25/- per share.
2) CRR = Nominal value of Preference shares redeemed - proceedof new issue of shares.
1,00,000 - 60,000 = 40,000
Illustration 9: [Converting partly Equity shares into fully paid andissue of fully paid bonus share]. The 10% Preference shares duefor redemption of 1st April 09, @ 10% premium.
275
The balance sheet of ABK Ltd. on 31st March 2012
Liabilities Rs. Assets Rs.
10% Redeemable Preference Shares of Rs.10/- each Rs.7.50 paid upEquity Shares of Rs.5/- each Rs.3/- paid upSecurity PremiumGeneral ReserveProfit and Loss A/c10% DebenturesCreditorsBills PayableOutstanding Expenses
1,50,000
1,50,0001,00,0002,00,0001,25,0001,00,000
75,00042,00023,000
I. Fixed AssetsLand & BuildingsPlant & MachineryFurnitureII. Current AssetsStockDebtorsCash & BankBills ReceivablePrepaid Insurance
4,95,0001,21,000
35,000
40,00091,500
1,71,00010,500
1,000
9,65,000 9,65,000
At the annual general meeting of the company the followingresolutions were passed.
1. To redeem the 10% Preference shares as per terms and toissue 20,000 Equity shares of Rs. 5 each at a premium ofRs. 2 per share.
2. To declare bonus at the rate of Rs.2 per Equity share for thepurpose of making the said shares fully paid.
3. To issue bonus shares to Equity shareholders including newshares in the ratio of one share for every two shares held.Pass the necessary journal entries to record the abovetransactions and prepare the balance sheet
Solution:
ABK Ltd.Journal
No. Particulars LF Dr. Rs. Cr. Rs.
1. Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 20,000 Equity shares of Rs.5/-each issued at a premium of Rs.2/- pershare]
1,40,000
1,00,000
40,000
2. Preference Share Final Call A/c Dr.
To 10% Preference Share Capital A/c
[Being final call on redemption ofPreferences shares made]
50,000
50,000
3. Bank A/c Dr.
To Preference Share Final Call A/c
[Being Preference share final call duesreceived]
50,000
50,000
276
4. 10% Preference Share Capital A/c Dr.
Premium on Redemption of PreferenceShare Capital A/c Dr.
To Preference Shareholders A/c
[Being amount due to Preferenceshareholders transferred]
200,000
20,000
220,000
5. Securities Premium A/c Dr.
To Premium on Redemption ofPreference Share Capital A/c
[Being premium on redemptiontransferred]
20,000
20,000
6. Profit and Loss A/c Dr.
To Capital Redemption Reserve A/c
[Being C.R.R. created to the extendredemption out of profit]
1,00,000
1,00,000
7. Preference Shareholder's A/c Dr.
To Bank A/c
[Being Preference shareholder's dueson redemption paid]
2,20,000
2,20,000
8. Equity Share Final Call A/c Dr.
To Equity Share Capital A/c
[Being final call on 50,000 Equity shares@ Rs.2/- per share]
1,00,000
1,00,000
9. General Reserve A/c Dr.
To Bonus to Equity Shareholders A/c
[Being bonus @ Rs.2/- per Equity shareon 50, shares]
1,00,000
1,00,000
10. Bonus to Equity Shareholder's A/c Dr.
To Equity Share Final Call A/c
[Being bonus adjusted with final callsdues]
1,00,000
1,00,000
11. Capital Redemption Reserve A/c Dr.
Securities Premium A/c Dr.
To Bonus to Shareholders A/c
[Being sanctioned at the rate of oneEquity shares for every two shares ofRs.5/- paid]
1,00,000
75,000
1,75,000
12. Bonus to Shareholders A/c Dr.
To Equity Share Capital A/c
[Being 35000 Equity shares of Rs.5/-each issued]
1,75,000
1,75,000
277
Balance sheet of ABK Ltd. as on ... (After bonus)
Particulars Note Amount Amount
EQUITY AND LIABILITIES1. Shareholder’s Funds
a. Share Capitalb. Reserves and
Surplus2. Non-Current
LiabilitiesLong Term Borrowings
3. Current Liabilitiesa. Trade Payablesb. Short term liabilities
TotalASSETS
1. Non Current AssetsFixed Assets
- Tangible Assets2. Current Assets
a. Inventoriesb. Trade receivablesc. Cash and cash
equivalentsd. Other current assets
Total
12
3
5,25,0001,70,000
2,17,00023,000
40,0001,02,0001,41,000
1,000
6,95,000
1,00,000
2,40,000
9,35,000
6,51,000
2,84,000
9,35,000
M Ltd.
Notes to Financial Statements for the year ended ______
As at __________
Number Rs
Note "1" : SHARE CAPITAL
Authorised Shares
Equity Shares of `5 each -
Issued, Subscribed & Fully Paid up Shares
Equity Shares of `5 each 1,05,000 5,25,000
Total 1,05,000 5,25,000
278
Note "2" : RESERVES & SURPLUS
As at________
Surplus
Reserves & Surplus
Securities Premium
Opening Balance 1,00,000
Add: Received on new issue 40,000
Less : used for premium on redemption 20,000
Less: used for issue of bonus 75,000 45,000
Capital redemption reserve
Add: Tr. From Profit & Loss A/c 1,00,000
Less: used for issue of bonus 1,00,000
General Reserve
Opening Balance 2,00,000
Less: used for issue of bonus 1,00,000 1,00,000
Profit & Loss A/c
Opg. Bal 1,25,000
Less: Tr to Capital redemption reserve 1,00,000 25,000
Total 1,70,000
Note "3" : FixedAssets
As at ________
Tangible Assets
Land & BuildingPlant & MachineryFurniture
4,95,0001,21,000
35,000 6,51,000
Working notes: 1Bank A/c
Particulars Amt. Particulars Amt.
To Balance b/dTo Equity Share Capital A/cTo Securities Premium A/cTo Preference Share Final Call A/c
1,71,000
1,00,000
40,000
50,000
By Preference Shareholders A/c By Bal c/fd
2,20,0001,41,000
3,61,000 3,61,000
279
2. Only fully paid Preference shares can be redeemed. Thereforefinal call on Preferences shares is made and received.
3. Issue of partly paid shares (call) is provided out of general
reserves 1,50,000
=5,000 shares × 2.507.5
4. C.R.R. Rs.
N.V. of Preference share capital redeemed 2, 00,000
Less: proceeds of fresh issued of shares - 1, 00,000
C.R.R. Rs. 1, 00,000
Illustration 10 [Calls in arrears and proposed dividend]
The undernoted balances were extracted from the
Ledger of S Ltd.
No. Particulars Rs.
1.
2.3.4.5.6.
1,00,000 10% Preference share of Rs.10/- eachLess calls in arrears @ Rs.4/- per shareAmount paid upSecurity PremiumInvestment Allowance ReserveGeneral ReserveProfit and Loss A/cProposed dividend since sanctioned on Preference Shares.
10,00,000
(2,000)9,98,0002,00,0007,50,0002,50,0005,81,000
99,500
The directors redeemed the Preference shares of Rs.10/-each at Rs.12/- and for the purpose made a fresh issue of Equityshares of Rs.10/- each at Rs.9.50 for such amount as wasnecessary for the purpose after utilizing the available sources to themaximum extend and satisfying amount of sanction Preferencesshare dividend. Rs.4,00,000/- of the Investment allowance reservesis free for distribution as dividend.
Give journal entries recording above transactions.
280
Solution:Journal of S Ltd.
No. Particulars Dr. Rs. Cr. Rs.
1. Bank A/c Dr.
Discount on issue of shares A/c Dr.
To Equity Share Capital A/c
[Being 30200 Equity shares of Rs.10/- each issued @ Rs.9.50 each]
2,86,900
15,100
3,02,000
2. 10% Preference Share Capital A/c Dr.
Premium on Redemption of Preference Share A/c Dr.
To Preference Shareholders A/c
[Being amount payable to Preference shareholders on redemption of 99500 Preference shares of Rs.10 each of premium of Rs. 2 per share]
9,95,000
1,99,000
11,94,000
3. Securities Premium A/c Dr.
To Premium on Redemption of Preference Shares A/c
[Being premium payable on redemption of Preference share written off]
1,99,000
1,99,000
4. Investment Allowance Reserved A/c Dr.
General Reserve A/c Dr.
Profit and Loss A/c Dr.
To Capital Redemption Reserve A/c
[Being amount transferred C.R.R. to the extent required under law]
4,00,000
2,50,000
58,100
7,08,100
5. Preference shareholders A/c Dr.
To Bank A/c
[Being amount paid to Preference shareholders]
11,94,000
11,94,000
6. Proposed Preference Dividend A/c Dr.
To Bank A/c
[Being Preference dividend paid]
99,500
99,500
Working Note:
1. Only fully paid Preference shares can redeemed
∴2,000
1,00,000 – = 99,5004
Preference share can be
redeemed.
281
2. Rs. Rs.Fresh issue of Equity Shares
N.V. of Preference Share [99,500×10]9, 95,000
Less: Divisible profits Investment allowance Reserve 4, 00,000General Reserve 2, 50,000Profit and Loss bal. 58,100 7, 08,100
Proceeds of fresh issue of Equity share 2, 86,900
∴No. of Equity share issued
= Proceeds of New Issue of Share
Proceed of one share2,86,900
= = 30,2009.50
Equity shares
Illustration 11 (Determining issue of Equity share by usingalgebraic equation)
Balance sheet of MJ Ltd. ason 31st March 2012
Liabilities Rs. Assets Rs.
10% Preference Shares of Rs.20/- each Rs.15/- paid up
Equity Shares of Rs.20/- eachfully paid up
Security Premium A/c
Profit and Loss A/c
Current Liabilities
3,75,000
6,00,000
5,000
45,000
1,25,000
Fixed Assets
Bank Balance
Other Current Assets
Investments
6,64,000
1,10,000
4,25,000
51,000
11,50,000 11,50,000
The Board of director has recommended that
i) Investment to be realized for Rs.58,000/-
ii) Preference shares to be redeemed @ 10% premium.
iii) Issue of minimum number of Equity shares of Rs.20/- each@10% premium.
iv) Assuming that all the formalities required under section 80Companies Act, were compiled with.
You are required to give the journal entries and prepare theBalance Sheet.
282
Solution:MJ Ltd.Journal
No. Particulars LF Dr. Rs. Cr. Rs.
1. Preference Share Final Call A/c Dr.
To 10% Preference Share Capital
[Being final call of Rs.5/- per share on25,000 Preference share made]
1,25,0001,25,000
2. Bank A/c Dr.
To Preference Share Final Call A/c
[Being amount of final call received]
1,25,0001,25,000
3. Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
[Being 22,410 Equity Shares of Rs.20/- each issued @ 10% premium]
4,93,0204,48,200
44,820
4. Bank A/c Dr.
To Investment A/c
To Profit & Loss A/c
[Being Investment sold at profit]
58,00051,000
7,000
5. 10% Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c Dr.
To Preference Shareholders A/c
[Being amount payable on redemptionof Preference Share plus premium on redemption transferred to Preference shareholders]
5,00,000
50,0005,50,000
6. Securities Premium A/c Dr.
Profit and Loss A/c
To Premium on Redemption of Preference Share A/c
[Being Premium on Redemption as Preference Shares adjusted]
49,820
18050,000
7. Profit and loss A/c Dr.
To capital redemption reserve A/c
[C.R.R. created to the extent redemption out of profit]
51,80051,800
8. Preference Shareholders A/c Dr.
To Bank A/c
[Being amount due to Preference shareholder paid]
5,50,0005,50,000
283
MJ Ltd.Balance Sheet as on 31st March 2012
Particulars Note Amount Amount
EQUITY AND LIABILITIES1. Shareholder’s Funds
a. Share Capitalb. Reserves and
Surplus2. Current Liabilities
a. Other currentliabilities Total
ASSETS3. Non Current Assets
a. Fixed Assets- Tangible Assets
b. Current Assetsb. Cash and cash
equivalentsc. Other current assets
Total
12
10,48,20051,820 11,00,020
1,25,000
42,000
12,25,020
6,64,000
1,36,020
4,25,000
12,25,020
MJ Ltd.
Notes to Financial Statements for the year ended ______
As at __________
Number Rs
Note "1" : SHARE CAPITAL
Authorised SharesEquity Shares of `10 each
-
Issued, Subscribed & Fully Paid up SharesEquity Shares of `10 each 1,04,820
10,48,200
Total 1,04,820 10,48,200
284
Note "2" : RESERVES & SURPLUS
As at _____
Surplus
Reserves & Surplus
Securities Premium
Opening Bal 5,000
Add: Received on new issue 44,820
Less : used for premium on redemption 49,820 -
Capital redemption reserve
Add: Tr. From Profit & Loss A/c 51,800
Profit & Loss A/c
Opg. Bal 45,000
Less: used for premium on redemption 180
Less: Tr to Capital redemption reserve 51,800
Add : Profit on Investment 7,000 20
Total 51,820
Working Note:
Paid Preference shares can be redeemed. Therefore final callshould make and received then only Preference shares can beredeemed.
1. Final call = 3,75,000
= 25,000 Preference Shares × Rs.5/ –15
= Rs.1,25,000/ –
2. The given balance in Securities Premium and premium receivedon new issue of shares is insufficient for providing premiumpayable. The number of new issue of share is to be determinedby algebraic equation.
Let N.V. of Equity share to be issued = x
∴Premium received = 0.10x on new issue
N.V. of Preference share capital = Balance in SecuritiesPremium + Premium on redemption = Balance in Profit & LossA/c + New issue + premium received on new issue
5,00,000 + 50,000 = 5,000 + 52,000 + x + 0.10 x
∴5, 50,000 = 57,000 + 1.10x
∴5, 50,000 – 57,000 = 1.10x
∴x = 4,48,182
285
∴No. of fresh issue of Equity Share 4,48,182
= 20
= 22,409.10 = 22,410 Equity shares
i.e. 22,410 Equity shares of Rs.20/- each @ 10% premium(Rs.2/- per share)
3. Premium on redemption = Rs.50,000/- Sources of premium payable Securities Premium [5000 + 44820] 49,820 Balance from Profit & Loss A/c 180
50,000
4. C.R.R. = N.V. of Preference share less proceeds of fresh issueof shares = 5,00,000 – 4,48,200 = Rs.51,800
5. Bank A/c Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance To Final Call A/cTo Equity Share A/cTo Securities Preference A/cTo Investment A/c
10,0001,25,0004,48,200
44,82058,000
By Preference Shareholder A/cBy Balance
5,30,000
1,36,020
6,86,020 6,86,020
Illustration 12 [New issue at discount]
KPM Ltd. decided to redeem their Preference shares on 31st
December 2012 on that date their balance sheet was as under:
Liabilities Rs. Assets Rs.
Share Capital50,000 Equity Shares of Rs.10/- each 50,000; 9% Redeemable Preference Shares of Rs.10/-Rs.5/- paid up75,000; 10% PreferenceShares of Rs.10/- fully paidReserves & SurplusSecurities PremiumCapital ReserveDividend Equalization ReserveProfit & Loss A/cSecured Loan10% DebenturesCurrent Liabilities
5,50,000
2,50,000
7,50,000
75,00025,000
2,10,0002,45,000
3,00,0001,20,000
Fixed Asset 23,55,000(-) Acc.Depn. 6,50,000InvestmentCurrent AssetBank Balance
17,05,0002,00,0003,50,0002,20,000
24,75,000
24,75,000
286
Preference shares are to be redeemed @ 5% premium. Forthe purpose of redemption the co. decided to issue, after carryingout the necessary formalities required under law. Minimum numberof Equity shares of Rs. 10/- each at a discount of 10%. Redemptionis duly carried out. Fixed assets costing Rs.4,50,000/-.Accumulated depreciation there on was Rs.90,000/- was sold forRs.3,85,000/-. Investment was sold for Rs,2,90,000/-. Shownecessary ledger accounts & prepare balance sheet afterredemption.
Solution:In the books of KPM Ltd
Preference Share Capital A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Preference Shareholder A/c 7,50,000
By Bal b/d 7,50,000
7,50,000 7,50,000
Equity share capital A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Bal c/d 7,00,000 By Bal B/dBy Bank A/cBy Discount on issue of
Equity Shares A/c
5,00,0001,80.000
20,000
7,00,000 7,00,000
Securities Premium A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Premium on Redemption of
Pref. Shares A/cTo Bal c/d
37,50037,500
By Bal B/d 75,000
75,000 75,000
Dividend Equalization Reserve A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Capital Redemption Reserve A/c
2,10,000 By Bal B/d 2,10,000
2,10,000 2,10,000
287
Premium on Redemption of Preference Shares A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Preference Shareholders A/c
37,500 By Securities Premium A/c
37,500
37,500 37,500
Profit & Loss A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Capital Redemption Reserve A/c
3,60,000 By Bal B/dBy Profit on Sale of Fixed Assets A/cBy Profit on Sale of Investment A/c
2,45,000
25,000
90,000
3,60,000 3,60,000
Fixed Asset (at cost)Dr. Cr.
Particulars Rs. Particulars Rs.
To Bal b/dTo Profit & Loss A/c
23,55,00025,000
By Accumulated Depreciation A/cBy Bank A/cBy Bal c/d
90,0003,85,000
19,05,000
23,80,000 23,80,000
Accumulated depreciation A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Fixed Asset A/cTo bal c/d
90,0005,60,000
By Bal B/d 6,50,000
6,50,000 6,50,000
Preference Shareholders A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Bank A/c 7,87,500 By 10% Preference Share Capital A/cBy Premium on Redemption of Preference Share A/c
7,50,000
37,500
7,87,500 7,87,500
288
Investment A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Bal b/dTo Profit & Loss A/c
2,00,00090,000
By Bank A/c 2,90,000
2,90,000 2,90,000
Capital Redemption Reserve A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Bal b/d 5,70,000 By Dividend Equalization Reserve A/cBy Profit & Loss A/c
2,10,0003,60,000
5,70,000 5,70,000
Discount on Issue of Shares A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Equity Share Capital A/c
20,000 By Bal B/d 20,000
20,000 20,000
Balance sheet as on 31st December, 2012
Particulars Note Amount Amount
EQUITY AND LIABILITIES1. Shareholder’s Funds
a. Share Capitalc. Reserves and Surplus
2. Non-Current LiabilitiesLong Term Borrowings
3. Current LiabilitiesOther current Liabilities Total
ASSETS1. Non Current Assets
a. Fixed Assets- Tangible Assets
2. Other Non-CurrentAssets
a. Discount on issue ofshares
3. Current Assetsa. Other current Assetb. Cash and cash
equivalents
Total
12
3
9,50,0006,32,500
3,50,0002,85,000
15,82,500
3,00,000
1,20,000
20,02,500
13,45,000
20,000
6,35,000
20,02,500
289
Notes to Accounts
As at 31 March2009
Number `
Note "1" : SHARE CAPITAL
Authorised Shares
Equity Shares of `10 each
Redeemable Pref Shares of `5 each
Issued, Subscribed & Fully Paid up Shares70,000 Equity Shares of `10 each 70,000
7,00,000
50,000 Redeemable Pref Shares of `5 each 5000 2,50,000
Total 75,000 950000
Note "2" : RESERVES & SURPLUS
As at _______
Surplus
Reserves & Surplus
Securities Premium
Opening Balance 75,000
Less: used for premium on redemption 37,500 37,500
Capital redemption reserve
Add: Tr. From Profit & Loss A/c 3,60,000
Add: Tr. From Dividend equalisation reserve
2,10,0005,70,000
Profit & Loss A/c
Op. Bal 2,45,000
Add : Profit on Investment 25,000
Add : Profit on Fixed Assets 90,000
Less: Tr to Capital redemption reserve 3,60,000 -
Capital Reserve 25,000
Total 6,32,500
Note "3”: Tangible Assets
Assets Gross Block Provision for
Depreciation
Net Block
Opening Additions Closing Opening Additions Closing Opening closing
Tangible
Assets
23,55,000 (4,50,000) 19,05,000 6,50,000 (90,000) 5,60,000 17,05,000 13,45,000
290
Working Notes:
I. Only fully paid Preference Shares can be redeemed. As callon 9% Preference shares is not made, it is not redeemed
II. Proceeds of new issue:Nominal value of Preference shares 7,50,000Less : Profits available for redemptionDividend equalization reserve 2,10,000Profit & Loss A/c 3,60,000 5,70,000Proceeds of new issue 1,80,000
No. of Equity shares of Rs.10/- issued at Rs.9/- each
Proceeds reqired 1,80,000 = = 20,000
proceeds of one share 9
∴20,000 Equity Shares of Rs. 10/- issued at Rs.9/-
III. Premium payable on redemption of Preference shares isprovided from Securities Premium.
Illustration 13 [Minimum cash balance and bonus]
The following is the Balance Sheet of Y Ltd. as at 31st March 08
Liabilities Rs. Assets Rs.
I Share capital
Authorized
25,000 12% Redeemable
Preference Shares of Rs.20/- each
1,00,000 Equity Shares of Rs.20/- each
Issued, subscribed & paid up
25000, 12% Redeemable
Preference Shares of Rs.20/- each
25,000 Equity Shares of Rs.20/- each
II Reserves and Surplus
Securities Premium
General Reserve
Profit & Loss A/c
III Secured Loans
IV Unsecured Loans
Fixed Deposits
V Current Liabilities
Provisions
5,00,000
20,00,000
25,00,000
5,00,000
5,00,000
1,00,000
2,50,000
62,500
NIL
50,000
1,20,500
I Fixed Assets
II Investments
III Current Assets And Loans & Advances
Inventory
Stores
Sundry Debtors
Bank Balance
IV Miscellaneous Expenditure
(to the extent not written off)
Preliminary EXP.
9,23,000
2,40,000
50,000
40,000
1,05,000
1,85,000
40,000
15,83,000 15,83,000
291
The following information is available with regards to company'soperations:
a) Y Ltd. redeemed the Preference Shares at a premium of 5%along with the Preference dividend for the ended 31st March 09.All payments were made except to the holder of 500 Preferenceshares.
b) Investment costing Rs.2, 00,000/- sold for Rs. 3,10, 000/-.
c) Except Bank balances Other Current Assets and CurrentLiabilities as on 31st March 09 were the same as on 31.03.08.
d) The company issued Bonus Shares in the ratio of one share ofevery two Equity share held on 31.03.09.
e) The company repaid Fixed Deposit, For the year ended 31/3/09,the company earned a Net Profit of Rs.1,75,000/- after providingRs.40,000/- depreciation and writing off the half of PreliminaryExpenditure.
Journalize the transition which took place during year 2008-2009
Solution: Journal of Y Ltd.
No. Particulars Dr. Rs. Cr. Rs.
1. Bank A/c [Cash profit] Dr.
To Profit & Loss A/c
[Being net profit made for the year ended 31.3.09]
2,35000
2,35,000
2. Bank A/c Dr.
To Investment A/c
To Profit & Loss A/c
[Being amount realized on sale of Investment]
3,10,000
2,00,000
1,10,000
3. Profit & Loss A/c Dr.
To Preference Dividend A/c
[Being Preference Dividend @ 12% on Rs.500,000 Preference Share Capital]
60,000
60,000
4. 12% Preference Share capital A/c Dr.
Premium on Redemption A/c Dr.
Preference dividend A/c Dr.
To Preference Share holders A/c
[Being the amount payable to Preferenceshareholder including dividend transfer]
5,00,000
25,000
60,000
5,85,000
292
5. Securities Premium A/c Dr.
To Premium on Redemption A/c
[Being Premium on Redemption of PreferenceShare Capital provided]
25,000
25,000
6. Profit & Loss A/c Dr.
General Reserve A/c Dr.
To Capital Redemption Reserve A/c
[Being transfer to C.R.R. A/c on redemption ofPreference Shares]
2,87,500
2,12,500
5,00,000
7. Preference Shareholder's A/c Dr.
To Bank A/c
[Being payments on redemption of 12%Preference Shares, including Preference dividendexcept on 500 shares]
5,73,300
5,73,300
8. Capital Redemption Reserve A/c Dr.
To Bonus to Shareholders A/c
[Being amount adjusted for issuing Bonus Sharesin the ratio of 1:2 on 25000 Equity Shares]
2,50,000
2,50,000
9. Bonus to Shareholders A/c Dr.
To Equity Share Capital A/c
[Being Bonus Shares issued]
2,50,000
2,50,000
10. Fixed Deposit A/c Dr.
To Bank A/c
[Being Fixed Deposit repaid]
50,000
50,000
Working Notes:
1. Profit and loss A/c Bal. as on 31.3.09 Rs.Balance as on 31.3.08 62,500Profit for the year 1,75,000Profit on sale of Investment 1,10,000Preference dividend paid (60,000)Balance used for C.R.R. 2,87,500
2. Payments to Preference shareholders Rs.Total claim including dividend 5,85,000
Less : unpaid on 500 shares
Capital 500 × 20 10,000
Premium @ 5% 500Preference dividend @ 12% 1,200 (11,700)
Payments made to Preference shareholder 5,73,300
293
Illustration 14(Shares forfeited and calculation of fresh issue ofshares)
The Balance Sheet of B.R. Ltd. as at 31st March 12
Liabilities Rs. Rs. Assets Rs. Rs.
2,000 Equity shares of Rs.100/- each fully paid
20,000 10% Redeemable Preference Shares of Rs.50/- each fully called up
Less : calls in arrears @ Rs.10/- each
Security Premium
Capital Redemption Reserve
General Reserve
Profit & Loss A/c
10% Debenture [Rs.100/-each]
Sundry Creditors
10,00,000
(5,000)
2,00,000
9,95,000
10,000
50,000
2,10,000
1,60,000
2,00,000
1,50,000
Fixed Assets
Sundry Debtors
Inventories
Marketable Securities
Bank balance
(Miscellaneous Expenditures to the extent not written off)
Discount on Issue of
Debentures
9,90,000
3,20,000
2,00,000
4,00,000
60,000
5,000
19,95,000 19,95,000
10% Redeemable Preference Shares were due forredemption on 1st April 09 at a premium of 10%.
Company sent reminders for the final call on 500, 10%Preference Shares and could collect money from shareholdersholding 300 shares and forfeited remaining defaulting shares.
Marketable securities sold for Rs.4,20,000/- Companyissued adequate number of new Equity Shares of Rs.100/- each @25% premium, to the extent available profits were insufficient toback up the redemption.
10% Debenture also, due for redemption @5% Mr. Kaleholding 200 Preference shares and 100 Debentures could not betraced and payment due to him on redemption of shares andDebentures could not be paid to him.
Prepare necessary ledger A/cs and prepare the BalanceSheet of the company after redemption.
Solution:In books B.R. Ltd.
Equity Share Capital A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Bal c/fd 8,00,000 By Bal b/fdBy Bank A/c
2,00,0006,00,000
8,00,000 8,00,000
294
10% Preference Share Capital A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Share Forfeited A/c [200 x 50]To Preference
Shareholder A/c
10,000
9,90,000
By Bal b/fd 10,00,000
10,00,000 10,00,000
Calls in Arrears A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Bal b/fd 5,000 By Bank A/cBy Shares Forfeited A/c
3,0002,000
5,000 5,000
Shares forfeited A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Calls in Arrears A/cTo Capital Reserve A/c
2,0008,000
By 10% Preference Share Capital A/c 10,000
10,000 10,000
Securities Premium A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Premium on Redemption of Preference Shares A/c
To Premium on Redemption of
Debentures A/cTo Dis. on Issue
Debentures A/cTo Balance c/fd
99,000
10,000
5,00046,000
By Balance b/fdBy Bank A/c
10,0001,50,000
1,60,000 1,60,000
General Reserve A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Capital Redemption Reserve A/c
2,10,000 By Bal b/fd 2,10,000
2,10,000 2,10,000
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10% Debentures A/c
Dr. Cr.Particulars Rs. Particulars Rs.
To Debenture holders A/c
2,00,000 By Bal b/fd 2,00,000
2,00,000 2,00,000
Profit & Loss A/c
Dr. Cr.Particulars Rs. Particulars Rs.
To Capital Redemption Reserve A/c
1,80,000 By Balance b/fdBy Marketable
Securities A/c
1,60,000
20,000
1,80,000 1,80,000
Preference Shareholders A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Bank A/cTo Balance c/fd
[dues to Mr. Kale] (200 x 55)
10,78,00011,000
By 10% Preference Share Capital A/cBy Premium on
Redemption Pref. Capital A/c
9,90,000
99,000
10,89,000 10,89,000
Debenture holders A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Bank A/cTo Balance c/fd
[dues to Mr. Kale] (100 x 105)
1,99,50010,500
By 10% Debentures A/cBy Premium on
Redemption of Debentures A/c
2,00,000
10,000
2,10,000 2,10,000
Capital Reserves A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Balance c/fd 8,000 By Share Forfeited A/c 8,000
8,000 8,000
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Marketable securities A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Balance b/fdTo Profit and Loss A/c
4,00,00020,000
By Bank A/c 4,20,000
4,20,000 4,20,000
Discount on Issue of Debentures A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Balance b/fd 5,000 By Securities Premium A/c
5,000
5,000 5,000
Bank A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Balance B/fd
To Calls in Arrears A/c
To Marketable
Securities A/c
To Equity Share
Capital A/c
To Securities Premium
A/c
To Balance c/fd
60,000
3,000
4,20,000
6,00,000
1,50,000
44,500
By Preference
Shareholders A/c
By Debenture holders
A/c
10,78,000
1,99,500
12,77,500 12,77,500
Capital redemption reserve A/cDr. Cr.
Particulars Rs. Particulars Rs.
To Balance c/fd 4,40,000 By Balance b/fd
By General Reserve A/c
By Profit and Loss A/c
50,000
2,10,000
1,80,000
4,40,000 4,40,000
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B.R. Ltd.Balance sheet as on 1st April 2012
Particulars Note Amount Amount
EQUITY AND LIABILITIES1. Shareholder’s Funds
a. Share Capitalb. Reserves and
Surplus2. Current Liabilities
a. Trade Payablesb. Short Term Loans & Prov.
Total
ASSETS3. Non Current Assets
a. Fixed Assets- Tangible Assets
4. Current Assetsa. Trade Receivablesb. Inventories
Total
12
8,00,0004,94,000 12,94,000
1,50,000
66,000
15,10,000
9,90,000
3,20,0002,00,000
15,10,000
B.R. Ltd.
Notes to Financial Statements for the year ended ______
As at __________
Number Rs
Note "1" : SHARE CAPITAL
Authorised Shares
Equity Shares of `10 each -
Issued, Subscribed & Fully Paid up Shares
Equity Shares of `10 each 8,000 8,00,000
Total 8,000 8,00,000
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Note "2" : RESERVES & SURPLUS As at
________
Surplus
Reserves & Surplus
Securities Premium
Opening Balance 10,000
Add: Received on new issue 150,000
Less: used for premium on redemption 99,000
Less: used for premium on redemption 10,000
Less : used for Discount on Deb. 5000 46,000
Capital redemption reserve
Opening Balance 50,000
Add: Tr. From Profit & Loss A/c 1,80,000
Add: Tr. From Gen Res 2,10,000 4,40,000
Profit & Loss A/c
Opg. Bal 1,60,000
Add : Profit on Investment 20,000
Less: Tr to Capital redemption reserve 1,80,000 -
Capital Reserve 8000
Total 4,94,000
Working Notes: Fresh issue of Equity Shares Rs.
N.V. of Preference Share Capital 9, 90,000
Less: Divisible Profits [C.R.R.]
General Reserve 2, 10,000
Profit & Loss A/c 1, 80,000 (3, 90,000)
Proceeds of fresh issue of Equity Shares 6, 00,000
∴6,000 Equity Shares of Rs.100/- each issued at Rs.25/-premium per share.
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10.2 KEY POINTS / KEY TERMS:
Only fully paid Preference Shares can be redeemed
• C.R.R. can be created only of Divisible Profits.
• Premium on redemption of Preference Share Capital should beprovided first out of Securities Premium, Capital Reserve[realized in Cash], it they are inadequate, then form DivisibleProfit.
• If in balance sheet, partly paid Preference share given, thenmake the final call and after call money received only fully paidPreference shares can be redeemed.
• C.R.R. = Face value of Preference Shares to be redeemedLess Proceeds of fresh issued of shares.
• Conversion of Preference Shares into Equity Share, newPreference Shares amounts less fresh issue of shares.
• For converting partly paid Equity Shares into fully paid by caplasing Profit, only Free Reserves should be use.
• For issuing fully paid Bonus Shares, C.R.R. should be used first,then Security Premium then other divisible profit.
• Divisible Profits: Profit available for distribution as divided.
• Party paid Preference share : i) Can not be redeemed, ii) FinalCall may made and after Preference shares fully paid up, thenonly Preference shares can be redeemed.
•
N.V. of Pref. Shares Proceeds of NewC.R.R. = Less Redemed issue of shares
• Proceeds of Fresh issue: Amount received on a/c of sharecapital. i.e.
Rs.100/- issued at par, proceeds = Rs.100/-
Rs.100/- issued @ Rs.140/-, proceeds = Rs.100/- (premiumignore)
Rs.100/- issued @ Rs.96/-, proceeds = Rs.96/-.
• Unpaid amount of Preference shareholders, show in Balancesheet as current liabilities.
• Issued of partly paid bonus: utilize only divisible profits.
• Issue of fully paid bonus share: utilized first C.R.R., theSecurities Premium lastly Revenue Reserve and Profit and lossA/c surplus.
• Revaluation Reserve (Profit cannot be used for Bonus as wellas dividend)
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• Workmen’s compensation Fund: It is free Reserve to extentthere is no compensation payable
• Workmen’s Profit sharing Fund / Provident Fund: There areliabilities, hence cannot be used for C.R.R., payment of dividendand bonus share.
10.3 EXERCISES:
10.3.1 OBJECTIVE QUESTIONS:
• Fill in the blanks.
a) 1,000 Equity shares of Rs.100/- each issued at 20% premium,proceeds of Equity share capital will be Rs.__________.
b) Profits otherwise available for dividend is called as __________.
c) No company can issue __________ Preference shares.
d) Only __________ Preference shares can be redeemed.
e) Premium on redemption of Preference share can be providedfor either out of the __________ of the company or its__________ accounts.
f) __________ Preference shares can not be redeemed.
g) Unpaid amount to some Preference shareholders who are non-traceable, their claim should be shown as __________ in theBalance sheet.
h) __________ should be use first for issue of fully paid BonusEquity Shares.
i) Investment sold @ 10% Loss, for Rs.180, 000/-, Loss on saleamounts to Rs.__________.
j) ____________
Proceeds of NewC.R.R. = Less issue of shares
k) Preference share redeemable within __________ years can beissued.
l) Redeemable Preference shares can be issued only when it isauthorized by its __________.
m) Rs.6,00,000/-, 12% Debentures of Rs.100/- each converted into10% Preference shares of Rs.10/- each @ Rs.15/-. C.R.R.=Rs.__________
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n) Rs.16, 00,000/- Preference shares to be redeem @ par. FreeReserve available for redemption Rs.4,00,000/-. Ascertainminimum number of Equity shares to be issue
a) Equity shares of Rs.100/- each at par __________.
b) Equity shares of Rs.10/- each at premium__________.
c) Equity shares of Rs.100/- each at 4% discount__________.
[Answer : a) Rs.1,00,000/-, b) Divisible Profit, c) Irredeemable Preference, d)Fully paid, e) Profit Security Premium, f) Partly paid up, g) current liabilities,h) C.R.R., i) Rs.20,000/-, j) N. value of Preference shares redeemed, k) 20, l)Articles of Association, m) Nil or Not Req., n) [a – 12,000/-, b – 40,000/-, c –12,500/-]
• Fill in the blanks.
I. For redemption of Preference share, a company can issueEquity shares or __________ shares.
II. For redemption of Preference share amounting Rs.5, 00,000/-,new 2,000 Equity shares Rs.100/- issued @ 5% Discount,C.R.R. required Rs. __________ .
III. For redemption of 12% Preference share capital of Rs.12,00,000/-.
a) When divisible Profit available Rs.6, 00,000/-, proceeds ofnew issue of shares = Rs. __________.
b) When 4,000 Equity Shares of Rs.100/- issued @ Rs.125/-,CRR = Rs. __________.
c) When 12% Debentures of Rs.10, 00,000/- issued @ 10%premium, C.R.R. = Rs. __________.
d) When 20,000, 10% Preference shares of Rs.50/- eachissued @ 20% discount, C.R.R. = Rs. __________.
e) C.R.R. created Rs.7, 10,000/- out of Free Reserve, NewEquity Shares of Rs.100/-, issued @ 2% discount forpurpose of redemption of Preference shares.
IV. Rs.8,00,000/- 12% Preference shares are converted intoEquity shares of Rs.100/- @ 25% premium, then C.R.R.__________ .
V. __________ section of Company Act 1956, relates toRedemption of Preference shares.
VI. Dividend Equalisation Reserve is __________ Reserve.
VII. Failure to pay call money on shares result into __________ ofshares.
VIII. __________shares can be issued out of Capital RedemptionReserve.
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IX. The calls made on shares can not be consider as __________of fresh issue of shares.
X. Conversion of Preference shares into new Equity shares atpar can be considered on proceeds of __________.
XI. On redemption of Preference share __________ is reduced.
XII. Loss on sale of Investment decreases __________ Reserve.
XIII. The issue of Debentures __________ be treated as proceedsof fresh issue of shares.
[Answer : I – Preference, II – Rs.3,10,000/-, III – (a – Rs.6,00,000/-, b –Rs.8,00,000/-, c – Rs.12,00,000/-, d – Rs.2,20,000/-, e – 4,900 shares), IV –Rs.1,60,000/-, V – Sec.80, VI – Free, VII – Forfeiture, VIII – Proceeds, IX –Fresh issue, X – Paid up share capital, XI – Free, XII – can not]
• Select the most appropriate answer.
i) For purpose of redemption of Preference share Company canissue ___________ .
a) Debentures at premium b) Equity shares
c) Bonds d) Fixed Deposits Certificates
ii) Profit on sale of Investment should be debited to ___________ .
a) Profit & Loss A/c b) Capital Reserve A/c
c) Investment A/c d) Sinking Fund A/c
iii) Issue of bonus of make partly paid profits can be used___________.
a) C.R.R. b) Securities Premium
c) Profits prior to incorporation d) Profit & Loss Account
iv) Capital Redemption Reserve should be created only whenredemption of Preference shares.
a) Some Preference shareholders non-traceable
b) Redemption out of divisible profits
c) Redemption out of issue of Equity shares
d) Redemption out of issue of Preference shares.
v) 50,000 Equity shares of Rs.10/- each, issued at Rs.20/-, for thepurposed of redemption of Preference share capital amountingRs.7, 50,000/-. How much amount to be transferred to C.R.R.
a) Rs.5, 00,000/- b) Rs.10, 00,000/-
c) Rs.2, 50,000/- d) Rs.2, 50,000/-
[Answer: (i – b), (ii – c), (iii – d), (iv – e), (v – c)]
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• Select the most appropriate answer and write again.
i) Dividend paid to Preference shareholders on a) Face value b) Called upc) Paid up d) None of above
ii) Capital Redemption Reserve is createda) Redemption of Debentureb) Refund of Fixed Depositc) Redemption of Preference share capitald) Redemption of Preference share capital out of Free Reserve
iii) Capital Redemption Reserve is created a) Voluntarilyb) Redemption not out of proceeds of Debenturesc) Legal Requirementsd) All above the three
iv) A company can issue redeemable Preference shares a) Only at par b) At premiumc) Out of Free Reserve d) All above the three
v) Preference share can be redeemed a) Out of profits onlyb) Out of proceeds of issue of sharesc) Partly out of issue of shares and balance of out of Free
Reserved) All the above
vi) After redemption of Preference share, Bonus share issued to a) Preference Shareholders b) Old Equity Shareholdersc) New Equity Shareholder d) Both b and c
vii) The terms & redemption is specified at time a) Redemption of Preference shareb) Payment to Preference shareholderc) Divided by Board of Directorsd) Issue of shares
[Answer : (i – c), (ii – d), (iii – c), (iv – d), (v – d), (vi – d), (vii – d)]
• State whether the following statements are true or false.
i) Only partly paid Preferences can be redeemed.
ii) No company can issue irredeemable Preference shares.
iii) Preference share can be redeemed only out of Capital Profit.
iv) Only Equity Shares can be issued for purpose of redemption ofPreference shares.
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v) Conversion of Preference shares into Equity shares are alsoamounted to issue of Preference shares.
vi) Premium on redemption of Preference shares can be debited toRevaluation Reserve.
vii) No company can issue redeemable Preference share after 15th
June 1988.
viii) Balance Security premium can be used for providingpremium on redemption of Preference shares.
[Answer : True – ii, iv, viii, False – i, iii, v, vi, vii]
i) Divisible profit mean available for distribution as divided.
ii) A company can redeemed Preference share out of proceeds offresh issue of Debentures.
iii) Company can redeemed Preference share out of proceeds offresh issue of Debentures.
iv) Company can not issue irredeemable Preference share.
v) Paid up share capital is reduce due to redemption of Preferenceshare capital.
vi) Premium or redemption of Preference share can be providedout of Revaluation Reserve.
vii) Preference divided is payable annual even though the companymakes loss.
[Answer : True – i, iv, v, False – ii, iii, vi, vii]
• Match the columns :
I.
Group A Group B
i) Unclaimed Dividendii) Security Premiumiii)Capital Redemption Reserveiv)Partly paid Preference sharev) Partly called up Preference share
a) Premium on Redemption ofPreference shares
b) Share final call madec) Can not be redeemd) Current Liabilitiese) Capital Reservef) Redemption out of Free
Reserveg) Can be redeem only after final
call money received
[Answer : (1 – d), (2 – a), (3 – f), (4 – c), (5 – g)]
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II.
Group A Group B
i) Pre-incorporation Profitii) Capital Redemption
Reserve can be usediii) Preference Dividendiv) Redemption of Preference
Share Capitalv) 7,500 Preference Share of
Rs.100/- redeemable at10% premium, issued ofnew 60,000 PreferenceShare at Rs.10/- at 20%premium C.R.R.
vi) 8,000 Equity share ofRs.100/- each, issued at2% discount for redemptionof Preference share capitalRs.10,00,000/- C.R.R. =
vii) Irredeemable PreferenceShare
a) Appropriation of Profitb) Proceeds of issue of
Debenturesc) Rs.1,50,000/-d) Not Free Reservee) Fully Paid Bonus sharef) Free Reserve + proceed of
fresh issue of shareg) Rs.2,16,000/-h) Rs.2,00,000/-i) Rs.1,90,000/-j) Can not be issued by Ltd.
companyk) Partly paid Bonus share
[Answer: (i – d), (ii - e), (iii – a), (iv – f), (v – c), (vi - g), (vii – j)]
10.3.2 THEORY QUESTION:
1. Explain the provision of the Companies Act, 1956, regardingredemption of Preference Shares.
2. Distinguish between Redemption of Preference shares and buy– back of Equity shares.
3. Write short notes on
a) Capital Redemption Reserve
b) Profit otherwise available for dividend
c) Proceeds of fresh issue of shares
d) Issue of fully paid Bonus Shares
e) Irredeemable Preference shares
f) Various methods of Redemption of Preference Shares
g) Profits not available for redemption of Preference shares
4. Redemption of Preference share of by way of conversion intoEquity shares issued at premium.
5. Redemption of Preference share at premium by a way ofconversion into New Preference Shares issued at discount.
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10.3.3 PRACTICAL PROBLEMS:
Illustration 1[For calculation of new issue to raised funds required]
The balance sheet of N J Ltd. as on 31st March 09 was as follows.
Liabilities Rs. Assets Rs.
Share Capital :
1,500, 9% Preference
Share of Rs.100/- each fully paid
50,000 Equity of Rs.10/- each fully paid.
Reserve surplus :
Securities Premium
Profit & Loss A/c
Secured Loans :
10% Debentures
Current Liabilities :
Sundry Creditors
1,50,000
5,00,000
50,000
1,40,000
2,00,000
1,52,000
Fixed Assets :
Investments :
Current Assets :
Bank Balance
Other Current Assets
6,12,000
90,000
63,000
4,27,000
11,92,000 11,92,000
In order to facilitate the redemption of Preference shares and 10%debenture, both redeemable at 10% premium the companydecided:
a) To sell all Investments for Rs.1,12,000/-.b) To finance part of redemption from company funds, subject
to leaving a bank balance of Rs.40,000/-.c) To issue minimum Equity shares of Rs.10/- each at a
premium of Rs. 40 per share to raise the balance of fundsrequired.
You are required to pass the necessary Journal entries torecord above the transaction and prepare balance sheet as oncompletion of the above transactions.
I) Working for issue of shares Rs. Rs.9% Preference Share Capital 1,50,00010% Debentures 2,00,000 3,50,000Premium payable on redemption 10% 35,000Total amount required 3,85,000
Less: i) Available bank bal. 23,000 [63000-40000 required]
ii) Sale of Investment 1,12,000 1,35,000Funds from new issue of Equity share 2,50,000
Number of Equity Shares = Amount required
Proceed of one equity share
= , ,
,=2 50 000
5 00050
∴500 Equity share of Rs.10/- each issued @ Rs.40/- premium
307
II) Face value of Preference Share 1,50,000Less: Proceeds of new issue of share (5000 X 10) 50,000
C.R.R. 1,00,000 (Balance sheet total: 10, 79,000)
2. (Minimum Reduction in Revenue Reserve)The Balance Sheet of BM Ltd. as at 31st December, 2008 is asfollows :
Liabilities Rs. Assets Rs.
Share Capital :750 redeemable Preference shares of Rs.100/- each fully paid10,000 Equity Shares of Rs.10/- each fully paidReserves and Surplus:Securities PremiumGeneral ReserveProfit & Loss A/cCurrent Liabilities
75,000
1,00,000
20,00030,00025,00020,000
Fixed AssetsCurrent Assets :StockDebtorsInvestmentsBank
1,85,000
60,00010,00030,00010,000
2,95,000 2,95,000
The company decided to redeem its Preference shares at apremium of 10 per cent, on 31st January, 2009. A fresh issue ofEquity shares of Rs.10/- each was made at Rs.14/- pre share,payable in full on 1st January, 2009. These were fullysubscribed and all moneys were duly collected. All theInvestments were sold realizing Rs.42,000/-. The Directorswish that only a minimum reduction should be made in therevenue reserves.
You are required to give the journal entries, including thoserelating to cash to record the above transactions and draw upthe Balance Sheet as it would appear after redemption ofPreference shares.
3. (Bonus to make fully paid shares, issue of fully paid Bonusshare)The Bharat Steel Ltd. whose issued share capital on 31st
December, 2008, consisted of 10,000 8% redeemablePreference shares of Rs.100/- each fully paid and 50,000 Equityshares of Rs.100/- each Rs.30/- paid up, decided to redeemPreference shares at a premium of Rs.10/- per share. Thecompany’s balance sheet as at 31st December, 200 showed aGeneral Reserve of Rs.18,00,000/- and a Capital Reserve ofRs.1,70,000/-. The redemption was effected partly out of profitsand partly out of the proceeds of a new issue of 7,000, 10%cumulative Preference shares of Rs.100/- each at a premium of
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Rs.40/- per share. The premium payable on redemption wasmet out of the premium received on the new issue.
On 1st April, 2009, the company at its General meeting resolvedthat all the Capital Reserves be applied in the following manner:
a) The declaration of bonus at the rate of Rs.10/- per share onEquity shares for the purpose of making the said Equityshares fully paid and
b) The issue of bonus shares to the Equity shareholders in theratio of one share for every shares held by them.
You are required to pass journal entries.
4. (Redemption of Preference shares at premium)The following is the Balance Sheet of RK Ltd. as on 31st March2009.
Liabilities Rs. Assets Rs.
Share Capital :5,000 9% Redeemable Pref. Shares of Rs.10/- each fully paid10,000 Equity sharesof Rs.10/- each fullypaidSecurities PremiumA/cProfit & Loss AccountSundry Creditors
50,000
1,00,000
30,0001,04,500
29,500
Fixed Assets Investment Current AssetsCash at Bank
1,28,00020,00086,00080,000
3,14,000 3,14,000
The company exercised its option to redeem on 1st April, 2009,the whole of the Preference share capital at a premium of 10%per cent.
To assist in financing the redemption, all the Investments weresold for Rs.24, 000/-. On 1st May, 2009, the company made abonus issue of two Equity shares fully paid for every Equityshares held on that date.
The appropriate resolutions having been passed the abovetransactions were duly completed.
You are required to five pass the journal entries to record thetransactions in the books of the company and the balance sheetafter above transaction.
309
5. RK Ltd. has issued 5,000 12% redeemable Preference sharesof Rs.100/- each, Rs.80/- paid. In order to redeem these sharesnow being redeemable, the company issued for cash 20,000Equity shares of redeemed, balance being met out of theGeneral Reserve which stood at Rs.3,00,000/-. The companythen declared the bonus issue of 10,000/- ordinary shares ofRs.10/- each to the existing ordinary shareholders out of reservecreated for redemption purpose.Pass the necessary journal entries giving effect to the abovetransactions.
6. On 1st July, 2008 the following balances appeared in the booksof Jai Ltd.
Particulars Rs.
10% Preference share capital(Shares of Rs.100/- each redeemable on 31-12-2008,at a premium of Rs.5/- per share)Security Premium A/cProfit & Loss A/c (Cr.)
4,00,000
1,00,0003,00,000
To provide a part of cash necessary for the repayment ofRedeemable Preference Shares (which were redeemed on thedue date), the company made an issue of 14% PreferenceShares of Rs.100/- each at Rs.110/- per share payable in full onapplication.
Applications for 1,200 of the new shares were received on 1st
November, 2008 and expenses of the issue amounting toRs.10,000/- were paid on 30th November, 2005.
Show the Journal entries (including cash transactions)necessary to record the above transactions in the books of thecompany.
7. The following is the summarized Balance Sheet of A Ltd. as on30th September, 2008.
Liabilities Rs. Assets Rs.
Share Capital :10% Redeemable Preference shares of Rs.100/- each Equity shares of Rs.100/- each fully paid upSecurity PremiumProfit & Loss A/cCreditors
60,000
2,00,0002,64,000
17,0001,60,000
Fixed AssetsCurrent Assets
3,00,0001,57,000
4,57,000 4,57,000
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The Preference shares were redeemed on 10th October, 2008 ata premium of 15%. A bonus issue of two Equity share for everyfive shares held was made on the same date. No trace couldbe found of the holder of 20 Preference Shares.
You are required to give the journal entries in the book of thecompany and draw up the resultant Balance Sheet in asummarized form.
8. DT Ltd. has the following Balance Sheet as on 31-03-2009.
Liabilities Rs. Assets Rs.
Issued, subscribed and fully paid up20,000 Equity shares of Rs.100/- each50,000 Preference Shares of Rs.10/- eachCapital ReserveSecurity Premium A/cProfit & Loss A/cCurrent Liabilities
20,00,000
5,00,0002,00,0001,00,0002,00,0002,50,000
Fixed AssetsCurrent Assets(including Bank bal.Rs.4,50,000/-)
19,00,00013,50,000
32,50,000 32,50,000
The Preference shares are to be redeemed at 10% premium.Fresh issue of Equity shares is to be made to the extent it isrequired under the Companies Act for the purpose of thisredemption.
Show journal entries giving effect to the redemption and drawup the Balance Sheet of the company as it would appearimmediately after the redemption.
9. On 1st April, 08 a company issued 4,000 12% Debentures ofRs.100/- each. The interest is payable on 30th and 31st Marchevery year. The company is allowed to purchase its ownDebentures which may be cancelled or kept or re-issued at thecompany’s option. The company made the following purchasesin the open market.
On 31st July 2008 500 Debentures at Rs.96/- ex-interestOn 30th Nov. 2008 200 Debentures at Rs.97/- cum-interest
The Debentures, which were purchased on 31st July 2008 werecancelled on 31st December, 2008. All payments were made ondue dates.
Give journal entries to record the above transactions and therelevant items in the Balance Sheet as on 31st March 2009.
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10. (Forfeiture of Shares and their Reissue)
A company issued 20,000 6% Redeemable Preference Sharesof Rs.100/- each at par. At 30th June, 2009; the shares are tobe redeemed at Rs.110/- a share and for the purpose ofassisting the redemption 1,00,000 Equity Shares of Rs.10/-each were issued at 40% premium. On the above date, 500 ofthe Redeemable Preference Shares had been forfeited for non-payment of the last call of Rs.20/-, 400 of which had been re-issued as fully paid for Rs.80/- a share. The balance of Profit &Loss Account was Rs.15,40,000/- and the General ReserveRs.2,00,000/-. On the same day, as the redemption took place,a bonus was declared of Rs.10, 00,000/- to the Equityshareholders.
Show the journal of the company to record the above transactions.
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11 REDEMPTION OF DEBENTURES I
Unit Structure
11.0 Objectives 11.1 Introduction and Meaning 11.2 Definition 11.3 Types of Debentures 11.4 Debenture Interest 11.5 Issue of Debentures 11.6 Accounting Procedure for Issue of Debentures 11.7 Exercise
11.0 OBJECTIVES:
After studying the unit the students will be able to Define Debentures Explain the types of Debentures Know the terms of issue and redemption of Debentures
Know the Terms of redemption
Understand the Methods of redemption
Explain the procedure of Conversion of debentures
Understand how to create debenture redemption reserve asper rules
Journalize the transactions Solve the problems
11.1 INTRODUCTION AND MEANING:
A Debenture is a document acknowledging a loan to company and executed under the common seal of the company, usually containing provisions as to payment, of interest and the repayment of principal amount and giving a charge on the assets of a such a company, which may give security for the payment over the some or all the assets of the company.
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Issue of Debentures is one of the most common methods of raising the funds available to the company. It is an important source of finance.
11.2 DEFINITION:
Debenture may be defined as a certificate issued by company under its seal acknowledging a debt due by to its holder. The essential characteristic of debentures is indebtedness Sec.2 (12) of the Companies Act, 1956. A Debenture includes debenturestock bonds any other securities of a company whether constitutinga charge on company assets or not. A person who purchases adebenture is called a debenture holder.
11.3 TYPES OF DEBENTURES:
Different types of debentures can be classified as follows:-
I) ON THE BASIS OF SECURITY:
a) Naked Debentures: These Debentures are not securedagainst any assets of the Co. In case of winding of thecompany, debentures holders holding unsecured debenturestreated as unsecured creditors.
b) Secured Debentures: These Debentures are secured by acharge on the assets of the company. These debentures aresecured either on a particular asset called fixed charge or onthe general assets of the company called floating charge.The debentures holder has a right to recover outstandingloan & interest out of such charge assets. These debenturesare issued by the company under an agreement which iscalled “Mortgage Deed”. Such mortgage is registered withRegister of Companies.
II) ON THE BASIS OF PERFORMANCE:a) Redeemable Debentures: The debentures are redeemed
by repayment of the amount of debentures after a specifieddate, as per terms & conditions issued.
b) Irredeemable Debentures: In this case the issuingcompany does not fix any date by which debentures shouldbe redeemed & the debentures holder cannot demandrepayment of the sum of debenture from the company solong as it is going concern.
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III) ON THE BASIS OF PRIORITY:
a) First debentures: As the name implies this type ofdebentures are repaid before the repayment of otherdebentures.
b) Second debentures: These debentures are paid afterpayment of first debentures.
IV) ON THE BASIS OF CONVERTIBILITY:
a) Convertible debentures: Holders of such debentures are givenoption to convert the debentures fully or partly into equity sharesor preference shares or new debentures after a specified time.
b) Nonconvertible debentures: The holders of this type ofdebentures do not have any right to convert them into equityshares etc.,
v) On the basis of Records:a) Bearer debentures: Just like bearer cheques these
debentures can be transferred freely. Payment of interest ismade on productions of coupons attached with debentures.
b) Registered debentures: These are transferred only bytransfer deed. The complete particulars in regard to suchdebentures are entered into register & the interest is paidonly to those whose name appears in the register.
11.4 DEBENTURE INTEREST:
Debentures being borrowed capital, they carry a specific rate of interest payable on specified date Debentures interest is expenditure & it is payable as an when interest is due whether there is a profit or loss. It is usually paid half-yearly. The amount of interest is calculated & paid on nominal value i.e., face value of Debentures.
The following Journal entries are passed.
a) When debentures interest is due:Debenture Interest A/c Dr. (Gross amt.)
To Tax Deducted as source (With income tax) To Debentures holder A/c (Net amt. payable)
b) When net amount due is paid:Debentures Holder A/c Dr.
To Bank A/c
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c) At the end of the year balance in debenture interest beingexpense transferred to P & L A/cP & L A/c Dr.
To Debenture Interest A/c
11.5 ISSUE OF DEBENTURES:
11.5.1 Debentures can, be issued in three ways.
a) At par: Debenture is said to have been issued at par when theamount collected for it is equal to the nominal value ofdebentures. e.g. the issue of debentures of Rs. 100/- for Rs.100/-.
b) At Discount: Debenture is said to have been issued at discountwhen the amount collected is less than the nominal value, fore.g., issue of debentures of Rs. 100/- for Rs. 95/-. Thedifference of Rs. 5/- is the discount and is called discount onissue of Debentures. This discount on issue of debentures is acapital loss & it is charged to P & L A/c over the period of itsbenefit to the company & it is shown under the head“Miscellaneous Expenditure” on the assets side of the BalanceSheet.
c) At Premium: When the price charged is more than it’s nominalvalue, a debentures is said to be issued at a premium. e.g.,issue of debentures of Rs. 100 each for Rs. 120, the excessamount over the nominal value i.e., Rs. 20 is the premium onissue of debentures. Premium received on issue of debenturesis a capital gain & it is credited to “Securities Premium A/c”.Premium on issue of debentures cannot be utilised fordistribution of dividend. Premium on debentures is shown underthe head Reserves & Surplus on the liability side of the BalanceSheet.
11.5.2 ISSUE OF DEBENTURES FOR CASH:
Debentures may be issue for cash at a par, at a discount or at a premium. When amount is payable in installments entries will be similar to the issue of shares. Any premium or discount on issue of debentures is usually adjusted at the time of making allotment. Premium payable on redemption of debentures is also adjusted at the time of issue of debentures.
11.5.3 ISSUE OF DEBENTURES FOR NON-CASH CONSIDERATION
Debentures may be issued for consideration other than cash such as acquisition of business, or assets. It should be noted that ouch debentures may be issue at par or at a premium or at a discount.
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11.5.4 ISSUE OF DEBENTURES AS A COLLATERAL SECURITY
Debentures can be issued as collateral security against a
loan or overdraft from bank or other financial institution. Collateral Security means an additional or parallel security. Debentures issued as collateral security is a contingent liability. However, it can become a definite liability only in the invent of default by the company in repaying the loan. No interest is payable on such debentures. Normally no entry is passed in the books for issue of such debentures. Only a note is given under loan concerned that such loans are secured by way of collateral security by issue of debentures. Normally no entry is passed in the books for issue of such debentures. Only a note, however, the following entry may be passed in the books in the issue of such debentures: Debentures Suspense A/c Dr. To Debentures A/c On repayment & release of debenture, the entry pass is Debentures A/c Dr. To Debentures Suspense A/c
11.6 ACCOUNTING PROCEDURE FOR ISSUE OF DEBENTURES
No. Transaction Accounting Entries 1) Issue for cash (collection in
installments)
a) Receipt of application money
Bank A/c Dr. To Debentures Application A/c
b) Transfer of application money to debentures
Debentures Application A/c Dr. To Debentures A/c
c) Allotment money due Debentures Allotment A/c Dr. To Debentures A/c
d) For receipt of allotment money
Bank A/c Dr. To Debenture Allotment A/c
e) Call money due Debenture Call A/c Dr. To Debentures A/c
f) Receipt of call money Bank A/c Dr. To Debenture Call A/c
Note: Discount or premium on issue of debentures should be adjusted at the time of making allotment entries for such will be the similar to the issue of shares.
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2) Issue for cash (collection in lump sum) a) Issue at par redeemable
at parBank A/c Dr.
To Debentures A/c b) Issue at discount
redeemable at par.Bank A/c Dr. Discount on issue of Debentures A/c Dr.
To Debentures A/c c) Issued at premium
redeemable at par.Bank A/c Dr. To Debentures A/c
To Securities Premium A/c d) Issued at par redeemable
at premium.Bank A/c Dr Loss on issue of debentures A/c
Dr. To Debentures A/c
To Premium on redemption of debentures A/c
e) Issued at a discountredeemable at premium.
Bank A/c Dr. Loss on issue of debentures A/c
Dr. To Debentures A/c
To Premium on redemption of debentures A/c.
3) Issue of Debentures for Non-cash consideration a) On purchase of business Sundry Assets A/c Dr.
*Goodwill A/c Dr. To Sundry Liabilities A/c To Vendor A/c To Capital Reserve A/c
Note: Goodwill=P.C consideration – Net Assets. OR Capital Reserve = Net Assets – P. C b) On issue of Debentures toVendor(i) Issue at per redeemableat par
Vendor A/c Dr. To Debentures A/c
(ii) Issued at discountredeemable at par
Vendor A/c Dr. Discount on issue of Debentures A/c Dr.
To Debentures A/c
(iii) Issued at premiumredeemable at par
Vendor A/c Dr. To Debentures A/c To Securities Premium A/c
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(iv) Issued at par redeemable at premium.
Vendor A/c Dr. Loss on issue of debenture A/c Dr. To Debentures A/c To Premium on redemption of debentures A/c
(v) Issued at a discount redeemable at premium
Vendor A/c Dr. Loss on issue of debentures A/c Dr To Debentures A/c To Premium on redemption of debentures A/c
4) Issue of Debenture as collateral security
No Entry
11.6.1 Treatment of Discount on Issue of Debentures: Discount on issue of debentures is a capital loss & such loss is written off from books of account as early as possible. Following journal entries passed to write off discount. P & L A/c Dr. To Discount on issue of Debentures A/c Balance on discount is shown in the balance sheet on the assets side under the head “Miscellaneous Expenditure”. The amount of discount is written off in the following ways. a) When debentures are redeemed after certain period.
In this case total discount on debentures is written off equally each year over the period of debenture tenure.
Total Discount
Discount to be written offNo.of years after which debentures will be redeemed
11.7 EXERCISE State whether true or false 1. Registered debentures are transferred only by transfer deed. 2. Redeemable Debentures are redeemed at any time. 3. Debenture interest is payable only when a company makes
profits. 4. When the price charged is more than its nominal value, a
debenture is said to be issued at a premium. 5. If the debentures are redeemed at discount such discount is a
revenue profit for the company.
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6. Premium payable on redemption of debentures is a capital loss for the company.
7. No interest is payable on the debentures issued as a collateral security.
8. Debentures can be issued at a discount and redeemed at a premium
9. The maximum rate of discount at which debentures can be issued is 10%
10. Debentures can be forfeited for non-payment of calls. 11. A Company can buy its own debentures. 12. Debenture holders are the members of the company
Fill in the blanks 1. When debentures are to be redeemed at their face value they
are to be said as----------------------------. 2. Accumulated balance of premium on redemption is shown
under the head------------ on the assets of the Balance Sheet. 3. If the term on issue of debentures is ‘Issued at par redeemable
at premium’ the journal entry is----------------------- 4. Debentures issued as collateral security is a ---------- liability. 5. The amount of interest is calculated and paid on-------------- of
Debentures. 6. Premium received on issue of debentures is a capital gain and it
is credited to----------------------------. 7. Debentures which are secured by a charge on the assets of the
company are termed as ----------------------- 8. A company issues 100 debentures of Rs.1000 each at 97
percent. These are repayable out of profits by equal annual drawings over 5 years. Discount on issue of debentures will be written off in the__________ ratio
9. Debenture stock _____ partly paid 10. Raj Ltd. purchased assets of Alpa Ltd. for purchase
consideration of Rs. 60 lacs.It was decided that the purchase consideration will be discharged by issue of 10% debentures of Rs.10 each at a premium of 20%.The amount of debentures issued will be___________
11. Hansa Ltd. purchased assets of Alpa Ltd. for purchase consideration of Rs. 60 lacs. It was decided that the purchase consideration will be discharged by issue of 10% debentures of Rs.10 each at a discount of 20%.The amount of debentures issued will be___________
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12. ______________ debentures need not be registered with thecompany.
13. The premium collected on issue of debentures is transferred to_____________
14. Priya Ltd. issued 5000,12% debentures of Rs.100 each at apremium of 10%,which are redeemable after 10 years at apremium of 20%.The amount of loss on redemption ofdebentures to be written off every year is _____________
15. Zenith Ltd. issued Rs. 1,00,000 Debentures at a discount of 6%on 1st Jan.,2001 repayable at the end of the 5th year. Discountwritten off is _________
16. Discount on issue of debentures is a________________17. Loss on issue of debentures is treated as_____________
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12
REDEMPTION OF DEBENTURES II
Unit Structure : 12.0 Objectives 12.1 Solves Problems 12.2 Terms of redemption 12.3 Methods of Redemption of Debentures 12.4 Accounting Procedure for Redemption of Debentures 12.5 Solved Problems 12.6 Key Terms 12.7 Exercise 12.0 OBJECTIVES
After studying the unit the students will be able to solve the practical problems on redemption of debentures.
12.1 SOLVED PROBLEMS Illustration: 1 A Ltd. issued 5000 debentures of Rs. 100 each at 10% discount redeemable at par after 10 years. Total discount = 10% of Rs. 5, 00,000= Rs. 50,000
Discount returned off each year = Rs. 5000010 years
= Rs. 5.000 each year. a) When debentures are redeemable in installment by annual drawings. In this case, discount written off each year is proportionate to the debentures outstanding at the beginning of the year. At the end of the life of debentures the entire discount on issue of debenture is written off.
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Illustration: 2 K Ltd., issued Rs. 1000000 15% debentures at 5% discount and redeemable at 10% premium. Debentures are to be redeemed in the following manner:
Year end Face value of debentures to be redeemed Rs.
2 100000 3 200000 4 300000 5 400000
Give loss on issue of debentures account for the 5 Years.
Solution:
Bank A/c 950000 Loss on issue of debentures A/c 150000
To 15% debentures A/c 1000000 To Premium on redemption on debentures A/c 100000 (Being Loss to be written off in each year)
In the books of K Ltd. Loss on issue of debentures account
Particulars AMT. Particulars AMT. To 15% debentures A/c 1,50,000 By P & L A/c 37,500
By Bal. C/d 1,12,500 1,50,000 1,50,000
To Bal. B/d 1,12,500 By P & L A/c 37,500 By Bal. C/d 75,000
1,12,500 1,12,500 To Bal. B/d 75,000 By P & L A/c 37,500
By Bal. C/d 75,000 75,000 75,000
To Bal. B/d 41,250 By P & L A/c 26,250 By Bal. C/d
41,250 41,250 To Bal. B/d 15,000 By P & L A/c 15,000
15,000 15,000
Illustration: 3 (When amount of debentures is collected in installments)
YES Ltd., issued 1000 10% debentures of Rs. 1000 each payable at Rs. 250 on application & Rs. 750 on allotment. Application mere received for 1000 debentures. All the applicants mere allotted debentures. All the money were received. Pass the journal entries in the books of the Company.
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Solution: Journal of YES Ltd
Particulars Dr. Cr. Bank A/c Dr. To Debenture Application A/c (Application money of Rs. 250 per debenture received on 1000 debenture as per details in debenture Application Book.)
250000 250000
Debenture Application A/c Dr. To 10% Debenture A/c
(Application money of Rs. 25 per debenture transferred to Debenture A/c on allotment of 1000 Debentures vide Board Resolution No. .............dated .............& per particulars in Debenture Application & Allotment Book)
250000 250000
Debenture Allotment A/c Dr. To 10% Debenture A/c (Allotment amount due on 1000 debentures at Rs. 750 per debenture vide Board Resolution No. ............. dated ..........& particulars in debenture Application & Allotment Book.)
750000 750000
Bank A/c Dr. To Debenture Allotment A/c
(Allotment money of Rs. 750 per debenture received on 1000 debentures as per details in Allotment Book)
750000 750000
Balance sheet (extract) of YES Ltd.as on ____
Particulars Note Amount Amount EQUITY AND LIABILITIES
1. Non-Current Liabilitiesa. Long term borrowings
TotalASSETS
1. Current Assetsa. Cash and cash
equivalents(balancewith banks)Total
1
2
10,00,000
10,00,000
____10,00,000
10,00,000
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Notes to Accounts
No Particulars Amount Amount 1. 2.
Long term borrowings a. 1000 10% debentures of Rs. 1000 each Cash and Cash Equivalents a. Balance with Banks
10,00,000
10,00,000
Illustration: 4 (When different conditions of issues and redemption are given) City Enterprises Ltd., Issued 1000 debentures of Rs. 100/- each. You are asked to give journal entries on issue if. 1. The debentures are issued at par and redeemable at par. 2. Debentures are issued at discount of 5% but redeemable at par. 3. Debentures are issued at a premium of 5% but redeemable at a
par. 4. Debentures are issued at a discount of 5% but redeemable at a
premium of 5%. 5. Debenture issued at par but redeemable at 10% premium. Solution:
Journal of City Enterprise Ltd.
Particulars Dr. Cr. Bank A/c Dr. To Debenture A/c (Issue of 1000 7% debenture of Rs. 100 each vide Board Resolution No. ..........dated ..........& per details in Debenture Application & Allotment Register)
100000 100000
Bank A/c Dr. Discount on issue of Debentures A/c Dr. To 10% Debenture A/c (Issue of 1000 debentures of Rs. 100 each at a discount of 5% vide Board Resolution No. ........... dated ............ & per particulars in Debenture Application & Allotment Register)
95000 5000
100000
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Bank A/c Dr. To 10% Debenture A/c To Security Premium A/c
(Issue of 1000 debenture of Rs. 100 each at Rs. 105 vide Board Resolution No. .........dated .............& particulars in Debenture Application & Allotment Register)
105000 100000
5000
Bank A/c Dr. Loss of issue of Debenture A/c Dr.
To 10% Debenture A/c To Premium on redemption of
Debentures A/c (Issue of 1000 debentures of Rs. 100 each at Rs. 95 but redemeable at Rs. 105 vide Board Resolution No. ....... dated ............& particulars in Debenture Application & Allotment Register)
95000 10000
100000 5000
Bank A/c Dr. Loss of issue of Debenture A/c Dr.
To 10% Debenture A/c To Premium on redemption of Debentures A/c (issue of 1000 debentures at par redemeable at Rs. 110 vide Board Resolution No.......... dated ......... & per detail in Debenture Application & Allotment Register)
100000 10000
100000 10000
Illustration: 5 (When amount of debenture is collected in installments)
N Ltd. issued 1000, 8% Debenture of Rs. 100/- each at a discount of 10% Payable as Rs. 10/- on application, Rs. 30/- on allotment and Balance on final call All the money were duly received.
Pass necessary journal entries in the books of company.
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Solution: Journal of N Ltd.
Particulars Dr. Cr. Bank A/c Dr. To 8% Debenture Application A/c (Being application money received)
10000 10000
8% Debenture Application A/c Dr. To 8% Debenture A/c (Being application money transferred to Debenture A/c)
10000 10000
8% Debenture Allotment A/c Dr. Discount on 8% Debenture A/c Dr. To 8% Debenture A/c
(Being amount due on allotment)
30000 10000
40000
Bank A/c Dr. To 8% Debenture Allotment A/c (Being Allotment money received)
30000 30000
8% Debenture First Call A/c Dr. To 8% Debenture A/c (Being first call of Rs. 40 per share due)
40000 40000
Bank A/c Dr. To 8% Debenture First Call A/c
(Being first call money received)
40000 40000
8% Debenture Final Call A/c Dr. To 8% Debenture A/c (Being final call of Rs. 10 per share due)
10000 10000
Bank A/c Dr. To 8% Debenture Final Call A/c
(Being final call received)
10000 10000
12.2 TERMS OF REDEMPTION
12.2.1 Meaning of redemption :
Redemption means repayment debenture is basically loan capital and has to be repaid as terms agreed at the time of issue.
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According to sec. 80A of the companies Act, 1956 debentures issued by a company have to be redeemed within 10 years after issue.
Debentures are normally redeemed after expiry of a specified period. However, the company may redeem debentures before expiry of a specified period; if articles of association & debenture deed permit it. Even companies are allowed to purchase it own debentures in open market such own debentures may be kept by company as investment or it may be redeemed own debentures by cancellation.
Debentures may be redeemed (repaid) a) at a par b) at a premium or c) at a discount.
a) Redeemable at par: When debentures are to be redeemed attheir face value they are said to be redeemable at par.
b) Redeemable at a premium: When debentures are to beredeemed at an amount higher than their face value they said tobe redeemable at a premium. For example, a debenture of facevalue of Rs.100 may be redeemable at Rs.110 such premiumpayable on redemption is a capital loss for the company. Suchpremium even though payable on redemption must be providedas a liability at a time of issue of debentures. Loss on issue ofdebentures should be charged to the P & L A/c over the periodof it’s benefits to the company & it is shown under the headMiscellaneous Expenditure on the assets of the Balance Sheet.
c) Redeemable at a discount: When debentures are to beredeemed at an amount lower than their face value, they are said tobe redeemable at a discount such discount is a capital profit for thecompany. Practically such debentures are not issued by anycompany. However the company may purchase its owndebentures in open market when debentures are traded at lessthan face value, and redeemed own debentures at discount.
The amount to be paid to debentures holders depends upon the terms of issue. According to the terms of issue, the debentures may be redeemable fully in one lump sum at a given time or in installment or by drawing lots.
12.3 METHODS OF REDEMPTION OF DEBENTURES
1. Redemption In lump-sum, at the end of stipulated period :
Under this method the entire debentures are redeemed at the stipulated date stated in the prospectus for the issue of
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debentures. The drawback of this method is that the company has to arrange a large amount at the time of redemption. Usually companies prepare well advance for the redemption of debentures. 2. By Draw of Lots :
Under this method the company does not redeem all the debentures at the same time. Instead it will call back only a portion of its debentures in the market for redemption each year. The company select the debentures of a predetermined value, by drawing lot and they are redeemed that year. This method of redemption reduces the burden of redemption. Planning is relatively easy and the impact of redemption on the finance of the company is limited. Illustration 6 On 31st December, 2010 XYZ Ltd. had 12% debentures of Rs.4,50, 000, 1/3rd of which were selected by lot to be redeemed. Pass Journal Entries for the redemption.
Date Particulars Amount Dr.
Amount Cr.
2010 Dec 31
12% Debenture Account Dr. To Bank (1/3rd Debentures redeemed by draw of lots)
1,50,000 1,50,000
2010 Dec 31
Profit and Loss Appropriation a/c Dr To Debenture Redemption Reserve (Debenture redemption reserve `created to substitute redeemed debentures)*
1,50,000 1,50,000
Note: Debenture redemption reserve should be created even when the question is silent about it. 12.3.1 REDEMPTION OUT OF CAPITAL :
This is the method of redemption of Debentures. Debentures may be redeemed out of capital. Payments to debenture-holders are not plain from date of issue of debenture. On redemption, the debenture-holders are paid out of cash and bank balance. This reduces working capital available with the company. As per SEBI guidelines, redemption of debentures wholly out of capital is not possible. And a company has to create debenture redemption reserve equivalent to 50% of the amount of debenture issue, before debenture redemption commences. Hence it will not be possible for a company to redeem debentures purely out of capital. Creation of debenture redemption reserve is not required for issue of debenture with a maturity period of 18 months or less.
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12.3.2 REDEMPTION OUT OF PROFIT:
Under this method the company holds a part of divisible profit, for redeeming the debentures. The amount of profit is reduced to the extent of debentures to be redeemed and hence not available for distribution by way of dividend among the shareholders. The existing liquid resources are not affected by redemption of debenture. For redemption of debentures out of profit; adequate amount is appropriated from profit and loss appropriation A/c and it is transferred to Debenture Redemption Reserve A/c every year till debenture redeemed. The companies' amendment Act 2000 has introduced Sec. 117 C dealing with the liability of a company to create "Debenture redemption reserve A/c" (DRR). DRR represents the retention out of profits made for the purpose of redeeming debentures. As it is created for a specific purpose out of revenue profits, it may be called as a "Specific Revenue Reserve". 12.3.3 DEBENTURE REDEMPTION RESERVE (D.R.R): Following guidelines has been issued with regard to redemption of debentures.
Every company shall create D.R.R in case of issue of debentures with maturity period of more than 18 months.
D.R.R. shall be created for non-convertible debentures and non-convertible portion of partly convertible debentures.
A company can create D.R.R. equivalent to at least 50% of the amount of debentures issue before starting the redemption of debentures.
Withdrawal from D.R.R is permissible only after 10% of debenture liability have been actually redeemed by the company.
DRR shall be treated as part of general reserve; for consideration of bonus issue proposal.
The company shall create D.R.R. for redemption of debentures. A company can create D.R.R. by transferring adequate amount from profit & Loss appropriation A/c until such debenture redeemed debentures. However, it does not specify the percentage or amount to be transferred to D.R.R.
There are three options available to the company in regard:
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12.3.4. DRR AMOUNT NOT INVESTED OUTSIDE BUSINESS :
The amount of divisible profits with held by the company may be retained in the business itself as a source of internal finance. I.e. DRR amount not invested outside business to provide cash for redemption.
In such case following entries are passed. 1) On debentures becoming due for redemption
Debentures A/c Dr. [with face value] Premium on redemption of Debentures A/c Dr. [with premium it any]
To Debenture holder A/c Total amount to be paid 2) On redemption
Debenture holder's A/c Dr. with the amount paid To bank A/c
3) On transfer of profit to D.R.R.Profit & Loss appropriation A/c Dr. To Debenture redemption Reserve A/c Note: Every year adequate amount should be transferred to D.R.R.
4) On redemption of debenture balance, in D.R.R. can betransfer to general reserve A/cDebenture redemption reverses A/c Dr. To General Reserve A/c
12.3.5 Redemption by Purchasing in the Open Market :
Debentures can be redeemed by purchasing them from the open market. If a company finds its debentures are available in the open market at cheap rate it will purchase those debentures and cancel them. Price paid for the debentures depends on the market quotation
*If the quotation is Ex-interest it excludes the interest and forrecording purposes interest is calculated and added separately tothe quotation.
*If the quotation is Cum-interest that means it is with interest andinterest deducted from the total price. If nothing is stated then thequotation is to be considered Ex-Interest. Interest on debenturesis generally paid half-yearly to the holders on certain certified dates.E.g. 30th September & 31st March every year. If the debentures arepurchased between the specified dates, the quotation may be Cum-
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Interest or Ex-Interest depending upon whether it includes the interest in the price paid for the purchase of debentures. E.g if the purchase price is Rs. 95 per debenture of 9% debenture Face value Rs. 100 on 31st July, then the price can be cum-interest or ex-interest. Case 1 : if cum-interest, then it includes the interest for the period from 1st April to 31st July (4 Months). This amounts to 100*9/100*4/12=Rs. 3 Hence the purchase price of Debenture is Rs. 95-Rs.3= Rs.92 Case 2: Ex-Interest, then the purchase price is Rs.95 and in addition Rs. 3 to be paid as interest, so the company pays Rs.95+ Rs.3(Interest) = Rs. 98 *Amount paid towards the price of debentures is capital expenditure whereas amt paid for interest is revenue expenditure. *When securities are purchased or sold on a date other than the date of interest, distinction must be made between the capital and revenue portion of the price paid for the debentures. Illustration 7 On 1st January 2003 a limited company purchased its 8% debentures of Rs.50,000 at 90% from the open market for cancellation. Pass necessary journal entries.
Journal Entries
Date Particulars Amount Dr.
Amount Cr.
2003 Jan 01
8% Debenture Account Dr. To Bank To Profit on redemption (Purchase of Debentures from open market for cancellation)
50,000 45,000 5,000
2003 Jan 01
Profit on Redemption of Debentures Dr. To Capital Reserve (Profit on Redemption transferred to capital reserve)
5,000 5,000
2003 Jan 01
Profit and Loss Appropriation a/c Dr. To Debenture Redemption Reserve a/c (Reserve created for redemption of debentures)
45,000 45,000
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12.3.6 Sinking fund / debenture redemption fund investment method : In most cases, the debentures are redeemable in lump sum on a specified date. Therefore it is necessary to make an arrangement for the amount required to redeem debentures. Sinking fund/Debenture redemption fund is created by setting aside a fixed sum of profit every year. The amount of annual appropriation should be such amount which required for payment on redemption, debenture holders. Such accumulate a fixed amount at the expiry of given period of time and at given rate of interest. For calculating annual appropriation towards Sinking fund, Sinking fund table can be used.
Annual Appropriation Amount payable at the Relevant sinking time of Redemption of X Fund Table value Debentures The same amount is Invested in readily marketable securities. Income from such Investment (S.F. Investment) is credited to Sinking fund and along with annual appropriation. It is invested every year; till debenture, become due for redemption. When debentures become due for redemption, Sinking fund investment is realized. Any profit OR loss on sale of S.F. investment is transferred to Sinking fund A/c again any profit or loss on redemption of debenture is also transferred to Sinking fund. After redemption of debenture, balance in Sinking fund is free reserve, therefore it is transferred to general reserve, in case of partial redemption of debenture to the extent nominal value of debentures redeemed should be transferred to general reserve. The accounting entries in such a case will be as follows: I First year [At the end] (1) On transfer of profit to Sinking fund account. Profit and loss appropriation A/c Dr. with annual To Sinking Fund A/c Appropriation (2) On purchase of S.F. investment Sinking Fund Investment A/c Dr. With amount To Bank A/c invested. Note: i) Sinking fund is also called debenture redemption reserve
A/c ii) Sinking fund balance is shown on the liabilities side of balance sheet under the head reserve and surplus. Sinking Fund Investment on the asset side under head investment.
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II Second and subsequent years over the life of the debentures excepting the last year.
1. On receipt of interest on Sinking Fund Investment Bank A/c Dr. To Interest on Sinking Fund Investment A/c
With the amount of interest received on S.F. investment
2. On transfer of interest Interest on Sinking fund investment A/c Dr. To Sinking Fund A/c
With the amount of interest received
3. On transfer of annual appropriation Profit & Loss Appropriation A/c Dr. To Sinking Fund A/c
With the amount of interest received
4. On investment purchased [Annual appropriation + Interest received on S.F. investment] Sinking fund investment A/c Dr. To Bank A/c
III In the last year when the Debentures becomes due for redemption (at the end of year).
1. On receipt of interest on Sinking fund investment Bank A/c Dr. To Interest on Sinking Fund Investment
2. On transfer of interest Interest on Sinking fund investment A/c Dr. To Sinking Fund A/c
3. For transferring annual appropriation Profit & Loss appropriation A/c Dr. To Sinking Fund A/c
4. On realization of Sinking fund investments a) at cost Bank A/c Dr. To Sinking Fund Investment
335
b) At profit Bank A/c Dr. To Sinking Fund Investment To Sinking Fund A/c
c) At Loss Bank A/c Dr. Sinking fund A/c Dr.
To Sinking Fund Investment
Amount realized cost of invest
Amount realized loss on sale
Profit
cost
5. On debentures are due for payment a) At par
Debentures A/c Dr. To Debenture holder A/c
b) i) At premiumDebentures A/c Dr.
Premium on redemption of debentures A/c Dr.
To Debenture holder's A/c b) ii) On transferring premium
On redemption of debentures(if it is not provided at time of issue of debentures] Sinking fund A/c Dr.
To premium on redemption of debentures A/c
c) At discountDebentures A/c Dr.
To Debenture holder's A/c To Sinking Fund A/c
Nominal value of the Debentures
X
X
X
Face value
X
X
Amt.to be paid Dis. on redemption
6. On payment/Redemption Debenture holder's A/c Dr.
To Bank A/c X
X
7. On transfer of Sinking fund balance to general reserve Sinking fund A/c Dr.
To General Reserve A/c
Note: In case of partial redemption of debentures, to the extent of nominal value of debenture redeemed should be transferred to General Reserve.
336
Note: 3 i. No investment should be made in last yearii. This method assures the availability of profit and sufficient
cash for purchasing investment.iii. Where only part of the debentures redeemed it must be
ensured that the balance in Sinking fund is equal to 50% ofthe amount of debentures issue on the date of redemptionsis obligatory. However, a company may create more reserveif it so desires.
12.3.7 Redemption of debentures by conversion into new class of shares or debentures :
Conversion of debentures into shares is another method of redemption. When debentures are converted to shares, the company does not pay money to debenture holders. Instead the company issues share certificates in place of debentures. It may look good for the company because there is no need of cash payment. But the company is selling its shares. Selling shares is actually selling part of the ownership. Debenture holders become shareholders as company agree to give some shares to make the issue of debentures more attractive to buyers.
When the company converts debentures into shares it may issue shares at par premium of discount. If the company converts debentures of Rs.5,000 in shares issued at par means the company cancels debentures of Rs.5,000 and issues share of the same value. Debentures become share capital of equal value.
When the company issues shares at a premium, the debenture holders get less in the form of shares than what they were holding as debentures. It is opposite in case of a issue at a discount.
Illustration 8
On 31st December 2013, a limited company redeemed its 6% debentures of the total value of Rs.100,000 by converting debentures of Rs.63,000 into equity shares of Rs.100 each and paying cash for the balance. Pass Journal Entries assuming that: a. Equity shares have been issued at a premium of 25%b. Equity shares have been issued at a discount of 10%
a. Equity shares issued at premium:No of equity shares issued = 63,000 / 125 =504
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Journal Entries
Date Particulars Amount Dr.
Amount Cr.
2013 Dec 31
6% Debenture Account a/c Dr. To Debenture holders a/c (Debentures transferred for redemption)
100,000 100,000
2013 Dec 31
6% Debenture holders a/c Dr. To Bank a/c (Debentures redemption by payment)
37,000 37,000
2013 Dec 31
6% Debenture holders a/c Dr. To Share capital To Securities Premium (Debentures redemption by conversion))
63,000 50,400 12,600
2013 Dec.31
Profit and Loss Appropriation a/c Dr To Debenture Redemption Reserve (Reserve created for the redemption by cash payment)
37,000 37,000
b. Equity shares issued at Discount No of equity shares issued = Rs.63,000 / 90 = 700
Date
Particulars Amount Dr.
Amount Cr.
2013 Dec 31
6% Debenture Account a/c Dr. To Debenture holders a/c (Debentures transferred for redemption)
100,000 100,000
2013 Dec 31
6% Debenture holders a/c Dr. To Bank a/c (Debentures redemption by payment)
37,000 37,000
2013 Dec 31
6% Debenture holders a/c Dr. Discount on issue of Shares Dr To Share capital (Debentures redemption by conversion)
63,000 7,000
70,000
2013 Dec.31
Profit and Loss Appropriation a/c Dr To Debenture Redemption Reserve (Reserve created for the redemption by cash payment)
37,000 37,000
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12.4 ACCOUNTING PROCEDURE FOR REDEMPTION OF DEBENTURES
Accounting Entries:
Date Sr. No.
Particulars LF
Dr. Rs. Cr. Rs.
1. On debentures becoming due for payment a) Redemption at par Debentures A/c Dr. To debenture holders A/c b) Redemption at a premium Debentures A/c Dr. Premium on redemption of
debentures A/c To Debenture holders A/c c) Redemption at discount Debenture A/c Dr. To debenture holders A/c To profit on redemption of
debenture A/c
(F.V.) X F.V. With premium F.V.
X With amount payable with amount payable dis. on redemption Discount earned
2. On redemption Debenture holders A/c Dr. To Bank A/c
X
X
3. On transfer of premium on redemption Securities premium A/c Dr. OR Profit & Loss A/c Dr. To premium on redemption
of debentures A/c Note: [Only it it is not provided at the time of issue of debentures]
X X
X
4. On transfer of profit to D.R.F. Profit & Loss Appropriation A/c Dr. To Debenture Redemption Reserve A/c
X
X
5. On transferring the balance on debenture redemption reserve Debenture redemption reserve A/c Dr. To General Reserve A/c
X
X
Illustration no.9 [Issue of debenture and redemption under various alternatives] Give necessary journal entries both at time of issue and redemption of debentures in each of the following alternative cases.
I. K Ltd. Issued 5000, 9% debentures of Rs.100 each at par and redeemable at par at the end of five years.
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II. K.P.M. Ltd. issued 5000, 9% debentures of Rs.100 each at 2.5% discount, redeemable at par at the end of five years.
III. O.K. Ltd. issued 5000, 9% debentures of Rs.100 each at a premium of 10% to be redeemed at par at the end of five years.
IV. Mama Ltd. issued 5000, 9% debentures of Rs.100 each at par, redeemable at 5% premium at the end of five years.
V. Yes Ltd. issued 5000, 9% debentures of Rs.100 each at a discount of 3%, redeemable at a premium of 7% at the end of five years.
VI. OM Ltd. issued 5000, 9% debentures of Rs.100 each at a discount of5% redeemable at a discount of 5% at the end of five years.
Solution:
All above companies issued debenture on 1st January 2001 debenture interest paid annually on 31st December every year. [Narration not required] Solution: Important Note: Even though redemption is out of capital, debenture redemption reserve is created as per 4/5 117C requirement of the companies amendment Act 2000 Solution: Case I
Journal of K Ltd.
Date/ Year
Particulars LF
Dr. Rs. Cr. Rs.
1 Jan 01 1. On issue of 5000 debenture of Rs.100 each at par Bank A/c Dr. To 9% Debentures A/c
500,000
500,000
31 Dec 01 2. For debenture interest paid Debenture interest A/c Dr. To Bank A/c
45,000
45,000
31 Dec 01 3. For transferring debenture interest Profit and Loss A/c Dr. To debenture interest A/c
45,000
45,000
31 Dec 01 31.12.02 31.12.03 31.12.04 31.12.05
4. On transferring profit to D.R.R. Profit and Loss Appropriation A/c Dr. To Debentures redemption reserve A/c Entry no.2, 3, 04 will be repeated every year with same amount.
100,000
100,000
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31.12.05 5. On debentures are due forpayment at par9% Debentures A/c Dr. To Debenture holders A/c
500,000 500,000
31.12.05 6. On redemptionDebenture holder's A/c Dr. To Bank A/c
500,000 500,000
31.12.05 7. On transfer of D.R.R.Debenture redemption reserve A/c
Dr. To General Reserve A/c
500,000
500,000
Case II Journal of K.P.M. Ltd.
Date Particulars LF
Dr. Rs. Cr. Rs.
1 Jan 01 1. On issueBank A/c Dr.Discount on issue of debentures A/c
Dr. To 9% Debentures A/c
487,500 12,500
500,000
31 Dec 01
2. On payment debenture interestDebenture interest A/c Dr. To Bank A/c
45,000 45,000
31 Dec 01
3. On transferring debenture interestProfit and Loss of discount of issue ofdebentures.Profit & Loss A/c Dr. To Debenture interest To Discount on issue of debenture A/c
47,500
45,000 2500
31 Dec 01
4. On transferring profit to D.R.R.Profit and Loss Appropriation A/c Dr. To Debentures redemption reserve A/c
100,000 100,000
31.12.02 31.12.03 31.12.04 31.12.05
5. Entry no.2, 3, 04 will be repeatedevery year
31.12.05 6. On debentures are due forpayment at par9% debentures A/c Dr. To Debenture holders A/c
500,000 500,000
31.12.05 7. On redemptionDebenture holder's A/c Dr. To Bank A/c
500,000 500,000
31.12.05 8. On transfer of D.R.R.Debenture redemption reserve A/c
Dr. To General Reserve A/c
500,000
500,000
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Case III Journal of O.K. Ltd.
Date Particulars L
F Dr. Rs. Cr. Rs.
1 Jan 01 1. On issue Bank A/c Dr. To 9% Debentures A/c To securities premium A/c
550,000
500,000 50,000
31 Dec 01
2. On payment debenture interest Debenture interest A/c Dr. To Bank A/c
45,000
45,000
31 Dec 01
3. On transferring debenture interest Profit & Loss A/c Dr. To Debenture interest
45,000
45,000
31 Dec 01
4. On transferring profit to D.R.R. Profit and Loss Appropriation A/c Dr. To Debentures Redemption Reserve A/c
100,000
100,000
31.12.02 31.12.03 31.12.04 31.12.05
5. Entry no.2, 3, 04 will be repeated every year
31.12.05 6. On debentures are due for payment at par 9% Debentures A/c Dr. To Debenture holders A/c
500,000
500,000
31.12.05 7. On redemption Debenture holder's A/c Dr. To Bank A/c
500,000
500,000
31.12.05 8. On transfer of D.R.R. Debenture redemption reserve A/c Dr. To General Reserve A/c
500,000
500,000
Case IV
Journal of Mama Ltd.
Date Particulars LF
Dr. Rs. Cr. Rs.
1 Jan 01 1. On issue Bank A/c Dr. Loss on issue of debentures A/c Dr. To 9% Debentures A/c To Premium on redemption of debenture
500,000 25,000
500,000 25,000
31 Dec 01 2. On payment of debenture interest Debenture interest A/c Dr. To Bank A/c
45,000
45,000
31 Dec 01 3. On transferring debenture interest and w/off 1/5 of loss on issue of debenture Profit & Loss A/c Dr. To Debenture interest A/c To Loss on redemption of debenture
50,000
45,000 5,000
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31 Dec 01 4. On transferring profit to D.R.R.Profit and Loss Appropriation A/c Dr. To Debentures redemption reserve A/c
100,000 100,000
31.12.02 31.12.03 31.12.04 31.12.05
5. Entry no.2, 3, 04 will be repeatedevery year
31.12.05 6. On debentures are due forpayment at 5% premium9% debentures A/c Dr. Premium on redemption of debentures A/c To Debenture holders A/c
500,000 25,000
525,000 31.12.05 7. On redemption
Debenture holder's A/c Dr. To Bank A/c
525,000 525,000
31.12.05 8. On transfer of D.R.R.Debenture redemption reserve A/c Dr. To General Reserve A/c
500,000 500,000
Case V Journal of Yes Ltd.
Date Particulars LF
Dr. Rs. Cr. Rs.
01.01.01 1. On issueBank A/c Dr.Loss on issue of debentures A/c Dr. To 9% Debentures A/c To Premium on redemption of debenture
485,000 50,000
500,000 35,000
31.12.01 2. On payment of debenture interestDebenture interest A/c Dr. To Bank A/c
45,000 45,000
31.12.01 3. On transferring debenture interestand w/off 1/5 of loss on issue ofdebentureProfit & Loss A/c Dr. To Debenture interest A/c To Loss on redemption of debenture
55,000 45,000 10,000
31.12.01 4. For transferring profit to D.R.R.Profit and Loss Appropriation A/c Dr. To Debentures redemption reserve A/c
100,000 100,000
31.12.02 31.12.03 31.12.04 31.12.05
5. Entry no.2, 3, 04 will be repeatedevery year
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31.12.05 6. On debentures are due forpayment at 5% premium9% Debentures A/c Dr.Premium on redemption ofdebentures A/c To Debenture holders A/c
500,000 35,000
535,000 31.12.05 7. On redemption
Debenture holder's A/c Dr. To Bank A/c
535,000 535,000
31.12.05 8. On transfer of D.R.R.Debenture redemption reserve A/c Dr. To General Reserve A/c
500,000 500,000
Case VI Journal of OM Ltd.
Date Particulars LF
Dr. Rs. Cr. Rs.
01.01.01 1. On issueBank A/c Dr. Discount on issue of debentures A/c
Dr. To 9% Debentures A/c
475,000 25,000
500,000 31.12.01 2. On payment of debenture interest
Debenture interest A/c Dr. To Bank A/c
45,000 45,000
31.12.01 3. On transferring debenture interestand w/off 1/5 of Discount on issue ofdebentureProfit & Loss A/c Dr. To Debenture interest A/c To Loss on issue of debenture A/c
50,000 45,000 5,000
31.12.01 4. For transferring profit to D.R.R.Profit and Loss Appropriation A/c Dr. To Debentures Redemption Reserve A/c
100,000 100,000
31.12.02 31.12.03 31.12.04 31.12.05
5. Entry no.2, 3, 04 will be repeatedevery year
31.12.05 6. On debentures due for payment atdiscount9% Debentures A/c Dr. To Debenture holders A/c To Discount on redemption A/c
500,000 475,000 25,000
31.12.05 7. On redemptionDebenture holder's A/c Dr. To Bank A/c
475,000 475,000
31.12.05 8. On transfer of D.R.R.Debenture redemption reserve A/c
Dr. To General Reserve A/c
500,000
500,000
Note: According to prudence and realization concepts, discount on redemption of debenture being gain, should be recorded at the time
344
of redemption of debenture and not at the time of issue or allotment of debentures.
12.5 SOLVED PROBLEMS:
Illustration No. 10 [Sinking fund created for redemption of debentures at the end of the specified period.]
On 1st January 06 S Ltd. issued 2000, 10% debentures of Rs.100 each @ 5% premiums, redeemable at par. The company decided to set aside every year a sum of Rs.63440 to be invested in 5% Govt. securities. The investments were sold at Rs.130200 at the end of third year and debentures were redeemed.
Give journal entries in the books of S Ltd.
Solution Journal of S Ltd.
Date Particulars LF
Dr. Rs. Cr. Rs.
01.01.06 Bank A/c Dr. To 10% Debentures A/c To Securities premium A/c [Being 2000, 10% debentures of Rs.100 each issued @ 5% premium]
210,000 200,000 10,000
31.12.06 Profit and appropriation A/c Dr. To Sinking Fund A/c [Being amount set aside from profit for redemption of debentures]
63,440 63,440
31.12.06 Sinking fund investment A/c Dr. To Bank A/c [Being 5% Govt. securities purchased out of Sinking fund]
63,440 63,440
31.12.07 Bank A/c Dr. To Interest on Sinking Fund Investment [Being into @ 5% received on Sinking fund investment]
3172 3172
31.12.07 Interest on Sinking fund investment A/c Dr. To Sinking Fund A/c [Being interest received on Sinking fund investment transferred to Sinking fund]
3172
3172
31.12.07 Profit and Loss appropriation A/c Dr. To Sinking Fund A/c [Being amount set aside from profit for redemption of debentures]
63,440 63,440
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31.12.07 Sinking fund investment A/c Dr. To Bank A/c [Being 5% Govt. securities purchased out of Sinking fund 63440 + 3172]
66,612 66,612
31.12.08 Bank A/c Dr. To Interest on Sinking Fund Investment A/c [Being interest received on Sinking fund investment 130052 x 5%]
6503 6503
31.12.08 Interest on Sinking fund investment A/c Dr. To Sinking Fund A/c [Being interest on Sinking fund investment transferred to Sinking fund]
6503
6503
31.12.08 Profit & Loss appropriation A/c Dr. To Sinking Fund A/c [Being amount set aside from profit for redemption of debenture A/c]
63,440 63,440
31.12.08 Bank A/c Dr. To Sinking fund investment A/c To Sinking fund A/c [Being amount received on sale of Sinking fund investment of profit]
130,200 130,052 148
31.12.08 10% Debenture A/c Dr. To Debenture holder's A/c
[Being 10% debenture due for redemption]
200,000 200,000
31.12.08 Debenture holder's A/c Dr. To Bank A/c [Being amount paid to debenture holders]
200,000 200,000
31.12.08 Sinking fund A/c Dr. To General Reserve A/c [Being balance in Sinking fund transferred on redemption of debentures]
200,143 200,143
Working Notes: 1. In year 2007, annual appropriation plus int. on Sinking fund
investment received is invested.2. Profit on sale Sinking fund investment is credited to Sinking
fund.3. On 31.12.08, no Sinking fund investment made as
debentures are due for redemption on that date.
Illustration No. 11 [Debenture are issued at discount, Sinking fund created]
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On 01/04/2004 P Ltd. issued 4,000, 12% debentures of Rs.100/- each @ 5% discount. The debentures as redeemable @ 4% premium in lump sum on 31/03/2007. The interest is payable on 30th September, and 31st March. The company closes the accounts on 31st March every year. It has been stipulated to annually appropriate Rs. 124,000 towards debenture redemption fund & invest the same in 10% IDBI bonds together with interest received. Interest is received on 31st March every year & investment is also made on the same day. On 31/03/2007, the investment is sold for Rs.2, 62,000 including bonus & the debenture are redeemed. Show relevant ledger accounts in the books of P Ltd.
In the books of P Ltd. 12% Debenture
Date Particulars Rs. Date Particulars Rs. 31/03/05 To balance
c/d 4,00,000 01/04/04 By Bank A/c
By Disc. on issue of Debenture
380,000
20,000
4,00,000 4,00,000
31/03/06 To bal c/d 4,00,000 01/04/05 By bal b/d 4,00,000
4,00,000 4,00,000
31/03/07 To debenture holders A/c
4,00,000 01/04/06 By bal b/d 4,00,000
4,00,000 4,00,000
Loss on issue of Debenture
Date Particulars Rs. Date Particulars Rs. 01/04/04 To discount
on issue of debenture To premium on redemption of debenture
20,000
16,000
31/03/05 By Profit & Loss A/c [36000 x 1/3]
By Bal. c/d
12,000
24,000
36,000 36,000
01/04/05 To bal c/d 24,000 31/03/06 31/03/06
By P & L A/c By bal c/d
12,000 12,000
24,000 24,000
31/03/07 To bal. c/d 12,000 31/03/07 By P & L A/c 12,000
12,000 12,000
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Debenture Interest A/c
Date Particulars Rs. Date Particulars Rs. 30/09/04 31/03/05
To bank A/c To bank A/c
24,000 24,000
31/03/05 By P & L a/c 48,000
48,000 48,000 30/09/05 31/03/06
To Bank A/c To Bank A/c
24,000 24,000
31/03/06
By P & L A/c
48,000
48,000 48,000 30/09/06 31/01/07
To Bank To Bank
24,000 24,000
31/03/07
By P & L A/c
48,000
48,000 48,000
Premium on redemption of Debenture A/c
Date Particulars Rs. Date Particulars Rs.
31/03/05 To balance c/d 16,000 01/04/04 By loss on issued debenture
16,000
16,000 16,000 31/03/06
To bal c/d
16,000
01/04/05
By bal b/d
16,000
16,000 16,000 31/03/07
To Debenture holders A/c
16,000
01/04/06
By bal b/d
16,000
16,000 16,000
Debenture Redemption fund invest A/c Dr. Cr.
Date Particulars Rs. Date Particulars Rs.
31/03/05 To Bank A/c 1,24,000 31/03/05 By Bal. c/d 1,24,000
1,24,000 1,24,000 01/04/05 31/03/06
To bal b/d To Bank A/c
1,24,000 1,36,400
31/03/06
By bal c/d
2,60,400
2,60,400 2,60,400 01/04/06 31/03/07
To Bal. b/d To debenture redemption reserve profit
2,60,400 1,600
31/03/07
By Bank A/c
2,62,000
2,62,000 2,62,000
348
Debenture Redemption fund A/c Date Particulars Rs. Date Particulars Rs. 31/03/05 To balance
c/d 1,24,000 31/03/05 By profit &
Loss appropriation
1,24,000
1,24,000 1,24,000
31/03/06 To bal c/d 2,60,400 01/04/05 31/03/06
31/03/06
By bal b/d By Bank A/c (Int.) By Profit & Loss appropriation
1,24,000 12,400
1,24,000
2,60,400 2,60,400
To general reserve A/c (Bal. transferred)
4,12,040 31/03/06 By bal b/d By Bank A/c By profit & Loss appropriation A/c By debenture redemption reserve A/c
2,60,400 26,040
1,24,000
1,600
4,12,040 4,12,040
9% Debenture holder A/c Date Particulars Rs. Date Particulars Rs. 31/03/07 To Bank A/c 4,16,000 31/03/07
31/03/07
By 9% Debenture A/c By premium on redemption of debenture
4,00,000
16,000
4,16,000 4,16,000
Illustration 12
JJ ltd. had debentures of Rs.3,000. In redemption of these debentures the company offered: a. cash orb. equity shares issued at a premium of 50%.
Half the debenture holders opted for cash and remaining half opted for shares. Pass journal entries.
349
Date Particulars Amount Dr.
Amount Cr.
Xxx 1. X% Debenture Account a/c Dr. To Debenture holders a/c (Debentures transferred for conversion))
3,000 3,000
Xxx 2. Debenture Holders a/c Dr. To Bank a/c (Debentures redeemed by cash payment)
1,500 1,500
Xxx 3 P&L Appropriation a/c DRR (Appropriation of profit for the debentures redeemed)
1,500 1,500
Xxx 3. Debenture Holders a/c Dr. To Share capital To Securities premium (Debentures redeemed by conversion)
1,500 1,000
500
Illustration 13
On 1st January, 2000 a company issued 5000, 15% debentures of Rs.100 each at Rs.98. Holders of these debentures had an option to convert their debentures into 10% preference shares of Rs.100 each at a premium of Rs,20 per share at any time within 2 years. On 31st December, 2000 a holder of 1200 debentures notified his intention to exercise his option. Pass necessary Journal entries.
Date Particulars Amount Dr.
Amount Cr.
2000 Jan 1
Bank a/c Dr. Discount a/c Dr. To 15% Debenture a/c (Issue of debentures at discount)
490,000 10,000
500,000
2000 Dec 31
15% Debenture a/c Dr. To Debenture holders a/c (Debentures transferred for redemption)
120,000 120,000
2003 Dec 31
15% Debenture holders a/c Dr. To 10% Preference share capital Dr To Securities Premium (Debentures redemption by conversion)
120,000 100,000 20,000
12.6 KEY TERMS
Redemption of Debentures: Repayment of Debentures.
Sinking Fund: It is a fund created out of Profit for the purpose of redemption of Debentures.
Sinking Fund Investments: Annual Profit appropriated, along with Interest received, is invested in outside securities. Such investment is known as Sinking Fund Investment.
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Own Debentures: These are companies own Debenture, purchased in open market, for investment or for immediate cancellation.
Premium on Redemption of Debentures: It is additional amount to Debenture holders at time of redemption. It is a Capital Loss to the company. Normally it is provided at the time of Issue of Debentures.
Cum Interest: means interest is also included in the price of debenture upto the date of purchase of debenture.
Ex Interest: means interest is not included in the price of debenture while purchasing.
Annuity method: When Company plans to redeem the debentures after a specified time period with the help of its investment, which is created through investing a certain fixed sum after a specific time period to acquire a desired sum at the time of requisition of sum, accordingly Company also, earns interest on its principal amount.
Key Points: Debenture may be issued at par, or at discount or at
premium. Similarly, Debentures may be redeemed at par, at discount or at a premium.
Discount / Loss on issue of Debentures, is Capital Loss can be transferred to Securities Premium A/c or Profit & Loss A/c. Normally it is written off over the period of outstanding Debentures. Till the Loss / Discount not written off, it appears in the Balance sheet of the company on the asset side, under heading Miscellaneous Expenditure” (to extent not written off)
Any Profit or Loss on sale of Sinking Fund investment should be transfer to Sinking Fund A/c.
Redemption of Debentures, balance Sinking Fund A/c should be transferred to General Reserve A/c.
Debenture may be redeemed by conversion into shares on new Debenture issued.
Amt. payable to debentureholdersNo. of Shares/Debenture issued =Issue price of Shares/Debentures
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12.7 EXERCISE:
12.7.1 OBJECTIVE QUESTIONS:
1. Fill in the blanks with suitable words:
A) After redemption of Debentures for transferring balance inSinking Fund ___________ A/c is debited.
B) Interest accured on Debenture Redemption Fund Investmentcredited to ___________ A/c.
C) When Debentures are due for conversion ___________ A/c isdebited.
D) New shares on Debenture issued on conversion amountpayable to Debenture holders ___________ .
E) 40,000 9% Debentures of Rs.100/- are to be redeemed @12.50% premium on conversion into Equity Shares of Rs.10/-each issued at Rs.20/-. Equity shares issued = ___________ .
F) 40,000 9% Debentures of Rs.100/- each redeemable @ 12.50%premium are to be converted at to 96
No. of Debentures issued = ___________ .
G) Companies Act allows company to purchase ___________Debentures from market as S.F. Investment.
H) Interest received on Own Debentures purchased as S.F.Investment is transferred to ___________ Account.
I) Profit or loss on cancellation of own Debenture held as S.F.Investment is transferred to ___________ Account.
J) Interest on Own Debentures can be transferred to ___________Account.
K) Interest accrued on Debentures Redemption Fund Investment___________ Account.
L) X Ltd. issued Rs.5,00,000/- Debentures at 5% Discountredeemable in 5 years equally. Discount on issue ofDebentures will be written off in the ratio of _____________ .
M) Z Ltd. issued Rs.5,00,000/- Debentures @ 5% Discountredeemable at the end of 5th year Annual Discount to be writtenoff = Rs. _____________ .
N) Debentures may redeemed at _____________ or at_____________.
O) _____________ is a special fund established out of Profit forredemption of Debentures.
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P) Company may purchased Own Debentures for _____________ or for _____________.
Q) Redemption of Debentures means _____________ .
R) Debentures can be redeemed by _____________ then in shares / New Debentures.
S) Premium or redemption of Debentures is normally provided at the _____________.
T) Discount on issue of debenture is shown in Balance sheet under heading _____________.
U) Sinking Fund for redemption of Debenture is also known as _____________.
V) Annual Appropriation for Sinking Fund = Amt. payable at the time of Redemption _____________.
W) Amount of S.F. Investment purchased = Annual Appropriation + _____________.
X) Any Profit on Loss on Sale of S.F. Investment is transferred to _____________ account.
Y) After redemption of Debentures, balance in Sinking Fund is transferred to _____________.
Z) On partial Redemption Debentures, balance in S.F. Account is transferred to General Reserve to the extent _____________ .
[Answer: A) Sinking Fund, B) Debenture Redemption Fund Account, C) Debenture holder’s Account, D) Issue price of one share, E) 2,25,000 Equity Shares, F) 46,875 New Debentures, G) Own, H) Sinking Fund, I) Sinking Fund, J) Profit and Loss Account, K) Debenture Redemption Fund, L) 5:4:3:2:1, M) 5,000, N) Par, Premium or Discount, O) Sinking Fund / D.R.F., P) Investment, immediate cancellation, Q) Discharge of Debentures Liability, R) Converting, S) Issue of Debentures, T) Miscellaneous Expenditure, U) Debenture Redemption Fund, V) Relevant Annuity Table Value, W) Interest received on S.F. Investment, X) Sinking Fund Account, Y) General Reserve Account, Z) Nominal value of Debentures Redeemed. 2. STATE WHETHER TRUE OR FALSE 1) Debentures can be redeemed only at par. 2) Annual Appropriation to Sinking is debited to Bank A/c. 3) After redemption of all Debenture, balance in Sinking Fund A/c
is transferred to General Reserve. 4) Debentureholders are not entitled to invest if company is making
Loss. 5) A company can purchased its own debentures from market. 6) Company may held its own Debentures as investment.
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7) Debentures are always secured.8) Security Premium can be used to write off Discount on issue of
Debentures.9) Capital Reserve can used to pay Debenture interest.10) Loss on sale of Sinking Fund Investment is debited to Profit &
Loss A/c.11) Interest received on Sinking Fund Investment, is debited to
Sinking Fund A/c.12) Capital Redemption Reserve is created when Debentures are
redeemed in cash.13) A company cannot issue unsecured Debentures.14) Accrued Debenture Interest is added to Debentures.15) Debentures hold get their money only on liquidation of
company.
[Answer: True: 3, 5, 6, 8, False: 1, 2, 4, 7, 9, 10, 11, 12, 13, 14, 15.]
3. MULTIPLE CHOICE QUESTIONS :
1) The balance of Sinking Fund A/c is transferred to_____________ .a) Capital Reserve A/c b) Balance sheetc) General Reserve A/c d) None of the above
2) Profit on sale of Sinking Fund Investment with be debited to_____________ .a) Profit & Loss A/c b) Sinking Fund Investment A/cc) Sinking Fund A/c d) Revaluation A/c
3) Interest received on debenture redemption fund investment willbe _____________ .a) Debited to Bank A/c b) Debited to Sinking Fund A/cc) Profit & Loss A/c d) Sinking Fund A/c
4) On Redemption of Debentures, account paid to Debentureholders A/c credited to _____________.a) Debenture holders A/c b) Bank A/cc) Debentures A/c d) Sinking Fund A/c
5) On payment of debenture interest amount paid is debited to_____________ .a) Sinking Fund A/c b) Debenture Interest A/cc) Bank A/c d) Investment A/c
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6) Balance in Discount on issue of Debentures is shown in Balance sheet.
a) On Liabilities side b) Current Assets c) On Assets side d) None of the above
7) Premium on redemption of debenture not provided at the time of issue, transferred to _____________.
a) Profit & Loss A/c b) Trading A/c c) Sinking Fund A/c d) Debenture A/c [Answer: (1 – c), (2 – b), (3 – a), (4 – b), (5 – b), (6 – c), (7 – c)] 4. Match the following Columns. 1)
Group “A” Group “B”
a) Sinking Fund b) Price including accrued
interest c) Debentures d) Terms of Redemption e) Interest received on S.F.
Investment
i) Carries Fixed Rate Interest ii) Specified at the time of
issue iii) Credited to S.F. A/c iv) Credited to Trading A/c v) P&L Appropriation debit vi) Cum – interest price vii) Ex – interest price
[Answer: (a – v), (b – vi), (c – i), (d – ii), (e – iii)] 2)
Group “A” Group “B”
a) Sinking Fund b) Sinking Fund Investment c) Amount to be invested d) Redemption of Debentures e) Debenture interest
i) Balance Sheet Assets side ii) Annual appropriation
Interest received on S.F. Investment
iii) Profit & Loss A/c iv) Unsecured Loans v) Optional vi) Reduction in owed fund vii) Own Debenture viii)Reduction is own fund
[Answer: (a – v), (b – i), (c – ii), (d – vi), (e – iii)]
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12.7.2 Theory Questions:
1. What do you mean by Redemption of debentures? 2. Distinguish between redemption of Preference shares and
redemption of Debentures. 3. Discuss various methods of redemption of debentures. 4. Distinguish between redemption of Debentures out of Profit &
out of capital. 5. Explain Own Debentures. 12.7.3 PRACTICAL PROBLEMS: 1) The following balances appeared in the books of a company as
on 31.12.2008. 10% Mortgage Debentures Rs.6,00,000/-; Sinking Fund Rs.5,81,000/-; Sinking Fund Investment, 4% Government Loan purchased at par Rs.2,80,000/- and 5% Government paper purchased for Rs.3,01,000/- - F.V. 3,20,000/-.
On 31st March 2009; the Investments were sold at Rs.105/- and
Rs.98/- respectively and the Debentures were paid off at Rs.104/- together with accrued interest. The interest on Debentures had been paid up to 31st December, 2008.
Write up the ledger accounts concerned. 2) On 30th June, 2008 the following balances stood in the books of
Kumari Ltd.
Particulars Rs.
10% First mortgage Debentures
Debenture redemption Reserve Fund
The above Fund was invested the following securities :
Rs.3,60,000/-, 5% Government Loan
Rs.3,80,000/-, 4% Government Loan
7,50,000
7,25,000
3,52,000
3,73,000
To redeem the Debentures on 30th June, 2008 the above
investments were sold on the same day under: 5% Government loan, at par, 4% Government Loan, at Rs.98/- Draw up the necessary accounts; bring down their balances, if
any, after the redemption of Debentures, and state how they will be disclosed in the balance sheet of the company.
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3) Ext. Co. Ltd. has 4,000, 6% Debentures of Rs.100/- each outstanding on 1st January, 2009. There was a Sinking Fund amounting to Rs.3,50,000/- represented by 5% Mumbai Municipal Corporation Debentures of face value of Rs.3,60,000/-. Interest on these is payable on 30th June and 31st December every year and these were also the dates for the payment of interest as Debentures of the company. Half yearly interest of Rs.9,000/- was received up to 30th June, 2009.
On 31st December, 2009; further Rs.50,000/- was appropriated
towards the Sinking Fund and corresponding investment in Mumbai Municipal Corporation Debentures were acquired with this amount and interests received on existing investments which amounted to Rs.9,000/-. The face value of investments made was Rs.60,000/-. Show ledger account in books of Ext. Ltd., relating to following :
a) Sinking Fund Account b) Sinking Fund Investment Account; and c) 6% Debenture Account. 4) The Balance Sheet of a Company as at 31st March, 2008 as
follows :
Particulars Rs. Particulars Rs.
Equity Share Capital Securities Premium Debenture Redemption Reserve General Reserve 10% Debentures (Rs.100/- each) Premium on Redemption of Debentures Current Liabilities
20,00,000 3,00,000
10,00,000 4,00,000
12,00,000
1,00,000
1,40,000
Sinking Fund Investment (Face value Rs.10,00,000/-) Other Assets Discount on issue of Debentures
10,00,000
41,00,000 40,000
51,40,000 51,40,000 On 1st April, 2008, the Board of Directors decided to and gave
following options to remaining debenture holders : a) to accept cash payment at 10% premium, or b) to accept three shares of Rs.100/- each for four Debentures
held in the company.
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Debenture holders holding Rs.5,00,000/- Debentures opted for cash payment and balance of debenture holders opted for the conversion of their Debentures into shares. Journalise.
5) On 1st April, 2005, Apana Sapan Ltd. issued 1,000 10%
Debentures of Rs.500/- each at par, payable @ Rs.525/-. As per terms of issue, the Board of Directors decided to provide Sinking Fund for redemption of Debentures and took an Insurance Policy to provide the necessary cash. The annual premium being Rs.1,65,000/-. On which the return is 3% p.a. compound interest, Insurance Premium paid on 1st April, 2005, 2006, 2007.
On 31st March 2008, Insurance Policy was surrendered and
Debentures were redeemed as per terms surrendered and debentures were redeemed as per terms.
You are required to prepare necessary ledger accounts for the
three year ended on 31st March 2006, 2007 & 2008. 6) The following balances appearent in the books on 1st January
2008.
Particulars Rs. 12% Debentures A/c Sinking Fund A/c Sinking Fund Investments : 6% Maha. Govt. Loan A/c 4% Sadar Bonds [F.V. Rs.6,50,000/-]
15,00,000 12,00,000
6,00,000 6,00,000
Following transaction took place during year. a) Half yearly Debenture Interest paid on 30th June 08 and 31st
Dec. 08. b) On 31st December 08, Debentures redeemed @ 5%
premium. c) 6% Maha. Govt. Loan realized for Rs.6,20,000/- and 4%
Sadar Bonds Rs.5,95,000/-. d) Interest on Sinking Fund Investment received. e) Annual contribution to Sinking Fund transferred Rs.50,000/-. 7) On 1st April, 2008 Z Ltd. issued 1,200 6% Debentures of
Rs.500/- each at Rs.525/- each. Debenture holders had an option to convert their holding into 9% Preference shares of Rs.100/- each at a premium of Rs.20/- per share. On 31st March 09, one year’s interest had accrued on these Debentures which was paid. All the Debenture holders notified intention to convert their holdings into 9% Preference shares. Journalise the above transactions on March 09.
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8) On January 1, 2008 Tatal Ltd. gave notice of its intention toredeem its Rs.20,00,000/- 10% Debentures on 31st March, 2008at 110 per cent offered the debentureholders the followingoptions :a) To apply the redemption money in subscribing :
i) 11% Cumulative Preference shares of Rs.100/- each atRs.125/- (opted by the holders of 9,800 Debentures) or
ii) 8% Debentures at Rs.98/- per cent (opted by the holdersof 8,800 Debentures)
b) To get their holding redeemed for cash if neither of theoptions under (a) was accepted.
Show as on 31st March, 2008 the journal entries to record the redemption.
9) On 01-04-2003 Z Ltd. issued 5,000 Debentures of Rs.100/-each at a discount of 5%. These Debentures were repayable atpar on 31-03-2008 and a Sinking Fund was to be created out ofprofits by setting aside an equal amount of Rs.40,000/- on 31st
December every year to be invested in 6% securities.
You are requested to show the Sinking Fund Account and theinvestment Account in the books for four years.
10) The following balances appeared in books of R. Chiski Ltd. ason 01-04-05.
Rs. 8% First Mortgage Debentures 18,00,000 Income received on Sinking Fund Investments 1,45,000 Discount on issue of Debentures 45,000 Sinking Fund Account 15,00,000 Sinking Fund Investment : a) 7% RBI Bonds 9,00,000 b) 9% Central Govt. Securities 6,00,000
On the same day the investments were sold as follows : a) RBI Bonds at 10% Profitb) 9% Central Govt. Securities at 5% Loss
On 1st April 2006 Debentures of Rs.12,00,000/- were redeemed at a premium of 6%. On the same day Gujarat Road Development Corporation Bonds of Rs.2,00,000/- were purchased at 5% premium. Annual contribution for Sinking Fund was Rs.1,50,000/-.
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You are required to prepare for the year ended 31-03-06. 1) Debentures A/c2) Sinking Fund A/c3) Sinking Fund Investment A/c4) General Reserve A/c
11) J. Ltd. Took over the assets of Rs. 150000 & liabilities of ALtd. For an agreed purchase consideration of Rs. 108000 is to besatisfied by the issue of 10% debentures of Rs. 100 each. Showjournal entries in the books of J Ltd. Under the followingcircumstances:a) When Debentures are issued at parb) When Debentures are issued at 20% premium &c) When Debentures are issued at 10% discount.
Working Note: a) Number of Debentures to be issued = Purchase consideration
Issued price
b) Debenture issued at 20% premiumDebenture = 108000 120= 900 Debentures of Rs. 100 eachat 20% premium
c) Debenture issued at 10% discountDebentures= 10800090=1200 Debentures of Rs. 100 each at10% discount.
12) P.T. Ltd., took a loan of Rs. 100000 from a bank & deposited1000, 8% Debentures of Rs. 100 each as Collateral security,Company again took a loan of Rs. 100000 after 3 months from abank & deposited 1000, 8% Debentures of Rs. 100 each as acollateral securities. With this amount company purchased plant& machineries for Rs. 150000 pass necessary Journal entries inthe books of the company & prepare balance sheet.
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13 ACCOUNTING WITH THE USE OF
ACCOUNTING SOFTWARE
Unit Structure :
13.0 Objectives 13.1 Purchase order and Sales order 13.2 Budgeting and Controls 13.3 Product Invoice and Service Invoice 13.4 Short - cut keys or keyboard shortcuts available in tally
ERP9 13.5 Key combination used for navigation 13.6 Management information system 13.7 Exercise
13.0 OBJECTIVES
After studying the unit students will be able to know the use of accounting software for advance accounting and shortcut keys for operating the software.
13.1 PURCHASE ORDER AND SALES ORDER
Purchase order: It is a commercial document issued by a buyer to a seller
indicating details of quantity and agreed prices for products / services the seller will provide to the buyer.
Purchase orders are generally pre - printed numbered documents generated by the retailers’ financial management system which shows that purchase details have been recorded and payment will be made.
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Details in purchase order Party a/c name
Order number
Name of the item
Delivery date
Location where goods are to be delivered
Quantity, rate and amountTo create a purchase order:Gateway of Tally ------ Inventory vouchers ----- F4 (Alt F4)purchase order on button panelFor purchase order processing or sales order processing - Go toinventory features -------- order processing and type ‘Yes’.The purchase order can be altered or deleted.
Sales order: It can be created once the quote is accepted by prospective
customer. Sales order contains the following details:
Sales order number
Date
Product quantity
Product price
Billing address
Terms and conditions
To create a Sales order: Gateway of Tally ----- Inventory vouchers ------ F5 (Alt F5) sales order on side button panel Reorder - It is the level at which new order for supply of materials is to be placed.
The two factors that determine the appropriate order point are the delivery time stock which is the inventory needed during the lead time (difference between the order date and the receipt of the inventory ordered) and the safety stock which is the minimum level of inventory that is held as protection against shortages due to fluctuations in demand Gateway of Tally ------- Display Menu --------- Statements of Inventory ---------- Reorder Status.
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Delivery Notes: It is a document accompanying a shipment of goods that lists the description, grade and quantity of the goods delivered. Delivery note voucher is used to record the delivery of goods to customers.
To create Delivery note voucher: Use F8 (Alt and F8 simultaneously) or F8 on the right hand side button panel.
13.2 BUDGETING AND CONTROLS
An estimation of the revenue and expenses over a specified future period of time is a budget. A Budget serves as an action plan for achieving quantified objectives - Budget is a standard for measuring performance and a device for coping with foreseeable adverse situations. Budget creation - Budget Menu has three options - Create -------- Alter ---------- Delete Gateway of Tally ------ Account Info ------ Budgets ------- Create Gateway of Tally ------ Account Info ------ Budgets ------- Alter Gateway of Tally ------ Account Info ------ Budgets ------- Delete
13.3 PRODUCT INVOICE AND SERVICE INVOICE
An Invoice is a non-negotiable instrument issued by a seller to a buyer which may be for sale of goods or service Gateway of Tally ------ F11 ------ Accounts Features ------- Allow invoicing ------- Type ‘Yes’
13.4 SHORT - CUT KEYS OR KEYBOARD SHORTCUTS AVAILABLE IN TALLY ERP9
Tally ERP 9 offers a range of keyboard shortcuts to make it very user friendly.
The shortcut keys appear in button names in the button bar (right side of the Tally screen). You can either click the button from the button bar or press the relevant function key or character underlined / double - underlined.
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The buttons have a function key before the button names (Eg. F1 : Select Company) which means you need to press F1 key (Function Key) to select the ‘Select Company’ screen.
The buttons have an underlined character (Eg : F3 : Cmp Info), which means you need to press ALT + F3 to select the ‘Company Info’ screen.
Some buttons have a double- underlined character (Eg : As Voucher) which means you need to press CTRL+V to select the ‘Voucher’ in voucher mode.
The shortcut keys available in Tally ERP 9 are listed in the table below :
Windows Functionality Availability
F1 To select a company To select Accounts Button and inventory Buttons
At all masters menu screen All the Accounting / Inventory vouchers creation and alteration screen
F2 To change the menu period
To change the menu period
F3 To select the company To change the menu period
F4 To select the Contra voucher
At Accounting / Inventory Voucher creation and alteration screen
F5 To select the Payment voucher
At Accounting / Inventory Voucher creation and alteration screen
F6 To select the Receipt voucher
At Accounting / Inventory Voucher creation and alteration screen
F7 To select the Journal voucher
At Accounting / Inventory Voucher creation and alteration screen
F8 To select the Sales voucher
At Accounting / Inventory Voucher creation and alteration screen
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F8 (CTRL+F8)
To select the Credit note voucher
At Accounting / Inventory Voucher creation and alteration screen
F9 To select the Purchase voucher
At Accounting / Inventory Voucher creation and alteration screen
F9 (CTRL+F9)
To select the Debit Note At Accounting / Inventory Voucher creation and alteration screen
F10 To select the Reversing Journal voucher
At Accounting / Inventory Voucher creation and alteration screen
F10 To select the Memorandum voucher
At Accounting / Inventory Voucher creation and alteration screen
F11 To select the Functions and Features screen
At almost all screens in TALLY
F12 To select the Configure screen
At almost all screens in TALLY
ALT+2 To Duplicate a voucher At list of Vouchers - creates a voucher similar to the one where you positioned the cursor and used this key combination
ALT+A To Add a voucher At List of Vouchers - adds a voucher after the one where you positioned the cursor and used this key combination
ALT+C To create a master at a voucher screen (if it has not been already assigned a different function, as in reports like Balance Sheet, where it adds a new column to the report)
At voucher entry and alteration screens, at a field where you have to select a master from a list. If the necessary account has not been created already, use this key combination to create the master without quitting from the voucher screen
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ALT+D To delete a voucher To delete a master (if it has not been already assigned a different function, as explained above)
At Voucher and Master (Single) alteration screens. Masters can be deleted subject to conditions, as explained in the manual.
ALT+C To create a master at a voucher screen (if it has not been already assigned a different function, as in reports like Balance Sheet, where it adds a new column to the report)
At voucher entry and alteration screens, at a field where you have to select a master from a list. If the necessary account has not been created already, use this key combination to create the master without quitting from the voucher screen.
ALT+D To delete a voucher To delete a master (if it has not been already assigned a different function, as explained above)
At Voucher and Master (Single) alteration screens. Masters can be deleted subject to conditions, as explained in the manual.
ALT+E To export the report in ASCII, SDF, HTML OR XML format
At all reports screens in TALLYY
ALT+I To insert a voucher At list of Vouchers - inserts a voucher before the one where you positioned the cursor and used this key combination.
ALT+R To remove a line in a report
At all reports screens in TALLY
ALT+S To bring back a line you removed using ALT+R
At all reports screens in TALLY
ALT+X To cancel a voucher in Day Book / List of Vouchers
At all voucher screens in TALLY
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CTRL+A To accept a form - wherever you use this key combination, that screen or report gets accepted as it is
At most all screens in TALLY, except where a specific detail has to be given before accepting
13.5 KEY COMBINATION USED FOR NAVIGATION
Windows Functionality Availability
PgUp Display previous voucher during voucher entry / alter
At voucher entry and alteration screens
PgDn Display next voucher during voucher entry / alter
At voucher entry and alteration screens
ENTER To accept anything you type into a field. To accept a voucher or master To get a report with further details of an item in a report
You have to use this key at most areas in TALLY At the receivables report - press enter at a pending bill to get transactions relating to this bill (e.g., original sale bill, receipts and payments against this bill, etc)
ESC To remove what you typed into a field To come out of a screen To indicate you do not want to accept a voucher or master
At most all screens in TALLY
SHIFT + ENTER
Collapse next level details At Voucher Register screen and Trial Balance Sheet.
SHIFT + ENTER
To explode a line into its details
In almost all Reports : At a Group / Stock Group / Cost Category / Godown / Stock Category - displays Sub Groups and Ledgers / Stock Items / Cost Centres / Secondary
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Godowns / Secondary Stock Categories At a Voucher - displays its entries and narration At a Stock Item - displays its godowns and batch details At Voucher Register screen - displays the next level details At Trial Balance report - displays the next level details
CTRL + ENTER
To alter a master while making an entry or viewing a report
At voucher entry and alteration screens At all reports
13.6 MANAGEMENT INFORMATION SYSTEM
Management Information Systems (MIS) Reports are required by the management to asses the performance of the organization and allow for faster decision - making
Types of MIS Reports in Tally.ERP9
Accounting Reports : To obtain information on the financialposition, operational performance and economic activities of thebusiness.
Financial Reports : To determine the financial condition of anorganization as required by shareholders, creditors andgovernment units.
Inventory Reports : To manage the Inventory effectively sincethe actual status of stock items is obtained.
Management Control Reports : To utilize budgets, cost centrereports, scenario reports etc. for controlling activities.
Few of the financial MIS reports are listed below :
1. Receivables2. Payables3. Cost Centre Reports4. Ratio Analysis5. Cash Flow6. Funds Flow7. Exceptional Reports
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Tally automatically generates a number of reports. The following reports are readily available.
Trial Balance Balance Sheet Profit and Loss A/c Stock summary Ratio Analysis Display Menu Day Book Bank Reconciliation Statement
Gateway of Tally ------- Display ------- Trial BalanceGateway of Tally ------- Balance SheetGateway of Tally ------- P & L A/cGateway of Tally ------- Stock summaryGateway of Tally ------- Ratio AnalysisDisplay Menu –
The following options can be verified Trial Balance Day Book Accounts Book Statement of Accounts Inventory Books Statements of Inventory Cash Flow and Fund Flow List of Accounts Exceptional Reports
Tally 9 is the most powerful business accounting software with basic MIS.
Best for simple, instant as well as advanced financial MIS Best Inventory and Statutory MIS Simple input capabilities Easy to use interface
Tally 9 designed exclusively to meet the needs of smallbusiness is a fully integrated, affordable, and highly reliablesoftware.
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13.7 EXERCISE
A. Write the proper key used for the following function:1. To alter a master while making an entry.2. To collapse next level details.3. To come out of a screen4. To accept anything you type into a field.5. To display next voucher during voucher entry.6. To cancel a voucher in Day Book / List of Vouchers.7. To insert a voucher.8. To select the Functions and Features screen.9. To delete a voucher or master.10. To duplicate a voucher.11. To add a voucher.12. To select the company.13. To select the Payment voucher.14. To select the Sales voucher.15. To select the Credit note voucher.
