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CA- INTERMIDIATE
SOLUTIONS OF
ACCOUNTING
FOR Dec 2021
BY
CA. IQTIDAR A. MALIK
(B.COM (H), FCA, CS)

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DISCLAIMER
SOLUTIONS ARE MADE ON THE BASIS OF MY OWN ASSUPMTIONS, INSTITUTE
ASSUMPTIONS
MAY BE DIFFERNET.

SUGGESTIONS AND FEEDBACK ARE WELCOMED.

REGARDS
CA. IQTIDAR A. MALIK
Email: [email protected]

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ANSWER TO QUESTION NO 1 (5 Marks Each)

Question 1(a)
(i) PP Ltd. An Indian Company acquired long term finance from WW (P) Ltd, a U.S.
company, amounting to Rs. 40,88,952. The transaction was recorded at US $1 = Rs.
72.00, taking exchange rate prevailing at the date of transaction. The exchange rate
on balance sheet date (31.03.21) is US $1 = Rs. 73.60.
(ii) Trade receivables of PP Ltd. Include amount receivable from Preksh Ltd, Rs.
20,00,150 recorded at the prevailing exchange rate on the date of sales,
transaction recorded at US $ 1 = 73.40. The exchange rate on balance sheet Date
(31.03.2021) is US $1 = Rs. 73.60. Exchange rate on 1st April, 2020 is US $1= Rs.
74.00
You are required to calculate the amount of exchange difference and also explain the
accounting treatment needed in the above two cases as per AS 11 in the books of PP Ltd.
Ans.
(i)
Long term foreign currency loan
Long term foreign currency loan in Rupees ` 40,88,952
Divided by Exchange rate on the date when loan was taken 72
Long term foreign currency loan in Dollars $ 56,791
Exchange loss for the year ended 31-03-21 ` 90865.60
(56,791 X (73.60 – 72)
Treatment as per AS 11:
Option 1: Such Loss may be transferred to Profit & Loss a/c
Option 2: Company may adopt irrevocable option under Para
46/46A and accumulate such loss in FCMITD a/c which will be
amortised over the period of Loan
(ii)
Sundry Debtors
Trade Receivable in Rupees ` 20,00,150
Divided by Exchange rate on the date of sale 73.40
Trade Receivable in Dollars $ 27,250
Exchange loss for the year ended 31-03-21 ` 5,450
(27,250 X (73.60 – 73.40)
Treatment as per AS 11:
Such Loss will be transferred to Profit & Loss a/c

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Question 1 (b)
Following are the extracts from the Balance Sheet of ABC Ltd.
Liabilities 31.3.2020 31.3.2021

Equity Share Capital 25,00,000 35,60,000

10% Preference Share Capital 7,00,000 6,00,000
Securities Premium Account 5,00,000 5,50,000
Profit & Loss A/c 20,00,000 28,00,000
Equity Share Capital for the year ended31st March 2021 includes Rs. 60,000 of equity shares
issued to Grey Ltd at par for supply of Machinery of Rs. 60,000.
Profit & Loss account on 31st March2021 includes Rs. 50,000 of dividend received on Equity
shares invested in X. Ltd.
Show how the related items will appear in the Cash Flow Statement of ABC Ltd. As per AS-3
(Revised)
Ans.
An Extract of Cash flow Statements of ABC Ltd.
For the year ended 31-03-2021
Particular ` ‘000 ` ‘000
A- Cash flow From Operating Activities
Difference in Profit & Loss 8,00,000
Less: Dividend income from Investments (50,000)
Cash flow From Operating Activities 7,50,000
B- Cash flow from Investing Activities
Dividend income on Investments in Shares in X Ltd
50,000
C- Cash flow from financing Activities
Issue of Equity shares 10,50,000
(35,60,000 – 60,000 – 25,00,000) + 50,000 Premium
Redemption of Preference Shares (1,00,000) 9,50,000

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Question 1 (c)
Mr. Mohan has invested some money in various Mutual funds. Following information
in this regard is given:
Stamp
Mutual Date of Purchase Brokerage Market value as on
duty
Funds purchase cost (Rs.) Cost (Rs.) 31.03.2021 (Rs.)
(Rs.)
A 01.05.2017 50,000 200 20 48,225
B 05.08.2020 25,000 150 25 24,220
C 01.01.2021 75,000 300 75 78,190
D 07.05.2020 70,000 275 50 65,880

You are required to:

1. Classify his investment in accordance with AS-13 (revised).
2. Value of Investment in mutual fund as on 31.03.2021
Ans.
Classifications of investments
Investments are classified long term investments when they are acquired with an intention
to hold them for more than 12 months and those investments which are acquired with an
intention to hold for less than 12 months are classified current investments.
Valuation of investments
Current Investments are valued at cost or market value whichever is lower while Long term
investments are valued at cost unless there is permanent reduction in value of such
investments.

Statement showing classification and valuation of investments in Mutual

Investments
Cost Valuation
Market
(Including Assumed
Mutual Date of value as on
Brokerage Classification
Funds purchase 31.03.2021
and Stamp on 31-03-21
(Rs.)
duty) (Rs.)
A 01.05.2017 50,220 Long Term 48,225 50,220 Cost
B 05.08.2020 25,175 Current 24,220 24,220 Lower
C 01.01.2021 75,375 Current 78,190 75,375 Lower
D 07.05.2020 70,325 Current 65,880 65,880 Lower

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Question 1 (d)
(i) ABC Ltd. Was previously making provision for non-moving stocks based on not issued
for the last 12 months up to 31.03.2020. Now, the company wants to make provision
based on technical evaluation during the year ending 31.03.2021.
Total value of stock Rs. 133.75 lakhs
Provision required based on technical evaluation Rs. 4.00 lakhs
Provision required based on 12 months not issued Rs. 5.00 lakhs
Ans.
The decision of making provision for non-moving inventories on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a company
may require that provision for non-moving inventories should be made. The method of
estimating the amount of provision may be changed in case a more prudent estimate can be
made.
-
In the given case, considering the total value of inventory, the change in the amount of
required provision of non-moving inventory from ` 5 lakhs to ` 4 lakhs is also not material.
The disclosure can be made for such change in the following lines by way of notes to the
accounts
- in the annual accounts of ABC Ltd. for the year 2016-17:
“The company has provided for non-moving inventories on the basis of technical
evaluation unlike preceding years. Had the same method been followed as in the previous
year, the profit for the year and the corresponding effect on the year end net assets would
have been lower by ` 1 lakh
(ii) In the Books of M/s Kay Ltd, Closing stock as on 31st March, 2021 amounts to Rs.
1,24,000 (on the basis of FIFO method) The company decides to change from FIFO
method to weighted average method for ascertaining the cost of inventory from the
year 2020-2021. On the basis of weighted average method. Closing stock as on 31st
March, 2021 amounts to Rs. 1,15,000. Realisable value of the inventory as on 31st
March, 2021 amounts to Rs. 1,54,000.
Discuss Disclosure Requirement of change in accounting policy in above cases as per AS 1
Ans.
‘The company values its inventory at lower of cost and net realisable value. Since net
realisable value of all items of inventory in the current year was greater than respective
costs, the company valued its inventory at cost. In the present year the company has changed
to weighted average formula, which better reflects the consumption pattern of inventory, for
ascertaining inventory costs from the earlier practice of using FIFO for the purpose. The
change in policy has reduced profit and value of inventory by ` 9,000’.

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ANSWER TO QUESTION NO 2

Question 2 (a) (10 Marks)

The Godown of X Ltd. Caught fire on 01.06.2021, records saved from fire shows the following
particulars:
Rs.
Stock at cost on 01.01.2020 50,000
Stock at cost on 31.12.2020 80,000
Purchases for the year 2020 4,75,000
Purchases returns for the year 2020 5,000
Carriage inward for the year 2020 20,000
Sales for the year 2020 5,60,000
Sales returns for the year 2020 10,000
Following information is given for the period of 1st January 2021 to 1st June 2021.
Credit sales of Rs. 2,50,000, which constituted 25% of total sales. Sales return Rs. 9,500,
Goods used for personal purpose costing Rs. 5,000, Goods distributed as free sample
costing Rs. 2,700, Wages Rs. 25,000. Sales include goods sold on approval basis
amounting to Rs.81,000, no confirmation had been received in respect of 50% of such
goods sold on approval basis.
Stock on 31 December 2020 was calculated at 20% less than cost. Purchases for the
period 1st January 2021 to 1st June, 2021 is Rs. 6,75,000, purchase returns Rs. 10,000.
Selling price was increased by 20% with effect from 01.01.2021.
Company had taken an insurance policy of Rs.70,000 which was subject to an average
clause. The value of salvaged goods was subject to an average clause. The value of
salvaged goods was Rs. 21,967.
You are required to compute the amount of the claim.
Ans.
Trading A/c for the year ended on 31-12-20
Particulars ` Particulars `
To opening stock 50,000 By sales 5,60,000
To purchase 475,000 Less: Sale Return (10,000) 5,50,000
Less: Purchase return 5,000 470,000 By closing stock 1,00,000
To Carriage inwards 20,000 (80,000/80%)
To Gross profit (B/f) 1,10,000
6,50,000 6,50,000
GP ratio = 1,10,000/5,50,000 X 100= 20%

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Calculation of GP Ratio in current year

Sale price in 2021 (100 + 20%) = 120
Less: Cost 80
G.P 40
G.P Ratio = 40/120 X100 = 1/3 on sale

Memorandum Trading A/c for the year ended on 1-01-2021 to 1-06-2021

Particulars ` Particulars `
To opening stock 1,00,000 By sales 10,00,000
To purchase 6,75,000 (2,50,000 /25%)
Less: Purchase Return (10,000) 6,65,000 Less: Sale Return (9,500)
To wages 25,000 Less: Sale on Approval (40,500) 9,50,000
To Gross profit 3,16,667 By Sock with customers 27,000
(9,50,000 x 1/3) (40,500 – 13,500)
By Cost of free Drawing of Goods 5,000
By Cost of free Sample 2,700
By Stock on the Date of Fire 1,21,967
(Balancing figure)
11,06,667 11,06,667

Statement of loss by fire Claim

Particulars `
Value of stock immediately before fire 1,21,967
Less: Salvage 21,967
Actual Loss 1,00,000
Claim = Actual Loss × Sum insured/ value of stock on the date of fire
= 1,00,000 × 70,000/1,21,967 = ` 57,393

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Question 2 (b) (10 Marks)

During the year ended 31st March, 2021, Purple Ltd. entered into the following transaction.

1st April, 2020 Purchased Rs. 4,00,000, 10% Govt. loan (interest payable on
30th April and 31st October) at Rs 70 cum interest.
Purchased 6,000 Equity shares of Rs. 5 each in XY Ltd. For Rs.
1st April, 2020
1,26,000.

1st October 2020 Sold Rs. 80,000, 10% Govt. loan at 75 ex-interest.

XY Ltd made a bonus issue of four equity shares for every three
15th January, 2021 shares held. Purple Ltd sold all of the bonus shares for Rs. 10
each.

1st March, 2021 Received dividend @ 22% on shares in XY Ltd. For the year
ended 31st December 2020.

Prepare Investment accounts in the books of Purple Ltd.

Investment in 10% Government Loan a/c
Date Particular Nominal Interest Cost Date Particular Nominal Interest cost
Value Value
1.4.20 To Bank 4,00,000 16,667 2,63,333 30.4.20 By Bank A/c -- 20,000 --
15.2.21 To Profit (Interest)
31.3.21 on sale -- -- 7,333 01.10.20 By Bank A/c (Sale) 80,000 3,333 60,000
To P&L -- 36,000 31.10.20 By Bank (Interest) -- 16,000 --
31.3.21 By Balance c/d 3,20,000 13,334 2,10,666
4,00,000 52,667 2,70,666 4,00,000 52,667 2,70,666

Wn 1- Calculation of Profit on sale:

Sale Proceeds (800 X 75 E I) 60,000
Less: Cost of Sale (2,63,333/4,00,000) X 80,000 = 52,667
Profit on Sale 7,333
Investment in Equity Shares of XY Ltd.

Date Particulars No. Income Cost Date Particulars No. Income Cost
1.4.20 To Bank A/c 6,000 -- 1,26,000 15.01.21 By Bank A/c 8,000 -- 80,000
15.01.21 To Bonus Shares (Sale of Bonus)
(6000×4/3) 8,000 -- -- 1.03.21 By Bank -- 4,950 1,650
15.01.21 To Profit on Sale -- -- 8,000 (Dividend)
(wn2) 31.3.21 By Balance c/d 6,000 -- 52,350
31.3.21 To P & L a/c (b/f) 4,950
14,000 4,950 1,34,000 14,000 4,950 1,34,000

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Wn 2- Calculation of Profit on sale:

Sale Proceeds (8,000 X 10) 80,000
Less: Cost of Sale of 8000 Share
𝟏,𝟐𝟔,𝟎𝟎𝟎
( 𝟏𝟒,𝟎𝟎𝟎 )𝑿 𝟖, 𝟎𝟎𝟎 72,000
Profit on Sale 8,000
Note:
Dividend Received on 1st March for the year ended 31.12.20. it means for the period
1st Jan 20 to 31st Dec 20. Purple Ltd will receive dividend ` 6,600 (6000 X ` 5 X 22%).
For Purple Ltd, Dividend of 3 months from 1-1-20- to 31-03-20 will be pre
acquisition dividend ` 1,650 and Balance ` 4,950 will be dividend income.

ANSWER TO QUESTION NO 3
Question 3 (a) (10 Marks)
Delta Ltd. has a branch at Kanpur. Goods are invoiced from head office to Branch at cost plus
50%. Branch remits all cash received to head office and all expenses are met by head office.
Prepare necessary Ledger accounts in the books of Delta Ltd under stock and Debtor’s
system to show profit earned at the branch for the year ending 31stMarch, 2021. Following
information related to Branch is given:
Stock on 1st April, 2020 31,200 Goods returned by Debtors 3,000
(Invoice price) Surplus in stock
Debtors on 1st April, 2020 17,400 (Invoice price) 600
Goods invoiced at cost 72,000 Expense at Branch 13,400
Sales at Branch: Discount allowed to Debtors 700
Cash sales 20,000 Debtors on 31st March 2021 14,300
Credit sales 68,200

Ans.
Branch Stock Account
Particular Amounts Particular Amounts
(`) (`)
To Balance b/d 31,200 By Br. Cash a/c (Sales) 20,000
To GSTB a/c 1,08,000 By Br. Debtors (Sales) 68,200
(72,000 + 36,000) By Balance c/d (b/f) 54,600
To Sale Return 3,000
To Surplus in Stock 600
1,42,800 1,42,800

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Branch Debtors Account

Particular Amounts Particular Amounts
(`) (`)
To Balance b/d 17,400 By Discount Allowed 700
To Br. Stock a/c 68,200 By Sale Return 3,000
(Credit Sales) By Cash (b/f) 67,600
By Balance c/d 14,300
85,600 85,600

Branch Adjustment Account

Particular Amounts Particular Amounts
(`) (`)
To Stock Reserve (Clos.) 18,200 By Stock Reserve (OP) 10,400
To P & L a/c (b/f) 28,400 By GSTB (Loading) 36,000
By Surplus in Stock (Loading) 200
46,600 46,600

Branch Profit and Loss Account

Particular Amounts Particular Amounts (`)
(`)
To Br. Expenses 13,400 By Surplus in Stock 400
To Discount Allowed 700 (600 – 200 (Loading))
To Net Profit (b/f) 14,700 By Br. Adjustment 28,400
28,800 28,800

GSTB Account a/c

Particular Amounts Particular Amounts (`)
(`)
To Branch Adjustment 36,000 By Br. Stock a/c 1,08,000
To Purchase a/c 72,000
1,08,000 1,08,000

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Question 3 (b) (10 Marks)

M/s Wee has two Departments X and Y. From the following particulars, Prepare
Departmental Trading Account and Consolidated Trading Account for the year ending 31st
March, 2021.
Particulars Department X Department Y
` `
Opening stock (at Cost) 1,40,000 1,08,000
Purchase 4,28,000 3,32,000
carriage inwards 12,000 12,000
Carriage Outwards 5,000 4,000
Wages 42,000 48,900
Sales 5,70,000 4,74,000
Purchased goods transferred by
60,000 -
Dept. Y to Dept. X
Purchased goods transferred by
- 48,000
Dept. X to Dept. Y

Finished goods transferred by

1,60,000 -
Detp. Y to Dept. X
Finished goods transferred by
- 2,00,000
Dept. X to Dept. Y

Closing Stock of Purchased Goods 24,000 30,000

Closing Stock of Finished Goods 1,54,000 1,20,000

Purchased goods have been transferred mutually at their respective departmental purchase
cost and finished goods at departmental market price and that 15% of the finished stock
(closing) at each department represented finished goods received from the other
department.

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Ans.
Departmental Trading a/c
For the year ended 31st March 2021
Particular X Y Particular X Y
To Opening Stock 1,40,000 1,08,000 By Sales 5,70,000 4,74,000
To Purchase (Adj) 4,40,000 3,20,000 By IDT 2,00,000 1,60,000
To Carriage Inward 12,000 12,000 By Closing Stock
To Direct Wages 42,000 48,900 - Purchase
To IDT 1,60,000 2,00,000 Goods 24,000 30,000
To Gross Profit 1,54,000 95,100 - Finish Goods 1,54,000 1,20,000
9,48,000 7,84,000 9,48,000 7,84,000

Consolidated Trading a/c

For the year ended 31st March 2021
Particular Amounts Particular Amounts
To Opening Stock (`)
2,48,000 (`)
By Sales (5,70,000 + 4,74,000) 10,44,000
(1,40,000 + 1,08,000) By Closing Stock
To Purchase (Adj) 7,60,000 - Purchase Goods 54,000
(4,40,000 + 3,20,000) (24K + 30K)
To Carriage Inward 24,000 - Finish Goods 2,74,000 2,66,935
(12,000 + 12,000) Less: Stock Res 7,065
To Direct Wages (42,000 + 48,900) 90,900
To Gross Profit 2,42,035
13,64,935 13,64,935
Wn 1
Adjusted Purchase
Particular X Y
Original Purchase 4,28,000 3,32,000
Transfer:
- Y to X 60,000 (60,000)
- X to Y (48,000) 48,000
4,40,000 3,20,000
Wn 2
G.P. Ratio of X = (1,54,000/7,70,000) X 100 = 20%
G.P. Ratio of Y = (95,100 /6,34,000) X 100 = 15%

Wn 3 Calculation of Stock Reserve

In X’s Stock (Earned by Y) = 1,54,000 X 15% X 15% = ` 3,465

In Y’s Stock (Earned by X) = 1,20,000 X 15% X 20% = ` 3,600

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ANSWER TO QUESTION NO 4

Question 4 (20 Marks)

The following is the summarized Balance Sheet of R Limited as at 31st March 2021.
Rs.
Liabilities ‘
Authorised Capital

1,50,000 Equity shares of Rs. 10 each 15,00,000

30,000 Redeemable Preference shares of Rs 100 each 30,00,000
45,00,000
Issued, subscribed and paid up

90,000 Equity shares of Rs. 10 each 9,00,000

15,000 Redeemable Preference shares of Rs. 100 each 15,00,000

Reserves & Surplus

Securities Premium 18,00,000

General Reserve 16,50,000
Profit & Loss A/c 1,20,000
7500, 9% Debentures of Rs 100 each 7,50,000
Sundry Creditors 2,12,500
Total 69,32,500
Assets

Non-Current Assets
Property Plant & Equipment 31,60,000
Investments (Market Value Rs. 17,40,000) 14,70,000
Debtors 17,60,000
Cash & Bank Balance 5,42,500
69,32,500

In Annual General Meeting held on 15th May, 2021 the company passed the following
resolutions:
(i) To redeem 10% preference shares at a premium of 5%.
(ii) To redeem 9% Debentures by making offer to Debenture holders to convert their
holding into equity shares at Rs. 40 per share or accept cash on redemptiotion.
(iii) To issue fully
paid bonus shares in the ratio of one equity share for every three shares held on 31st
March 2021.

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(iv) Redemption
of preference shares and debentures will be paid through company’s cash & bank
balance subject to leaving a minimum cash & bank balance of Rs. 2,00,000.
(v) To issue sufficient number of equity shares @ Rs. 40 per share as required to finance
redemption of Preference Shareholders and debenture holders.
On 5th June, 2021 investments were sold for Rs. 16,80,000 and preference shares were
redeemed.
30% of Debenture holders exercised their option to accept cash and their claims were
settled on 1st August 2021. The bonus issue was concluded by 10th August 2021.
You are requested to journalize the above transaction including cash transactions and
prepare Balance Sheet as at 30th September, 2021. All working notes should form part of
your answer.
Ans.
Since only 30% Debenture holders exercise cash option, So Company has sufficient
Cash to redeem Preference shares and debentures, so no need to issue fresh equity
Shares:
Journal Entries
Date Particulars L.F Amounts Amounts
.
15-5-21 Preference Capital a/c Dr. 15,00,000
Premium on Red a/c Dr. 75,000
To Preference Shareholders a/c 15,75,000
(Being Preference Shares are due for
Redemption.)
15-5-21 Debenture a/c Dr. 7,50,000
To Debenture holder’s a/c 7,50,000
(Being Preference Shares are due for
Redemption.)
05-06-21 Bank a/c Dr. 16,80,000
To Investments a/c 14,70,000
To Profit & Loss 2,10,000
(Being Investments are sold)
05-06-21 Preference Shareholders a/c Dr. 15,75,000
To Bank 15,75,000
(Being Amount paid to PSH)
05-06-21 General Reserve a/c Dr. 15,75,000
To CRR a/c 15,00,000
To Premium on Redemption a/c 75,000
(Being CRR created, and Premium written off)

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01-08-21 Debenture holder’s a/c Dr. 7,50,000

To Bank (30%) 2,25,000
To Equity Share Capital a/c (13,125 X 10) 1,31,250
To Security Premium a/c (13,125 X 40) 3,93,750
(Being 30% Amount paid to DH in cash and
Balance 70% converted into equity shares of ` 10
@ ` 40)

10-08-21 CRR a/c Dr. 3,00,000

To Bonus to Shareholders a/c 3,00,000
(Being Bonus announced in 1:3 = 90,000 x 1/3) X
` 10
10-08-21 Bonus to Shareholders a/c Dr. 3,00,000
To Equity Share Capital a/c 3,00,000
(Being 30,000 Bonus shares of 10 each allotted)

Balance sheet of H Ltd as at 31.03.2021

Particulars Notes Amounts (`)
I- Equity and Liabilities
1. Shareholders’ funds
(a) Share Capital 1 13,31,250
(b) Reserve & Surplus 2 37,98,750
2. Current Liabilities
Sundry Creditors 2,12,500
53,42,500
II- Assets
1. Non-Current Assets
Properties, Plants & Equipment: 31,60,000
2. Current Assets
(a) Trade Receivables 17,60,000
(b) Cash & Equivalents 3 4,22,500

53,42,500

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Note 1 – Share Capital

Amounts (`)
Authorized Capital:
30,000 Preference Share Capital of ` 100 each 30,00,000
1,50,000 Equity Shares of ` 10 each 15,00,000
45,00,000
Issued & Subscribed :
1,33,125 Equity Shares of ` 10 each 13,31,250
(out of which, 13,125 are issued to DH on conversion and 30,000 are issued
as bonus shares)
Total 13,31,250

Note 2 – Reserve & Surplus

Opening Addition Deletion Closing
CRR -- 15,00,000 3,00,000 12,00,000
Securities Premium 18,00,000 3,93,750 -- 21,93,750
General Reserve 16,50,000 -- 15,75,000 75,000
Profit & Loss a/c 1,20,000 2,10,000 -- 3,30,000
Total 37,98,750

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ANSWER TO QUESTION NO 5
Question 5 (a) (12 Marks)
a) Peek Ltd was incorporated on 01.07.2020 to take over the existing business of Rich &
Co. with effect from 01.04.2020. Date of closing books of accounts is 31.03.2021.
Total sales were Rs. 75,00,000, Rate of Gross profit is 10% on sales.
The expenses charged to profit and loss statement includes;
Salesmen’s Commission Rs.30,000
Discount Allowed Rs. 15,000
Carriage outward Rs. 45,000
Free Sample Rs. 60,000
After sales service charge Rs. 90,000
Directors fees Rs. 1,50,000
Audit fees (statutory audit of company) Rs. 70,000
Tax audit fees to Chartered Accountant Rs. 15,000
Salary to general staff Rs. 16,000
Formation Expenses Rs. 30,000
Rent (Office Building) Rs. 27,000
General Expenses Rs. 48,000
Donation to political party Rs. 51,000
General traveling Expenses Rs. 60,000
The sales per month in the first half year were half of what they were in the later half year.
Rent of office building was paid @ Rs. 2000 p.m upto 30th September, 2020 and thereafter
it was increased by Rs. 500 p.m
Prepare a statement showing pre incorporation & post incorporation profit for the year
ended 31.03.2021 and also compute the amount to be transferred to capital reserve
account.

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Statement showing pre and post incorporation profit of Peek Ltd

For the year ended 31.03.2021
Particulars. Total Basis Pre Post
Of incorporation incorporation
distribution period period
Gross Profit (75,00,000 X 10%) 7,50,000 Sales (1:5) 1,25,000 6,25,000
Less: Expenses
Salesmen’s Commission 30,000 Sales (1:5) 5,000 25,000
Discount Allowed 15,000 Sales (1:5) 2,500 12,500
Carriage outward 45,000 Sales (1:5) 7,500 37,500
Free Sample 60,000 Sales (1:5) 10,000 50,000
After sales service charge 90,000 Sales (1:5) 15,000 75,000
Directors fees 1,50,000
Post -- 1,50,000
Audit fees 70,000
Post -- 70,000
(statutory audit of company)
Tax audit fees to Chartered
Accountant 15,000
Salary to general staff 16,000 Sales (1:5) 2,500 12,500
Formation Expenses 30,000 Time (1:3) 4,000 12,000
Rent (Office Building) 27,000 Post -- 30,000
General Expenses 48,000 Actual 6,000 21,000
Donation to political party 51,000 Time (1:3) 12,000 36,000
General traveling Expenses 60,000 Post -- 51,000
Time (1:3) 15,000 45,000
Capital Reserve 43,000 45,500 --
(Pre Incorp. Profit) --
Net Loss (Post Incorp. Loss) (2,500)

Time ratio 3: 9 or 1:3

Sales Ratio =
Pre: 1 x 3 = 3
Post: 1 x 3 + 2 X 6 = 15
SR = 3:15 or 1:5
Pre incorporation profit is in the nature of capital profit, so it is transferred to
Capital Reserve accounts.
Note: It is assumed that donation to political party paid by Company.

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Question 5 (b) (8 Marks)

ABC Ltd. acquired a Machine on hire purchase from P Ltd. with term of payment is four equal
annual installments. The annual installment is commencing from the date of agreement
signed by both the parties. The payment of annual installments is Rs. 25,000 at the end of
each yea. The interest is charged @ 25% and is included in the annual installment. ABC Ltd.
could not pay third annual installment and declared “Purchaser Defaulted” Whereupon the
P Ltd. act to repossess the Machinery. ABC Ltd. is providing depreciation on Machinery at
the rate of 20% per annum on the diminishing balance method.
You are required to prepare Machinery Account and P Ltd account in the books of ABC Ltd.
Working notes will form part of the answer.
Ans.
In the Books of ABC Ltd
Machinery Account
Date Particulars ` Date Particulars `
1st Year To P Ltd’s A/c 58,880 1st Year By Depreciation @ 11,776
20% 47,104
By Balance c/d
58,880 58,880
2 Year
nd To Balance b/d 47,104 2 Year
nd By Depreciation @ 9,421
20% 37,683
By Balance c/d
47,104 47,104
3 Year
rd To Balance b/d 37,683 3 Year
rd By Depreciation @ 7,537
To P & L a/c (b/f) 14,854 20% 45,000
By P Ltd a/c
52,537 52,537

P Ltd’s Account
Date Particulars ` Date Particulars `
1stYear To Cash a/c 25,000 1 Year
st By Machinery a/c 58,880
To Balance c/d 48,800 By Interest a/c 14,920
73,800 73,800
2nd Year To Cash a/c 25,000 2nd Year By Balance b/d 48,800
To Balance c/d 36,000 By Interest a/c 12,200
61,000 61,000
3rd Year To Machinery 45,000 3rd Year By Balance b/d 36,000
a/c By Interest a/c 9,000
45,000 45,000

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Wn 1
Statement showing Interest and Cash price
Installment No. Amount of Installment Interest Cash price
(a) (b) (a – b)
4th Installment 25,000 25,000 X 25/125 = ` 5,000 20,000
3rd Installment 25,000 (45,000) X 25/125 = ` 9,000 16,000
2nd Installment 25,000 (61,000) X 25/125 = ` 12,200 12,800
1st Installment 25,000 (74,600) X 25/125 = ` 14,920 10,080
Total 1,00,000 =` 41,120 58,880

ANSWER TO QUESTION NO 6 (5 X 4)
Answers any four of the following:
Question 6 (a)
Mrs. A is showing the consolidated aggregate opening balance of equity, liabilities and assets
of Rs. 6 lakh, 4 lakh and 10 lakh respectively. During the current years Mrs. A has the
following transactions:
1. Received 20% dividend on 10,000 equity shares of Rs. 10 each held as investment.
2. The amount of Rs. 70,000 is paid to creditors for settlement of Rs. 90,000.
3. Salary is pending by Rs. 20,000.
4. Mrs. A’s drawing Rs. 20,000 for her personal use.
You are required to prepare the statement of the effect of aforesaid each transaction on
closing balance sheet in the form of Assets – Liabilities = Equity after each transaction.
Ans.
Statement Showing Effects on Assets, Liability and Equity
Particulars Assets - liabilities Equity
Assets Liabilities
Opening Balance 10,00,000 4,00,000 6,00,000
Dividend Received 20,000 20,000
New Equation 10,20,000 4,00,000 6,20,000
Payment to Creditors (70,000) (90,000) 20,000
New Equation 9,50,000 3,10,000 6,40,000
Salary is Pending (Due) -- 20,000 (20,000)
New Equation 9,50,000 3,30,000 6,20,000
Drawing for Personal use (20,000) -- (20,000)
New Equation 9,30,000 3,30,000 6,00,000

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Question 6 (b)
X Ltd. a non-investment company has been incurring losses for the past few years. The
company provides the following information for the current year: Rs. In lakhs
Paid up equity share capital Rs. 90
Paid up preference share capital Rs. 10
Reserves (including revaluation reserve Rs. 5 lakhs) Rs. 75
Securities premium Rs. 30
Long term loans Rs. 20
Deposit repayable after one year Rs. 10
Application money pending allotment Rs. 360
Accumulated losses not written off Rs. 40
Investment Rs. 90
X Ltd. has only one whole time director, Mr Y . You are required to calculate the amount of
maximum remuneration that can be paid to him if no special resolution is passed at the
general meeting of the company in respect of payment of remuneration for period not
exceeding three year.
Ans.
Statement Showing Effective Capital
Particulars ` in Lakhs
Paid up equity share capital 90
Paid up preference share capital 10
Reserves (Excluding revaluation reserve Rs. 5 lakhs) 70
Securities premium 30
Long term loans 20
Deposit repayable after one year 10
Total 230
Less: Accumulated Losses (40)
Less: Investment (Non-Trade) (90)
Effective Capital 100 Lakhs

Since the Effective Capital is ` 100 Lakhs, then Remuneration to Whole time Director
shall not exceed ` 1,20,00,000 p.a.

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Question 6 (c)
What is meant by ‘Measurement’? What are the bases of measurement of Elements of
Financial Statements? Explain in brief.
Ans.
Measurement is the process of Determining money value at which an element can be
recognized in the Balance Sheet or in Statement of Profit & Loss. There are Four alternative
bases of measurement which are as under:
(a) Historical Cost: It means acquisition price. For example, the businessman paid `
10,00,000 to purchase the machine and spend `2,00,000 on its installation, its
acquisition price including installation charges is ` 12,00,000. The historical cost
of machine would be ` 12,00,000.
(b) Current Cost: Current cost gives an alternative measurement base. Assets are
carried out at the amount of cash or cash equivalent that would have to be paid if
the same or an equivalent asset was acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently.
(c) Realizable Value: As per realizable value, assets are carried at the amount of cash
or cash equivalents that could currently be obtained by selling the assets in an
orderly disposal.
(d) Present Value: As per present value, an asset is carried at the present discounted
value of the future net cash inflows that the item is expected to generate in the
normal course of business. Liabilities are carried at the present discounted value
of future net cash outflows that are expected to be required to settle the liabilities
in the normal course of business

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Question 6 (d)
A company had issued 25,000, 12% Debentures of Rs. 100 each on 1st April, 2018. The
debentures were due for redemption on 1st July, 2020. The terms of issue of Debenture
provided that they will be redeemable at a premium of 5% and also conferred option to
convert 20% of their holding into equity Shares (Nominal value Rs. 10 each) at a price of Rs.
20 share.
Debenture holders holding 5,000 Debentures did not exercise the option. Calculate the
number of Equity shares to be allotted to the debenture holders exercising the option to the
maximum.
Ans.
Calculation of No of Shares Issued on Conversion
Debenture Holder Who exercise the conversion option
(25,000 – 5,000) 20,000 debentures
Convertible portion (20,000 x 20%) 4,000 debentures
No of Shares issuable (4,000 x 105) /20 21,000 shares

Question 6 (e)
A company sold 20% of the Goods on Cash Basis and the balance on Credit basis. Debtors are
allowed 1.5 month’s credit and their balance as on 31st March, 2021 is Rs. 1,50,000. Assume
that sale is evenly spread throughout the year. Purchases during the year Rs. 9,50,000.
Closing stock is Rs. 10,000 less than the Opening Stock. Average stock maintained during
the year Rs. 60,000. Direct Expenses amounted to Rs. 35,000.
Calculate Credit sales, Total sales and Gross profit for the year ended 31st March, 2021.
Ans.
Credit sales: Debtors X 12/1.5 = 1,50,000 X 12/1.5 = ` 12,00,000
Cash Sales: Credit sales X 20/80 = 12,00,000 X 20/80 = 3,00,000
Total Sales: 15,00,000
Trading a/c
For the year ended 31st March 2021
Particular Amounts (`) Particular Amounts
To Decrease in Stock 10,000 By Sales (Total)) (`)
15,00,000
To Purchase 9,50,000
To Direct Expenses 35,000
To Gross Profit 5,05,000
15,00,000 15,00,000

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