Untitled

DEPARTMENTAL ACCOUNTS
QUESTION NO 1 (CROSS TRANSFERS)
Telarad & co. has two Departments A and B. From the following particulars prepare
Departmental trading account and consolidated trading account for the year ending 31st
march 1993:
Department A Department B
Rs. Rs.
Opening stock (at cost) 1,00,000 60,000
Purchases 4,60,000 3,40,000
Carriage 10,000 10,000
Wages 60,000 40,000
Sale (excluding inter-transfers) 7,00,000 5,60,000
Purchased goods transferred:
By B to A 50,000
By A to B 40,000
Finished goods transferred:
By B to A 1,75,000
By A to B 2,00,000
Return of finished goods:
By B to A 50,000
By A to B 35,000
Closing stock:
Purchased goods 22,500 30,000
Finished goods 1,20,000 70,000
Purchased goods have been transferred at their respective Departmental purchase cost and
finished goods at Departmental market price. 20% of the finished stock (closing) at each
Department represented finished goods received from the other Department.
QUESTION NO 2 (SIMPLE CASE OF CONTENT RATIO)

Green & co. has two Departments P & Q. Department P sells goods to Department Q at
normal selling prices. From the following particulars prepare Departmental trading and Profit
and Loss account for the year ended 31.3.1994 and also ascertain the net Profit to be
transferred to the Balance Sheet:
Particulars Department P Department Q

Rs. Rs.
Opening stock 1,00,000 NIL
Purchases 23,00,000 2,00,000
Goods from department P -- 7,00,000
ACCOUNTING
2
Wages 1,00,000 1,60,000

Traveling expenses 10,000 1,40,000
Closing stock at cost to the 5,00,000 1,80,000
department 23,00,000 15,00,000
Sales 20,000 16,000
Printing and stationary
The following expenses incurred for both the Departments were not apportioned
between the Departments:
(a) Salaries Rs.270000.
(b) Advertisement expenses Rs. 90000.
(c) General expenses Rs.800000
(d) Depreciation @ 25 % on the machinery value of Rs.48000.
Advertisement expenses are to be apportioned in the turnover ratio; Salaries in 2:1
ratio and Depreciation in 1:3 ratio between the Departments P and Q. General expenses are
to be apportioned in 3:1 ratio.
QUESTION NO 3 (MANAGER COMMISSION)

Department X sells goods to Department Y at a Profit of 25% on cost and to
Department Z at 10% Profit on cost. Department Y sells goods to X and Z at a Profit of 15%
and 20% on sales, respectively. Department z charges 20% and 25% Profit on cost to
Department X and Y respectively.
Department Managers are entitled to 10 % commission on net Profit subject to
unrealized Profit on Departmental sales being eliminated. Departmental Profits after
charging managers commission, but before adjustment of unrealized Profit are as under:
Department X 36000
Department Y 27000
Department Z 18000
Stocks lying at different Departments at the end of the year are as under:
Department Department Y Department
X Rs. Z
Rs. Rs.
Transfer from Department X -- 15,000 11,000
Transfer from Department Y 14,000 -- 12,000
Transfer from department Z 6,000 5,000 --
Find out the correct Departmental Profits after charging managers commission.
3
QUESTION NO 4
A firm has two Departments, Timber and Furniture. Furniture was made by the firm itself
out of timber supplied by Timber Department at its usual selling price. From the following
figures, prepare Departmental trading and profit and loss account for the year 2002:
Timber Furniture
Opening stock (1.1.2002) 3,00,000 50,000
Purchases 20,00,000 15,000
Sales 22,00,000 4,50,000
Transfer to furniture Department 3,00,000 -
Expenses: Manufacturing - 60,000
Selling 20,000 6,000
Closing stock 2,00,000 60,000
The stocks in the furniture Department may be considered as consisting 75% of timber and
25% other expenses. Timber Department earned gross profit at the rate of 20% in 2001.
General expenses of the business as a whole came to Rs.1,00,000.
ANSWER:
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING ON
31.12.2002
Particulars Timber Furniture Particulars Timber Furniture
Department Department Department Department
To opening 3,00,000 50,000 By sales 22,00,000 4,50,000
stock By trans. 3,00,000 -
To purch. 20,00,000 15,000 By closing 2,00,000 60,000
To trans. - 3,00,000 stock
To manuf. - 60,000
exp.
To gross 4,00,000 85,000
profit
27,00,000 5,10,000 27,00,000 5,10,000
To selling 20,000 6,000 By gross 4,00,000 85,000
exp. profit
To net 3,80,000 79,000
profit
4,00,000 85,000 4,00,000 85,000
ACCOUNTING
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GENERAL PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.12.2002
Particulars Rs. Particulars Rs
To stock reserve 7,200 By net profit:
(closing stock) (3,80,000+79,000) 4,59,000
To general expenses 1,00,000 By stock reserve 7,500
To net profit 3,59,300 (opening stock)
------------- ---------------
4,66,500 4,66,500
Working notes:
Calculation of stock reserve:
(on opening stock of furniture)
75% of stock is Timber i.e, portion of timber included in furniture= 50,000*75/100=37,500

stock reserve=37500*20/100=7500
(on closing stock of furniture)
G.P.ratio of timber Department:= 4,00,000/25,00,000*100=16%

Stock reserve=60,000*75%*16%=7,200
QUESTION NO 5 (PARTNERSHIP MIXED WITH DEPARTMENTAL)

Messrs D, B and R carried on a business of Drapers and Tailors in Delhi; D was in-
charge of Department “A” dealing in cloth, B of Department “B” for selling garments and R of
Department “C” the tailoring section. It had been agreed that each of the three partners
would receive 75% of the Profits disclosed by the accounts of the Department of which he
was in charge and he balance of the Profits would be shared in the proportion: D ½, B ¼ and
R ¼ . The following is the Trading and Profit and Loss Account of the firms for the six months
ended March 31, 1999.
Trading and Profit and Loss Account
Rs. Rs. Rs. Rs.
To Opening By Sales:
stock: Cloth (A) 1,80,000
Cloth (A) 37,890 Ready-made
Ready-made Garments (B) 1,30,000
Garments (B) 24,000 Tailoring Jobs 90,000 4,00,000
Tailoring Jobs 20,000 81,890 (C)
(C) By Discount 800
To Purchase: received
Cloth (A) 1,40,700 By Closing stock:
Ready-made Cloth (A)
Garments (B) 80,600 45,100
5
Tailoring Jobs 44,400 2,65,700 Ready-made

(C) Garments (B) 22,300
To Salaries & 48,000 Tailoring Jobs 21,600 89,000
Wages (C)
To Advertising 2,400 [Including
To Rent 10,800 Rs.5,700 for
To Discount 1,200 goods
allowed transferred
To Sundry exp. 12,000 from department
To Depreciation 750 (A)]
on Furniture and
Fittings
Net profit 67,060
4,89,800 4,89,800
After consideration of the following prepare Departmental accounts and Profit and Loss
appropriation account:
(i) Cloth of the value of Rs.10700 and other goods of the value of Rs.600 were
transferred at selling price by Departments A and B respectively to Department C.
(ii) Cloth and garments are sold in the showroom. Tailoring work is carried out in the
workshop.
(iii) The details of salaries and wages were as follows:
(a) General office 50%, show room 25% and 25 % for the workshop, which is for
tailoring.
(b) Allocate general office Expenses, in the proportion of 3:2:1 among the
Departments A, B, C.
(c) Distribute show-room expenses in the proportion of 1:2 between Departments
A and B.
(iv) The workshop rent is Rs.1000 per month. The rent of the general office and show
room is to be divided equally between Department A and B.
(v) Depreciation charges are to be allocated equally amongst the three Departments.
(vi) All other expenses are to be allocated on the basis of turnover.
(vii) Discounts received are to be credited to the three Departments as follows: A:
Rs.400; B: Rs.250; C: Rs.150.
(viii) The opening stock of Department C does not include any goods transferred from
Department A.
ACCOUNTING
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QUESTION NO 6 (MARK UP ACCOUNTS)

Southern store Limited is a retail store operating two Departments. The company
maintains a memorandum stock account and memorandum mark up account for each of the
Departments. Supplies issued to the Departments are debited to the memorandum stock
account of the Department at cost plus the mark up and Departmental sales are credited to
this account. The mark up on supplies issued to the Departments is credited to the mark up
account for the Department. When it is necessary; to reduce the selling price below the
normal selling price, i.e., cost plus mark up, the reduction (mark down) is entered in the
memorandum stock account and in the mark up account. Department Y has a mark up of 33-
1/3 % on cost and Department Z 50% on cost.
The following information has been extracted from the records of southern store LTD.
for the year ended 31st December 1988:
Department Department
Y Z
st
Stock 1 January 1988, at cost 24,000 36,000
Purchases 1,62,000 1,90,000
Sales 2,10,000 2,85,000
(i) The stock of Department Y at 1st January 1988 includes goods, on which the selling
price has been marked down by Rs.510. These goods were sold in January 1988 at
the reduced price.
(ii) Certain goods purchased in 1988 for Rs.2700 for Department Y, were transferred
during the year to Department Z, and sold for Rs.4050. Purchases and sales are
recorded in the purchases of Department Y and the sales of Department Z
respectively, but no entries in respect of the transfer have been made.
(iii) Goods purchased in 1988 were marked down as follows:
Department Y Department Z
Cost 8,000 21,000
Mark down 800 4,100
At the end of the year there were some items in the stock of Department Z, which
had been marked down to Rs.2300. With this exception all goods marked down in
1988 were sold during the year at the reduced prices.
(iv) During stock taking at 31st December 1988 goods, which had cost Rs.240 were found
to be missing in Department Y. It was determined that the Loss should be regarded
as irrecoverable.
(v) The closing stock in both Departments is to be valued at cost for the purpose of
the annual accounts.
You are requested to prepare for each Department for the year ended 31st December 1988:
(a) A Trading Account
(b) A Memorandum stock Account and,
(c) A Memorandum Mark up Account.
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QUESTION NO 7 (UNIFORM GP RATIO)

The following purchases were made during the year 1989 by a business house having
three Departments:
Department A 1000 units
Department B 2000 units
Department C 2400 units
At a total cost of Rs.1,00,000
Stock on 1st January 1989 were:
Department A 120 units
Department B 80 units
Department C 152 units
The sales during, 1989 were:
Department A 1020 units at Rs.20 each
Department B 1920 units at Rs.22.50 each
Department C 2496 units at Rs.25 each
The rate of gross Profit is the same in each case. Prepare Departmental Trading account for
the year 1989.
QUESTION NO 8 (CHAIN TRANSFERS)

Complex Limited has 3 departments A, B, and C. the following information is provided:
A B C
Rs. Rs. Rs.
Opening stock 3,000 4,000 6,000
Consumption of direct
materials 8,000 12,000 -
Wages 5,000 10,000 -
Closing stock 4,000 14,000 8,000
Sales - - 34,000
Stock of each department is valued at cost to the department concerned, stocks of A

department are transferred to B at a margin of 50% above departmental cost, stocks of B
department are transferred to C department at a margin of 10% above departmental cost.
Other expenses were:
Salaries 2,000
Printing and stationary 1,000
Rent 6,000
Interest paid 4,000
Depreciation 3,000
Allocate expenses in the ratio of departmental gross profit. Opening figures of
reserves for unrealized profits on departmental stock were:
ACCOUNTING
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Department B Rs.1,000
Department C Rs.2,000
Prepare departmental trading and Profit and Loss account for the year ending March 31,
1999.
QUESTION NO 9 (UNIFORM GP RATIO)

Shankar is earning uniform rate of gross profit in all the three departments he is handling.
Following are the relevant details:-
Department A 15000 packets
Department B 20000 packets
Department C 15000 packets
The total cost to purchases came to Rs.6,00,000.
Sales:-
Department A 16,000 packets at Rs.20 per packet
Department B 22,000 packets at Rs.15 per packet
Department C 17,000 packets at Rs.10 per packet
Details of opening stock:
Department A 4,000 packets
Department B 5,000 ,,
Department C 4,000 ,,
You are required to prepare the trading account for the three departments in a columnar
form. Working required:
(i) Calculation of gross profit for each department assuming no stock situations.
(ii) Department wise purchase price and value and
(iii) Valuation of opening and closing stocks.
QUESTION NO 10 (APPLICATION OF GP RATIO ON NORMAL SELLING PRICE)

A Limited has three departments X, Y, and Z. from the following particulars given by A
Limited, compute:-
(i) The value of stock as on 31st March 1999 and
(ii) The departmental results
1. X Y Z
Rs. Rs. Rs.
Stock (opening) 12,000 18,000 6,000
Purchases 73,000 62,000 24,000
Actual sales 86,250 79,700 37,300
Gross profit on normal selling price20% 25% 33.333%
2. During the year certain goods were sold at a discount given below and these discounts were
reflected in the values of sale stated above:-
X Y Z
Sales at normal selling price 5,000 1,500 500
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Sales at actual price 3,750 1,200 300
(Ans:- closing stock: X=15,000, Y= 20,000, Z= 5,000)

profit of X=16,250, Y=19,700, Z=12,300)
QUESTION NO 11(CHAIN TRANSFER) (same question 8)

FGH Ltd. has three departments I.K.J. The following information is provided for the
year ended 31.3.2004:
I J K
Rs Rs Rs
Opening stock 5,000 8,000 19,000
Opening reserve for unrealized profit -- 2,000 3,000
Material consumed 16,000 20,000 --
Direct Labour 9,000 10,000 --
Closing stock 5,000 20,000 5,000
Sales -- -- 80,000
Area occupied (Sq. mtr.) 2,500 1,500 1,000
No. of employees 30 20 10
Stocks of each department are cost to the department concerned. Stocks of I are
transferred to J at cost plus 20% and stocks of J are transferred to K at a Gross Profit of
20% on sales. Other common expenses are Salaries and Staff Welfare Rs18,000 Rent
Rs6,000.
Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2004.
ANSWER:
DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR
ENDED 31.3.2004
PARTICULRS I (Rs.) J (Rs.) K(Rs.) PARTICULRS I (Rs.) J (Rs.) K(Rs.)
To opening By internal
stock 5,000 8,000 19,000 transfer 30,000 60,000 -
To materials 16,000 20,000 - By sales - - 80,000
To D.Labour 9,000 10,000 - By closing
To Internal - 30,000 60,000 stock 5,000 20,000 5,000
trans.
To gross 5,000 12,000 6,000 35,000 70,000 85,000
profits 35,000 70,000 85,000
PARTICULRS I (Rs.) J (Rs.) K(Rs.) PARTICULRS I (Rs.) J (Rs.) K(Rs.)
To salaries 9,000 6,000 3,000 By gross 5,000 12,000 6,000
(30:20:10) profits
To Rent 3,000 1,800 1,200 By net loss 7,000 - -
(Area)
To net profits 4,200 1,800
12,000 12,000 6,000 12,000 12,000 6,000

ACCOUNTING
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GENERAL P & L ACCOUNT

Particulars Rs Particulars Rs
To net loss 7,000 By net profit (J+K) 6,000
To stock reserve By stock reserve 5,000
J 1,667 (J+K)
K 1,333
To net profit 1,000
------------- ---------------
11,000 11,000
WORKING NOTES:
(1) Calculation of gross profit:
Department I Department J
Opening stock 5,000 8,000
Materials and labours 25,000 30,000
------------------- -----------------
30,000 38,000
Less: Closing Stock (5,000) (20,000)
Add transfer - 30,000
------------------ ----------------
Total cost of sales 25,000 48,000
Gross profit:
25,000*1/5 5,000 -
48,000*1/4 - 12,000
(2) Stock Reserve J
Cost 30,000
Transfer from I 30,000
Closing stock 20,000
Proportion of stock 20,000*30,000/60,000=10,000
Stock reserve 10,000*20/120=1,667
(3) Stock reserve K
Stock transferred from J 5,000
Less: profit 20% (1,000)
----------
Cost of J 4,000
Proportion of stock 4000*30,000/60,000=2,000
Stock reserve 2,000*20/120=333
Total reserve = 1,000+333=1333
(4) Salaries and welfare exp have been allocated on the basis of number of employees and
rent has been allocated on the basis of area occupied.
(STOCK RESERVE CAN ALSO BE COMPUTED ALTERNATIVELY 1000 & 2000)

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AS WE DISCUSSED IN CLASS IN QUESTION 8.
QUESTION NO 12 (PREVIOUS YEAR GP RATIO)

Snow white Ltd. has two departments- cloth and Readymade clothes. Ready made lothes are
made by the firm itself out of cloth supplied by the cloth department iat its usual selling
price. From the following figures, prepare departmental trading and profit and loss account
for the year ended 31st March:
Cloth Readymade
department clothes
st
Opening stock on 1 April 3,00,000 50,000
Purchases 20,00,000 15,000
Sales 22,00,000 4,50,000
Transfer to readymade clothes 3,00,000 -
department
Manufacturing expenses - 60,000
Selling expenses 20,000 6,000
st
Closing stock on 31 March 2,00,000 60,000
The stock in the readymade clothes department may be considered as consisting of 75% cloth
and 25% other expenses. The cloth department earned gross profit at the rate of 15% during
the previous year. General expenses of the business as a whole came to Rs.1,10,000.
QUESTION NO 13
THE trading and profit and loss account of Gopa kishore for the year ending 31st March is as
under:
Purchases Rs. Sales Rs.
-Transistors 1,60,000 -Transistors 1,75,000
-Tape recorders 1,25,000 -Tape recorders 1,40,000
-Spare parts for repairs 80,000 -Spare parts for 35,000
Salaries and wages 48,000 repairs
Rent 10,800 stock on 31st March:
Sundry expenses 11,000 transistors 60,100
Net profit 40,200 tape recorders 20,300
4,75,000 spare parts for repairs 44,600
4,75,000
Prepare departmental accounts for each of the three departments A, B and C mentioned
above after taking into consideration the following :
(a) transistors and tape recorders are sold at the showroom. Servicing and repairs
are carried out at workshop.
(b) Salaries and wages comprise as follows:
i. Show room 3/4th and
ii. Workshop 1/4th
ACCOUNTING
12
iii. It was decided to allocate the showroom salaries and wages in ratio 1:2
between department A and B.
(c) Workshop rent is Rs.500 per month. Showroom rent is to be divided equally
between departments A and B.
(d) Sundry expenses are to be allocated on the basis of the turnover of each
department.
QUESTION NO 14 (SAME TO SAME AS QUESTION NO.5)

Samsare co, a firm has three departments L, M, and N which are under the charge of the
partners X, Y and Z respectively. The following consolidated profit and loss account is given
below:
Particulars Rs. Particulars Rs.
To opening stocks (note 1) 81,890 By sales (note 7) 4,00,000
To purchases (note 2) 2,65,700 By closing stocks(note 89,000
To salaries and wages 48,000 8)
(note 3) By discounts received 800
To rent expenses(note 4) 10,800 (note10)
To selling expenses(note
5) 14,400
To discount allowed(note
5) 1,200
To depreciation (note 6)
To net profit for the year 750
67,060
4,89,800 4,89,800
From the above account and following additional information, prepare the departmental profit
and loss account for the year ended 31st march:
(a) Break up of opening stock departmentwise is : L Rs.37890, M Rs.24000 and N Rs.20000
(b) Total purchases were as under : L Rs.140,700, M Rs.80,600 and N Rs.44,400
(c) Salaries and wages include Rs.12,000 wages of department N. The balances salaries
should be apportioned to the three departments as 4:4:1
(d) Rent is to be apportioned in the ratio of floor space which as to 2:2:5
(e) Selling expenses and discount allowed are to be apportioned in the ratio of turnover.
(f) Depreciation on assets should be equally charged to the three departments.
(g) Sales made by three departments were: L Rs.1,80,000, M Rs.1,30,000 and N Rs.90,000.
(h) Break up of closing stock department wise is : L Rs.45,100, M Rs.22,300 and N
Rs.21,600. The closing stock of department N includes Rs.5700 goods transferred
from department L. however , opening stock does not include any goods transferred
from other departments.
(i) Departments L and M sold goods worth Rs.10,700 and Rs.600 respectively to
department N.
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(j) Discounts received are traceable to departments :L Rs.400, M Rs.250 and N Rs.150.
(k) Partners are to share profits as under :
a. 75% of the profits of the departments L, M and N to the respective partner
incharge
b. balance profits tobe credited as 2:1:1.
QUESTION NO15 (MARK UP ACCOUNTS)

Fairways Ltd. is a retail organization with several departments. Goods supplied to each
department are debited to a memorandum, departmental stock account at cost plus a fixed
percentage (mark up) to give the normal selling price. The mark up is credited to memorandum
departmental mark up account. Any reduction in selling prices (mark down) required
adjustment in the stock account and in mark up account. The mark up for department A for
the last three years has been 40%.
Figures relevant to Department A for the year ended 30th june 2002 were as follows:
Stock on 1st July,2001 at cost Rs.80,000
Purchases at cost Rs.1,80,000
Sales Rs.3,20,000
It is further ascertained that:
(a) The goods purchased in the period were marked down by Rs.1400 from a cost of
Rs.16000. Marked down stock costing Rs.4000 remained unsold on 30th June 2002.
(b) Stock shortages at the year end, which had cost Rs.1200 were to be written off.
(c) Stock at 1st July 2001 including goods costing Rs.8200 had been sold during the year
and had been marked down in the selling price by Rs.740. the remained stock had been
sold during the year.
(d) The departmental closing stock is to be valued at cost subject to adjustments for
markup and markdown.
You are required to prepare:
(a) A departmental trading account for A department for the year ended june 2002 in
head office books.
(b) A memorandum stock for the year
(c) A memorandum mark up account for the year
QUESTION NO 16 (PRODUCTION DEPARTMENTS WITH SERVICE DEPTT.)

MOON Ltd. has three departments. They are “cloth stitching department” “selling
department “ and “General administration deparments”. Cloth department transfer its goods
to selling department 20% profit on cost. From the following details, prepare departmental
trading account and profit and loss account for the year ended 31st December 2002;
Cloth stitching Selling
department department
Opening stock 1.,20,000 80,000
Purchases 5,00,000 -
ACCOUNTING
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Wages and other expenses 1,25,000 25,000

Closing stock 45,000 95,000
Sales - 11,05,000
The expenses of general administration department are as follows:
Manager salary @ 1000 per month
Clerk`s salary (2 no.) Rs.600 per month each
Maintenance expenses Rs 9600
Apportioned general department expenses equally to the cloth stitching and selling
department.
QUESTION NO 17 (CHAIN TRANSFERS)

Calculate stock reserve A,B and C are three departments:
Content Ratio Profit Ratio Closing Stock
A Nil ¼ of sales 15,000
B 2/10 1/5 of cost 22,000
C 5/15 not available 40,000
Assume A sales to B sales to C.
QUESTION NO 18 (PROBLEM WITHOUT STOCK RESERVE)

From the following trial balance prepare departmental trading and profit and loss account for
the year ending 31.03.2004:
Rs (in
`000)
st
Stock 1 April 2003 Department A 1,700
Department B 1,450
Purchases Department A 3,540
Department B 3,020
Sales Department A 6,080
Department B 5,125
Wages Department A 820
Department B 270
Rent, Rates and taxes and -
Insurance - 939
Sundry expenses - 360
Salaries - 300
Lighting and Heating - 210
Discounts allowed - 222
Discounts received - 65
Advertising - 368
Carriage inward - 234
Furniture and fitting - 300
Machinery - 2100
15
Sundry Debtors - 606

Sundry creditors - 1,860
Capital accounts - 4,766
Drawings - 450
Cash at bank 1,007
The following further information is available:
a. Internal Transfer of goods from A to B Department Rs.42,000.
b. The items rent, rates and taxes and insurance, sundry expenses, lighting and
heating, salaries and carriage are to be apportioned 2/3 to A department and
1/3 to B Department.
c. Advertising is to be apportioned equally.
d. Discount allowed and received are to apportioned on the basis of Departmental
sales and purchases excluding transfers
e. Depreciation @ 10% per annum on furniture and on machinery is to be charged
(3/4th to A Department and 1/4th to B Department)
f. Services rendered by B Department to A Department are included in wages
Rs.50,000.
g. Stock on 31.3.2004 in A Department was worth Rs.16,74,000 and in B
Department was worth Rs.12,05,000.
ANSWER:
ENDING 31.3.2004
Particulars A Dept. B Dept. A Dept. B Dept.
To opening 1,700 1,450 By sales 6,080 5,125
stock By tran. 42 50
To purchases 3,540 3,020 By closing stock 1,674 1,205
To wages 820 270
To transfer 50 42
To carriage 156 78
inward
To gross profit 1,530 1,520
7,796 6,380 7,796 6,380
To salaries 200 100 By gross profit 1,530 1,520
To rent, rates, By discount 35 30
taxes and insu. 626 313 By net loss 126 nil
To sundry exp. 240 120
To lighting,
heat. 140 70
To advertising 184 184
ACCOUNTING
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To
depreciation: 158 52
Machinery 22 8
Furniture 121 101
To discount nil 602
To net profit
1,691 1,550 1,691 1,550
QUESTION NO 19 (PROBLEM WITHOUT STOCK RESERVE)

From the following figures prepare accounts to disclose total profit and the profit of the two
Departments, A and B:
Rs
st
Stock 1 April 2003 Department A 15,200
Department B 10,800
Purchases Department A 75,100
Department B 69,800
Sales Department A 1,00,000
Department B 80,000
Salaries Department A 9,000
Department B 8,500
Purchase Returns Department A 1,100
Department B 800
Carriage inward - 2,860
Discounts received - 1,430
General salaries - 11,600
Rent, Rates - 6,000
Advertising - 8,100
Insurance - 1,000
General expenses - 5,400
Discounts allowed - 1,800
Accounting charges 500
The following further information is supplied:
1. Goods Transferred from Department A to Department B were Rs.5,000 this has
not yet been recorded.
2. General salaries are to be allocated Equally.
3. Allocate carriage inward and discount received on suitable basis
4. The area occupied is in the ratio of 3:2
5. Insurance premium is for a comprehensive policy, allocation being inconvenient
6. the closing stock of the two Department were A:17,800 and B 15,600
7. Allocate advertising, general expenses and discount allowed in the ratio of sales
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ANSWER:
ENDING 31.3.2004
Particulars A B A B
Depart. Depart. Depart. Depart.
To opening 15,200 10,800 By sales 1,00,000 80,000
stock By transfer 5,000 -
To purchases 74,000 69,000 By closing stock 17,800 15,600
less returns
To carriage 1,480 1,380
inward
To transfer - 5,000
To gross profit 32,120 9,420
1,22,800 95,600 1,22,800 95,600
To salaries : By gross profit 32,120 9,420
Departmental 9,000 8,500 By discount 740 690
General 5,800 5,800 By net loss - 13,390
To rent,rates 3,600 2,400
To advertising 4,500 3,600
To general exp. 3,000 2,400
To discount 1,000 800
To net profit 5,960 -
32,860 23,500 32,860 23,500
To net loss 13,390 By net profit 5,960
To insurance 1,000 By net loss to -
To accout.cha. 500 balance sheet 8,930
----------------------- ----------------------
14,890 14,890
----------------------- -----------------------
Notes:
1. Carriage inward and discount received have been allocated in the ratio of net
purchase
2. Rent and taxes have been allocated in the ratio of area occupied.
QUESTION NO 20
ACCOUNTING
18
A firm has two Departments, Timber and Furniture. Furniture was made by the firm itself
out of timber supplied by Timber Department at its usual selling price. From the following
figures, prepare Departmental trading and profit and loss account for the year 2002:
Timber Furniture
Opening stock (1.1.2002) 3,00,000 50,000
Purchases 20,00,000 15,000
Sales 22,00,000 4,50,000
Transfer to furniture Department 3,00,000 -
Expenses: Manufacturing - 60,000
Selling 20,000 6,000
Closing stock 2,00,000 60,000
The stocks in the furniture Department may be considered as consisting 75% of timber and
25% other expenses. Timber Department earned gross profit at the rate of 20% in 2001.
General expenses of the business as a whole came to Rs.1,00,000.
ANSWER:
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING ON
31.12.2002
Particulars Timber Furniture Particulars Timber Furniture
Depart. Depart. Depart. Depart.
To O. stock 3,00,000 50,000 By sales 22,00,000 4,50,000
To purchases 20,00,000 15,000 By transfer 3,00,000 -
To transfer - 3,00,000 By closing stock 2,00,000 60,000
To manu.exp. - 60,000
To gross profit 4,00,000 85,000
27,00,000 5,10,000 27,00,000 5,10,000
To selling exp. 20,000 6,000 By gross profit 4,00,000 85,000
To net profit 3,80,000 79,000
4,00,000 85,000 4,00,000 85,000
(closing stock) (3,80,000+79,000) 4,59,000
-------------- ---------------
4,66,500 4,66,500
Working notes:
19
Calculation of stock reserve:

(on opening stock of furniture)
75% of stock is Timber i.e, portion of timber included in furniture= 50,000*75/100=37,500

stock reserve=37500*20/100=7500
(on closing stock of furniture)
G.P.ratio of timber Department:= 4,00,000/25,00,000*100=16%

Stock reserve=60,000*75%*16%=7,200
QUESTION NO 21 (CA IPCC NOV 2009)
Goods are transferred from Department P to Department Q at a price 50% above cost. If
closing stock of Department Q is Rs. 27,000, compute the amount of stock reserve.
(ANS:9000)
QUESTION NO 22 (CA IPCC MAY 2010) (CROSS TRANSFERS)

Siva Ltd. Has two departments X and Y. from the following particulars prepare
departmental trading accounts and general profit and loss account for the year ending 31st
March, 2009.
Dept. X Dept.
Opening stock (at cost) 80,000 48,000
Purchase 3,68,000 2,72,000
Carriage inward 8,000 8,000
Wages 48,000 32,000
Sales 5,60,000 4,48,000
Purchase goods transferred
By Dept. Y to X 40,000 -
By Dept. X to Y - 32,000
Finished goods transferred
By Dept. Y to X 1,40,000 -
By Dept. X toY - 1,60,000
Return of finished goods
By Dept. Y to X 40,000 -
ACCOUNTING
20
By Dept. X to Y - 28,000
Closing stock
Purchased goods 18,000 24,000
Finished goods 96,000 56,000
Purchased goods have been transferred mutually at their respective departmental purchase
cost and finished goods at departmental market price and that 25% of the closing finished
stock with each departmental represents finished goods received from the other
department.
ANSWER:
GROSS PROFIT: X 1,70,000 Y 1,68,000
QUESTION NO 23 (CA NOV 2010 IPCC) (COMMISSION)

Department X sells goods to Department Y at a profit of 25% on cost and to Department Z
at 10% profit on cost. Department Y sell goods to X and Z at a profit 15% and 20% on
sales, respectively. Department Z charges 20% and 25% profit on cost to Department X
and Y, respectively.
Department Managers are entitled to 10% commission on net profit of before charging such
commission, subject to unrealized profit on departmental sales being eliminated.
Departmental profits after charging Managers` commission, but before adjustment of
unrealized profit are as under; -
Department X Rs. 54,000
Department Y Rs. 40,500
Department Z Rs. 27,000
Stock lying at different departmental at the end of the year are as under;
Dept. X Dept. Y Dept. Z
Rs. Rs. Rs.
Transfer from Department X 22,500 16,500
Transfer from Department Y 21,000 18,000
Transfer from Department Z 9,000 7,500
Find out the correct department Profits after charging Manager`s Commission.
ANSWER:
Deptt. X 48,600
21
Deptt. Y 34,425
Deptt. Z 24,300
Examiner Comments: Most of the Candidates failed to give the correct treatment for the
unrealized profit in the concerned department . as a result, department profit and
manager`s commission after unrealized profit was calculated incorrectly.
QUESTION NO 24 (CA MAY 2011)
The Z Ltd has three departments and submits the following information for the year ending
on 31st march, 2009.
A B C Total
Rs.
Purchases (Units 5,000 10,000 15,000
Purchases (Amounts) 8,40,000
Sales (Units) 5,200 9,800 15,300
Selling price (per unit) Rs 40 Rs 45 Rs 50
Closing stock (units) 400 600 700
You are required to prepare department trading account of Z Ltd. Assuming that the rate
of Profit on sale is the uniform in each case.

ANSWER: UNIFORM GP RATIO 40%
QUESTION 25 (C A IPCC NOV.11)(8MARKS)
M/s AM Enterprises had two departments. Cloth and Read/made Clothes. The Readymade
clothes were made by the firm itself out of the cloth supplied by the Cloth Department at
its usual selling price. From the following figures, prepare Departmental Trading and Profit
and Loss Account for the year ended 31st March, 2011:
Cloth Readymade Clothes
Department Department Rs.

ACCOUNTING
22
Rs.
Opening Stock on 1st April, 2010 31,50,000 5,32,000
Purchases 2,10,00,000 1,68,000
Sales 2,31,00,000 47,25,000
Transfer to Readymade Clothes 31,50,000 --
Department
Manufacturing Expenses -- 6,30,000
Selling Expenses 2,10,000 73,500
Rent & Warehousing 8,40,000 5,60,000
Stock on 31st March, 2011 21,00,000 6,72,000
In addition to the above, the following information is made available for necessary
consideration:
(i) The stock in the Readymade Clothes Department may be considered as consisting
of 75% cloth and 25% other expenses.
(ii) The Cloth Department earned a gross profit at the rate of 15% in 2009-10.
(iii) General Expenses of the business as a whole amount to Rs. 10,85,000.
Answer :
M/s AM Enterprises
Trading and Profit and Loss Account
For the year ended 31st March, 2011
Particulars Cloth Ready Particulars Cloth Ready
Rs. Rs. Rs. Rs.
To Opening stock 31,50,000 5,32,000 By Sales 2,31,00,000 47,25,000
To Purchases 2,10,00,000 1,68,000 By Transfer 31,50,000 ---
To Transfer ` -- 31,50,000 By Closing stock 21,00,000 6,72,000

To Mfg. Expenses -- 6,30,000
To Gross profit c/d 42,00,000 9,17,000
2,83,50,000 53,97,000 2,83,50,000 53,97,000

23
To Selling Expenses 2,10,000 73,500 By Gross Profit 42,00,000 9,17,000

b/d
To Rent & 8,40,000 5,60,000

Warehousing
To Net Profit 31,50,000 2,83,500
42,00,000 9,17,000 42,00,000 9,17,000
(closing stock) (3150000+283500) 34,33,500
-------------- ---------------
34,93,350 34,93,350
Working Notes :
1. Calculation of Stock Reserve
Opening Closing
Total 5,32,000 6,72,000
Break Up
75% cloth 3,99,000 5,04,000
25% Other expenses 1,33,000 1,68,000
Stock reserve
@ 15% on opening stock 59,850 --
@ 16% on closing stock (refer WN 12) -- 80,640
2. Calculation of Gross Profit %
Opening (given) 0.15 --
Closing
, ,
= (including dept. trf.) ---- 0.16
, , ,
ACCOUNTING
24
QUESTION NO 26 ( NOV 2012 8MARKS)

Department A sells goods to Department B at a Profit of 20% on cost and to
Department C at 15% Profit on cost. Department B sells goods to A and C at a Profit of 10%
and 20% on sales, respectively. Department C charges 15% and 10% Profit on cost to
Department A and B respectively.
Department A 36000
Department B 27000
Department C 18000
Department Department B Department
A Rs. C
Rs. Rs.
Transfer from Department A -- 7,200 5,750
Transfer from Department B 19,000 -- 15,000
Transfer from department C 46,00 3,300 --
ANSWER:COMMISSION=A,B,C=3805,2510,1910
ACCURATE PROFITS=A,B,C=34245,22590,17190
QUESTION NO 27(MAY 2013 4MARKS)

Department A sells goods to Department B at a Profit of 50% on cost and to
Department C at 20% Profit on cost. Department B sells goods to A and C at a Profit of 25%
and 15% on sales, respectively. Department C charges 30% and 40% Profit on cost to
Department A and B respectively.
A Rs. C
Rs. Rs.
Transfer from Department A -- 45,000 42,000
Transfer from Department B 40,000 -- 72,000
Transfer from department C 39,000 42,000 --
ANSWER: STOCK RESERVE=A,B,C=22000,20800,21000

25
QUESTION NO 28 (MAY 2014 8MARKS)
Department P sells goods to Department S at a Profit of 25% on cost and to

Department Q at 15% Profit on cost. Department S sells goods to P and Q at a Profit of 20%
and 30% on sales, respectively. Department Q charges 20% and 10% Profit on cost to
Department P and S respectively.
Department P 90000
Department S 60000
Department Q 45000
A Rs. C
Rs. Rs.
Transfer from Department P -- 18000 14000
Transfer from Department S 48000 -- 38000
Transfer from department Q 12000 8000 --
QUESTION 29
M/s Omega is a departmental store having tree departments X,Y and Z. The information
regarding three departments for the year ended 31st March, 2013 are given below :
X Y Z
Rs Rs Rs
Opening Stock 36000 24000 20000
Purchases 132000 88000 44000
Debtors at end 15000 10000 10000
Sales 180000 135000 90000
Closing stock 45000 17500 21000
Value of furniture in each department 20000 20000 10000
Floor space occupied by each department (in sq. ft.) 3000 2500 2000
Number of employees in each Department 25 20 15
Electricity consumed by each department (in units) 300 200 100
The balances of other revenue items in the books for the year are given below:
ACCOUNTING
26
Amount (Rs)
Carriage inwards 3000
Carriage outwards 2700
Salaries 48000
Advertisement 2700
Discount allowed 2250
Discount received 1800
Rent, Rates and taxes 7500
Depreciation on furniture 1000
Electricity expenses 3000
Labour welfare expenses 2400
You are required to prepare Departmental Trading and Profit and Loss Account for the year
ended 31st March, 2013 after providing provision for Bad Debts
27
ACCOUNTING
28
29
Working Note:
Basis of allocation of expenses
Carriage inwards Purchases (3:2:1)

Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labor welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Debtors balances (3:2:2)
Provision for bad debts
QUESTION 30
M/s X has two departments, A and B. From the following particulars prepare the consolidated
Trading Account and Departmental Trading Account for the year ending 31st December, 2012:
A B
Rs Rs
Opening Stock (at cost) 20,000 12,000

Purchases 92,000 68,000
Sales 1,40,000 1,12,000
Wages 12000 8000
Carriage 2000 2000
Closing Stock:
i,) Purchased goods 4500 6000
(ii) Finished goods 24000 14000
Purchased goods transferred.
by B to A 10000
by A to B 8000
Return of finished goods:
by A to B 1000
by B to A 7000
Finished goods transferred:
BY A TO B 35,000
BY B TO A 40,000
ACCOUNTING
30
You are informed that purchased goods have been transferred mutually at their respective
departmental purchase cost and finished goods at departmental market price and that 20% of the
finished stock (closing) at each department represented finished goods received from the other
department.
Solution
M/s X
Departmental Trading A/c for the year ending 31st December, 2012
Deptt.A Deptt.B. Deptt.A Deptt.B.

Rs. Rs Rs. Rs
To Stock 20,000 12,000 By Sales 1,40,000 1,12,000

92,000 68,000 By Purchased Goods 8,000 10,000
To Purchases
transferred
To 12,00 8,000 By Finished goods 35,000 40,000

wages 2,000 2,000 transferred
To Carriage Return of finished 10,000 7,000
To Purchased 10,000 8,000 Goods
Goods transferred 40,000 35,000 By Closing Stock :
To F.G. transferred 7,000 10,000 Purchased Goods 4,500 6,000
To Ret. of finished Finished Goods 24,000 14,000
Goods 38,500 46,000
To Gross profit
2,21,500 1,89,000 2,21,500 1,89,000
Consolidated Trading Account for the year ending 31st December, 2012
To Opening stock 32,000 By Sales 2,52,000

To Purchase 1,60,000
20,000 By Closing Stock:
To Wages
4,000 10,500
To Carriage Purchased Goods
To Stock Reserve
2,196 38,000
To Gross Profit c/d Finished Goods
82,304
3,00,500 3,00,500
31
Working note :
Deptt. A Deptt. B.
Closing Stock out of transfer 4,800 2,800
sale 1,40,000 1,12,000
Add: Transfer 35,000 40,000
1,75,000 1,52,000
Less: Returns (7,000) (10,000)
Net Sales Plus Transfer 1,68,000 1,42,000
, ,
Rate of Gross profit x 100 = 22.916% x 100 = 32.394%
, , , ,
Unrealised Proift 4,800 x 32.394% = 1,555 2,800 x 22.916% = 641
QUESTION 31 (BEST QUESTION ON DEPARTMENTAL COVERING ALL CONCEPTS)

M/s Alpha, has a factory with two manufacturing department `X` and `Y` part of the output
of department X is transferred to department Y for further processing and the balance is
directly transferred to selling department. The entire production of department Y is directly
transferred to the selling department. Inter-department stock transfers are made as
follows:
X department to Y department at 33-1/3% over department cost.
X department to selling department at 50% over department cost.
Y department to selling department at 25% over departmental cost.
The following information is given for the year ending 31st March, 2013.
Department X Department Y Selling Department
Units Rs Units Rs Units Rs
Opening stock
Finished Goods 60 60,000 20 40000 50 1,28,000
Raw materials - - - - - -
Raw material consumed - 1,82,000 - 20,000 - -
Labour charges - 70,000 - 32,000 - -
Sales - - - - 120 4,80,000
Closing stock
Finished 40 - 50 - 60 -
Out of the total transfer by X department 30 units were transferred to selling
department, while the remaining to department Y. per unit material and labour consumption
of X department on production to be transferred directly to the selling department is 300
per cent of the labour and material consumption on units transferred to Y department.
General Administration expenses Rs 1,80,000.
ACCOUNTING
32
Prepare Department Profit and Loss Account and General Profit and Loss Account.
QUESTION 32 (MARK UP ACCOUNTS)
Gram Udyog, a retail store, has two department, `Khadi and Silks` for each of which
stock account and memorandum `mark up` accounts are kept. All the goods supplied to each
department are debited to the stock account at cost plus a `Mark-up`, which together make-
up the selling price of the goods and in the account of the sale proceeds of the goods are
credited. The amount of `mark-up` is credited to the departmental mark up account. if the
selling price of any goods is reduced below its normal selling price, the reduction `marked
down` is adjusted both in the stock account and the departmental `Mark up` account. The
rate of `Mark-up` for Khadi Department is 33-1/3% of the cost and for Silks Department
it is 50% of the cost.
The following figures have been taken from the books:
Particulars Khadi Silk

Opening stock at cost 10,500 18,600
Purchases 75,900 93400
Sales 95,600 1,25,000
The following figures have been taken from the books for the year ended December 31, 2012:
(1) The stock of Khadi on January 1, 2012 included goods the selling price of which
had been marked down by Rs 1,260. These goods were sold during the year at the reduced
prices.
(2) Certain stock of the value of Rs 6,900 purchased for the Khadi Department were
later in the year transferred to the Silks department and sold for Rs
10,350. As a result though cost of the goods is included in the Khadi Department the sale
proceeds have been credited to the silks Department.
(3) During the year 2012 to promote sale the goods were marked down as follow :
Cost Marked down
Khadi 5,600 360
Silk 10,000 2,000
Al the goods marked down, were sold except Silks of the value of Rs 5,000 marked down by
Rs 1,000.
(4) At the time of stock-taking on December 31, 2012 it was discovered that Khadi cloth
of the cost of Rs 390 was missing and it was decided that the amount be written off.
You are required to prepare for both the departments for the year 2012.
(a) The Memorandum stock Account ; and
(b) The Memorandum mark up Account
33
Solution
Silk Stock Account
2012 Rs 2012 Rs
To balance b/d By Sales A/c 1,25,000
To Cost 18,600 By Mark-up A/c 2,000
Mark-up 9,300 27,900 By Balance c/d 51,350
To Purchase 93,400
Mark-up 46,700 1,40,100
To Khadi A/c 6,900
Mark-up 3,450 10,350
1,78,350 1,78,3500
Silk Mark-up Account
2012 Rs 2012 Rs
To stock A/c 2,000 By Balance b/d 9,300
To Profit & Loss A/c 41,000 By Stock A/c 46,700
To balance c/d [ 1/3 of 52, 350) - 1000] 16,450 By Stock A/c 3,450
59,450 59450
Working Notes:
Verification of Profit Rs
Sale Rs 1,25,000
Add: Mark down in goods sold 1,000
Gross Profit 1/3 1,26,000
Less: Mark down 42,000
Gross profit as per books ( 1,000)
41,000
Khadi stock Account
2012 Rs Rs 2012 Rs Rs
To Balance b/d By Sales 95,600
( 10, 500+2,240) 12,740 Silks Deptt. 6900
To Purchase 75,900 Mark-up A/c 2300 9,200
Markup 25,300 1,01,200 By Loss of 390
stock A/c
Mark-up A/c 130 520
By Mark-u/s A/c 360
By Balance c/d 8260
1,13,940 1,13,940
ACCOUNTING
34
Khadi Mark-up Account
2012 Rs 2012 Rs
To Stock A/c (transfer) 2,3000 By Balance b/d
To Stock A/c (Re-sale) 130 ( 3,500-1,260) 2240
To Stock A/c (mark down) 360 By Stock A/c 25300
22,685
To Profit & Loss A/c
2,065
To Balance ( 1/4 of Rs 8,260)
27,540 27,540
Working Note:
Rs
Verification of Profit
95,600
Sales as per books 1,620
Add: Mark-down ( 1260+360) 97, 220
Gross profit on fixed selling price @ 25@ on Rs 97, 24,305
220 (1,620)
22,685
35
CONCEPT 15: LATEST EXAMINATION PROBLEMS
QUESTION NO 33 (CA NOV.2016) (8 MARKS) (MARK UP QUESTION)

M/s. Shyam Udyog, a retail store, has two departments, Department X and Department Y for
each of which stock account and memorandum `mark-up` account are kept. All the goods
supplied to each department are debited to the stock account at cost plus a `mark-up`, which
together make up the selling price of the goods and in the account the sale proceeds of the
goods are credited. The amount of `mark-up` is credited to the Departmental Mark-up
Account. If the selling price of any goods is reduced below its normal selling price, the
reduction `marked down` is adjusted both in the Stock Account and the Departmental Mark-
up Account. The rate of `Markup` for X Department is 33-1/3% of the cost and for Y
Department it is 50% of the cost.
The following figures have been taken from the books for the year ended March, 2016:
Particulars X Y
Deptt. Amount Deptt. Amount
(Rs.) (Rs.)
Stock as on April 1st at cost 3,15,000 5,58,000
Purchases 22,77,000 28,02,000
Sales 28,68,000 37,50,000
(1) The stock of Department X on April 1, 2015 included goods the selling price of which had
been marked down by Rs.37,800. These goods were sold during the year at the reduced prices.
(2) Certain stock of the value of Rs.2,07,000 purchased from the Department X was later in the
year transferred to the Department Y and sold for Rs. 3,10,5000. As a result though cost of the
goods is included in the Department X the sale proceeds have been credited to the Department Y.
(3) During the year 2015-16 to promote the goods, they were marked down as follows:
Cost Rs. Marked down

(Rs.)
Department X 1,68,000 10800
Department Y 3,00,000 60,000
All the goods marked down, were sold except of Department Y of the value of Rs.1,50,000
marked down by Rs. 30,000.
ACCOUNTING
36
(4) At the time of stock taking on 31st March,2016 it was discovered that cloth of
Department X of the cost of Rs. 11,700 was missing and it was decided that the amount be
written off.
You are required to prepare for both the departments for the year ended 31st March,
2016:
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark-up Account.
You are requested to prepare Branch Account in the Head Office books and also prepare
Chena Swami`s Trading and Profit & Loss Account (excluding branch transactions) for the
year ended 31st March 2016.
ANSWER
(a) Department X Memorandum Stock Account.

2015- Rs. Rs. 2015- Rs. Rs.
16 16
To Balance b/d (3,15,000 + By Sales 28,68,000
105,000 – 37,800) 3,82,200 XDeptt. 2,07,000
Mark-up A/c. 69,000 2,76,000
To Purchases 22,77,000 By Loss of
Mark up 7,59,000 30,36,000 Stock A/c. 11,700
Mark-up A/c. 3,900 15,600
By Mark up A/c. 10,800
By Balance c/d. 2,47,800
34,18,200 34,18,200
Department X Memorandum Mark-up Account

2015-16 Rs. 2015-16 Rs.
To Stock A/c.(Transfer) 69,000 By Balance b/d
To Stock A/c. (re-sale) 3,900
To Stock A/c. (markdown) 10,800 (1,05,000 – 37,800) 67,200
To Profit & Loss A/c. 6,80,550 By Stock A/c. 7,59,000
To Balance (1/4 of Rs.2,47,800) 61,950
8,26,200 8,26,200
Working Note:
Verification of Profit Rs.
Sales as per books 28,68,000
Add: Mark-down (37,800 + 10,800) 48,600
___________
29,16,600
___________
Gross Profit on fixed selling price @ 25% on Rs. 29,16,600 7,29,150
37
Less: Mark down (48,600)

____________
6,80,550
____________
Department Y Memorandum Stock Account
2015-16 Rs. 2015-16 Rs.

To Balance b/d By Sales A/c. 37,50,000
(558000+279000) 8,37,000 By Mark-up A/c. 60,000
To cost 28,02,000 By Balance c/d 15,40,500
Mark up 14,01,000 42,03,000
To x Deptt. A/c. 2,07,000

Mark-up 1,03,500 3,10,500
53,50,500 53,50,500
Department Y Memorandum Mark up Account
2015-16 Rs. 2015-16 Rs.

To Stock A/c. 60,000 By Balance b/d 2,79,000
To Profit & Loss A/c. 12,30,000 By Stock A/c. 14,01,000

(28,02,000 x 50%)
To Balance c/d: 4,93,500
(1/3 (15,40,500+30,000)- By Stock A/c. 1,03,500
Rs.30,000)
17,83,500 17,83,500
Working Notes:
Verification of Profit Rs.
Sales 37,50,000
Add: Mark-down in goods sold 30,000
___________
37,80,000
___________
Gross Profit 1/3 12,60,000
Less: Mark down (30,000)

____________
Gross Profit as per books 12,30,000
____________
ACCOUNTING
38
QUESTION NO 34 (CA MAY 2016) (8MARKS)
There is transfer/sale among the three departments as below:
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z

at20% profit on cost.
Department Y sells goods at a x and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Department x and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealized
profit on departmental sales being eliminated.
Departmental profits after charging Managers` commission, but before adjustment of

unrealized profit are as under:
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Dept. X Dept. Y Dept. Z

Transfer from Department X -- 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 --
Find out the correct departmental profits after charging Manager`s commission.
ANSWER
(a) Calculation of Correct Profit
Department X Department Y Department Z
Rs. Rs. Rs.
Profit after charging 1,80,000 1,35,000 90,000
managers` commission
39
Add back: Managers` 20,000 15,000 10,000

commission (1/9)
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on (24,500) (22,500) (10,000)
stock (W.N.)
Profit before Manager`s 1,75,500 1,27,500 90,000
commission
Less: Commission for (17,550) (12,750) (9,000)
Department Manager @
10%
Departmental Profits after 1,57,950 1,14,750 81,000
manager`s commissioner
Working Note:
Stock lying with
Dept. X Dept. Y Dept.Z Total
Unrealized
Profit of:
Department X 1/5x75,000=15,000 20/120x57,000=9,500 24,500
Department Y 0.15x70,000=10,500 0.20x60,000=12,000 22,500
Department Z 20/120x30,000=5,000 25/125x25,000=5,000 10,000
QUESTION NO 35 (CA NOV.2015) (4MARKS)

Sona Ltd. has three departments – P, Q and R. From the following particulars given below,
compute:
(i) The departmental results:

(ii) The value of stock as on 31st December, 2014:
Particulars P Q R
Stock as on 01.01.2014 30,000 45,000 15,000
Purchases 1,60,000 1,30,000 60,000
Actual Sales 1,88,000 1,66,000 93,000
Gross Profit on normal sales price 25% 33% 40%
During the year 2014 some items were sold at discount and these discounts were reflected
in the above sales value. The details are given below:
Particulars P Q R
Sales at normal price 15,000 8,000 6,000
ACCOUNTING
40
Sales at actual price 11,000 6,000 4,000
SOLUTION
Calculation of Departmental Results:
P (Rs.) Q (Rs.) R (Rs.)
Actual Sales 1,88,000 1,66,000 93,000
Add: Discount (Refer W.N.) 4,000 2,000 2,000
Normal Sale 1,92,000 1,68,000 95,000
Gross Profit % on normal sales 25% 33.33% 40%
Normal gross profit 48,000 56,000 38,000
Less: Discount (4,000) (2,000) (2,000)
Actual gross Profit 44,000 54,000 36,000
Computation of value of stock as on 31st Dec. 2014
Departments P Q R
Stock (on 1.1.2014) 30,000 45,000 15,000
Add: Purchase 1,60,000 1,30,000 60,000
1,90,000 1,75,000 75,000
Add: Actual gross Profit 44,000 54,000 36,000
2,34,000 2,29,000 1,11,000
Less: Actual Sales (1,88,000) (1,66,000) (93,000)
Closing Stock as on 31.12.2014 (bal.fig) 46,000 63,000 18,000
Working Note:
Calculation of discount on sales
Departments P Q R
Sales at normal price 15,000 8,000 6,000
Less: Sales at actual price (11,000) (6,000) (4,000)
4,000 2,000 2,000
QUESTION NO 36 (CA MAY 2015) (8MARKS)

M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are
made by the Firm itself out of leather supplied by Leather Department at its usual selling
price. From the following figures, prepare Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2014:
Finished Leather Shoes

Department (Rs.) Department
41
(Rs.)
Opening Stock (As on 01.04.2013) 30,20,000 4,30,000
Purchases 1,50,00,000 2,60,000
Sales 1,80,00,000 45,20,000
Transfer to Shoes Department 30,00,000 -
Manufacturing Expenses - 5,00,000
Selling Expenses 1,50,000 60,000
Rent and Warehousing 5,00,000 3,00,000
Stock on 31.03.2014 12,20,000 5,00,000
The following further information are available for necessary consideration:

(i) The stock in Shoes Department may be considered as consisting of 75% of Leather
and 25% of other expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% in 2012-13.
(iii) General expenses of the business as a whole amount to Rs. 8,50,000.
SOLUTION
Departmental Trading and Profit and Loss Account for the year ended
31st March, 2014
Particulars Finished Shoes Total Particulars Finished Shoes Total
Leather (Rs.) (Rs.) Leather (Rs.) (Rs.)
(Rs.) (Rs.)
To Opening 30,20,000 4,30,000 34,50,000 By Sales 1,80,00,000 45,20,000 2,25,20,000
Stock
To Purchases 1,50,00,000 2,60,000 1,52,60,000 By Shoes 30,00,000 - 30,00,000
Deptt.
Transfer
To Transfer 30,00,000 30,00,000 By Closing 12,20,000 5,00,000 17,20,000
from Leather Stock
Deptt.
To Mfd. Exp. 5,00,000 5,00,000
To Gross 42,00,000 8,30,000 50,30,000
Profit c/d
2,22,20,000 50,20,000 2,72,40,000 2,22,20,000 50,20,000 2,72,40,000
To Selling 1,50,000 60,000 2,10,000 By Gross 42,00,000 8,30,000 50,30,000
Expenses Profit b/d
To Rent & 5,00,000 3,00,000 8,00,000
warehousing
To Net Profit 35,50,000 4,70,000 40,20,000
42,00,000 8,30,000 50,30,000 42,00,000 8,30,000 50,30,000
General Profit and Loss Account

Particulars Amount (Rs.) Particulars Amount (Rs.)
To General Expenses 8,50,000 By Net Profit 40,20,000
To Unrealized Profit 26,625
ACCOUNTING
42
(Refer W.N.)
To General net Profit 31,43,375
(Bal. fig.)
40,20,000 40,20,000
Working Note:
Calculation of Stock Reserve
Rent of Gross Profit of Finished leather Department, for the year 2013-14
= Gross Profit x 100 = (42,00,000)/(1,80,00,000 + 30,00,000) x 100 = 20%

Total Sales
Closing Stock of Finished leather in Shoes Department = 75%.

i.e. Rs. 5,00,000 x 75% = Rs. 3,75,000
Stock Reserve required for unrealized profit @ 20% on closing stock.

Rs.3,75,000 x 20% = Rs. 75,000
Stock reserve for unrealized profit included in opening stock of Shoes Dept. @ 15% i.e.
(Res.4,30,000 x 75% x 15%) = Rs. 48,375
Additional Stock Reserve required during the year = Rs. 75,000 – Rs. 48,375 = Rs.26,625
QUESTION NO 37 (CA NOV 2014) (8 MARKS)

Mega Ltd. has two departments, A and B. From the following particulars, prepare
departmental Trading A/c. and General Profit & Loss Account for the year ended 31st March,
2014.
Particulars Amount (Rs.)

Department A Department B
Opening Stock as on 01.04.2013 (at cost) 70,000 54,000
Purchases 3,92,000 2,98,000
Carriage Inward 6,000 9,000
Wages 54,000 36,000
Sales 5,72,000 4,60,000
Purchased Goods Transferred
By Department B to A 50,000
By Department A to B 36,000
Finished Goods Transferred
By Department B to A 1,50,000
By Department A to B 1,75,000
43
Return of Finished Goods

By Department B to A 45,000
By Department A to B 32,000
Closing Stock
Purchased Goods 24,000 30,000
Finished Goods 1,02,000 62,000
Purchased goods have been transferred mutually at their respective departmental purchase
cost and finished goods at departmental market price and that 30% of the closing finished
stock with each department represents finished goods received from the other department.
SOLUTION
Department Trading Account in the books of Mega Ltd.
for the year ended 31st March, 2014
Particulars Department Department Particulars Deptt. A Deptt. B

A B
To Opening 70,000 54,000 By Sales 5,72,000 4,60,000
Stock By Transfer:
To Purchase 3,92,000 2,98,000 Purchased Good 36,000 50,000
To Carriage 6,000 9,000 Finished Goods 1,30,000 1,18,000
Inward By Closing
To Wages 54,000 36,000 stock:
To ransfers: Purchase.Goods 24,000 30,000
Purchased Finished* Goods 1,02,000 62,000
Goods 50,000 36,000
Finished**
Goods 1,18,000 1,30,000
To Gross
Profit c/d 1,74,000 1,57,000
8,64,000 7,20,000 8,64,000 7,20,000
* Finished goods from other department included inclosing stock.
Particulars Department A (Rs.) Department B (Rs.)

Stock of Finished Goods 1,02,000 62,000
Stock related to other 30,600 18,600
department
(30% of Finished Goods)
** Net transfer of Finished goods by
Department A to B = Rs. (1,75,000 – 45,000) = Rs. 1,30,000

Department B to A = Rs. (1,50,000 – 32,000)= Rs. 1,18,000
ACCOUNTING
44
Profit and Loss A/c.

Particulars Amount Particulars Amount (Rs.)

(Rs.)
To Provision for By Gross Profit b/d:
unrealized Profit including Department A 1,74,000
in closing stock: Department B 1,57,000
Department A (W.N.2) 8,311
Department B (W.N.2) 4,611
To Net Profit 3,18,078
3,31,000 3,31,000
Working Notes
1. Calculation of ratio of gross profit margin on sales.
Particulars Department A (Rs.) Department B (Rs.)

Sales 5,72,000 4,60,000
Add: Transfer of Finished 1,75,000 1,50,000
Goods _________ ________
7,47,000 6,10,000
Less: Return of Finished Goods (45,000) (32,000)

_________ _________
7,02,000 5,78,000
_________ _________
Gross Profit 1,74,000 1,57,000

Gross Profit margin = 1,74,000 x 100 = 24.79% 1,57,000 x 100 = 27.16%
7,02,000 5,78,000
2. Unrealized profit included in the closing stock
Department A = 27.16% of Rs. 30,600 (30% of Stock of Finished Goods Rs. 1,02,000) = Rs.
8311.00
Department B = 24.79% of Rs. 18,600 (30% of Stock of Finished Goods Rs. 62,000) =
Rs. 4611.00
45
QUESTION NO 38(CA MAY 2014) (8MARKS)

Department P sells goods to Department S at a profit of 25% on cost and to Department Q
at a profit of 15% on cost. Department S sells goods to P and Q at a profit of 20% and 30%
on sales respectively. Department Q sells goods to P and S at 20% and 10% profit on cost
respectively.
Departmental Managers are entitled to10% commission on net profit subject to unrealized
profit on departmental sals being eliminated. Departmental profits after charging Manager`s
commission, but before adjustment of unrealized profits are as below:
Rs.
Department P 90,000
Department S 60,000
Department Q 45,000
Stock lying at different Departments at the end of the year are as below:
Figures in rs.
DEPARTMENS
p S Q
Transfer from P - 18,000 14,000
Transfer from S 48,000 - 38,000
Transfer from Q 12,000 8,000 --
Find out correct Departmental Profits after charging Managers` Commission.
SOLUTION
Calculation of correct Departmental Profits
Department Department S Department
P (Rs.) Q
(Rs.) (Rs.)
Profit after charging Manager`s 90,000 60,000 45,000
Commission
Add: Manager`s Commission (1/9) 10,000 6,667 5,000
1,00,000 66,667 50,000
Less: Unrealized Profit on Stock (5,426) (21,000) (2,727)
(WN)
Profit Before Manager`s Commission 94,574 45,667 47,273
Less: Manager`s Commission 10%

(9,457) (4,567) (4,727)
Correct Profit after Manager`s 85,117 41,100 42,546
Commission
ACCOUNTING
46
Working Notes:
Department P Department S Department Q Total
(Rs.) (Rs.) (Rs.) (Rs.)
Unrealized Profit of:
Department P 25/125x18,000 15/115x14,000 5,426
= 3,600 = 1,826
Department S 20/100x48,000 - 30x100x38,000 21,000

=9,600 =11,400
Department Q 20/120x12,000 10/110x8,000 2,727

=2,000 =727
QUESTION NO 39 (CA INTER MAY 2017)(8 MARKS)

(a) The following balances were extracted from the books of Beta. You are required to
prepare Departmental Trading Account and General Profit & Loss Account for the year
ended 31st December, 2016.
Particulars Deptt. A (Rs.) Deptt. B (Rs.)

Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
General expenses incurred for both the Departments were Rs. 7,50,000 and you are also
supplied with the following information:
(ii) Closing Stock of Department A Rs. 6,00,000 including goods from Department B
for Rs. 1,20,000 at cost to Department A.
(iii) Closing Stock of Department B Rs. 12,00,000 including goods for Department A for
Rs. 1,80,000 at cost to Department B.
(iv) Opening stock of Department A and Department B include goods of the value of Rs.
60,000 and Rs.90,000 taken from Department B and Department A respectively at
cost to transferee departments.
(v) The gross profit is uniform from year to year.

47
Answer
Departmental Trading Account for the year ended on 31st December, 2016
Particulars A B Particulars A B
` ` ` `
To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24,00,000 45,00,000
66,00,000 1,02,00,000 66,00,000 1,02,00,000
st
General profit and loss account of Beta for the year ended on 31 December,2016
Particulars Amount Particulars Amount
` `
To General expenses* 7,50,000 By Stock reserve (opening stock)
To stock reserve Dept. A 30,000
(closing stock)
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross Profit
To Net profit 60,84,000 Dept. A 24,00,000
Dept. B 45,00,000
69,66,000 69,66,000
Working Notes:
Dept. A Dept.B
1. Percentage of Profit 24,00,000/60,00,000 x100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock reserve 60,000 x 50% = 30,000 90,000 x 40% = 36,000
3. Closing Stock reserve 1,20,000 x 50% = 60,000 1,80,000 x 40% = 72,000
48 ACCOUNTING
QUESTION 40(CA INTER NOV 2019) (10MARKS)
ABC Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost plus a fixed percentage (mark-up) to give
the normal selling price. The amount of mark-up is credited to a Memorandum Departmental
Markup account. If the selling price of goods is reduced below its normal selling prices, the
reduction (mark-down) will require adjustment both in the stock account and the mark-up
account. The mark-up for department X for the last three years has been 20%. Figures
relevant to department X for the year ended 31st March, 2019 were as follows:
Stock as on 1st April, 2018, at cost ` 1,50,000
Purchases at cost ` 4,30,000
Sales
` 6,50,000
It is further ascertained that:
(1) Shortage of stock found in the year ending 31.3.2019, costing ` 4,000 were written
off.
(2) Opening stock on 1.4.2018 including goods costing ` 12,000 had been sold during the
year and had been marked-down in the selling price by ` 1,600. The remaining stock
had been sold during the year.
(3) Goods purchased during the year were marked down by ` 3,600 from a cost of `
30,000. Marked-down stock costing ` 10,000 remained unsold on 31.3.2019.
(4) The departmental closing stock is to be valued at cost subject to adjustment for
mark- up and mark-down.
You are required to prepare for the year ended 31st March, 2019 :
(i) Departmental Trading Account for department X for the year ended 31st March,
2019 in the books of head office.
(ii) Memorandum Stock Account for the year ended 31st March, 2019.
(iii) Memorandum Mark-Up account for the year ended 31st March, 2019.
DEPARTMENTAL ACCOUNTS 49
SOLUTION:
Department Trading Account for Department X
For the year ending on 31.03.2019
In the books of Head Office
Particulars ` Particulars `
To Opening Stock 1,50,000 By Sales 6,50,000
To Purchases 4,30,000 By Shortage 4,000
To Gross Profit c/d 1,05,000 By Closing Stock 31,000
6,85,000 6,85,000
(ii) Memorandum Stock Account (for Department X) (at selling price)
To Balance b/d 1,80,000 By Profit & Loss A/c 4,000
(` 1,50,000+20% of (Cost of Shortage)
` 1,50,000)
To Purchases 5,16,000 By Memorandum Departmental 800
(` 4,30,000 + 20% of Mark up A/c (Load on
` 4,30,000) Shortage) (` 4,000 x 20%)
By Memorandum Departmental 3,600

Mark-up A/c (Mark-down on
Current Purchases)
By Debtors A/c (Sales) 6,50,000
By Memorandum Departmental 1,600

Mark-up A/c
(Mark Down on Opening
Stock)
By Balance c/d 36,000
6,96,000 6,96,000
50 ACCOUNTING
(iii) Memorandum Departmental Mark-up Account
To Memorandum Departmental 800 By Balance b/d 30,000
Stock A/c (` 4,000 × 20/100) (` 1,80,000 x 20/120)
To Memorandum Departmental 3,600 By Memorandum 86,000
Stock A/c Departmental Stock A/c
To Memorandum Departmental 1,600 (` 5,16,000 x 20/120)
Stock A/c
To Gross Profit transferred to 1,05,000
Profit & Loss A/c
To Balance c/d [(` 36,000 + 5,000
1,200*) x 20/120 - ` 1,200]
1,16,000 1,16,000
*[` 3,600 ×10,000/30,000] = ` 1,200. Alternatively, this adjustment of ` 1,200 may be

routed through Memorandum Stock Account.
Working Notes:
(i) Calculation of Cost of Sales
`
A Sales as per Books 6,50,000
B Add: Mark-down in opening stock (given) 1,600
C Add: mark-down in sales out of current Purchases
(` 3,600 x 20,000 /30,000) 2,400
D Value of sales if there was no mark-down (A+B+C) 6,54,000
E Less: Gross Profit (20/120 of ` 6,54,000) subject to Mark Down (1,09,000)
F Cost of sales (D-E) 5,45,000
(ii) Calculation of Closing Stock
`
A Opening Stock 1,50,000
B Add: Purchases 4,30,000
C Less: Cost of Sales (5,45,000)
D Less: Shortage (4,000)

E Closing Stock (A+B-C-D) 31,000
QUESTION 41(CA INTER NOV 2020)(5 MARKS)
Department A sells goods to Department B at a profit of 20% on cost and to Department

C at 50% on cost. Department B sells goods to Department A and Department C at a profit
of 15% and 10% on sales respectively. Department C sells goods to Department A and
Department B at a profit of 10% and 5% on cost respectively.
Stock lying at different departments at the end of the year are as follows:
Department A Department B Department C

(`) (`) (`)
Transfer from Department A 1,14,000 60,000
Transfer from Department B 55,000 15,200
Transfer from Department C 52,800 1,11,300
Calculate Department wise unrealized profit on Stock.
SOLUTION:
Calculation of unrealized profit of each department
Dept. A Dept. B Dept. C Total

` ` ` `
Unrealized
Profit of:
Department A 1,14,000 x 60,000 x 50/150 39,000
20/120 = 19,000 = 20,000
Department B 55,000 x .15 15,200 x.10 9,770

= 8,250 = 1,520
Department C 52,800 x 10/110 1,11,300 x 5/105

= 4,800 5,300 10,100
52 ACCOUNTING
QUESTION 42(CA INTER JAN 21)(10MARKS)
XYZ Garage consists of 3 departments: Spares, Service and Re pairs, each department
being managed by a departmental manager whose commission was respectively 5%, 10% and
10% of the respective departmental profit subject to a minimum of `5,000 in each case.
Inter departmental transfers take place at a “loaded” price as follows:
From Spares to Service 5% above cost
From Spares to Repairs 10% above cost
From Spares to Service 10% above cost
In respect of the year ended March 31st 2019 the firm had already prepared and closed
the departmental trading and profit and loss account. Subsequently it was discovered that
the closing stocks of department had included inter-departmentally transferred goods at
“loaded” price instead of the correct cost price. Instead of the correct cost price.
From the following information, you are required to prepare a statement re-computing the
departmental profit or loss:
Spares Service Repairs

` ` `
Final Net Profit/Loss (after charging commission) 38,000 50,400 72,000
(Loss) (Profit) (Profit)
Inter-departmental transfers 65,000 4,202
Included at “loaded” price in the departmental (21,000 from (from

stocks Spares and Spares)
44,000 from
Repairs
SOLUTION
Calculation of correct Departmental Profits or Losses
Department Department Department

Spares (`) Service (`) Repair (`)
Profit after charging Manager’s (38,000) 50,400 72,000
Commission
Add: Manager’s Commission (1/9) 5,000 (Minimum) 5,600 8,000
(33,000) 56,000 80,000

Less: Unrealized profit on Stock (WN) (1,382) (4,000)
Profit Before Manager’s Commission (34,382) 56,000 76,000
Less: Manager’s Commission 10% (5,000) (5,600) (7,600)
Correct Profit after Manager’s (39,382) 50,400 68,400
Commission
Working Note:
Department Department Department Repair Total

Spares (`) Service (`) (`) (`)
Unrealized Profit of:

Department Spares 21,000X5/105 4202X10/110 = 382 1,382
= 1,000
Department Repair 44000X10/110 4,000
= 4000
QUESTION 43 (CA INTER JULY 21 EXAM) (10 MARKS)
The firm, M/s K Creations has two Departments, Dyed fabric and Readymade garments.
Readymade garments are made by the firm itself. Both dyed fabric and readymade garments
have independent market. Some of readymade garment department’s requirement is supplied
by Dyed Fabric Department at its usual Selling Price.
From the following figures, prepare Departmental Trading and Profit & Loss Account for
the year ended 31st March 2021.
Particulars Dyed Fabric Readymade

Department garments
department
Opening stock as on April 1, 2020 5,40,000 15,20,000
Purchases (excluding inter department transfers) 20,12,080 1,50,00,000
Sales (excluding inter department transfers) 31,06,000 3,12,50,000
Transfer to Readymade garment 5,00,000 -
Direct wages 3,00,000 67,30,000
54 ACCOUNTING
Direct expenses 1,00,000 19,50,000

Plant and Equipment for dyeing/stitching 5,00,000 15,00,000
readymade garments (WDV as on April 1 ,2020)
Rent and warehousing 4,50,000 12,00,000
Stocks as on March 31 2021 st
6,00,000 22,50,000
The following further information are available for necessary consideration:
(i) The Stock in Readymade garments department may be considered as consisting of

60% of dyed fabric and 40% of Other Expenses.
(ii) The Dyed Fabric Department earned a Gross Profit @ 30% in 2019-2020.
(iii) On the plant and equipment, depreciation @ 20% p.a. to be provided.
(iv) The following expenses incurred for both the departments were not apportioned
between the departments:
`
(a) Salaries 2,70,000
(b) Advertisement expenses 90,000
(c) General expenses 8,00,000
(v) Salaries in 1:2 ratio, Advertisement expenses in the turnover ratio and General
expenses in 1:3 ratio are to be apportioned between the Dyed Fabric Department and
Readymade Department respectively.
SOLUTION:
M/s K Creations
Departmental Trading and Profit & Loss Account
For the Year Ended 31st March 2021
Particulars Dyed Readymade Total Particulars Dyed Readymade Total

Fabric Garments (`) Fabric Garments (`)
Depart- Department Department Depart-
ment (`) (`) ment
(`) (`)
To Opening 5,40,000 15,20,000 20,60,000 By Sales 31,06,000 3,12,50,000 3,43,56,000
Stock
To Purchases 20,12,080 1,50,00,000 1,70,12,080 By 5,00,000 5,00,000

Transfer to
Readymade
Garments
To Transfer 5,00,000 5,00,000 By Closing 6,00,000 22,50,000 28,50,000

from Dyed Stock
Fabric
Department
To Direct 3,00,000 67,30,000 70,30,000

Wages
To Direct 1,00,000 19,50,000 20,50,000

Expenses
To 1,00,000 3,00,000 4,00,000

Depreciation*
To Gross Profit 11,53,920 75,00,000 86,53,920
Total 42,06,000 3,35,00,000 3,77,06,000 Total 42,06,000 3,35,00,000 3,77,06,000
To Rent and 4,50,000 12,00,000 16,50,000 By Gross 11,53,920 75,00,000 86,53,920

Warehousing Profit
To Salaries 90,000 1,80,000 2,70,000
To 8,137 81,863 90,000

Advertisement
Expenses
To General 2,00,000 6,00,000 8,00,000
Expenses
To Net Profit 4,05,783 54,38,137 58,43,920
Total 11,53,920 75,00,000 86,53,920 Total 11,53,920 75,00,000 86,53,920
Profit and Loss Account (Combined)
Particulars Amt (`) Particulars Amt (`)
To Unrealized Profit (WN) 1,58,400 By Net Profit 58,43,920
To General Net Profit 56,85,520
Total 58,43,920 Total 58,43,920

56 ACCOUNTING
Calculation of Stock Reserve

Rate of Gross Profit of Dyed Fabric Department for the year 2020 -21
= 11,53,920 / (31,06,000+5,00,000) X 100 = 32%
Closing stock of Dyed Fabric in Readymade Garments Department
= 22,50,000 x 60% = ` 13,50,000
Stock reserve required for unrealized profit @ 32% on closing stock
= 13,50,000 x 32% = ` 4,32,000
Stock reserve for unrealized profit included in opening stock of Readymade Garments
Department = ` 15,20,000 x 60% x 30% = ` 2,73,600
Additional stock reserve required = ` 4,32,000 - ` 2,73,600 = ` 1,58,400
ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 57
ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE
CHAPTER OVERVIEW
BONUS Bonus issue means of issue of free additional shares to existing

SHARES shareholders.
A company may issue fully paid-up bonus shares to its shareholders
out of –
(i) Its free reserves;
(ii) securities premium account; or
(iii) capital redemption reserve account:
Bonus shares should not be issued out of revaluation reserves (i.e.,
reserves created by the revaluation of assets).
RIGHT ISSUE Rights issue is an issue of rights to a company’s existing share-holders

that entitles them to buy additional shares directly from the company
in proportion to their existing holdings, within a fixed time period.
In a rights offering, the subscription price at which each share may
be purchased is generally at a discount to the current market price.
Rights are often transferable, allowing the holder to sell them in the
open market.
The difference between the cum-right and ex-right value of the share
is the value of the right.
ISSUE OF BONUS SHARES

A bonus share may be defined as issue of shares at no cost to current shareholders in a
company, based upon the number of shares that the shareholder already owns. In other
words, no new funds are raised with a bonus issue while the issue of bonus shares increases
the total number of shares issued and owned, it does not increase the net worth of the
company. Although the total number of issued shares increases, the ratio of number of
shares held by each shareholder remains constant.
Bonus issue is also known as ‘capitalization of profits. Capitalization of profits refers to the
process of converting profits or reserves into paid up capital. A company may capitalize its
profits or reserves which otherwise are available for distribution as dividends among the
members by issuing fully paid bonus shares to the members.
58 ACCOUNTING
If the subscribed and paid-up capital exceeds the authorized share capital as a result of
bonus issue, a resolution shall be passed by the company at its general body meeting for
increasing the authorized capital. A return of bonus issue along with a copy of resolution
authorising the issue of bonus shares is also required to be filed with the Registrar of
Companies.
PROVISIONS OF THE COMPANIES ACT, 2013

Section 63 of Companies Act, 2013 deals with the issue of bonus shares. According to Sub-
section (1) of Section 63, a company may issue fully paid up bonus shares to its member, in
any manner whatsoever, out of-
(i) Its free reserves*;

(ii) The securities premium account; or
(iii) The capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalizing reserves created by
the revaluation of assets.
Sub-section (2) of Section 63 provides that no company shall capitalize its profits or
reserves for the purpose of issuing fully paid-up bonus shares under sub sub-section (1),
unless-
(a) it is authorized by its articles;

(b) it has, on the recommendation of the Board, been authorized in the general meeting of
the company;
(c) it has not defaulted in payment of interest of principal in respect of fixed deposits or
debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus,
(e) the party paid-up shares, if any outstanding on the date of allotment, are made fully
paid-up.
The company which has once announced the decision of its Board recommending a bonus
issue shall not subsequently withdraw the same.
Sub-section (3) of the Section also provides that the bonus shares shall not be issued in
lieu of dividend.
A securities premium account and a capital redemption reserve account may be applied
in the paying up of unissued shares to be issued to members of the company as fully
paid bonus shares. In other words, securities premium account and capital redemption
reserve cannot be applied towards payment of unpaid amount on any shares held by
existing shareholders.
As per Section 63(2) of the Companies Act, 2013, bonus shares cannot be issued unless
party paid-up shares are made fully paid-up. Para 39 (ii) of Table F under Schedule I to
the Companies act, 2013 allows use of free reserves for paying up amounts unpaid on
shares held by existing shareholders.
On a combined reading of both the provisions, it can be said that free reserves may
be used for paying up amounts unpaid on shares held by existing shareholders (though
securities premium account and capital redemption reserve cannot be used.)
SEBI REGULATIONS
A listed company, while issuing bonus shares to its members, has to comply with the following
requirements under the SEBI (issued of Capital and Disclosure Requirements) Regulations,
2009:
Regulation 92- Conditions for Bonus issue

Subject to the provisions of the Companies Act, 2013 or any other applicable law for the
time being in force, a listed company may issue bonus shares to its members if:
(a) it is authorized by its articles of association for issue of bonus shares, capitalization
or reserves, etc.:
Provided that if there is no such provision in the articles of association, the issuer
shall pass are solution at its general body meeting making provision in the articles of
associations for captalisation of reserve;
(b) it has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities issued by it;
(c) it has sufficient reason to believe that it has not defaulted in respect of the payment
of statutory dues of the employees such as contribution to provident fund, gratuity
and bonus;
(d) the partly paid shares, if any outstanding on the date of allotment, are made fully paid
up
Regulation 93- Restriction on bonus issue

No issuer shall make a bonus issue of equity shares unless it has made reservation of equity
shares of the same class in favour of the holders of outstanding compulsorily convertible
debt instruments, if any, in proportion to the convertible part thereof. The equity shares
60 ACCOUNTING
so reserved for the holders of fully or partly compulsorily convertible debt instruments
shall be issued at the time of conversion of such convertible debt instruments on the same
terms of same proportion at which the bonus shares were issued.
Regulation 94- Bonus shares only against reserves, etc. if capitalized in cash
The bonus issue shall be made out of free reserves built out the genuine profits or securities
premium collected in cash only and reserves created by revaluation of fixed assets shall not
be capitalized for the purpose of issuing bonus shares. The bonus share shall not be issued
in lieu of dividend.
Regulation 95- Completion of bonus issue

An issuer, announcing a bonus issue after the approval of its board of directors and not
requiring shareholder’s approval for capitalization of profits or reserves for making the
bonus issue, shall implement the bonus issue within fifteen days from the date of approval
of the issue by its board of directors: Provided that where the issuer is required to seek
shareholder’s approval for capitalization of profits or reserves for making the bonus issue,
the bonus issue shall be implemented within two months from the date of the meeting of
its board of directors wherein the decision to announce the bonus issue was taken subject
to shareholder’s approval.
Once the decision to make a bonus issue is announced, the issue cannot be withdrawn.
Journal Entries
(A) (1) Upon the sanction of an issue of bonus shares

(a) Debit Capital Redemption Reserve Account
Debit Securities Premium Account 1
Debit General Reserve Account
Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account.
(2) Upon issue of bonus shares
(a) Debit Bonus to Shareholders Account
(b) Credit Share Capital Account.
(B) (1) U
pon the sanction of bonus by converting partly paid shares into fully paid
shares
(a) Debit General Reserve Account
Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account

(2) On making the final call due
(a) Debit Share Final Call Account
(b) Credit Share Capital Account
(3) On adjustment of final call
(a) Debit Bonus to Shareholders Account
(b) Credit Share Final Call Account
QUESTION NO. 1
Following items appear in the trial balance of Bharat Ltd. (a listed company) as on 31st
March, 20X1:
`
40,000 Equity shares of ` 10 each 4,00,000
Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
General Reserve 1,05,000
Surplus i.e. credit balance of profit and Loss Account 2,00,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share
for every 4 shares held and for this purpose, it decided that there should be the minimum
reduction in free reserves. Pass necessary journal entries.
SOLUTION
Journal Entries in the Books of Bharat Ltd.
Dr. (`) Cr. (`)

Capital Redemption Reserve A/c Dr. 55,000
Securities Premium A/c Dr. 30,000
General Reserve A/c (b.f.) Dr. 15,000
To Bonus to Shareholders A/c 1,00,000
(Bonus issue of one share for every four shares held,
by utilizing various reserves as per Boards’ resolution
dated ……….)
62 ACCOUNTING
Bonus to Shareholders A/c Dr. 1,00,000

To Equity Share Capital A/c 1,00,000
(Capitalisation of profit )
QUESTION NO. 2
Following is the extract of the Balance Sheet of Solid Ltd. as at 31st March, 20X1:
`
Authorised capital :
10,000 12% Preference shares of ` 10 each 1,00,000
1,00,000 Equity shares of ` 10 each 10,00,000
11,00,000
Issued and Subscribed capital :
8,000 12% Preference shares of ` 10 each fully paid 80,000
90,000 Equity shares of ` 10 each, ` 8 paid up 7,20,000
Reserves and Surplus :
General reserve 1,60,000
Revaluation reserve 35,000
Securities premium (collected in cash) 20,000
Profit and Loss Account 2,05,000
Secured Loan :
12% Debentures @ ` 100 each 5,00,000
On 1st April, 20x1 the Company has made final call @ ` 2 each on 90,000 equity shares.
The call money was received by 20th April, 20x1. Thereafter the company decided to
capitalize its reserves by way of bonus of the rate of one share every four shares held.
Show necessary entries in the books of the company and prepare the extract of the Balance
Sheet immediately after bonus issue assuming that the company has passed necessary
resolution at its general body meeting for increasing the authorized capital.
SOLUTION
Solid Ltd.
Journal Entries
20X1 Dr. (`) Cr. (`)

April 1 Equity Share Final Call A/c Dr. 1,80,000
(Final call of ` 2 per share on 90,000
equity shares due as per Board’s Resolution
dated…………)
April 20 Bank A/c Dr. 1,80,000
To Equity Share Final Call A/c 1,80,000
(Final Call money on 90,000 equity shares
received)
General Reserve A/c Dr. 1,60,000
Profit and Loss A/c (b.f) Dr. 45,000
To Bonus to Shareholder A/c 2,25,000
(Bonus issue @ one share for every four shares
held by utilizing various reserves as per Board’s
Resolution dated….)
April 20 Bonus to Shareholder A/c Dr. 2,25,000
(Capitalisaiton of profit )
Balance Sheet (Extract) as on 30th April, 20X1 (after bonus issue)
Particulars Notes Amounts (`)

Equity and Liabilities
1 Shareholder’s funds
a Share capital 1 12,05,000
b Reserves and Surplus 2 1,95,000
2 Non-current liabilities
a Long –term borrowings 3 5,00,000
Total 19,00,000
64 ACCOUNTING
Note to Account
1 Share Capital
Equity share capital
Authorised share capital
1,25,000 Equity shares of ` 10 each (refer working 12,50,000
note below)
Issued, subscribed and fully paid share capital
1,12,500 Equity shares of ` 10 each, fully paid
(Out of above, 22,500 equity shares @ ` 10 each 11,25,000
were issued by way of bonus ) (A)
Preference share capital
Authorised share capital
10,000 12% Preference share of ` 10 each 1,00,000
Issued, subscribed and fully paid share capital
8,000 12% Preference shares of ` 10 each (B) 80,000
Total (A+B) 12,05,000
2 Reserves and Surplus
Revaluation Reserve 35,000
Securities Premium 20,000
Less: Utilised for bonus issue (20,000) Nil
Less: Utilised for bonus issue (1,60,000) Nil
Profit & Loss Account 2,05,000
Less: Utilised for bonus issue (45,000) 1,60,000
Total 1,95,000
3. Long –term borrowings
Secured
12% Debentures @ ` 100 each 5,00,000
Working Note:
The authorized capital should be increased as per details given below:
`
Existing authorized Equity share capital 10,00,000
Add: Issue of bonus shares to equity shareholders
(25% of ` 10,00,000) 2,50,000
12,50,000
QUESTION NO. 3
Following is the extract of the Balance Sheet of Preet Ltd. as at 31st March, 20X1
Authorized `
16,50,000
Issued and Subscribed capital :
12,000 12% Preference shares of ` 10 each fully paid 1,20,000
1,35,000 Equity shares of ` 10 each, ` 8 paid up 10,80,000
Reserves and surplus
On 1st April, 20X1, the Company has made final call @ ` 2 each on 1,35,000 equity shares. The
call money was received by 20th April, 20X1. Thereafter, the company decided to capitalize
its reserves by way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the
balance sheet as on 30th April, 20X1 after bonus issue.
66 ACCOUNTING
ANSWER
Journal Entries in the books of Preet Ltd.
` `
1-4-20X1 Equity share final call a/c Dr. 2,70,000
To Equity share capital A/c 2,70,000
(For final calls of ` 2 per share on 1,35,000
equity share due as per Board’s Resolution
dated…….)
20-4-20X1 Bank A/c Dr. 2,70,000
To Equity share final call A/c 2,70,000
(For final call money on 1,35,000 equity shares
received)
Capital Redemption Reserve A/c Dr. 60,000
Profit and Loss A/c Dr. 60,000
To Bonus to shareholders A/c 3,37,500
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 3,37,500
(For issue of bonus share )
Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)
`
Authorised Capital
1,83,750 Equity shares of ` 10 each (refer working note below) 18,37,500
Issued and subscribed capital
12,000 12% Preference shares of ` 10 each, fully paid 1,20,000
1,68,750 Equity shares of ` 10 each, fully paid 16,87,500
(Out of above, 33,750 equity shares @ ` 10 each were issued by way of

bonus)
Reserves and surplus
Working Note:
The authorized capital should be increased as per details given below: `

Existing authorized Equity share capital 15,00,000
Add: Issue of bonus shares to equity shareholders 3,37,500
18,37,500
QUESTION 4
Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 20X1:
Particulars Amount
4,500 Equity Shares of ` 100 each 4,50,000
Profit and Loss Account (Cr. Balance) 65,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share
for every 3 shares held. Company decided that there should be the minimum reduction in
free reserves. Pass necessary Journal Entries in the books Saral Ltd.
QUESTION 5
The following notes pertain to Brite Ltd.’s Balance Sheet as on 31st March, 20X1:
Notes ` in Lakhs
(1) Share Capital
Authorised:
20 crore shares of ` 10 each 20,000
Issued and Subscribed:
68 ACCOUNTING
10 crore Equity Shares of ` 10 each 10,000

2 crore 11% Cumulative Preference Shares of ` 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of ` 10 each, ` 8 per share called and 8,000
paid up
2 crore 11% Cumulative Preference Shares of ` 10 each,
Fully called and paid up 2,000
Total 10,000
(2) Reserves and Surplus:
General Reserve 1,040
Surplus i.e. credit balance of profit & Loss Account 273
Total 4,798
On 2nd April 20X1, the company made the final call on equity shares @ ` 2 per share.
The entire money was received in the month of April, 20X1.
On 1st June 20X1, the company decided to issue to equity shareholders bonus shares at the
rate of 2 shares for every 5 shares held. Pass journal entries for all the above mentioned
transactions. Also prepare the notes on Share Capital and Reserves and Surplus relevant to
the Balance Sheet of the company immediately after the issue of bonus shares.
QUESTION 6
Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1
Authorized capital: `
33,00,000
Issued and Subscribed capital:
24, 000 12% Preference shares of ` 10 each fully paid 2,40,000
Reserves and surplus:

Capital Redemption Reserve 1,20,000
On 1st April, 20X1, the Company has made final call @ ` 2 each on 2,70,000 equity shares.
The call money was received by 20th April, Thereafter, the company decided to capitalize
its reserves by way of bonus at the rate of one share for every four shares held.
balance sheet as on 30th April, 20X1 after bonus issue.
70 ACCOUNTING
Right Issue
Provision of section 62(1) (a) govern any company, public or private, desirous of raising its
subscribed share capital by issue of further shares. Whenever a company intends to issue
new shares, the voting and governance rights of the existing shareholders may be diluted,
if they are not allowed to preserve them. It may happen because new shareholders may
subscribe to the issued share capital. Companies Act, 2013 allows existing shareholders
to preserve their position by offering those newly issued shares at the first instance to
them. The existing shareholders are given a right to subscribe these shares, if they like.
However, if they do not desire to subscribe these shares, they are even given the right to
renounce it in favour of someone else (unless the articles of the company prohibits such a
right to renounce).
In nutshell, the existing shareholders have a right to subscribe to any fresh issue of shares
by the company in proportion to their existing holding for shares. They have an implicit
right to renounce this right in favour of anyone else, or even reject it completely.
In other word, the existing shareholders have right of first refusal, i.e., the existing
shareholders enjoy a right to either sub-scribe for these shares or sell their rights or
reject the offer.
Example
Assume a company makes a right issue of 10,000 shares when its existing issued and
subscribed capital is 100,000 shares. This enables any shareholder having 10 shares to
subscribe to 1 new share. Hence X, an existing shareholder holding 1,000 shares, may
subscribe to 100 shares as a matter of right. The existing share percentage of X was 1%
(1,000/100,000). If X subscribes these shares, his percentage holding in the company
will be maintained (1,00/110,00). However, if X does not mind his share % diluting
(1,000/110,000), he may renounce the right in favour of anyone else, say Y. Hence, these
100 shares will be issued to Y, at the insistence of X.X may charge & for this privilege,
which is technically termed as the value of right.
A company desirous of issuing new shares has to offer, as per Section 62(1) (a) of Companies
Act 2013, the shares to existing equity shareholders through a letter of offer subject to
the following conditions, namely:
 The offer shall be made by notice specifying the number of shares offered and limiting
a time not being less then fifteen days and not exceeding thirty days from the date
of the offer within which the offer, if not accepted, shall be deemed to have been
declined;
 Unless the articles of the company otherwise provide, the offer aforesaid shall be
deemed to include a right exercisable by the person concerned to renounce the shares
offered to him or any of them in favour of any other person; and the notice (referred
to in above bullet point) shall contain a statement of this right;
 After the expiry of the time specified in the notice aforesaid, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the
shares offered, the Board of Directors may dispose of them in such manner which is
not disadvantageous to the shareholders and the company
Exceptions to the rights of existing equity shareholders

Section 62 recognises four situations under which the further shares are to be issued by a
company, but they need not be offered to the existing shareholders.
The shares can be offered, without being offered to the existing shareholders, Provided
the company has passed a special resolution and shares are offered to
Situation 1
To employees under a scheme of employee’s stock option subject to certain specified
conditions
Situation 2
To any persons, either for cash or for a consideration other than cash, if the price of such
shares is determined by the valuation report of a registered valuer subject to certain
specified conditions.
Situation 3
Sometimes companies borrow money through debentures/ loans and give their creditor an
option to buy equity shares of a company. An option is a right, but not an obligation, to buy
equity shares on a future date (expiry date) at a price agreed in advance (exercise price).
According to Section 62(3), nothing in this section shall apply to the increase of the
subscribed capital of a company caused by the exercise of an option as a term attached to
the debentures issued or loan raised by the company to covert such debentures or loans
into shares in the company.
Provided that the terms of issue of such debentures or loan containing such an option
have been approved before the issue of such debentures or the raising of loan by a special
resolution passed by the company in general meeting.
Situation 4
It is a special situation where the loan has been obtained from the government, and
government in public interest, directs the debentures/ loan to be converted into equity
shares.
72 ACCOUNTING
According to Section 62(4), notwithstanding anything contained in sub-section (3), where

any debentures have been issued, or loan has been obtained from any Government by a
company, and if that Government considers it necessary in the public interest so to do, it
may, by order, direct that such debentures or loans or any part thereof shall be converted
into shares in the company on such terms and conditions as appear to the Government to be
reasonable in the circumstances of the case even if terms of the issue of such debentures
or the raising of such loans do not include a term for providing for an option for such
conversion.
Provided that where the terms and conditions of such conversion are not acceptable to the
company, it may, within sixty days from the date of communication of such order, appeal to
the Tribunal which shall after hearing the company and the Government pass such order as
it deems fit.
In determining the terms and conditions of conversion under sub-section (4), the Government
shall have due regard to the financial position of the company, the terms of issue of
debentures or loans, as the case may be, the rate of interest payable on such debentures
or loans and such other matters as it may consider necessary.
Where the Government has, by an order made under sub-section (4), directed that any
debenture or loan or any part thereof shall be converted into shares in a company and where
no appeal has been preferred to the Tribunal or where such appeal has been dismissed, the
memorandum of such company shall, where such order has the effect of increasing the
authorized share capital of the company, stand altered and the authorized share capital of
such company shall stand increased by an amount equal to the amount of the value of shares
which such debentures or loans or part thereof has been converted into.
Financial effects of a further issue

The financial position of a business is contained in the balance sheet. Further issue of
shares increase the amount of equity (net worth2) as well as the liquid resources (Bank).
The amount of equity is the product of further number of shares issued multiplied by issue
price. The issue price may be higher than the face value (issue at a premium). Companies
Act does not allow issue of shares at a discount, except issue of sweat equity shares under
section 53.
Book Value of a share

Book value of share = Net worth (as per books)/ Number of shares
If there are 10,000 shares with book value 1,25,000. The book value of one share is (`
125,000/10,000 shares) ` 12.50 per share. However, the market value may differ from
the book value of shares. The market value of a company’s shares represents the present
value of future cash flows expected to be earned from the share in the form in the form of
dividends and capital gains from expected future shares price appreciation.
The market price, which exists before the rights issue, is termed as Cum-right Market
Price of the share. If the company decides to issue further shares, it may affect the
market value of the share. ‘Theoretically’, the value of a company’s shares after a rights
issue must equal the sum of market capitalization immediate prior to rights issue and the
cash inflows generated from the rights issue.
Normally, the further public issue to the existing shareholders are offered at a discounted
price from the market value, to evoke positive response as well as to reward the existing
shareholders.
Assume 1,000 shares are issued (making it a right issue of 1:10; or 1 share for 10 existing
shares held) at a price of ` 14 per share. The existing worth of tangible assets held by the
business shall become 264,000 (Existing net worth ` 250,000 + Fresh Issue ` 14,000).
Equity shares shall correspondingly command a valuation of ` 264,000.
The market price of the shares after further issue of shares (right issue) is termed as
Ex-right Market price of the shares. Theoretical Ex-Rights Price is a deemed value, which
is attributed to a company’s share immediately after a rights issue transaction occurs. This
price is going to prevail after the further issue of shares is executed.
EXAMPLE:
Mr. Narain has 100 shares of Prosperous Company before rights issue.
Current worth of holding = No. of shares × Cum-right Market price
= 100 × 25
= ` 2,500
(a) If Narain exercises his rights, he will pay ` 14X10 shares = ` 140.
His total investment in the company including rights is ` 2,640 (` 2,500+` 140).
On a per share basis, it is ` 2,640/110 shares = ` 24, which is the Ex-right Market
value of the share.
(b) If Narain does not exercises his right to further issue, his holding’s worth will decline
to ` 24X100 shares = ` 2400. The law allows him to compensate for this dilution of
shareholding by renouncing this right in favour of, say, Mr. Murthy.
Narain can charge Murthy, in well-functioning capital markets, this dilution of ` 100 by
renouncing his right to acquire 10 shares. Hence Murthy will be charged `10 per share
(`100/10 shares), in return for a confirmed allotment of 10 shares at ` 14 each.
For every share to be offered to Murthy, Narain must have ten share at the back.
Hence his holding of 10 shares fetches him right money of ` 10 or ` 1 per share held.
This is exactly equal to the difference between Cum-right and Ex-right value of the share.
It is termed as the Value of Right.
74 ACCOUNTING
In a well-functioning capital market, this mechanism works in a fair manner to all the
participants.
 Murthy’s total investment will be ` 140 (payable to Company) + ` 100 (payable to Narain,
by way of value of right), or ` 240. He will end up holding ten shares at an average cost
of ` 24, which is the Ex-right Market Price of the share.
 Narain will have a final holding of ten shares worth ` 2400+ ` 100 by way of value of
right received from Murthy. It matches with his cum-right holding valuation.
Right of Renunciation
Right of renunciation refers to the right of the shareholder to surrender his right to buy
the securities and transfer such right to any other person. Shareholders that have received
right shares have three choices of what to do with rights issue; they can sell them in the
market; or they can pass on taking advantage of their rights (i.e., reject the right offer).
The renunciation of the right is valuable and can be monetised by the existing shareholders in
well-functioning capital market. The monetized value available to the existing shareholders
due to right issue is known as ‘value of right’. If a shareholder decides to renounce all or
any of the right shares in favour of his nominee, the value of right is restricted to the sale
price of the re-nouncement of a right in favour of the nominee. IN case the right issue
offer is availed by an existing shareholder, the value of right is determined as given below:
Value of right = Cum-right value of share – Ex-right value of share
Ex-right value of the share = [Cum-right value of the existing shares + (Rights shares ×
issue Price)]/ (Existing Number of shares + Number of right shares)
In our previous example, Ex-right value of share = [ ` 250,000 + (14 × 1,000 shares)]/
10,000 + 1,000 shares = ` 24
Value of right = ` 25 - ` 24 = ` 1 per share.
The Ex-right value of the share is also known as the average price.
QUESTION NO. 7
A company offers new shares of ` 100 each at 25% premium to existing shareholders on
one for four bases. The cum-right market price of a share is ` 150. Calculate the value of a
right. What should be the ex-right market price of a share?
SOLUTION:
Ex-right value of the share = (Cum-right value of the existing shares + Rights shares Issue
Price)/ (Existing Number of shares + Right Number of shares)
= (` 150 × 4 share + ` 125 × 1 Share)/ (4+1) Shares

= ` 725/ 5 shares
= ` 145 per share.
Value of right = Cum-right value of the share –Ex-right value of the share
= ` 150 - ` 145 = ` 5 per share.
Hence, any one desirous of having a confirmed allotment of one share from the company at
` 125 will have to pay ` 20 (4 shares × ` ) to an existing shareholder holding 4 shares and
willing to renounce his right of buying one share in favour of that person.
ACCOUNTING FOR RIGHT ISSUE

The accounting treatment of rights share is the same as that of issue of ordinary shares
and the following journal entry will be made:
Bank A/c Dr.
To Equity shares capital A/c
In case rights shares are being offered at a premium, the premium amount is credited to
the securities premium account.
The accounting entry is usual and is
Bank A/c Dr.
To Equity share capital A/c
To Securities Premium A/c
EXAMPLE:
A company having 100,000 shares of ` 10 each as its issued share capital, and having a
market value of ` 46, issues rights shares in the ratio of 1:10 at an issue price of ` 31.
The entry at the time of subscription of right shares by the existing shareholders will be
Bank A/c Dr.
To Equity Share Capital A/c 3,10,000 100,000
To Securities Premium A/c 210,000

76 ACCOUNTING
ADVANTAGES AND DISADVANTAGES OF RIGHT ISSUE
Advantages of right Issue
1. Right issue enables the existing shareholders to maintain their proportional holding in
the company and retain their financial and governance rights. It works as a deterrent
to the management, which may like to issue shares to known persons with a view to
have a better control over the company’s affairs.
2. In well-functioning capital markets, the right issue necessarily leads to dilution in the
value of share. However, the existing shareholders are not affected by it because
getting new shares at a discounted value from their cum-right value will compensate
decrease in the value of shares. The cum-right value is maintained otherwise also, if
the existing shareholders renounce their right in favour of a third party.
3. Right issue is a natural hedge against the issue expenses normally incurred by the
company in relation to public issue.
4. Right issue has an image enhancement effect, as public and shareholders view it
positively.
5. The chance of success of a right issue is better than that of a general public issue and
is logistically much easier to handle.
Disadvantages of right issue
1. The right issue invariably leads to dilution in the market value of the share of the
company.
2. The attractive price of the right issue should be objectively assessed against its true
worth to ensure that you get a bargained deal.
QUESTION 8
A company has decided to increase its existing share capital by making rights issue to its
existing shareholders. The company is offering one new share for every two shares held by
the shareholder. The market value of the share is ` 240 and the company is offering one
share of ` 120 each. Calculate the value of a right. What should be the ex-right market
price of a share?
EXTRA QUESTIONS ON BONUS SHARES
QUESTION NO 9
The following was the Balance sheet of Abhishek Cosmetics Limited as on 31st December,
1997.
Liabilities Rs. Assets Rs.

40,000 equity shares of Rs.10 each 4,00,000 Sundry Assets 8,20,000
Securities premium 1,40,000
Sundry creditors 90,000
8,20,000 8,20,000
The Company issued one bonus share for every four fully paid up shares. Securities Premium
Account will be utilized first. Show journal Entries.
QUESTION NO 10
Moon and Lal Limited has Rs.11,20,000 in equity capital consisting of 80,000 shares of
Rs.10 each fully paid and 40,000 shares of Rs.10 each of which Rs.8 paid it has Rs.40,000
in capital Reserve , Rs.90,000 in share premium Account, Rs.1,40,000 in capital Redemption
reserve Account and Rs.3,00,000 in General Reserve.
By way of Bonus the party paid up shares are converted in fully paid up shares and the
holders of fully paid up shares are allotted fully paid up Bonus shares in the same ratio
Share premium Account includes a premium of Rs.50,000 for shares issued to vendors
other than cash..
Pass journal entries showing separately the two types of Bonus issues as mentioned above
with the minimum reduction in free reserves.
78 ACCOUNTING
QUESTION NO 11
The Balance Sheet of a Limited as at 31.3.1995 is follows;

Authorized Share capital; Sundry Assets 17,00,000
1,50,000 Equity shares of Rs.10 each
Issued, Subscribed and paid-up 15,00,000
80,000 Equity Shares of Rs.7.50
each called up and paid up 6,00,000
Reserves;
Capital Redemption Reserves 1,50,000
Plant Revaluation Reserve 20,000
Securities premium Account 1,50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
17,00,000 17,00,000
The Company wanted to issue bonus shares to its shareholders @ one share for every two
shares held. Necessary resolutions were passed; requisite legal requirements were complies
with.
You are required to Give affect to the proposal by passing journal Entries in the books of
A Limited:
QUESTION 12 (CA INTER NOV 2019)(5MARKS)
Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2018 :
`
Authorized capital:
3,00,000 equity shares of `10 each 30,00,000
25,000,10% preference shares of `10 each 2,50,000
32,50,000
Issued and subscribed capital:

2,70,000 equity shares of ` 10 each fully paid up 27,00,000
24,000, 10% preference shares of ` 10 each fully paid up 2,40,000
29,40,000
Capital redemption reserve 1,20,000
Profit and loss account 6,00,000
11,55,000
On 1st April, 2018, the company decided to capitalize its reserves by way of bonus at the
rate of two shares for every five shares held.
balance sheet after bonus issue.
SOLUTION:
Prem Ltd.
Journal Entries
Dr. Cr.
April 1 Capital Redemption Reserve A/c Dr. 1,20,000
Profit and Loss A/c (b.f.) Dr. 5,25,000
To Bonus to Equity Shareholders A/c 10,80,000
(Bonus issue @ two shares for every five shares

held by utilizing various reserves as per Board’s
Resolution dated...)
(Issue of bonus shares)
80 ACCOUNTING
Balance Sheet (Extract) as on 1st April, 2018 (after bonus issue)
Particulars Notes Amount (`)

Equity and Liabilities
1 Shareholders’ funds
a Share capital 1 40,20,000
b Reserves and Surplus 2 75,000
Notes to Accounts
1 Share Capital (`)

Authorized share capital:
3,78,000* Equity shares of ` 10 each 37,80,000*
Total 40,30,000
Issued, subscribed and fully paid share capital:
3,78,000 Equity shares of ` 10 each, fully paid (Out of
above, 1,08,000 equity shares @ ` 10 each were issued
by way of bonus) 37,80,000
Total 40,20,000
2 Reserves and Surplus
Less: Utilized 1,20,000 Nil
Less: Utilised for bonus issue (75,000) Nil
Less: Utilised for bonus issue (3,60,000) Nil
Profit & Loss Account 6,00,000
Less: Utilised for bonus issue (5,25,000) 75,000
Total 75,000
Note: *Authorized capital has been increased by the minimum required amount i.e.
` 7,80,000 (37,80,000 – 30,00,000) in the above solution.
QUESTION 13(CA INTER JAN 21) (5MARKS)
Following items appear in the Trail Balance of Star Ltd. as on 31st March, 2019:
Particulars `
80,000 Equity shares of `10 each, ` 8 paid-up 6,40,000
Capital Reserve (including `45,000 being profit on sale of Machinery) 1,10,000
Revaluation Reserve 80,000
Profit & Loss Account (Cr. Balance) 1,00,000
On 1st April,2019, the Company has made final call on Equity shares @` 2 per share. The
entire money was received in the month of April, 2019.
On 1st June, 2019, the Company decided to issue to Equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it was decided that there
should be minimum reduction in free reserves.
Pass necessary journal entries in the Books of Star Ltd.
SOLUTION:
Journal Entries in the books of Star Ltd.
2019 ` Dr. Cr.

`
April 1 Equity Share Final Call A/c Dr. 1,60,000
(Final call of ` 2 per share on 80,000
equity shares made due)
Bank A/c Dr. 1,60,000

(Final call money on 80,000 equity shares
received)
82 ACCOUNTING
June 1 Capital Redemption Reserve A/c Dr. 75,000

Capital Reserve Dr. 45,000*
General Reserve A/c (b.f.) Dr. 1,40,000**
To Bonus to Shareholders A/c 3,20,000
(Bonus issue of two shares for every
five shares held, by utilizing various
reserves as per Board’s resolution
dated…….)
(Capitalization of profit)
* considering it as free reserve as it has been realized.

** Alternatively, different combination of profit and loss balance and general reserve may
also be used.
QUESTION 14 (CA INTER JULY 21)(5 MARKS)
Following is the extract of the Balance Sheet of K Ltd (listed company) as at 31st March,
2020
Authorized capital: `
30,00,000
Issued and Subscribed capital:
Securities premium (not realised in cash) 75,000
On 1st April, 2020, the Company has made final call @ ` 2 each on 2,00,000 equity shares.
The call money was received by 25th April, 2020. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
Show necessary entries in the books of the company and prepare the extract of the Balance
Sheet immediately after bonus issue.
SOLUTION:
Journal Entries
Date Particulars ` `
1.04.2020 Equity Share Final Call A/c Dr. 4,00,000
(Being final call of ` 2/- per share on 2,00,000
equity shares due as per Board’s resolution
dated ………..)
25.04.2020 Bank A/c Dr. 4,00,000
(Final Call money on 2,00,000 equity shares
received)
Capital Redemption Reserve A/c D r . 1,20,000
Profit and Loss A/c Dr. 20,000
To Bonus to shareholders 5,00,000
(Being provision for bonus shares at one share
for every four shares held as per Board’s
resolution dated…………)*
Bonus to shareholders Dr. 5,00,000
(Being issue of bonus shares)
*Any other logical method for utilization of reserves may be followed as per the Companies
Act, 2013.
Extract of Balance Sheet
Authorized Capital `
3,00,000 Equity shares of ` 10/- each 30,00,000
Issued and Subscribed Capital
84 ACCOUNTING
2,50,000 Equity shares of ` 10/- each, fully paid 25,00,000

(out of the above 50,000 Equity shares ` 10/- each were issued
by way of bonus shares)
Reserves and Surplus
Securities premium (not realized in cash) 75,000
QUESTION 15
Pass Journal Entries in the following circumstances:
(i) A Limited company with subscribed capital of ` 5,00,000 consisting of 50,000 Equity
shares of ` 10 each; called up capital ` 7.50 per share. A bonus of ` 1,25,000
declared out of General Reserve to be applied in making the existing shares fully paid
up.
(ii) A Limited company having fully paid up capital of ` 50,00,000 consisting of Equity
shares of ` 10 each, had General Reserve of ` 9,00,000. It was resolved to capitalize
` 5,00,000 out of General Reserve by issuing 50,000 fully paid bonus shares of ` 10
each, each shareholder to get one such share for every ten shares held by him in the
company.
SOLUTION:
Journal Entries
` `
(i) General Reserve A/c Dr. 1,25,000
(For making provision of bonus issue)
Share Final Call A/c 1,25,000

(For final calls of ` 2.5 per share on 50,000
equity shares due as per Board’s Resolution
dated….)
(ii) Bonus to shareholders A/c Dr. 1,25,000

To Share Final Call A/c 1,25,000
(For bonus money applied for call)

(For making provision of bonus issue)
Bonus to shareholders A/c Dr. 5,00,000

(For issue of 50,000 bonus shares at ` 10)
86 ACCOUNTING
NOTES
REDEMPTION OF PREFERENCE SHARES 87
REDEMPTION OF PREFERENCE SHARES

(SECTION 55 OF COMPANIES ACT)
PURPOSE OF ISSUING REDEEMABLE PREFERENCE SHARES

A company may issue redeemable preference shares because of the following:
1. It is a proper way of raising finance in a dull primary market.

2. A company may face difficulty in raising share capital, as its shares are not traded
on the stock exchange. Potential investors, hesitant in putting money into shares that
cannot easily be sold, may be encouraged to invest if the shares are redeemable by the
company.
3. The preference shares may be redeemed when there is a surplus of capital and the
surplus funds cannot be utilised in the business for profitable use.
In India, The issue and redemption of preference shares is governed by Section 55 of the
Companies Act, 2013.
PROVISIONS OF THE COMPANIES ACT (SECTION 55)

A company limited by shares if so authorized by its Articles, may issue preference shares
which at the option of the company, are liable to be redeemed within a period, normally not
exceeding 20 years from the date of their issue. It should be noted that:
(a) no shares can be redeemed except out of profit of the company which would otherwise
be available for dividend or out of proceeds of fresh issue of shares made for the
purpose of redemption;
(b) no such shares can be redeemed unless they are fully paid;
(c) (i) in case of such class of companies, as may be prescribed and whose financial
statement comply with the accounting standards prescribed for such class of
companies under Section 133, the premium, if any, payable on redemption shall be
provided for out of the profits of the company, before the shares are redeemed:
Provided also that premium, if any, payable on redemption of any preference
shares issued on or before the commencement of this Act by any such company
shall be provided for out of the profits of the company or out of the company’s
securities premium account, before such shares are redeemed.
(ii) in case of other companies (not falling under (i) above), the premium, if any payable
on redemption shall be provided for out of the profits of the company or out of
the company’s securities premium account, before such shares are redeemed.
88 ACCOUNTING
(d) where any such shares are proposed to be redeemed out of the profits of the company,
there shall, out of profits which would otherwise have been available for dividends, be
transferred to a reserve account to be called Capital Redemption Reserve Account, a
sum equal to the nominal amount of the shares redeemed; and the provisions of the Act
relating to the reduction of the share capital of a company shall, except as provided in
the Section, apply as if the Capital Redemption Reserve (CRR) Account were the paid-
up share capital of the company. The utilisation of CRR Account is further restricted
to issuance of fully paid-up bonus shares only.
From the legal provision outlined above, it is apparent that on the redemption of redeemable
preference shares out of accumulated profits it will be necessary to transfer to the Capital
Redemption Reserve Account an amount equal to the amount repaid on the redemption
of preference shares on account of face value less proceeds of a fresh issue of capital
made for the purpose of redemption. The object is that with the repayment of redeemable
preference shares, the security for creditors/ bankers, etc. should not be reduced. At
times, a part of the preference share capital may be redeemed out of accumulated profits
and the balance out of a fresh issue.
METHODS OF REDEMPTION OF FULLY PAID-UP SHARES

Redemption of preference shares means repayment by the company of the obligation on
account of shares issued. According to the Companies Act, 2013, preference shares issued
by a company must be redeemed within the maximum period (normally 20 years) allowed
under the Act. Thus, a company cannot issue irredeemable preference shares. Section 55
of the Companies Act, 2013, deals with provisions relating to redemption of preference
shares. It ensures that there is no reduction in shareholders’ funds due to redemption
and, thus, the interest of outsiders is not affected. For this, it requires that either fresh
issue of shares is made or distributable profits are retained and transferred to ‘Capital
Redemption Reserve Account’.
The rationale behind these provisions is to protect the interest of outsiders to whom the
amount is payable before redemption of preference share capital. The interest of outsiders
is protected if the nominal value of capital redeemed is substituted, thus, ensuring the
same amount of shareholders fund. In case of redemption of preference shares out of
proceeds of a fresh issue of shares, replacement of capital and tangible assets is obvious.
But, if redemption is done out of distributable profits, replacement of capital is ensured
in an indirect manner by retention of profit by transfer to Capital Redemption Reserve.
In this case, the amount which would have gone to shareholders in the form of dividend
is retained in the business and is used for settling the claim of preference shareholders.
Thus, there is no additional claim on net assets of the Company. The transfer of divisible
profits to Capital Redemption Reserve makes them non-distributable profits. As Capital
Redemption Reserve can be used only for issue of fully paid bonus shares, profits retained
in the business ultimately get converted into share capital.
Security cover available to outside stakeholders depends upon called-up capital as well as
uncalled capital to be demanded by the company as per its requirements. To ensure that the
interests of outsiders are not reduced, Section 55 provides for redemption of only fully
paid-up shares.
From the above paras, it can be concluded that the ‘gap’ created in the company’s capital by
the redemption of redeemable preference shares much be filled in by:
(a) The proceeds of a fresh issue of shares;
(b) The capitalisation of undistributed profits; or
(c) A combination of (a) and (b).
Redemption of Preference Shares by Fresh Issue of Shares

One of the methods for redemption of preference shares is to use the proceeds of a fresh
issue of shares. A company can issue new shares (equity share or preference share) and the
proceeds from such new shares can be used for redemption of preference shares.
The proceeds from issue of debentures cannot be utilized for the purpose.
A problem arises when a fresh issue is made for the purpose of redemption of preference
shares, at a premium. The point to ponder is that whether the proceeds of a fresh issue
of shares will include the amount of securities premium for the purpose of redemption of
preference shares.
For securities premium account, Section 52 of the Companies Act, 2013 provides that the
securities premium account may be applied by the company;
(a) Towards issue of un-issued shares of the company to be issued to members of the
company as fully paid bonus securities
(b) To write off preliminary expenses of the company
(c) To write off the expenses of, or commission paid, or discount allowed on any of the
securities or debentures of the company
(d) To provide for premium on the redemption of redeemable preference shares or
debentures of the company.
(e) For the purchase of its own shares or other securities.
Note : If may be noted that certain class of Companies whose financial statements comply
with the Accounting Standards as prescribed under Section 133 of the Companies Act,
2013, can’t apply the securities premium account for the purposes (b) and (d) mentioned
above.
90 ACCOUNTING
Note : All the questions in this chapter have been solved on the basis that the companies
referred in the questions are governed by Section 133 of the Companies Act, 2013 and
comply with the Accounting Standards prescribed for them. Accordingly the balance in
securities premium account has not been utilized for the purpose of premium payable to
redemption of preference share.
Any other way, except the above prescribed ways, in which securities premium account is
utilised will be in contravention of law.
Thus, the proceeds of a fresh issue of shares will not include the amount of securities
premium for the purpose of redemption of preference shares.
Reasons for issue of New Equity Shares

A company may prefer issue of new equity shares for the following reasons:
(a) When the company has come to realise that the capital is needed permanently and it
makes more sense to issue Equity Shares in place of Redeemable Preference Shares
which carry a fixed rate of dividend.
(b) When the balance of profit, which would otherwise be available for dividend, is
insufficient.
(c) When the liquidity position of the company is not good enough.
Advantages of redemption of preference shares by issue of fresh equity shares

Following are the advantages of redemption of preference shares by the issue of fresh
equity shares:
(1) No cash outflow of money – now or later.

(2) New equity shares may be valued at a premium.
(3) Shareholders retain their equity interest.
Disadvantages of redemption of preference shares by issue of fresh equity shares

The disadvantages are:
(1) There will be dilution of future earnings;

(2) Share-holding in the company is changed.
Accounting Entries
1. When new shares are issued at par

Bank Account Dr.
To Share Capital Account
(Being the issue of .......shares of `......each for the purpose of redemption of preference
shares, as per Board’s Resolution No...... dated....... )
2. When new shares are issued at a premium
Bank Account Dr.
To Share Capital Account
To Securities Premium Account
(Being the issue of ........shares of `......each at a premium of `......each for the purpose
of redemption of preference shares as per Board’s Resolution No..... dated......)
3. When preference shares are redeemed at par
Redeemable Preference Share Capital Account Dr.
To Preference Shareholders Account
4. When preference shares are redeemed at a premium
Redeemable Preference Share Capital Account Dr.
Premium on Redemption of Preference Shares Account Dr.
To Preference Shareholders Account
5. When payment is made to preference shareholders
Preference Shareholders Account Dr.
To Bank Account
6. For adjustment of premium on redemption
Profit and Loss Account Dr.
To Premium on Redemption of Preference Shares Account
QUESTION NO. 1
Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of `100 each, fully
paid up. The company decided to redeem these preference shares at par by the issue of
sufficient number of equity shares of `10 each fully paid up at par. You are required to pass
necessary Journal Entries including cash transactions in the books of the company.
7.8
92 ACCOUNTING
QUESTION NO. 2
C Ltd. had 10,000, 10% Redeemable Preference Shares of `100 each, fully paid up. The
company decided to redeem these preference shares at par, by issue of sufficient number
of equity shares of `10 each at a premium of `2 per share as fully paid up. You are required
to pass necessary Journal Entries including cash transactions in the books of the company.
QUESTION NO. 3
G India Ltd. had 9,000 10% redeemable Preference Shares of `10 each, fully paid up. The
company decided to redeem these preference shares at par by the issue of sufficient
number of equity shares of `9 each fully paid up.
You are required to pass necessary Journal Entries including cash transactions in the books
of the company.
Calculation of Minimum Fresh Issue of Shares

Sometimes, examination problem does not specify the number of shares to be issued for
the purpose of redemption of preference shares and requires that the minimum number
of shares should be issued to ensure that provisions of Section 55 of the Companies Act,
2013, are not violated. This is done in four steps as given below:
(1) In such cases, the maximum amount of reserves and surplus available for redemption
is ascertained taking into account the balances appearing in the balance sheet before
redemption and the additional information provided in the problem. For example, if
balance of general reserve in the balance sheet is ` 1,00,000 and additional information
provides that the Board of Directors have decided that the balance of general reserve
should not be less than ` 40,000 under any circumstances, then, the maximum amount
of general reserve available for redemption is ` 60,000.
(2) After ascertaining the maximum amount of reserves and surplus available for
redemption, adjustment for premium on redemption payable out of profits is made and
then it is compared with the nominal value of shares to be redeemed. By comparison,
one gets the minimum proceeds of fresh issue as Section 55 permits redemption either
out of proceeds of fresh issue or out of divisible profits. Thus,
Minimum Proceeds of Fresh Issue of shares :
Nominal value of preference shares to be redeemed – Maximum amount of reserve and
surplus available for redemption.
(3) After computation of minimum proceeds, the minimum number of shares to be issued
are determined by dividing minimum proceeds by the proceeds of one share. This is
done as follows:
Minimum Number of Shares = Minimum proceeds to comply with Section 55/ face
value of one share
Proceeds of one share mean the par value of a share issued, if it is issued at par or
premium. However, in case of issue of share at a discount, it refers to the discounted
value.
(4) Minimum number of shares calculated as per (3) above, needs to be adjusted due to
various reasons. Firstly, shares fractions cannot be issued. Thus, if minimum number
of shares as per (3) above includes a fraction, it must be approximated to the next
higher figure to ensure that provisions of Section 55 are not violated. Secondly, if the
examination problem states that the proceeds/number of shares should be a multiple
of say, 10 or 50 or 100, then again the next higher multiple should be considered.
QUESTION NO. 4
The Board of Directors of a Company decide to issue minimum number of equity shares
of `9 to redeem `5,00,000 preference shares. The maximum amount of divisible profits
available for redemption is `3,00,000. Calculate the number of shares to be issued by
the company to ensure that provisions of Section 55 are not violated. Also determine the
number of shares if the company decides to issue shares in multiples of `50 only.
Fresh Issue at a Premium and Minimum Fresh Issue

The calculation of minimum number of shares, when fresh issue is at a premium should
be handled very carefully Minimum fresh issue cannot be calculated unless one knows the
profits available for replacement of preference shares and profit available for replacement
cannot be determined unless one knows the portion of profit available for redemption which
is required for paying premium on redemption. To tackle this, assume that profits available
for redemption is not required for paying premium on redemption of preference shares.
In other words, it means that securities premium including premium on fresh issue is
comparatively more than premium on redemption.
If the above assumption holds good, minimum number of shares can be calculated in a simple
manner without use of equation. But, if above condition does not hold good, then an equation
is used to determine the minimum number of shares.
Minimum Fresh Issue to Provide Funds for Redemption

Besides, ensuring compliance with Section 55, the fresh issue of shares is made to provide
funds for making payment to preference shareholders. To calculate minimum number of
fresh shares to be issued to provide funds, amount payable to preference shareholders
is compared with funds available for redemption and the balance of funds to be raised by
94 ACCOUNTING
fresh issue of shares are calculated. The amount to be raised is divided by the issue price
of a share (amount payable by shareholder including premium, if any, on fresh issue) to
compute the minimum number of shares to be issued.
QUESTION NO. 5
The Balance Sheet of X Ltd. as on 31st March, 20X3 is as follows:
Particulars `
EQUITY AND LIABILITIES
1. Shareholders’ funds
a. Share capital 2,90,000
b. Reserve and Surplus 48,000
2. Current liabilities
Trade Payables 56,500
Total 3,94,500
ASSETS
1. Fixed Assets
Tangible asset 3,45,000
Non-current investments 18,500
2. Current Assets
Cash and cash equivalents (bank) 31,000
Total 3,94,500
The share capital of the company consists of `50 each equity shares of `2,25,000 and `100
each Preference shares of `65,000(issued on 1.4.20X1). Reserves and Surplus comprises
Profit and Loss Account only.
In order to facilitate the redemption of preference shares at a premium of 10%, the
Company decided:
(a) To sell all the investments for `15,000.

(b) To finance part of redemption from company funds, subject to, leaving a bank balance
of `12,000.
(c) To issue minimum equity share of `50 each at a premium of `10 per share to raise the
balance of funds required.
You are required to pass:

The necessary Journal Entries to record the above transactions and prepare the balance
sheet as on completion of the above transactions.
Redemption of Preference Shares by Capitalisation of Undistributed Profits

Another method for redemption of preference shares, as per the Companies Act, is to
use the distributable profits in place of issuing new shares. When shares are redeemed
by utilising distributable profit, an amount equal to the face value of shares redeemed is
transferred to Capital Redemption Reserve Account by debiting the distributable profit. In
other words, some of the distributable profits are kept aside to ensure that it can never be
distributed to shareholders as dividend.
In this connection, the provisions of the Companies Act state that ‘When any such shares
are redeemed otherwise than out of the proceeds of a fresh issue, there shall out of
profits which would otherwise have been available for dividend, be transferred to a reserve
fund to be called the Capital Redemption Reserve Account sum equal to the nominal amount
of the shares redeemed’.
Advantages of redemption of preference shares by

capitalisation of undistributed profits
The advantages of redemption of preference shares by capitalisation of undistributed
profits are:
(1) No change in the percentage of equity share-holding of the company;

(2) Surplus funds can be used.
Disadvantages of redemption of preference shares by

capitalisation of undistributed profits
The disadvantage of redemption of preference shares by capitalisation of undistributed
profits is that there may be a reduction in liquidity.
Accounting Entries
1. When shares are redeemed at par

Redeemable preference share capital account Dr.
To preference shareholders account
(Being the amount payable on redemption of preference shares transferred
to preference shareholders account)
96 ACCOUNTING
2. When shares are redeemed at a premium

Redeemable preference share capital account Dr.
Premium on redemptions of preference shares account Dr.
To preference shareholders account
(Being the amount payable on redemption transferred to preference
shareholders account)
3. When payment is made to preference shareholders
Preference shareholder account Dr.
To Bank account
(Being the payment to preference shareholders as per terms)
4. For adjustment of premium redemption
Profit and loss account Dr.
To premium on redemption of preference shares account
(Being the premium on redemption adjusted against profit and loss Account)
5. For transferring nominal amount of shares redeemed to capital redemption
Reserve Account
General Reserve Account Dr.
Profit and Loss Account Dr.
To Capital redemption Reserve Account
(Being the amount transferred to Capital redemption reserve account as
per the requirement of the of the Act.)
QUESTION NO. 6
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December,
20X1.
Share capital: 40,000 Equity shares of `10 each fully paid – `4,00,000; 1,000 10% Redeemable
preference shares of `100 each fully paid – `1,00,000.
Reserve & Surplus: Capital reserve – `50,000; Securities premium – `50,000; General
reserve –`75,000; Profit and Loss Account – `35,000
On 1st January 20X2, the Board of Directors decided to redeem the preference shares at
par by utilisation of reserve.
You are required to pass necessary Journal Entries including cash transactions in the books
of the company.
Redemption of Preference Shares by Combination of Fresh Issue and Capitalisation of

Undistributed Profits
A company can redeem the preference shares partly from the proceeds from new issue and
partly out of profits. In order to fill in the ‘gap’ between the face value of shares redeemed
and the proceeds of new issue, a transfer should be made from distributable profits (Profit
& Loss Account, General Reserve and other Free Reserves) to Capital Redemption Reserve
Account.
Formula:
(i) Amount to be transferred to Capital Redemption Reserve `

Face Value of shares redeemed ***
Less: Proceeds from New Issue ***
***
(ii) Proceeds to be collected from New Issue `
Face Value of shares redeemed ***
Less: Profits available for distribution as dividend ***
***
QUESTION NO. 7
C Limited had 3,000, 12% Redeemable Preference Shares of `100 each, fully paid up. The
company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 25,000 Equity Shares of `10 each at par,

(ii) 1,000 14% Debentures of `100 each.
The issue was fully subscribed and all amounts were received in full .The payment was
duly made. The company had sufficient profits. Show Journal Entries in the books of the
company.
QUESTION NO. 8
The capital structure of a company consists of 20,000 Equity Shares of ` 10 each fully
paid up and 1,000 8% Redeemable Preference Shares of `100 each fully paid up (issued on
1.4.20X1).
Undistributed reserve and surplus stood as: General Reserve `80,000; Profit and Loss
Account `20,000; Investment Allowance Reserve out of which `5,000, (not free for
98 ACCOUNTING
distribution as dividend) `10,000; Securities Premium `2,000, Cash at bank amounted to

`98,000. Preference shares are to be redeemed at a Premium of 10% and for the purpose
of redemption, the directors are empowered to make fresh issue of Equity Shares at par
after utilising the undistributed reserve and surplus, subject to the conditions that a sum
of `20,000 shall be retained in general reserve and which should not be utilised..20
Pass Journal Entries to give effect to the above arrangements and also show how the relevant
items will appear in the Balance Sheet of the company after the redemption carried out.
Sale of Investments to Provide Sufficient Funds for Redemption

Companies may have sufficient investments, which can be sold, in the market to arrange
funds for redemption of preference shares.
REDEMPTION OF PARTLY CALLED-UP PREFERENCE SHARES

One of the conditions of redemption is that only fully paid up preference shares can be
redeemed by a company. If the examination problem states that it is decided to redeem
preference shares which are partly called up, then it is assumed that final call on these
shares is demanded and received before proceeding with redemption of these shares. If
information about both fully paid and partly paid preference shares is provided, then, only
fully paid shares are redeemed.
QUESTION NO.9
The Balance Sheet of XYZ as at 31st December, 20X1 inter alia includes the following:
`
50,000, 8% preference shares of `100 each , `70 paid up 35,00,000
1,00,000 Equity shares of `100 each fully paid up 1,00,00,000
Securities Premium 5,0,000
Under the terms of their issue, the preference shares are redeemable on 31st March,
20X2 at 5% premium. In order to finance the redemption, the company makes a rights issue
of 50,000 equity shares of `100 each at `110 per share, `20 being payable on application,
`35 (including premium) on allotment and the balance on 1st January, 20X3. The issue was
fully subscribed and allotment made on 1st March, 20X2. The money due on allotment were
received by 31st March, 20X2. The preference shares were redeemed after fulfilling the
necessary conditions of Section 55 of the Companies Act, 2013.
You are asked to pass the necessary Journal Entries and show the relevant extracts
from the balance sheet as on 31st March, 20X2 with the corresponding figures as on 31st
December, 20X1.
Redemption on fully called but partly paid –up preference shares

The problem of unpaid calls on fully called up shares may be studied under following
categories.
When calls –in arrears in received by the company

If the amount of unpaid calls is received by the Company before redemption, the entry
passed is as under:
Bank A/c Dr.
To Calls-in-Arrears A/c
After receipt of calls in arrears, the shares become fully paid up and, then, company can
proceed with redemption in the normal course.
In case of Forfeited Shares

If, on getting a proper notice from the company, the shareholders fail to pay the unpaid calls,
the Board of Directors may decide to forfeit the shares and cancel these shares instead
of reissuing the forfeited shares because redemption of these shares is due immediately
or in near future. In this case, entry for forfeiture is passed as usual.
QUESTION 10
The books of B Ltd. showed following balance on 31st December, 20X3: 30,000 Equity Shares
of ` 10 each fully paid; 18,000 12% Redeemable Preference Shares of ` 10 each fully paid;
4,000 10% Redeemable Preference Shares of ` 10 each, ` 8 paid up (all shares issued on 1st
April, 20X2).
Undistributed Reserve and Surplus stood as: Profit and Loss Account ` 80,000; General
Reserve ` 1,20,000; Securities Premium Account ` 15,000 and Capital Reserve ` 21,000.
Preference shares are redeemed on 1st January, 20X1 at a premium of ` 2 per share. The
whereabouts of the holders of 100 shares of ` 10 each fully paid are not known.
For redemption, 3,000 equity shares of ` 10 each are issued at 10% premium. At the same
time, a bonus issue of equity share was made at par, two shares being issued for every five
held on that date out of the Capital Redemption Reserve Account.
Show the necessary Journal Entries to record the transactions.
100 ACCOUNTING
QUESTION 11
The following is the summarized Balance Sheet of Bumbum Limited at 31st March, 20X1:
`
Sources of funds
Authorized capital
10,000 Preference shares of ` 100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up
5,000, 8% Redeemable Preference shares of ` 100 each 5,00,000
Reserves @ Surplus
Profit & Loss A/c 40,000
2,500, 9% Debentures of ` 100 each 2,50,000
Trade payables 1,70,000
25,10,000
Application of funds
Fixed Assets (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20th June, 20X1 the company passed the following
resolutions:
(i) To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1st July.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To redeem 9% Debentures by making offer to debentures holders to convert their
holdings into equity shares at ` 10 per share accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares
held on record date. On 10th July, 20x1 investments were sold for ` 5,55,000 and
preference shares were redeemed.
40% of Debenture holders exercised their option to accept cash and their claims were
settled on 1st August, 20X1.
The company fixed 5th September, 20X1 as record date and bonus issue was concluded
by 12th September, 20X1
You are requested to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30th September, 20X1. All working notes should form part of
your answer.
QUESTION 12
The following is the summarized Balance Sheet Trinity Ltd. as at 31.3.20X1:
Liabilities ` Assets `
Share Capital Fixed Assets
Authorised Gross Block 3,00,000
10,000 10% Redeemable Preference Less: Depreciation 1,00,000
Shares of ` 10 each 1,00,000 2,00,000
90,000 Equity Shares of ` 10 each 9,00,000 Investments 1,00,000
10,00,000 Current Assets and
Loans and Advances
Issued, Subscribed and Paid-up 1,00,000 Inventory 45,000
Capital 10,000 10% Redeemable
Preference Shares of ` 10 each
10,000 Equity Shares of ` 10 each 1,00,000 Trade receivable 25,000
Cash and Bank Balances 50,000
(A) 2,00,000
Reserves and Surplus
Profit and Loss A/c 18,500
(B) 2,08,500
102 ACCOUNTING
Current Liabilities and Provisions 11,500

(C)
Total (A+B+C) 4,20,000 Total 4,20,000
For the year ended 31.3.20X2, the company made a net profit of ` 35,000 after providing
` 20,000 depreciation.
The following additional information is available with regard to company’s operation:
1. The preference dividend for the year ended 31.3.20X2 was paid.
2. Except cash and bank balances other current assets and current liabilities as on
31.3.20X2, was the same as on 31.3.20X1.
3. The company redeemed the preference shares at a premium of 10%.
4. The company issued bonus shares in the ratio of one share for every equity share held
as on 31.3.20X2.
5. To meet the cash requirements of redemption, the company sold investments.
6. Investments were sold at 90% of cost on 31.3.20X2.
You are required to prepare necessary journal entries to record redemption and issue of
bonus shares.
EXTRA QUESTIONS FOR PRACTICE
QUESTION 13(CA INTER NOV 2020)(10MARKS)
The Books of Arpit Ltd. shows the following Balances as on 31st December, 2019:
Amount (`)
6,00,000 Equity shares of ` 10 each fully paid up 60,00,000
30,000, 10% Preference shares of ` 100 each, ` 80 paid up 24,00,000
Under the terms of issue, the Preference Shares are redeemable on 31st March, 2020 at
a premium of 10%. In order to finance the redemption, the Board of Directors decided to
make a fresh issue of 1,50,000 Equity shares of `10 each at a premium of 20%, ` 2 being
payable on application, ` 7 (including premium) on allotment and the balance on 1st January,
2021. The issue was fully subscribed and allotment made on 1st March, 2020. The money
due on allotment was received by 20th March, 2020.
The preference shares were redeemed after fulfilling the necessary conditions of Section
55 of the Companies Act, 2013.
You are required to pass the necessary Journal Entries and also show how the relevant
items will appear in the Balance Sheet of the company after the redemption carried out on
31st March, 2020.
SOLUTION:
(a) Journal Entries
` `
1 10% Preference Share Final Call A/c Dr. 6,00,000
To 10% Preference Share Capital A/c 6,00,000
(For final call made on preference shares @ `
20 each to make them fully paid up)
2 Bank A/c Dr. 6,00,000
To 10% Preference Share Final Call A/c 6,00,000
(For receipt of final call money on preference
shares)
104 ACCOUNTING
3 Bank A/c Dr. 3,00,000

To Equity Share Application A/c 3,00,000
(For receipt of application money on 1,50,000
equity shares @ ` 2 per share)
4 Equity Share Application A/c Dr. 3,00,000

(For capitalization of application money received)
5 Equity Share Allotment A/c Dr. 10,50,000

To Securities Premium A/c 3,00,000
(For allotment money due on 1,50,000 equity
Shares @ ` 7 per share including a premium of
` 2 per share)
6 Bank A/c Dr. 10,50,000

To Equity Share Allotment A/c 10,50,000
(For receipt of allotment money on equity shares)
7 10% Preference Share Capital A/c Dr. 30,00,000

Premium on Redemption of Preference Shares A/c Dr. 3,00,000
To Preference Shareholders A/c 33,00,000
(For amount payable to preference shareholders
on redemption at 10 % premium)
8 General Reserve A/c Dr. 3,00,000

To Premium on Redemption A/c 3,00,000
(Writing off premium on redemption of
preference shares)
9 General Reserve A/c Dr. 19,50,000

To Capital Redemption Reserve A/c 19,50,000
(For transfer of CRR the amount not covered by
the proceeds of fresh issue of equity shares i.e.,
30,00,000 - 3,00,000 - 7,50,000)
10 Preference Shareholders A/c Dr. 33,00,000

To Bank A/c. 33,00,000
(For amount paid to preference shareholders)
Balance Sheet (extracts)
Particulars Notes As at As at
No. 31.3.2020 31.12.2019
` `
1. EQUITY AND LIABILITIES
Shareholders’ funds
a) Share capital 1 70,50,000 84,00,000
b) Reserves and Surplus 2 59,00,000 59,00,000
Notes to Accounts:
As at As at
31.3.2020 31.12.2019
1. Share Capital
Issued, Subscribed and Paid up:
6,00,000 Equity shares of ` 10 each fully paid up 60,00,000 60,00,000
1,50,000 Equity shares of `10 each ` 7 paid up 10,50,000 -
30,000, 10% Preference shares of ` 100 each, `80 - 24,00,000
paid up
70,50,000 84,00,000
106 ACCOUNTING
2. Reserves and Surplus

Capital Redemption Reserve 37,50,000 18,00,000
Securities Premium 9,00,000 6,00,000
General Reserve 12,50,000 35,00,000
59,00,000 59,00,000
Note:
1. Securities premium has not been utilized for the purpose of premium payable on
redemption of preference shares assuming that the company referred in the question
is governed by Section 133 of the Companies Act, 2013 and comply with the Accounting
Standards prescribed for them.
2. Amount received (excluding premium) on fresh issue of shares till the date of
redemption should be considered for calculation of proceeds of fresh issue of shares.
Thus, proceeds of fresh issue of shares are ` 10,50,000 (`3,00,000 application money
plus ` 7,50,000 received on allotment towards share capital) and balance ` 19,50,000
to taken from general reserve account.
QUESTION 14 (CA INTER JAN 21) (12MARKS)
The Capital structure of a company BK Ltd., consists of 30,000 Equity Shares of ` 10 each
fully paid up and 2,000 9% Redeemable Preference Shares of ` 100 each fully paid up as on
31.03.2020. the other particulars as at 31.03.2020 are as follows:
Amount (`)
Profit &Loss Account 60,000
Investment Allowance Reserve (not free for distribution as dividend) 15,000
Cash at bank 1,95,000
Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption,
the directors are empowered to make fresh issue of Equity Shares at per after utilizing
the undistributed reserve &surplus, subject to the conditions that a sum of ` 40,000 shall
be retained in General Reserve and which should not be utilized.
Company also sold investment of 4500 Equity Shares in G Ltd., costing `45,000 at ` 9 per
share.
Pass Journal entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet as at 31.03.2020 of BK Ltd., afte r the
redemption is carried out.
SOLUTION
Journal Entries
Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 84,500
To Equity Share Capital A/c
(Being the issue of 8,450 Equity Shares of ` 10 each 84,500
as per Board’s Resolution No…..dated…….)
9% Redeemable Preference Share Capital A/c
Premium on Redemption of Preference Shares A/c Dr. 2,00,000
To Preference Shareholders A/c Dr. 20,000
(Being the amount paid on redemption transferred 2,20,000
to Preference Shareholders Account)
Bank A/c Dr. 40,500
Profit and Loss A/c (loss on sale) A/c Dr. 4,500
To Investment A/c 45,000
(Being investment sold at loss of ` 4,500)
Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 20,000
To Premium on Redemption of Preference 20,000
Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 80,000

To Capital Redemption Reserve A/c 1,15,500
(Being the amount transferred to Capital Redemption
Reserve Account)
108 ACCOUNTING
Balance Sheet as on ……… [Extracts]
Particulars Notes No. `

EQUITY AND LIABILITIES
1. Shareholders’ funds
Share capital 1 3,84,500
2. Reserves and Surplus ASSETS 2 1,70,500
Current Assets
Cash and cash equivalents 1,00,000
(1,95,000 + 84,500+ 40,500 – 2,20,000)
Notes to accounts
1. Share Capital
38,450 Equity shares (30,000 + 8,450) of `10 each fully paid up 3,84,500
2. Reserves and Surplus
Profit and loss account NIL
Investment Allowance Reserve 15,000
1,70,500
Working Note:
Number of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed `2,00,000
Less: Profit available for distribution as dividend:
General Reserve: ` (1,20,000-40,000) `80,000
Profit and Loss (60,000 less 20,000 set aside for
adjusting premium payable on redemption of Pref.
shares less 4,500 loss on sale of investments) `35,500
` (1,15,500)
` 84,500
Therefore, No. of shares to be issued = 84,500/`10 = 8,450 shares.
PROFIT OR LOSS PRE AND POST INCORPORATION 109
PROFIT OR LOSS PRE AND POST INCORPORATION
INTRODUCTION
When a running business is taken over by the promoters of a company, as at a date prior
to the date of incorporation of company, the amount of profit or loss of such a business
for the period prior to the date the company came into existence is referred to as pre-
incorporation profits or losses. Such profits or losses, though belonging to the company or
payable by it, are of capital nature; it is necessary to disclose them separately from trading
profits or losses.
The general practice in this regard is that:
i. If there is a loss, it is either written off by debit to the Profit and Loss Account or
to a special account described as “Loss Prior to Incorporation” and show as an “asset”
in the Balance Sheet, Alternatively, it may be debited to the Goodwill Account.
ii. On the other hand, if a profit has been earned by business prior to the same being
taken over and the same is not fully absorbed by any interest payable for the period,
it is credited to Capital Reserve Account or to the Goodwill Account, if any goodwill
has been adjusted as an asset. The profit will not be available for distribution as a
dividend among the members of the company.
COMPUTING PROFIT OR LOSS PRIOR TO INCORPORATION

The determination of such profit or loss would be a simple matter if it is possible to close
the books and take the stock held by the business before the company came into existence.
In such a case, the trial balance will be abstracted from the books and the profit or loss
computed. Thereafter, the books will be either closed off or the balance allowed continuing
undistributed; only the amount of profit or loss so determined being adjusted. The simplest,
though not always the most expedient method is to close off old books and open new books
with the assets and liabilities as they existed at the date of incorporation. In this way,
automatically the result to that date will be adjusted, the difference between the values
of assets and liabilities acquired and the purchase consideration being accounted for either
as goodwill or as reserve. The accounts, therefore, would relate exclusively to the post-
incorporation period and any adjustment for the pre-incorporation period, whether an
adjustment of profit or loss, would not be required.
Since the decision to take over a business usually takes time from the date when it is agreed
to be taken over it is normally not possible to follow any of the method aforementioned.
The only alternative left, in the circumstances, is to split up the profit of the year of the
110 ACCOUNTING
transfer of the business to the company between ‘pre’ and ‘post’ incorporation periods. This
is done either on the time basis or on the turnover basis or by a method which combines
the two.
BASIS OF APPORTIONMENT BASIS OF

APPORTIONMENT BETWEEN PRE AND POST
Item Basis of Apportionment between pre and

post incorporation period
Gross profit or gross loss Sales Ratio-On the basis of turnover in the
respective periods (first Preference)
Or
On the basis of cost of goods sold in the
respectively periods in the absence of any
information regarding turnover (second
preference)
Or
Time Ratio- On the basis of time in the
respective periods in the absence of any
information regarding turnover and cost of
goods sold (third preference)
Variable expenses linked with turnover [e.g. Sales Ratio
Carriage/ Cartage outward, Selling and
distribution expenses, Commission to selling
agents/traveling agents, advertisement
expenses, Bad debts, Brokerage, sales
Promotion]
Fixed common charges [e.g., Formation Charge to Post-incorporation period
expenses, interest on debentures directors
fees Directors remuneration, Preliminary
Expenses, share issue Expenses,
Underwriting Commission, Discount on issue
of securities.
Audit Fees
(i) For company’s Audit under the Charge to Post-incorporation Period

Companies Act.
(ii) For Tax Audit Under Section 44AB of On the basis of turnover in the respective
the income tax Act, 1961 periods
Interest on Purchase consideration to
Vendor
(i) For the period from the date of Charge to pre-incorporation period
acquisition of Business to date of
incorporation.
Charge to Post-incorporation period
(ii) From the date of incorporation
Calculation of time ratio and sales ratio.
EXAMPLE
Lion Ltd. was incorporated on 1.8.20X1 to take over the running business of M/s Happy with
assets from 1.4.20X1. The accounts of the company were closed on 31.3.20X2.
The average monthly sales during the first four months of the year (20X1-X2) was twice
the average monthly sales during each of the remaining eight months.
Calculate time ratio and sales ratio for pre and post incorporation periods.
SOLUTION
Time ratio:
Pre-incorporation period (1.4.20X1 to 1.8.20X1) = 4 months
Post incorporation period (1.8.20X1 to 31.3.20X2) = 8 months
Time ratio = 4 : 8 or 1 : 2
Sales ratio:
Average monthly sale before incorporation was twice the average sale per month of the
post incorporation period. If weightage for each post-incorporation month is x, then
Weighted sales ratio = 4 × 2x : 8 × 1x = 8x : 8x or 1 : 1
112 ACCOUNTING
PRE-INCORPORATION PROFITS & LOSSES
S.No Pre-incorporation Profits Pre –incorporation Losses

1. It is transferred to capital Reserve I\t is treated as a part of business
Account (i.e. Capitalised). acquisition cost (Goodwill).
2. It can be used for: It can be used for:
• Writing off Goodwill on acquisition • Setting off against Post

• Writing off Preliminary Expenses incorporation Profit
• Writing down over Valued assets • Addition to Goodwill on acquisition

• Writing off Capital Profit
QUESTION NO 1
The promoters of Glorious Ltd. took over on behalf of the company a running business with
effect from 1st April, 20X1. The company got incorporated on 1st August, 20X1. The annual
accounts were made up to 31st March, 20X2 which revealed that the sales for the whole
year totaled ` 1,600 lakhs out of which sales till 31st July, 20X1 were for ` 400 lakhs. Gross
profit ratio was 25%.
The expenses from 1st April 20X1, till 31st March, 20X2 were as follows:
(ìn Lakhs)
Salaries 69
Rent , Rates and insurance 24
Sundry Office Expenses 66
Travellers’ Commission 16
Discount Allowed 12
Bad Debts 4
Directors fee 25
Tax Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of profits for the pre-incorporation and post-
incorporation periods.
SOLUTION
Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods
Particulars Total Basis of Pre- Post-

Amount Allocation incorporation incorporation
(ìn Lakhs) (ìn Lakhs) (Ìn Lakhs)

Gross profit (25% of `1,600) 400 Sales 100 300
Less: Salaries 69 Time 23 46
Rent, rates and insurance 24 Time 8 16
Sundry office expenses 66 Time 22 44
Travellers’ commission 16 Sales 4 12
Discount allowed 12 Sales 3 9
Bad Debts 4 Sales 1 3
Directors’ fee 25 Post - 25
Tax audit fees 9 Sales 2.25 6.75
Depreciation on tangible assets 12 Time 4 8
Debenture interest 11 Post - 11
Net profit 152 32,75 119.25
Working Notes:
1. Sales ratio
(` in Lakhs)
Sales for the whole year 1,600
Sales up to 31st July, 20X1 400
Therefore, sales for the period from 1st August 20X1 to 31st 1,200
March, 20X2
Thus, sale ratio = 400:1200 = 1:3

2. Time ratio
1st April, 20X1 to 31st July, 20X1 : 1st August, 20X1 to 31st March, 20X2
= 4 months: 8 months = 1:2
Thus, time ratio is 1:2.
114 ACCOUNTING
QUESTION NO 2
ABC Ltd. took over a running business with effect from 1st April, 20X1. The company was
incorporated on 1st August, 20X1. The following summarised Profit and Loss Account has
been prepared for the year ended 31.3.20X2:
` `
To Salaries 48,000 By Gross Profit 3,20,000
To Stationery 4,800
To Traveling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade expenses 37,800
To Rent(office Building) 26,400
To Electricity charges 4,200
To Director’s fee 11,200
To Bad debts 3,200
To Commission to selling agents 16,000
To Tax adult fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
T o Depreciation on fixed assets 9,600
To Net profit 87,600
3,20,000 3,20,000
Additional information:
(a) Total sales for the year, which amounted to ` 19,20,000 arose evenly up to the date of
30.9.20X1. Thereafter they recorded an increase of two-third during the rest of the
year.
(b) Rent of office building was paid @ ` 2,000 per month up to September, 20X1 and
thereafter it was increased by ` 400 per month.
(c) Travelling expenses include `4,800 towards sales promotion.
(d) Depreciation include ` 600 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30th September, 20X1 by
issuing equity shares of `10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre
and post incorporation periods.
SOLUTION
Statement showing calculation of profits for pre and post incorporation

periods for the year ended 31.3.20X2
Particulars Pre-incorporation Post-incorporation

period period
` `
Gross profit (1:3) 80,000 2,40,000
Less: salaries (1:2) 16,000 32,000
Stationary (1:2) 1,600 3,200
Advertisement(1:3) 4,000 12,000
Travelling expenses (W.N.4) 4,000 8,000
Sales promotion expenses (W.N.4) 1,200 3,600
Misc. trade expenses (1:2) 12,600 25,200
Rent (office building)(W.N.3) 8,000 18,400
Electricity charges(1:2) 1,400 2,800
Directors fee(post incorporation) - 11,200
Bad debts (1:3) 800 2,400
Selling agents commission (1:3) 4,000 12,000
Audit fee (1:3) 1,500 4,500
Debenture interest (post-
incorporation) - 3,000
Interest paid to vendor(2:1) (W.N.5) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.5) 3,000 6,600
Capital reserve (Bal.Fig.) 12,800 74,800
Net Profit (Bal.Fig.) 6,300 18,900
116 ACCOUNTING
Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 20X1 to 31st July, 20X1
i.e. 4 months
Post incorporation period is 8 months
Time ratio is 1: 2.
2. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.20X1 to 30.09.20X1) be x Then,
sales for 6 months = 6x
2 5
Monthly sales for next 6 months (i.e. from 1.10.X1 to 31.3.20X2) = x + x = x
3 3
5
Then , sales for next 6 months = × 6x = 10x
3
Total sales for the year 6x + 10x = 16x
Monthly sales in the pre incorporation period = ` 19,20,000/16 = ` 1,20,000
Total sales for pre-incorporation period = ` 1,20,000 x 4 = ` 4,80,000
Total sales for post incorporation period = ` 19,20,000 – ` 4,80,000 = ` 14,40,000
Sales Ratio = 4,80,000 : 14,40,000 = 1 : 3 3. Rent
3. Rent
`
Rent for pre-incorporation period (`2,000 X4) 8,000(pre)
Rent for post incorporation period
August, 20X1 & September, 20X1 (`2,000X2) 4,000
October, 20X1 to March, 20X2 (`2,400x6) 14,400 18,400(post)
4. Travelling expenses and sales promotion expenses
Pre Post
` `
Traveling expenses ` 12,000 (i.e. `16,800 – `4,800) distributed
in Time ratio (1:2) 4,000 8,000
Sales promotion expenses ` 4,800 distributed in sales ratio (1:3) 1,200 3,600
5. Interest paid to vendor till 30th September, 20X1
Pre Post
` `
`4,200 2,800
Interest for pre-incorporation period ( × 4)
6
Interest for post incorporation period i.e. for
`4,200
August, 20X1 &September, 20X1 ( × 2) 1,400
6
6. Depreciation
P Pre Post
` `
Total depreciation 9,600
Less: Depreciation exclusively for
post incorporation period (600)
Remaining (for Pre and post incorporation period) 9,000 600
4
Depreciation for pre-incorporation period [9,000 × ]* 3000
12
8
Depreciation for post incorporation period [9,000 × ]*
12
*Time Ratio = 1 : 2 6,000
3000 6,600
QUESTION NO 3
ABC Ltd. was incorporated on 1.5.20X1 to take over the business of DEF and Co. from
1.1.20X1. The summarised Profit and Loss Account as given by ABC Ltd. for the year ending
31.12.20X1 is as under:
118 ACCOUNTING
Summarised Profit and Loss Account
` `
To rent and taxes 90,000 By Gross Profit 10,64,000
To salaries including manager’s By Interest on 36,000
salary of 85,000 3,31,000 Investment
To Carriage Outwards 14,000

To Printing and Stationery 18,000
To Interest on Debentures 25,000
To Sales Commission 30,800
To Bad Debts (related to Sales) 91,000
To Underwriting Commission 26,000
To Preliminary Expenses 28,000
To Audit Fees 45,000
To Loss on sale of investments 11,200
To Net profit 3,90,000
11,00,000 11,00,000
Prepare a Statement showing allocation of expenses and calculations of pre- incorporation

and post-incorporation profits after considering the following information:
(i) G.P. ratio was constant throughout the year.

(ii) Sales for January and October were 11⁄2 times the average monthly sales while sales
for December were twice the average monthly sales.
(iii) Bad Debts are shown after adjusting a recovery of ` 7,000 of Bad Debt for a sale
made in July, 20X0.
(iv) Manager’s salary was increased by ` 2,000 p.m. from 1.5.20X1.
(v) All investments were sold in April, 20X1.
(vi) The entire audit fees relates to the company.
SOLUTION
Pre-incorporation period is for four months, from 1st January, 20X1 to 30th April, 20X1. 8
months’ period (from 1st May, 20X1 to 31st December, 20X1) is post-incorporation period.
Statement showing calculation of profit/losses

for pre and post incorporation periods
Pre-Inc Post-Inc
` `
Gross Profit 3,42,000 7,22,000
Interest on investments 36,000 --
Bad debts Recovery 7,000 -
3,85,000 7,22,000
Less: Rent and Taxes 30,000 60,000
Salaries
Manager’s salary (85,000-refer note below) 23,000 62,000
Other salaries (3,31,000-85,000) 82,000 1,64,000
Printing and stationery 6,000 12,000
Audit Fees - 45,000
Carriage outwards 4,500 9,500
Sales commission 9,900 20,900
Bad Debts (91,000 + 7,000) 31,500 66,500
Interest on Debentures -- 25,000
Underwriting Commission -- 26,000
Preliminary expenses -- 28,000
Loss on sale of investments 11,200 --
Net Profit 1,86,900 2,03,100
Working Notes :
(i) Calculation of Sales ratio
Let average monthly sales be x.
Thus Sales from January to April are 4½ x (i.e., 1.5x + x + x + x) and sales from May
to December are 9½ x (x + x + x + x + x + 1.5x + x + 2x).
Sales are in the ratio of 9/2x : 19/2x or 9 : 19.
Calculation of Time Ratio
Pre-incorporation period = 1.1.20X1 to 30.4.20X1 = 4 months
Post-incorporation period = 1.5.20X1 to 31.12.20X1 = 8 months
Time ratio = 1:220
120 ACCOUNTING
(ii) Gross profit, carriage outwards, sales commission and bad debts written off (after
adjustment for bad debt recovery) have been allocated in pre and post incorporation
periods in the ratio of Sales i.e. 9 : 19.
(iii) Rent, salaries (subject to increase in manager’s salary), printing and stationery are
allocated on time basis.
(iv) Interest on debentures, underwriting commission and preliminary expenses are
allocated in post incorporation period.
(v) Interest on investments, loss on sale of investments and bad debt recovery are
allocated in pre-incorporation period.
Note :
Let Pre-incorporation period manager’s monthly salary be x
Total pre-incorporation period manager’s monthly salary = 4x Post-incorporation period
nager’s monthly salary = x + 2,000
Total pre-incorporation period manager’s monthly salary = 8 (x + 2,000)
Total manager’s salary (pre and post) = `85,000
Thus, 4x + 8(x + 2,000) = 85,000
x = 5,750
Total pre-incorporation period manager’s monthly salary = 4 x 5,750 = ` 23,000
Total pre-incorporation period manager’s monthly salary = 8(5,750 + 2,000) = ` 62,000
QUESTION 4
Sneha Ltd. was incorporated on 1st July, 20X1 to acquire a running business of Atul Sons
with effect from 1st April, 20X1. During the year 20X1-X2, the total sales were ` 24,00,000
of which ` 4,80,000 were for the first six months. The Gross profit of the company `
3,90,800. The expenses debited to the Profit & Loss Account included:
(i) Director’s fees ` 30,000

(ii) Bad debts ` 7,200
(iii) Advertising ` 24,000 (under a contract amounting to ` 2,000 per month)
(iv) Salaries and General Expenses ` 1,28,000
(v) Preliminary Expenses written off ` 10,000
(vi) Donation to a political party given by the company ` 10,000.]
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 20X2.
ANSWER
For the year ended 31st March, 20X2
Particulars Total Basis Pre-incor Post-incor

Amount Allocation Poration Poration
Gross profit 3,90,800 Sales 39,080 3,51,000
Less : Director’s fee 30,000 Post - 30,000
Bad debts 7,200 Sales 720 6,480
Advertising 24,000 Time 6,000 18,000
Salaries & General Expenses 1,28,000 Time 32,000 96,000
Preliminary expenses
Donation to political Party 10,000 Post 10,000
Net Profit 10,000 Post 10,000
(Pre-incorporation profit transfer 1,81,600 360 1,81,240
to Capital Reserve )
Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.20X1 (4,80,000 x 3/6) 2,40,000
Sales for period from 01.07.20X1 to 31.03.20X2 (24,00,000-2,40,000) 21,60,000
Thus, Sales Ratio = 1 : 9

2. Time ratio
1st April, 20X1 to 30 June, 20X1: 1st July, 20X1 to 31st March, 20X2
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3.26
122 ACCOUNTING
QUESTION 5
The partners Kamal and Vimal decided to convert their existing partnership business into
a Private Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-20X2.
The same books of accounts were continued by the company which closed its account for
first term on 31-3-20X3.
The summarised Profit and Loss Account for the year ended 31-3-20X3 is below:
(`)in Lakhs (`)in Lakhs

Turnover 240.00
Interest on investments 6.00
246.00
Less : cost of goods sold 102.00
Advertisement 3.00
Sales commission 6.00
Salary 18.00
Managing director’s remuneration 6.00
Interest on debentures 2.00
Rent 5.50
Bad Debts 1.00
Underwriting commission 2.00
Audit fees 2.00
Loss on sale of investment 1.00
Depreciation 4.00 152.50
93.50
The following additional information was provided:
(i) The average monthly sales doubled from 1-7-20X2. GP ratio was constant.
(ii) All investments were sold on 31-5-20X2.
(iii) Average monthly salary doubled from 1-10-20X2.
(iv) The company occupied additional space from 1-7-20X2 for which rent of `20,000 per
month was incurred.
(v) Bad debts recovered amounting to ` 50,000 for a sale made in 20X0, has been deducted
from bad debts mentioned above.
(vi) Audit fees pertains to the company.

Prepare a statement apportioning the expenses between pre and post incorporation periods
and calculate the Profit/Loss for such periods.
ANSWER
K V Trading Private Limited
Statement showing calculation of profit/loss for pre and post incorporation periods
` in lakhs
Ratio Total Pre- Post-

incorporation incorporation
Sales 1:6 240.00 34.29 205.71
Interest on investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.50 0.50 -
(i) 246.50 40.79 205.71
Cost of goods sold 1:6 102.00 14.57 87.43
Advertisement 1:6 3.00 0.43 2.57
Sales commission 1:6 6.00 0.86 5.14
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing directors
remuneration Pots 6.00 - 6.00
Interest on debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1+0.5) 1:6 1.50 0.21 1.29
Underwriting commission Post 2.00 - 2.00
Audit fees Post 2.00 - 2.00
Loss on sale of investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 153.00 22.00 131.00
Net profit [(i) – (ii)] 93.50 18.79 74.71
124 ACCOUNTING
Working Notes:
1. Calculation of Sales Ratio

Let the average sales per month be x
Total sales from 01.04.20X2 to 30.06.20X2 will be 3x
Average sales per month from 01.07.20X2 to 31.03.20X3 will be 2x
Total sales from 01.07.20X2 to 31.03.20X3 will be 2x X 9 =18x
Ratio of Sales will be 3 x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.20X2to 30.09.20X2 is x
Salary per month from 01.10.20X2 to 31.03.20X3 will be 2x
Hence, pre incorporation salary (01.04.20X2 to 30.06.20X2) = 3x
Post incorporation salary from 01.07.20X2 to 31.03.20X3 = (3x + 12x) i.e.15x
Ratio for division 3 x: 15x or 1: 5
4. Apportionment of Rent
` Lakhs
Total Rent 5.5
Less: additional rent from 1.7.20X2 to 31.3.20X3 1.8
Rent of old premises for 12 months 3.7
Apportionment in time ratio 0.925 2.775

Add: Rent for new space - 1.80
Total 0.925 4.575
QUESTION 6
SALE Limited was incorporated on 01.08.20X1 to take-over the business of a partnership

firm w.e.f. 01.04.20X1. The following is the extract of Profit and Loss Account for the year
ended 31.03.20X2:
Particulars Amount (`) Particulars Amount (`)

To salaries 1,20,000 By gross Profit 6,00,000
To Rent, Rates & taxes 80,000
To Commission on sales 21,000
To Depreciation 25,000
To Interest on Debentures 32,000
To Director Fees 12,000
To Advertisement 36,000
To Net profit for the year 2,47,000
6,00,000 6,00,000
(i) SALE Limited initiated an advertising campaign which resulted increase in monthly
average sales by 25% post incorporation.
(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post-
incorporation, also explain how pre-incorporation profit is treated in the accounts.
ANSWER

Amount amount incorporation incorporation
` ` ` `
Gross profit (W.N.2) 6,00,000 1:3 1,50,000 4,50,000
Less : Salaries 1,20,000 Time 40,000 80,000
Rent rates and taxes 80,000 Time 26,667 53,333
Sales’ Commission 21,000 Sales (2:5) 6,000 15,000
Depreciation 25,000 Time 8,333 16,667
Interest on Debentures 32,000 Post 32,000
Director’s fee 12,000 Post 12,000
Advertisement 36,000 Post 36,000
Net profit 2,47,000 69,000 2,05,000
126 ACCOUNTING
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.20X1 to 31.7.20X1) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.X1 to 31.3.20X2) = x + 25% of x= 1.25x
Then, sales for next 6 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4 x :10 x i.e. 2:5
2. Gross profit ratio
From 1.4.20X1 to 31.7.20X1 gross profit is 25% of sales
Then, 25% of 4x= 1x
gross profit for next 8 months (i.e. from 1.8.X1 to 31.3.20X2) is 30%
Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1:3
3. Time ratio
1st April, 20X1 to 31st July, 20 X1 : 1st August, 20X1 to 31st March, 20X2
QUESTION NO 7
VK Ltd. was incorporated on the 1st March 2003 and received its certificate for commencement
of business on 1st April 2003. The company bought the business of M/s Shared singh brothers
with effect from 1st November 2002 from the following figures relating to the year ending
October 31, 2003, find out the profits available for dividends:
(a) Sales for the year Rs.6,00,000 out of which sales up to 1st March were Rs.2,50,000
and upto 1st April Rs.3,00,000.
(b) Gross profit for the year was 1,80,000
(c) The expenses debited to the profit and loss account were:
a. Rent 9,000
b. Salaries 15,000
c. Directors fees 4,800
d. Interest on debentures 5,000
e. Audit fees 1,500
f. Discount on sales 3,600

g. Depreciation 24,000
h. General expenses 4,800
i. Advertising 18,000
j. Stationary and printing 3,600
k. Commission on sales 6,000
l. Bad debts 1500( Rs.500 relate to debts to created prior to incorporation)
m. Interest to vendor on purchase consideration up to 1st May 2003 Rs.3000
QUESTION NO 8
A company was incorporated on 1st May 2004 to take over the business a going concern
from 1st January of the same year. The total turnover for the year ended 31st December
was Rs.2,00000 namely Rs.60,000 for the first period upto 1st May and Rs.1,40,000 for
the following period. The gross profit is Rs.70,000 and the profit and loss account is given
below. Ascertain profits prior to incorporation:
PROFIT AND LOSS ACCOUNT
For the year ended 31st December 2004

Rent and rates 3,240 Gross profit b/d 70,000
Insurance 720
Lighting and heating 2,040
Salaries 7,800
Directors fees 2,000
Sales commission 10,000
Sales discounts 5,000
General office expenses 2,400
Carriage outwards 3,000
Bank charges 420
Repairs 1,380
Bad debts 600
Loan interest 1,200
Net profit 30,200
70,000 70,000
128 ACCOUNTING
QUESTION NO 9
Neeraj Ltd. was incorporated as a private Ltd. company on 1st August 2003 to take over a
business as a going concern as from 1st February 2003. The purchase price of the business
for such acquisition was fixed on the basis of the Balance Sheet of the firm as at 31st
January 2003 but the agreement provided that the vendors would get 80% of the profit
prior to 1st August 2003 as compensation. Company’s accounts were made up to 31st January
each year and the summarized trading and profit and loss account for the year ended
31.1.2004 disclosed the following results:

To material consumed 1,86,000 By net sales 2,60,000
To manufacturing wages 48,500 By finished goods 49,000
To misc. expenses 18,600 By incomplete goods 6,000
To carriage inwards 6,300
To gross profits 55,600
3,15,000 3,15,000
To salaries and charges 18,300 By gross profit 55,600
To office expenses 2,750
To director fees 1,800
To bad debts 2,300
To debentures interest 1,250
To commission and discounts 7,800
To carriage outwards 1,600
To depreciation 10,300
To net profit 9,500
55,600 55,600
Further information available was that sales made by the company amounted to Rs.1,16,000
and bad debts amounting to Rs.1,100 were written off prior to 1st August 2003.
Prepare a statement showing the profits earned prior and after incorporation, state also
the amount of profit prior to 1st August 2003 payable to the vendors.
How should the company deal with its share of profits in the year ending 31.1.2004.
QUESTION NO 10
X Ltd. was incorporated on 1.5.2004 to acquire a business as on 1st Jan 2004. The first
accounts were closed on 30.9.2004.
The gross profit for the period was Rs.42,000. Details of the other expense:
General expenses 7200
Directors remuneration 12000
Preliminary expenses 2000
Rent upto 30th June was Rs.6000 per annum after which it was increased by 40%
Salary of the manager, who on information of the company had become a whole time director
and whose remuneration has been given above, was Rs.5100 per annum.
The company earned uniform gross profits. The sales upto 30th September 2004 were
Rs.98000. The monthly average of sales for the first four months of the year was one half
of the remaining period.
Show the profit and loss account and indicate how you would deal with the pre incorporation
reserve.
QUESTION NO 11
The partners of Maitri agencies decided to convert the partnership in to private Ltd.
company called MA (P) company Ltd. with effect from 1.1.2003. The consideration was
agreed at Rs.1,17,00,000 based on the firm’s Balance Sheet at 31.12.2002. however, due to
some procedural difficulties, the company could be incorporated only on 1.4.2003. Meanwhile
the business continued on behalf of the company and the consideration was settled on
that date with interest at 12% per annum. The same books of account were continued the
company which closed its accounts for the first time on 31.3.2004. Prepare the following
summarized the profit and loss account:
Sales 2,34,00,000
Cost of goods sold (1,63,80,000)
Salaries (11,70,000)
Depreciation (1,80,000)
Advertisements (7,02,000)
Discounts (11,70,000)
Managing director’s remuneration (90,000)
130 ACCOUNTING
Misc. office expenses (1,20,000)

Office cum show room rent (7,20,000)
Interest (9,51,000)
---------------
Profit 19,17,000
The company’s only borrowed was a loan of Rs.50,00,000 at 12% per annum to pay the
purchase consideration due to the firm and for working capital requirement.
The company was able to double the average monthly sales of the firm, from 1.4.2003 but
the salaries trebled from that date. It had to occupy additional space from 1.7.2003 for
which rent was Rs.30,000 per month.
Prepare a profit and loss account in columnar form apportioning cost and revenue between
pre incorporation and post incorporation periods. Also suggest how the pre incorporation
profits are to be dealt with.
QUESTION NO 12
Ashish Ltd. was incorporated on 1.7.2003 to take over the running business Mr.sham with
effect from 1.4.2003. The following profit and loss account for the year 31.3.2004 was
drawn up:

To commission 2,625 By gross profit 98,000
To advertisement 5,250 By bad debts realized 500
To managing director remun.
To salaries 2,800
To insurance 18,000
To preliminary expenses 600
To rent and taxes 700
To discounts 3,000
To bad debts 350
To net profits 1,250
54,925
98,500 98,500
The following details are available:
(a) The average monthly turnover from july 2003 onwards was double then that of the
previous months.
(b) Rent for the first three months was paid at Rs.200 per month and thereafter at the
rate increased by Rs.50 per month.
(c) Bad debts Rs.350 related to sales effect after 1st September 2003 and the realization
of the bad debts was in respect of debts written off during 2002-03.
(d) Advertisement expenses were directly proportionate to the sales.
You are required to find out the profit prior to incorporation and to state the treatment
thereof in the books of the company.
QUESTION NO 13
MR X formed a private Ltd. company under the name and style of EXE private Ltd. to take
over his existing business as from 1st April 2000 but the company was not incorporated
until 1st july 2000. No entries related to transfer of the business were entered in the
books, which were carried on without a break until 31.3.2001. The following balances were
extracted from the books as on 31.3.2001:
Debit Credit
Opening stock 43,000
Purchases 1,89,000
Carriage outwards 3,300
Traveling commission 7,500
Office salaries 21,000
Administration expenses 19,900
Rent and rates 12,000
Fixed assets 1,00,000
Current assets (excluding stock) 34,000
Preliminary expenses 5,200
Sales 2,78,000
Mr. X capital account (1.4.2000) 2,30,000
Current liabilities 37,000
132 ACCOUNTING
You are also given that
(a) Stock on 31.3.2001 Rs.44,000

(b) The gross profit ratio is constant and monthly sales in April 2000, February 2001 and
March 2001 are doubled the average monthly sales for the remaining months of the
year
(c) The purchase consideration was agreed to be satisfied by issue of 3000 equity shares
of Rs.100 each
(d) The preliminary expenses are to be written off.
(e) You are to assume that carriage outward and traveler’s commission vary in direct
proportion to sales.
You are required to prepare profit and loss account for the year ended on 31.3.2001
apportioning the profit or loss of the periods before and after incorporation. Depreciation
shall be provided at 25% per annum on fixed assets.
QUESTION NO 14
C private Ltd. was incorporated on 1.2.2003. It took over the properitory business of C with
effect from 1.1.2003. The Balance Sheet of C as at 31.12.2002 is as follows:
Liabilities Amount Assets Amount

Capital 4,31,500 Debtors 25,700
Creditors 17,000 Buildings 1,10,000
Loans 8,500 Machinery 3,00,000
Expenses outstanding 2,500 Loss 23,800
4,59,500 4,59,500
It was agreed to pay Rs.4,50,000 in equity shares to C. The company decided to close its
first year’s accounts as at 31.12.2003. The following are the further details, furnished to
you:
Sales 3,00,000
Purchases 1,40,000
Salaries and wages 40,000
General expenses 32,000
Freight 4,700
Interest paid 8,000

Stock in trade 22,000
Additions to buildings 38,000
Depreciation may be provided 10% on assets including additions
Prepare Profit and loss account showing separately pre incorporation and post incorporation
profits for the year ending 31.12.003.
QUESTION NO 15
Bidyut Ltd. was incorporated on 1st July 1998 to acquire from Bijli as and from 1st January,
the individual business carried on by him. The purchase price of the fixed assets and goodwill
was agreed to be the sum equal to 80% of the profits made each year on ascertainment of
the sum due.
The following trail balances as on 31.12.98 is presented to you to enable you to prepare a
Balance Sheet as at that date. Also prepare a statement of appropriation of profit writing
off one third of the preliminary expenses.
Debit Credit
Share capital 1500 equity shares of Rs100 each 80 paid
Debtors 1,20,000
Stock on 31.12.98 82,000
Cash at bank and in hand 67,000
Preliminary expenses 3,000
Creditors 24,000
Net profit for the year providing for all expenses under 32,000
agreement entered into with Bijli 48,000
QUESTION NO 16
Inder and Vishnu, working in partnership registered a joint stock company under the name
of Fellow Travelers Ltd. on May 31,2000 to take over their existing business. It was agreed
that they would take over the assets of the partnership for a sum of Rs.3,00,000 as from
134 ACCOUNTING
January 1st , 2000 and that until the amount was discharged they would pay interest on the
amount at the rate of 6% per annum. The amount was paid on June 30,2000. To discharge
the purchase consideration, the company issued 20,000 equity shares of Rs.10 each at a
premium of Re.1 each and allotted 7% debentures of the face value of Rs.1,50,000 to the
vendors at par.
The profit and loss account of the “Fellow Travellers Ltd.” for the year ended 31.12.2000
was as follows:

Purchase, including stock 1,40,000 Sales:
Freight and carriage 5,000 1.1.2000-31.5.2000 60,000
Gross profit c/d 60,000 1.06.2000-31.12.2000 1,20,000
Stock in hand 25,000
2,05,000 2,05,000
Salaries and wages 10,000 Gross profit b/d 60,000
Debentures interest 5,250
Depreciation 1,000
Interest on PC (up to 30.6.)
Selling commission 9,000
Director’s fees 9,000
Preliminary expenses 600
Provision for taxes 900
Dividend on equity shares (5%) 6,000
Balance c/d 5,000
13,250
60,000 60,000
Prepare statement apportioning the balance between the post and pre incorporation periods
and also show how these figures would appear in the Balance Sheet of the company.
QUESTION 17(CA INTER NOV 2019) (10 MARKS)
The partners of C&G decided to convert their existing partners hip business into a private
limited called CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for
the first term on 31.3.2019.
The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs

Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debentures 2.00

Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per
month was incurred.
136 ACCOUNTING
(v) Bad debts recovered amounting to ` 60,000 for a sale made in 2016-17 has been
deducted from bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and p ost incorporation periods
and calculate the profit / loss for such periods.
SOLUTION:
C G Trading Private Limited
Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods
` In lakhs
Ratio Total Pre Post

Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 _
(i) 251.6 41.60 210.00
Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1:3 1.00 1.00 -
Depreciation 4.00 1.00 3.00
(ii) 177.07 25.44 151.63
Net Profit [(i) – (ii)] 74.53 16.16 58.37
Working Notes:

Total sales from 01.04.2018 to 30.06.2018 will be 3x
Average sales per month from 01.07.2018 to 31.03.2019 will be 2x
Total sales from 01.07.2018 to 31.03.2019 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
3. Apportionment of Salary
Let the salary per month from 01.04.2018 to 30.09.2018 is x
Salary per month from 01.10.2018 to 31.03.2019 will be 2x
Hence, pre incorporation salary (01.04.2018 to 30.06.2018) = 3x
Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
4. Apportionment of Rent ` In Lakhs
Total Rent 5.5 0
Less: additional rent from 1.7.2018 to 31.3.2019 1.80
Rent of old premises for 12 months 3.70
Pre Post
Apportionment in time ratio 0.93 2.77
Add: Rent for new space - 1.80
Total 0.93 4.57
138 ACCOUNTING
Moon Ltd. was incorporated on 1st August, 2019 to take over the running business of a
partnership firm w.e.f. 1st April, 2019. The summarized Profit & Loss Account for the year
ended 31st March, 2020 is as under:
Amount (`)
Gross Profit 6,30,000
Less: Salaries 1,56,000
Rent, Rates & Taxes 72,000
Commission on sales 40,600
Depreciation 60,000
Interest on Debentures 36,000
Director’s fees 24,000

Advertisement 48,000 4,36,600
Net Profit for the year 1,93,400
Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales by
25% post incorporation.
You are required to prepare a statement showing the profit for the year between pre-
incorporation and post-incorporation. Also, explain how these profits are to be treated in
the accounts?
SOLUTION:
Statement showing the calculation of Profits for
the pre-incorporation and post- incorporation periods

` ` `
Gross Profit (W.N.2) 6,30,000 2:5 (sales) 1,80,000 4,50,000
Less: Salaries 1,56,000 Time (52,000) (1,04,000)
Rent, rates and taxes 72,000 Time (24,000) (48,000)
Commission on sales 40,600 2:5 (sales) (11,600) (29,000)
Depreciation 60,000 Time (20,000) (40,000)
Interest on debentures 36,000 Post (36,000)
Directors’ fee 24,000 Post (24,000)

Advertisement 48,000 Post ( 48,000)
Net profit 72,400 1,21,000
Pre-incorporation profit will be transferred to Capital Reserve.

Post-incorporation profit will be transferred to Profit & Loss Account.
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2019 to 31.7.2019) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (1st August, 2019 to 31st March, 2020)
= x + 25% of x= 1.25x Then, sales for next 8 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x. Hence Sales Ratio = 4 x : 10x i.e. 2:5
2. Time ratio
1st April, 2019 to 31st July, 2019 : 1st August, 2019 to 31st March, 2020
= 4 months: 8 months = 1:2. Thus, time ratio is 1:2.
QUESTION 19 (CA INTER JULY 21)(5MARKS)
S. Ltd. was incorporated on 30th November 2020 to take over the running business of
proprietorship firm of Mr. S. The various expenses debited to the profit and loss Account
for the year 2020-21 included:
(i) Directors fees

(ii) Preliminary expenses written off
(iii) Salaries and general expenses
(iv) Statutory Audit fees
(v) Tax Audit fees u/s 44 AB of the Income Tax Act, 1961
(vi) Commission to travelling agents
(vii) Sale promotion expenses
(viii) Advertisement expenses
(ix) Rent expenses
(x) Bad debts
140 ACCOUNTING
You are required to determine the basis of apportionment of above expenses between pre
incorporation and post incorporation periods.
SOLUTION:
No. Particulars Basis of apportionment

(i) Directors Fees Charge to Post incorporation period
(ii) Preliminary Expenses written Charge to Post incorporation period
off
(iii) Salaries and general Time ratio
expenses
(iv) Statutory Audit Fees Charge to Post incorporation period
(v) Tax Audit Fees u/s 44 AB of On the basis of sales /turnover ratio in the
the Income Tax Act, 1961 respective periods
(vi) Commission to travel agents On the basis of sales / turnover ratio in the
respective periods
(vii) Sales Promotion expenses On the basis of sales / turnover ratio in the
respective periods
(viii) Advertisement Expenses On the basis of sales / turnover ratio in the
respective periods
(ix) Rent Expenses Time Ratio
(x) Bad Debts On the basis of sales / turnover ratio in the
respective periods
QUESTION 20
Rama Udyog Limited was incorporated on August 1, 20X1. It had acquired a running business
of Rama & Co. with effect from April 1, 20X1. During the year 20X1-X2, the total sales
were ` 36,00,000. The sales per month in the first half year were half of what they were
in the later half year. The net profit of the company,
` 2,00,000 was worked out after charging the following expenses:
(i) Depreciation ` 1,23,000, (ii) Directors’ fees ` 50,000, (iii) Preliminary expenses ` 12,000,
(iv) Office expenses ` 78,000, (v) Selling expenses ` 72,000 and (vi) Interest to vendors
upto August 31, 20 X1 ` 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st
March, 20X2.
SOLUTION:
Statement showing pre and post incorporation profit
for the year ended 31st March, 20X2
Particular Total Basis of Pre- Post-

Amount Allocation incorporation Incorporation
` ` `
Gross Profit (W.N.3) 5,40,000 2:7 1,20,000 4,20,000
Less: Depreciation 1,23,000 1:2 41,000 82,000
Director’s Fees 50,000 Post - 50,000
Preliminary 12,000 Post - 12,000
Expenses
Office Expenses 78,000 1:2 26,000 52,000
Selling Expenses 72,000 2:7 16,000 56,000
Interest to vendors 5,000 Actual 4,000 1,000
Net Profit (` 33,000 being
pre-incorporation profit
is transferred to capital
2,00,000 33,000 1,67,000
reserve Account)
Working Notes:
1. Sales ratio
The sales per month in the first half year were half of what they were in the later
half year. If in the later half year, sales per month is x then it should be .5 x per
month in the first half year. So sales for the first four months (i.e. from 1st April,
20X1 to 31st July, 20X1) will be 4 × .50 = ` 2 and for the last eight months (i.e. from
1st August, 20 X1 to 31st March, 20X2) will be (2 × .50 + 6 × 1) = ` 7. Thus, sales ratio
is 2:7.
2. Time ratio
1st April, 20X1 to 31st July, 20X1 : 1st August, 20X1 to 31st March, 20X2
3. Gross profit
Gross profit = Net profit + All expenses
=
` 2,00,000 + ` (1,23,000+50,000+12,000+78,000+72,000+5,000)
=
` 2,00,000 +` 3,40,000 = ` 5,40,000.
142 ACCOUNTING
QUESTION 21
Lotus Ltd. was incorporated on 1st July, 20X1 to acquire a running business of Feel goods
with effect from 1st April, 20X1. During the year 20X1-20X2, the total sales were `
48,00,000 of which ` 9,60,000 were for the first six months. The Gross profit of the
company ` 7,81,600. The expenses charged to the Profit & Loss Statement included:
(i) Director’s fees ` 60,000
(ii) Bad debts ` 14,400
(iii) Advertising ` 48,000 (under a contract amounting to ` 4,000 per month)
(iv) Salaries and General Expenses ` 2,56,000
(v) Preliminary Expenses written off ` 20,000
(vi) Donation to a political party given by the company ` 20,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 20X2.
SOLUTION:
Statement showing the calculation of Profits for the pre-incorporation and post-incorporation
periods for the year ended 31st March, 20X2

Gross Profit 7,81,600 Sales 78,160 7,03,440
Less: Directors’ fee 60,000 Post 60,000
Bad debts 14,400 Sales 1,440 12,960
Advertising 48,000 Time 12,000 36,000
Salaries & general 2,56,000 Time 64,000 1,92,000
expenses
Preliminary expenses 20,000 Post 20,000
Donation to Political 20,000 Post 20,000

Party
Net Profit 3,63,200 720 3,62,480

Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.20X1 (9,60,000 x 3/6) 4,80,000
Sales for period from 01.07.20X1 to 31.03.20X2 43,20,000
(48,00,000 – 4,80,000)
Thus, Sales Ratio = 1 : 9

2. Time ratio
1st April, 20X1 to 30 June, 20X1: 1st July, 20X1 to 31st March, 20X2
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
QUESTION 22
A partnership firm M/s. Nice Sons was carrying on business from 1st May, 20X1. The
partners of the firm decided to convert the partnership firm into a private company called
Zenith (P) Ltd. with effect from 1st September, 20X1. The annual accounts were drawn
upto 31st March, 20X2. The related information from 1st May, 20X1 to 31st March, 20X2
is as follows:
Particulars Amount (`) Amount (`)

Turnover 55,20,000
Interest on Investment 60,000
Profit on sale of Investment 42,000
56,22,000
Less:
Cost of goods sold 34,50,000
Printing & Stationery 77,000
Manager’s Salary 82,000
Audit Fees 41,000
Rent 1,33,000
144 ACCOUNTING
Bad Debts 33,000

Underwriting Commission 56,000
Depreciation 71,500
Interest on Debentures 8,900
Advertising campaign expenses 69,800
Sundry office expenses 1,06,700
Interest on borrowings 1,25,000
42,53,900
Net Profit 13,68,100
Additional Information Provided:

(1) The company’s only borrowing was a loan of ` 15,00,000 at 9% p.a., to pay the purchase
consideration due to the firm and for working capital requirements. The loan was
taken on 1st September, 20X1.
(2) The company occupied additional space from 1st September, 20X1 for which rent of
` 8,000 per month was incurred.
(3) Audit fee pertains to the company.
(4) Bad debts recovered amounting to ` 36,000 for a sale made in June 20X1, has been
deducted from bad debts mentioned above.
(5) All investments were sold in August 20X1.
(6) Zenith (P) Ltd. initiated an advertising campaign on 1st September, 20X1, which
resulted increase in monthly average sales by 40%.
(7) The salary of Manager was increased by ` 3,000 p.m. from 1st July, 20X1 Prepare
a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March 20X2.
SOLUTION:
Ratio Total Pre Post

Incorporation Incorporation
Sales 1:2.45 55,20,000 16,00,000 39,20,000
Interest on Investments Pre 60,000 60,000 -
Bad debts recovered Pre 36,000 36,000 -

Profit on sale of investment Pre 42,000 42,000 -
(i) 56,58,000 17,38,000 39,20,000
Cost of goods sold 1:2.45 34,50,000 10,00,000 24,50,000
Advertisement Post 69,800 - 69,800
Sundry office expenses 4:7 1,06,700 38,800 67,900
Printing & Stationary 4:7 77,000 28,000 49,000
Manager Salary W.N.3 82,000 26,000 56,000
Interest on Debentures Post 8,900 - 8,900
Rent W.N.4 1,33,000 28,000 1,05,000
Bad debts 1:2.45 69,000 20,000 49,000
Underwriting Post 56,000 - 56,000
commission Post 41,000 - 41,000
Audit fees 4:7 71,500 26,000 45,500
Depreciation 1,25,000 46,250 78,750
Interest on Borrowing W.N.5
(ii) 42,89,900 12,13,050 30,76,850
Net Profit [(i) - (ii)] 13,68,100 5,24,950 8,43,150
Working Notes:
Total sales from 01.05.20X1 to 31.08.20X1 will be 4x
Average sales per month from 01.09.20X1 to 31.03.20X2 will be 1.4x
Total sales from 01.09.20X1 to 31.03.20X2 will be 1.4x X 7 =9.8x
Ratio of Sales will be 4x: 9.8x =1:2.45
146 ACCOUNTING
3. Manager Salary
`
Total salary 82,000
Less: Increased salary 27,000
55,000
Monthly Salary = 55,000/11 5,000
Salary from May to August 5,000 + 5,000 + 8,000 + 8,000 = 26,000
Salary from Sep to March
8,000 x 7= 56,000
4. Apportionment of Rent
` `
Total Rent 1,33,000
Less: Additional rent from 1.9.20X1 to 31.3.20X2 56,000
Rent of old premises for 11 months 77,000
Pre Post
Apportionment in time ratio (4:7) 28,000 49,000
Add: Rent for new space 56,000
Total 28,000 1,05,000
5. Interest on borrowing
Company’s Borrowing Interest = ` 15,00,000 x 9% x 7/12= ` 78,750
Interest for Pre-incorporation period = ` 1,25,000 – 78,750 = ` 46,250
HIRE PURCHASE SYSTEM 147
HIRE PURCHASE SYSTEM
CHAPTER OVERVIEW
Hire Purchase Accounting: Under Hire Purchase System, hire purchaser pays the cost of
purchased asset in number of installments. The ownership of the goods is transferred by
the Hire Vendor only after payment of outstanding balance.
Installment System: Under Installment also, the purchaser pays the cost of purchased
asset in number installments. However, under installment system, ownership of the goods is
transferred by owner on the date of delivery of the goods
Methods of Accounting
In Hire Purchaser’s In Hire Purchaser’s

books books
Cash price Interest suspense Interest suspense

Sales method
methods methods methods
With an increasing demand for better life, the consumption of goods has been on the ex-
panding scale. But, this has not been backed up by adequate purchasing power, transform-
ing it into effectual demand, i.e., actual sale at set or settled prices. This has created the
market for what is called hire purchase.
When a person wants to acquire an asset, but is not sure how to make payment within a
stipulated period of time he may pay in installments if the vendor agrees. This enables the
purchaser to use the asset while paying for it in installments over an agreed period of time.
This type of a business deal is known as hire purchase transaction. Here, the customer
pays the entire amount either in monthly or quarterly or yearly instilments, while the asset
remains the property of the seller until the buyer squares up his entire liability. For the
seller, the agreed instalments include his interest on the assets given on credit to the
purchaser. Therefore, when the total amount (being paid in instalments over a period of
time) is certainly higher than the cash down price of the asset because of interest charges.
Obviously, both the parties gain in the bargain. By virtue of this, the purchaser has the
right of immediate use of the asset without making immediate payment for the asset, by
this, he gets both credit and product from the same seller. From seller’s view point, he
derives the benefits by way of increase in sales and also he recovers his own cost of credit.
148 ACCOUNTING
NATURE OF HIRE PURCHASE AGREEMENT

Under the Hire Purchase System, the Hire Purchaser gets possession of the goods at the
outset and can use it, while paying for it in installments over a specified period of time as
per the agreement. However, the ownership of the goods remains with the Hire Vendor
until the hire purchaser has paid all the installments. Each installment paid by the hire
purchaser is treated as hire charges for using the asset. IN case he fail to pay any of the
installments (even the last one) the hire vendor has the right to take back his goods without
compensating the buyer, i.e., the hire vendor is not going to pay back a part of whole of the
amount received through installments till the date of default from the buyer.
SPECIAL FEATURES OF HIRE PURCHASE AGREEMENT
1. Possession: The hire vendor transfers only possession of the goods to the hire
purchaser immediately after the contract for hire purchase is made.
2. Installments: The goods are delivered by the hire vendor on the condition that a hire
purchaser should pay the amount in periodical installments.
3. Down Payment: The hire purchaser generally makes a down payment, i.e., an amount on
signing the agreement.
4. Constituents of Hire purchase installments: Each consists of two elements- finance
charge (interest on unpaid amount) and capital payment.
5. Ownership: The property in goods is to pass to the hire purchaser on the payment of
the last installment and exercising the option conferred upon him under the agreement.
6. Repossession: In case of default in respect of payment of even the last installment,
the hire vendor has the right to take the goods back without making any compensation.
TERMS USED IN HIRE PURCHASE AGREEMENTS
1. Hire Vendor: Hire vendor is a person who delivers the goods along with its possession
to the hire purchase under a hire purchase agreement.
2. Hire Purchaser: Hire purchaser is a person who obtains the goods and rights to use
the same from hire vendor under a hire purchase agreement.
3. Cash Price: Cash price is the amount to be paid by the buyer on outright purchase in
cash.
4. Down Payment: Down payment is the initial payment made to the hire vendor by the
hire purchaser at the time of entering into a hire purchase agreement.
5. Hire Purchase Instalment: Hire purchase instalment is the amount which the hire
purchaser has to pay after a regular interval upto certain period as specified in the
agreement to obtain the ownership of the asset purchased (on payment of the last
installment) under a hire purchase agreement. It comprises of principal amount and
the interest on the unpaid amount.
6. Hire purchase price: It means the total sum payable by the hire purchaser to obtain
the ownership of the asset purchased under hire purchase agreement. It comprises of
cash price and interest on outstanding balances.
QUESTION NO. 1
What are the differences between Hire Purchase and Installment System?
ANSWER
Statement showing differences between Hire Purchase and Installment System
Basis of Distinction Hire Purchase Installment System
1. Governing Act It is governed by Hire Purchase It is governed by the

Act, 1972. Sale of Goods Act, 1930.
2. Nature of Contract It is an agreement of hiring. It is an agreement of

sale.
3. Passing of Title The title of goods passes on The title to goods

(ownership last payment passes immediately as in
the case of usual sale.
4. Right to Return goods The hirer may return goods Unless seller defaults,
without further payment goods are not
except for accrued installment returnable.
5. Seller’s right to The seller may take possession The seller can sue for
repossess of the goods if hirer is in price if the buyer is in
default. default. He cannot take
possession of the goods
6. Right of Disposal Hirer cannot hire out sell, The buyer may dispose
pledge of assign entitling of the goods and give
transferee to retain possession good title to the bona
as against the hire vendor. fide purchaser.
150 ACCOUNTING
7. Responsibility for The hirer is not responsible for The buyer is responsible
Risk of Loss. risk of loss of goods if he has for risk of loss of
taken reasonable precaution goods because of
because the ownership has not the ownership has
yet transferred. transferred.
8. Name of Parties The parties involved are called The parties involved are
involved Hirer and Hire vendor. called buyer and seller.
9. Component other than Component other than cash Component other than
cash price. price included in installment is cash price included in
called Hire charges. Installment is called
interest.
QUESTION NO 2 (BASIC PROBLEM)
On 1st January 1995, transport company purchased a Motor Lorry from Motor supply com
Ltd. on hire purchase basis, the cash price being Rs.60,000, Rs.15,000 was paid on the
signing of the contract and balance in three annual installments of Rs.15,000 each on 31st
December. In addition to it, interest at 5% per annum was also payable to vendors on
outstanding balances. Calculate the amounts of interest and installments.
QUESTION NO 3 (CALCULATION OF CASH PRICE)
Mr.X purchased a machine on Hire Purchase system on 1st January 2003. He paid Rs.5,000
at spot and then three annual installments of Rs.5,000 each. The rate of interest was 5%
per annum. Find out the amount of interest included in installments and cash price of the
machine.
QUESTION NO 4 (TWO YEAR SIMPLE RATE)
Remesh purchased an asset on hire purchase system. He paid Rs.1,000 down and 1200 each
at the end of 2nd, 4th and 6th year. Interest is charged @10% per annum on two yearly rests.
Calculate the amount of interest and cash price included in each installment.
QUESTION NO 5 (TWO YEAR COMPOUNDING RATE)
G.D Milling industries purchased an asset on hire purchase system. They pay Rs.1524 down
payment and Rs.5400 in 3 installments of Rs.1800 each at the interval of two years. Hire
vendor charge interest at 10 percent per annum on yearly rests.
QUESTION NO 6 (SALES METHOD)
On 1st April, 2012, M/s power Motors sold on hire purchase basis a truck whose cash price
was Rs. 9,00,000 to M/s Singh & Singh, a firm of transporters. The terms of the contract
were that the transporters were to pay Rs. 3,00,000 down and six four-monthly installments
of Rs. 1,00,000 plus interest on standing amount of cash price for the intervening four
months. The installments were payable on 31th July, 30th November and 31st March in each
one of the two accounting years. Interest was calculated @ 12% per annum.
M/s. Singh & Singh duly paid the installment on 31st July,2012 but failed to pay the installment
on 30th November,2012
M/s power Motors, spent Rs. 80,000 on repairs and repairing of the truck and on 7th
janaury,2013 sold it for Rs. 7,50,000 cash.
You are required to prepare the amount of M/s. Singh & Singh and Goods Repossessed
Account in the books of M/s power Motors.
QUESTION NO 7 (LOSS OF GOODS)
A firm acquired two tractors under hire purchase agreements, details of which were as
follows:
Date of purchase Tractor A Tractor B

1st April, ‘01 1st October, ‘01
Cash price 14,000 19,000
Deposit 2,000 2,680
Interest (deemed to accrue evenly
over the period of agreement) 2,400 2,880
Both agreements provided for payment to be made in twenty-four monthly installments,

commencing on the last day of the month of purchase, all installments being paid on due
dates.
On 30th June, 2002 tractor B was completely destroyed by fire. In full settlement, on 10th
July 2002 an insurance company paid Rs.15,000 under a comprehensive policy out of which
Rs.10,000 was paid to the hire purchase company in termination of the agreement. Any
balance on the hire purchase company’s account in respect of these transactions was to be
written off.
The firm prepared accounts annually to 31st December and provided depreciation on tractors
on a straight-line basis at a rate of 20 per cent per annum rounded off to nearest rupee,
apportioned as from the date of purchase to the date of disposal.
152 ACCOUNTING
You are required to record these transactions in the following accounts, carrying down the
balance on 31st December 2001 and 31st December 2002:
(i) Tractors on hire purchase

(ii) Provision for depreciation of tractors
(iii) Disposal of tractors
(iv) Hire purchase-company.
QUESTION NO 8 (PARTIAL REPOSSESSION)
X Transport Limited purchased from Delhi Motors 3 Tempos costing Rs.50,000 each on the
hire purchase system on 1-1-2000. Payment to be made Rs.30,000 down and the remainder
in 3 equal annual installments payable on 31-12-2000, 31-12-2001 and 31-12-2002 together
with interest @ 9%. X Transport Limited write off depreciation at the rate of 20% on the
diminishing balance. It paid the installment due at the end of the first year i.e. 31-12-2000
but could not pay the next on 31-12-2001. Delhi Motors agreed to leave one Tempo with the
purchaser on 1-1-2002 adjusting the value of the other 2 Tempos against the amount due
on 31-12-2001. The Tempos were valued on the basis of 30% depreciation annually. Show
the necessary accounts in the books of X Transport Limited for the years 2000, 2001 and
2002.
QUESTION 9 (CALCULATION OF CASH PRICE)
On 1st April, 2012, Fastrack Motor Co. sells at truck on hire purchase basis to Teja Transport
Co. for a total hire purchase price of ` 9,00,000 payable as to ` 2,40,000 as down payment
and the balance in three equal annual instalments of ` 2,20,000 each payable on 31st March
2013, 2014 and 2015.
The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Teja transport Co. Calculations
may be made to the nearest rupee.
ANSWER
Rate of interest 10 1
Ratio of interest and amount due = = = .
100 + Rate of interest 110 11
There is no interest element in the down payment as it is paid on the date of the transaction.
Instalments paid after certain period included interest portion also. Therefore, to ascertain
cash price, interest will be calculated from last instalment to first instalment as follows:
Calculation of Interest and cash Price
No of Amount due at the Interest Cumulative

instalments time of instalment Cash price
[1] [2] [3] (2-3) = [4]
3rd 2,20,000 1/11 of ` 2,20,000 = ` 20,000 2,00,000

2nd 4,20,000 pW.N.1] 1/11 of ` 4,20,000 = ` 38,182 3,81,818
1st 6,01,818 [W.N.2] 1/11 of ` 6,01,818 = ` 54,711 5,47,107
Total cash price = ` 5,47,107 + 2,40,000 (down payment) = ` 7,87,107.

Working Notes:
1. ` 2,00,000 + 2nd instalment of ` 2,20,000 = ` 4,20,000.

2. ` 3,81,818 + 1st instalment of ` 2,20,000 = ` 6,01,818.
QUESTION NO 10 (PARTIAL REPOSSESSION)
X Limited purchased 3 milk vans from Super Motors costing Rs.75,000 each on hire purchase
system. Payment was to be made: Rs.45,000 down and the remainder in 3 eqal installments
together with interest @ 9%. X Limited writes off depreciation @ 20% on the diminishing
balance. It paid the instalment at the end of the 1st year but could not pay the next. Super
Motor agreed to leave one milk van with the purchaser, adjusting the value of the other
two milk vans against the amount due. The milk vans were valued on the basis of 30%
depreciation annually on written down value basis. X Limited settled the seller’s dues after
three months.
QUESTION NO 11 (HYBRID QUESTION)
A machinery is sold on hire purchase. The terms of payment is four annual instalments of
Rs.6,000 at the end of each year commencing from the date of agreement. Interest is
charged @ 20% and is included in the annual payment of Rs.6,000.
Show Machinery account and Hire vendor account in the books of the purchaser who
defaulted in the payment of the third yearly payment whereupon the vendor re-possessed
the machinery. The purchaser provides depreciation on the machinery @ 10% per annum. All
workings should form part of your answer.
154 ACCOUNTING
A acquired on 1st January, 2003 a machine under a hire purchase agreement which provides
for 5 half yearly installments of Rs.6000 each, the first installment being due on 1st July,
2003. Assuming that the applicable rate of interest is 10 per cent per annum. Calculate the
cash value of the machine. All working should form part of the answer.
Ram & Co. acquired a motor lorry on hire-purchase basis. It has to make cash down payment
of Rs. 1,00,000 at the beginning. The payments to be made subsequently are Rs. 2,63,000; Rs.
1,85,000 and Rs. 1,14,000 at the end of first year, second year and third year respectively.
Interest charged is @ 14% per annum. Calculate the cost price of motor lorry and interest
paid in each installment.
From the following, calculate the cash price of the asset:
Rs,
Hire purchase price of the asset 50,000
Down payment 10,000
Four annual installments at the end of each year 10,000
Rate of Interest 5% p.a.
QUESTION NO 15 (CALCULATION OF IRR)
On 1st April, 2009 a car company sold to Arya Bros., a motor car on hire-purchase basis.
The total hire-purchase price was Rs. 4,60,000 with down payment of Rs. 1,60,000. Balance
amount was to be paid in there annual installments of Rs. 1,00,000 each. The first installment
payable on 31st March, 2010. The cash price of the car was Rs. 4,00,000.
How will Arya Bros. account for interest over three accounting years assuming books of
accounts are closed on 31st March every year.
QUESTION NO 16(HIRE PURCHASE SYSTEM)
Discuss installment payment system and its distinction from sale and hire purchase
agreement. (1992 — November [6]) 5 Marks
Nature of Hire Purchase Agreement and Installment Payment Agreement

A hire purchase agreement is a contract of bailment coupled with an option to the hire
purchaser to acquire the goods delivered to him under such an agreement. By the delivery
of goods to the hire purchaser, the hire vendor merely parts with their possession, but not
the ownership. The property or title to the goods is transferred to the hire-purchaser, on
his paying the last installment of the hire price or complying with some other conditions
stipulated in the contract. At any time before that the hire-purchaser has the option
to return the goods and, if he does so, he has only to pay the installments of price that
by then have fallen due. The right or option to purchase is the essence of hire-purchase
agreement. In the event of a default by the buyer (hire purchaser) in the payment of any of
the installments of hire price, the vendor can take back the goods into his possession. This
is legally permissible since the property in the goods is still with the vendor.
On the other hand, it may have been agreed between the buyer and the seller that the price
of the goods would be payable by installments and the property would immediately pass to
the buyer; in the event of a default of installments, it would not be possible for the vendor
to recover back the goods. He, however, would have the right to bring an action against the
purchaser for the recovery of the part of the price that has not been paid to him.
QUESTION NO 17
Mumbai Roadways Ltd. purchased three trucks costing Rs. 1,00,000 each from Hindustan
Auto Ltd. on 1st January, 1979 on the hire purchase system. The term were Payment on
delivery Rs. 25,000 for each truck and balance of the principal amount by 3 equal installments
plus interest at 15% per annum, to be paid at the end of each year. Mumbai Roadways Ltd.
writes off 25% depreciation each year on the diminishing balance method.
Mumbai Roadways Ltd paid the installment due on 31st December, 1979 and 31st December,
1980 but could not pay the final installment. Hindustan Auto Ltd. re-possessed two trucks
adjusting values against the amount due. The re-possession was done on 1st January, 1982
on the basis of 40% depreciation on the diminishing balance method.
1. Write up the ledger accounts in the books of Mumbai Roadways Ltd. showing the above
transactions upto 1-1-1982, and
2. Show the disclosure of the balance arising from the above in the Balance Sheet of
Mumbai Roadways Ltd. as on 31st December, 1981 ( 15 marks)
156 ACCOUNTING
SOLUTION:
Books on Mumbai Roadways Ltd. \
Vendor (Hindustan Auto Ltd.A/c
To Cash Account ( 25,000x3) 75,000 By Assets (Truck) A/c 3,00,000

To Cash A/c ( 75,000+33,750) 1,08,750 By Interest 33,750
(2,25,000x 15%)
To balance C/d 1,50,000
3,33,750 3,33,750
To cash ( 75,000 + 22,500) 97,500 By Balance B/d 1,50,000
To Balance C/d 75,000 By Interest ( 1,50,000x15% 22,500
1,72,500 1,72,500
To Assets (truck) A/c 43,200 By Balance B/d 75,000
To Balance C/d 43,050 By Interest ( 75,000x15%) 11,250
86,250 86,250
Truck Account
Hindustan Auto Ltd. 3,00,000 By Deprecation 75,000
( 3,00,000x 25% )
( 1, 00,000x3) By Balance C/d 2,25,000
3,00,000 3,00,000
To Balance B/d 2,25,000 By Deprecation 56,250
( 2,25,000x 25%)
2,25,00
To bank 1,68,750 By Deprecation 1,68,750
( 1,68,750 x 25%) 2,25,000
42,188
By Hindustan Auto Ltd. 43,200
By Loss on Repossession 41,175
By Balance C/d
( 1,68,750-42,188) /3 42,187
1,68,750 1,68,750
Working Note -1
Calculation of Goods Repossessed Value :

Value of 2 Truck on 1st Jan. 1979 2,00,000
(-) Deprecation for 1st year @ 40% 80,000
Remaining Assets 1,20,000
(-) Deprecation for 2nd year @ 40% 48,000
Remaining Assets 72,000
(-) Deprecation for 3rd year @ 40% 28,800
remaining Assets 43,200
QUESTION NO 18 (CALCULATION OF IRR)
Calculate Interest
Rs.
Cost price 1,00,000
Rate of interest ?
Down payment 20,000
First installment ` 40,000
Second installment 30,000
Third installment 30,000
Date of purchase of assets 1st January, 2002. Rate of interest 12% p.a. following payments
were agree. Calculate Cost.
Rs.
January 1, 2002 30,000
July 1,2002 50,000
January 1,2003 40,000
October 1,2003 40,000
January 1,2004 40,000
158 ACCOUNTING
QUESTION NO 20 (MASTER PROBLEM)
Calculate cost Price where rate of interest is 12% p.a. charged quarterly and down payment
is Rs. 10,000
Date Amount Nature

1.1.2003 10,000 Down
1.4.2003 15000 1st Instal
1.11.2003 20,000 2nd Instal
1.4.2004 20,000 3rd Instal
1.6.2005 30,000 4th Instal
Rate of interest is increasing by 2% every year with effect from 1.1.2004
QUESTION NO 21 (CALCULATION OF CASH PRICE )
K. Industries Ltd. Acquired plant delivered on January 1,1998 on the following hire purchase
terms.
(i) On initial payment of Rs. 40,000 payable on or before delivery;

(ii) Four half yearly payment of Rs. 30,000 each commencing from June 30,1999.
In arriving at terms the plant manufactures computed interest at 6% per annum with yearly
rests.
QUESTION NO. 22 (CALCULATION OF CASH PRICE)
Asha purchased at truck on hire purchase system. As terms she is required to pay ` 70,000
down, ` 53,000 at the end of first year ` 49,000 at the end of second year and ` 55,000 at
the end of third year. Interest is charged @ 10% p.a.
You are required to calculate the total cash price of the truck and the interest paid with
each instalment.
SOLUTION.
Rate of interest 10 1
(1) Ratio of interest and amount due = = = .
100 + Rate of interest 110 11
(2) Calculation of Interest and Cash Price
No. of Amount due at the Interest Cash price

instalments time of instlment
[1] [2] [3] [4]
3rd 55,000 1/11 of ` 55,000 = ` 5,000 50,000
2nd * 99,000 1/11 of ` 99,000 = ` 9,000 90,000
1st ** 1,43,000 1/11 of ` 1,43,000 = ` 13,000 1,30,000
Total cash price = ` 1,30,000 + 70,000 (down payment ) = ` 2,00,000.

* ` 50,000 + 2nd instalment of ` 49,000 = ` 99,000.
** ` 90,000+ 1st instalment of ` 53,000 = ` 1,43,000.
QUESTION NO 23 (ANNUITY METHOD)
On 1st April, 20x1 a manufacturing company buys on Hire-purchase system a machinery for
` 90,000, payable by three equal annual instalments combining principal and interest, the
rate of interest was 5% per annum, Calculate the amount of cash price and interest. Assume
that the present value of on annuity of one rupee for three years at 5% interest is ` 2.723.
Om Ltd. Purchased a machine on hire purchase basis from Kumar Machinery Co. Ltd. On the
following terms:
(a) Cash price ` 80,000

(b) Down payment at the time of signing the agreement on 1.1. 20 x 1 ` 21,622.
(c) 5 annual instalment of ` 15,400, the first to commence at the end of twelve months
from the date of down payment.
(d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in cash instalment.
160 ACCOUNTING
QUESTION NO 25 (IRR)
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.20x1 from
Ganesh Enterprises. The terms were as follows:
Particular Amount (`)

Hire Purchase Price 180,000
Down Payment 30,000
1st installment payable after 1 year 50,000
2nd installment after 2 years 50,000
3rd installment after 3 years 30,000
4th installment after 4 years 20,000
Cash price of van ` 1,50,000 you are required to calculate Total Interest and Interest
included in each instalment.
QUESTION NO. 26 (CASH PRICE METHOD)
On January 1, 20x1 HP M/s acquired a pick-up Van on hire purchase from FM M/s the terms
of the contract were as follows:
(a) The cash price of the van was ` 1, 00,000.

(b) ` 40,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of ` 20,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written off using the straight-line method
You are required to:
(a) Give journal Entries and show the relevant accounts in the books of HP M/s from
January 1, 20x1 to December 31, 20x3; and
(b) Show the relevant items in the balance sheet of the purchaser as on December 31,20x1
to 20x3.
SOLUTION
In the books of HP M/s
Journal Entries
Date Dr. Cr.

` `
20 x 1 Pick-up Van A/c Dr. 1,00,000
Jan. 31 To FM M/S A/c 1,00,000
(Being the purchase of a pick-up van on hire
purchase from FM M/s)
,, FM M/s A/C Dr. 40,000
To Bank A/c 40,000
(Being the amount paid on signing the H.P. contract
Dec. 31 Interest A/c Dr. 3,600
To FM M/s A/c 3,600
(Being the interest payable @ 6% on ` 60,000)
,, FM M/s A/c (` 20,000 + ` 3,600) Dr. 23,600
To Bank A/c 23,600
(Being the payment of 1st instalment along with
interest)
,, Depreciation A/c Dr. 10,000
To pick-up Van A/c 10,000
(Being the depreciation charged @ 10% p.a. on
` 1,00,000)
,, Profit & Loss A/c Dr. 13,600
To Depreciation A/c 10,000
To Interest A/c 3,600
(Being the depreciation and interest transferred
to Profit and Loss Account)
20x2 Interest A/c Dr. 2,400
Dec. 31 To FM M/s A/c 2,400
162 ACCOUNTING
FM M/s A/c (` 20,000 + ` 2,400) Dr. 22,400

To Bank A/c 22,400
(Being the payment of 2nd instalment along with
interest)
Depreciation A/c Dr. 10,000
To Pick-up Van A/c 10,000
(Being the depreciation charged @ 10% p.a.)
(Being the depreciation and interest charged to
profit and Loss Account)
20x3 Interest A/c Dr. 1,200
Dec.31 To FM M/s A/c 1,200

FM M/s A/c (` 20,000 + ` 1,200) Dr. 21,200
(Being the payment of final instalment along with 21,200
interest)
Depreciation A/c Dr. 10,000
To Pick-up Van A/c 10,000
(Being the depreciation charged @ 10% p.a. on
` 1,00,000)
(Being the interest and depreciation charged to
Profit and Loss Account)
Ledgers in the books of HP M/s

Pick-up Van Account
Date Particular ` Date Particular `
1.1.20x1 To FM M/s A/c 1,00,000 31.12.20x1 By Depreciation A/c 10,000
31.12.20x1 By Balance c/d 90,000
1,00,000 1,00,000
1.1.20x2 To Balance b/d 90,000 31.12.20x2 By Depreciation A/c 10,000
31.12.20x2 By Balance c/d 80,000
90,000 90,000
1.1.20x3 To Balance b/d 80,000 31.12.20x3 By Depreciation A/c 10,000
31.12.20x3 By Balance c/d 70,000
80,000 80,000
FM M/s Account
1.1.20x1 To Bank A/c 40,000 1.1.20x1 By Pick-up Van A/c 1,00,000
31.12.20x1 To Bank A/c 23,600 31.12.20x1 By Interest c/d 3,600
31.12.20x1 To Balance c/d 40,000
1,03,600 1,03,600
31.12.20x2 To Bank A/c 22,400 1.1.20x2 By Balance b/d 40,000
31.12.20x2 To Balance c/d 20,000 31.12.20X2 By Interest A/c 2,400
42,400 42,400
31.12.20x3 By Interest A/c 1,200
21,200 21,200
164 ACCOUNTING
Depreciation Account

31.12.20x1 To Pick-up Van A/c 10,000 31.12.20x1 By Profit & Loss A/c 10,000
31.12.20x2 To Pick-up Van A/c 31.12.20x2 By Profit & Loss A/c
31.12.20x3 To Pick-up Van A/c 10,000 31.12.20x3 By Profit & Loss A/c 10,000
10,000 10,000
Interest Account

31.12.20x1 To FM M/s A/c 3,600 31.12.20x2 By Profit & Loss A/c 3,600
31.12.20x2 To FM M/s A/c 31.12.20x3 By Profit & Loss A/c
31.12.20x3 To FM M/s A/c 2,400 By Profit & Loss A/c 2,400
1,200 1,200
Balance Sheet of HP M/s as at 31st December, 20x1
FM M/s 40,000 Pick –up Van 90,000
FM M/s 20,000 Pick –up Van 80,000
Pick –up Van 70,000
QUESTION NO. 27 (INTEREST SUSPENSE ACCOUNTING)
In illustration 6 assume that the hire purchaser adopted the interest suspense method for
recording his hire purchase transactions. On this basis, prepare H.P. Interest Suspense
Account, Interest Account and FM M/s Accounts and Balance Sheets in the books of hire
purchaser.
SOLUTION
H.P. Interest Suspense Account

1.1.20x1 To FM M/s A/c (W.N.) 7,200 31.12.20x1 By Interest A/c 3,600
31.12.20x1 By Balance c/d 3,600
7,200 7,200
1.1.20x2 To Balance b/d 3,600 31.12.20x2 By Interest A/c 2,400
31.12.20x2 By Balance c/d 1,200
3,600 3,600
1.1.20x3 To Balance b/d 1,200 31.12.20x3 By Interest a/c 1,200
Interest Account

31.12.20x1 To H.P. Interest 31.12.20x1 By Profit & Loss A/c 3,600
Suspense A/c 3,600
31.12.20x2 To H.P. Interest 31.12.20x2 By Profit & Loss A/c 2,400
Suspense A/c 2,400
To H.P. Interest
31.12.20x3 31.12.20x3 By Profit & Loss A/c 1,200
Suspense A/c 1,200
FM M/s Account

1.1.20x1 To Bank A/c 40,000 1.1.20x1 By Pick-up Van A/c 1,00,000
31.12.20x1 To Bank A/c 23,600 1.1.20x1 By H.P. Interest 7,200
Suspense A/c
166 ACCOUNTING
31.12.20x1 To Balance c/d 43,600
1,07,200 1,07,200
31.12.20x2 To Balance c/d 21,200
43,600 43,600
FM M/s 21,200 Pick-up Van 90,000
Less: H.P. Interest (1,200) 20,200 Less: Depreciation (10,000) 80,000
Suspense
Pick-up Van 80,000
Less: Depreciation (10,000) 70,000
Working Note:
Total interest = ` 3,600 + ` 2,400 + ` 1,200 = ` 7,200
QUESTION NO. 28 (CALCULATION OF CASH PRICE)
On 1st April, 20x1, Fastrack Motors co. sells truck on hire purchase basis to Teja Transport
co. for a total hire purchase price of ` 9,00,000 payable as to ` 2,40,000 as down payment
and the balance in three equal annual instalments of ` 2,20,000 each payable on 31st March
20x2,k 20x3 and 20x4.
The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations
may be made to the nearest rupee.
QUESTION NO. 29 (CALCULATION OF CASH PRICE & ACCOUNTING)
Lucky bought 2 tractors from Happy on 1-10-20x1 on the following terms:
`
Down payment 5,00,000
1st installment at the end of first year 2,65,000
2nd installment at the end of 2nd year 2,45,000
3rd installment at the end of 3rd year 2,75,000
Interest charged at 10% p.a.

Lucky provides depreciation @ 20% on the diminishing balances.
On 30-9-20x4 Lucky failed to pay the 3rd installment upon which Happy repossessed 1
tractor. Happy agreed to leave one tractor with Lucky and adjusted the value of the tractor
against the amount due. The tractor taken over was valued on the basis of 30% depreciation
annually on written down basis. The balance amount remaining in the vendor’s account after
the above adjustment was paid by Lucky after 3 months with interest @ 18% p.a.
(1) Calculate the cash price of the tractors and the interest paid with each installment
(2) Prepare Tractor Account and Happy Account in the books of Lucky assuming that
books are closed on September 30 every. Figures may be rounded off to the nearest
rupee.
QUESTION NO 30 (BASIC PROBLEM)
Cash price of asset purchased on hire purchase system Rs.37,500

Down payment Rs.5,000
Annual installment 5 of Rs.7,500 each
Rate of interest: 5% calculate interest included in each installment
168 ACCOUNTING
On 1st April, 2017, Mr. Nilesh acquired a Tractor on Hire purchase from Raj Ltd. The terms
of contract were as follows:
(i) The Cash price of the Tractor was ` 11,50,000.
(ii) ` 2,50,000 were to be paid as down payment on the date of purchase.
(iii) The Balance was to be paid in annual instalments of ` 3,00,000 plus interest at the
end of the year.
(iv) Interest chargeable on the outstanding balance was 8% p.a.
(v) Depreciation @ 10% p.a. is to be charged using straight line method.
Mr. Nilesh adopted the Interest Suspense method for recording his Hire purchase
transactions.
You are required to :
Prepare the Tractor account, Interest Suspense account and Raj Ltd.’s account in the books
of Mr. Nilesh for the period of hire purchase.
SOLUTION:
Tractor Account
Date Particulars ` Date Particulars `
1.4.2017 To Raj 11,50,000 31.3.2018 By Dep. 1,15,000
By Balance c/d 10,35,000
11,50,000 11,50,000
1.4.2018 To Balance b/d 10,35,000 31.3.2019 By Dep. 1,15,000
10,35,000 10,35,000
1.4.2019 To balance b/d 9,20,000 31.3.2020 By Dep. 1,15,000
9,20,000 9,20,000
H.P. Interest Suspense Account
1.4.2017 To Raj Ltd. A/c 1,44,000 31.3.2018 By Interest A/c 72,000

(W.N.)
31.3.2018 By Balance c/d 72,000
1,44,000 1,44,000
1.4.2018 To Balance b/d 72,000 31.3.2019 By Interest A/c 48,000
31.3.2019 By Balance c/d 24,000
72,000 72,000
1.4.2019 To Balance b/d 24,000 31.3.2020 By Interest A/c 24,000
Total Interest = ` 72,000 + ` 48,000 + ` 24,000 = ` 1,44,000
Raj Ltd. Account
1.4.2017 To Bank A/c 2,50,000 1.4.2017 By Tractor A/c 11,50,000
31.3.2018 To Bank A/c 3,72,000 By H.P. Interest 1,44,000

Suspense A/c
To Balance c/d 6,72,000
12,94,000 12,94,000
31.3.2019 To Bank A/c 3,48,000 1.4.2018 By Balance b/d 6,72,000
6,72,000 6,72,000
31.3.2020 To Bank A/c 3,24,000 1.4.2019 By Balance b/d 3,24,000

170 ACCOUNTING
Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following terms:
(a) Cash price ` 1,20,000.

(b) Down payment at the time of signing the agreement on 1-1-2016, ` 32,433.
(c) 5 annual instalments of `23,100, the first to commence at the end of twelve months
from the date of down payment.
(d) Rate of interest is 10% p.a.
Your are required to calculate the total interest and interest included in each instalment.
Also prepare the Ledger Account of KM Ltd. in the books of Jai Ltd.
SOLUTION:
Calculation of interest
Total (`) Interest in each Cash price in

instalment each instalment
(1) (2)
Cash Price 1,20,000
Less: Down Payment (32,433) Nil ` 32,433
Balance due after down payment 87,567 ` 87,567 x 10/100 ` 23,100 –
Interest/Cash Priceof 1st - = 8,757 ` 8,757 =
instalment
` 14,343
Less: Cash price of 1st instalment (14,343) ` 73,224x 10/100 ` 23,100 -
Balance due after 1st instalment 73,224 = ` 7,322=
Interest/cash price of 2nd
- ` 7322 ` 15,778
instalment
Less: Cash price of 2nd instalment (15,778) ` 57,446 x 10/100 ` 23,100 -
Balance due after 2nd instalment 57,446 = ` 5745 ` 5745=
` 17,355
Interest/Cash price of 3rd -

instalment
Less: Cash price of 3rd instalment (17,355)

Balance due after 3rd instalment 40,091
Interest/Cash price of 4th - ` 40,091x10/100= ` 23,100 -

instalment ` 4,009 ` 4,009=
` 19,091
Less: Cash price of 4th instalment (19,091)

Balance due after 4th instalment 21,000
Interest/Cash price of 5th
- `21,000 x10/100 ` 23,100 –
instalment
= ` 2,100 ` 2,100= 21,000
Less: Cash price of 5th instalment (21,000)

Total Nil ` 27,933 `1,20,000
Total interest can also be calculated as follow:

(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – `1,20,000 = ` 27,933
KM Ltd. Account in the books of Jai Ltd

1.1. 2016 To Bank A/c 32,433 1.1.2016 By Machine A/c 1,20,000
31.12.2016 To Bank A/c 23,100 31.12.2016 By Interest 8,757
A/c
31.12.2016 To Balance c/d 73,224
1,28,757 1,28,757
31.12.2017 To Bank A/c 23,100 1.1.2017 By Balance b/d 73,224
31.12.2017 To Balance c/d 57,446 31.12.2017 By Interest 7,322

A/c
80,546 80,546

A/c
63,191 63,191
172 ACCOUNTING

A/c
44,100 44,100
31.12.2020 By Interest 2,100

A/c
23,100 23,100
QUESTION 33(CA INTER JULY 21)(5MARKS)
An Engineer purchased a compressing machine on hire purchase system. As per the terms
he is required to pay ` 1,40,000 down, ` 1,06,000 at the end of first year, ` 98,000 at the
end of the second year ` 87,000 at the end of the third year and ` 55,000 at the end of
fourth year. Interest charged @ 12% p.a. You are required to calculate total cash price of
the machine and the interest paid with each instalment.
SOLUTION:
Ratio of interest and amount due
No of instalments Instalment Amount due Interest Principal due at

amount (`) at the time of (`) the beginning (`)
instalment (`)
(1) (2) (3) (4)
4th 55,000 55,000 5,893 49,107
3rd 87,000 1,36,107 14,583 1,21,524
2nd 98,000 2,19,524 23,520 1,96,004
1st 1,06,000 3,02,004 32,358 2,69,646
Total Cash Price = ` 1,40,000 + ` 2,69,646 = ` 4,09,646

INSURANCE CLAIM 173
INSURANCE CLAIM
Business enterprises get insured against the loss of stock on the happening of certain
events such as fire, flood theft earthquake etc. insurance being a contact of identify, the
claim for loss is restricted to the actual loss of assets sometimes an enterprises also gets
itself insured against consequential loss of profit due to decreased turnover, Increased
expenses etc.
If loss consequential to the loss of stock is also insured, the policy is known as loss of profit
of consequential loss policy.
Insurance claim can be studied under two parts as under:-
(i) Claim for loss of stock

(ii) Claim for loss of profit
1. Fire (whether resulting from explosion or otherwise) not occasioned or happening

through:
(a) Its own spontaneous fomentation or heating or its undergoing any process
involving the application of heat;
(b) Earthquake subterraneous fire riot civil commotion war invasion act of foreign
enemy hostilities (whether war be declared or not), civil war rebellion revolution,
insurrection military or usurped power,
2. lightening
3. explosion not occasioned or happening through any of the perils specified in 1 (a)
above.
(i) of boilers used for domestic purpose only;
(ii) of any other boilers or economies on the premises;
(iii) in a building not being any part of any gas works or gas for domestic purpose or
used for lightning or heating the building.
The policy of insurance can be made to cover any of the excepted perils by agreement
and payment of extra premium, if any damage may also be covered if caused by storm
or tempest, flood, escape of water, impact and break down of machinery, etc, again by
agreement with the insurer.
Usually, fire policies covering stock or other assets do not cover explosion of boilers used
for domestic purpose or other boilers or economizers in the premises in the premises but
policies in respect of profit cover such explosions.
174 ACCOUNTING
CLAIM FOR LOSS OF STOCK

Fire insurance being a contract of indemnity, a claim can be lodged only for the actual
amount of the loss, not exceeding the insured value. In dealing with problems requiring
determination of the claim the following point must be noted:
a. Total loss: if the goods are totally destroyed, the amount of claim is equal to the
actual loss, provided the goods are fully insured. However in case of under insurance
(i.e.) insurable value of stock insured is more than the sum insured), the amount of
claim is restricted to the policy amount.
b. Partial loss: if the goods are partially destroyed, the amount of claim is equal to the
actual loss provided the goods are fully insured. However in case of under insurance
the amount of claim will depend upon the nature of insurance policy as follows:
i) Without average clause:- claim is equal to the lower of actual loss or the sum
insured.
ii) with average clause:- amount of claim for loss of stock is proportionately
reduced, considering the ratio of policy amount (i.e. insured amount) to the
value of stock as on the date of fire (i.e. insurable amount) as shown below:
Amount of claim= Loss of stock x Sum insured/Insurable amount (total cost)
One should note that the average clause applies only where the insured value is less than
the total cost and not vice versa.
RELEVANT POINTS:
(i) where stock records are maintained and such records are not destroyed by fire, the
value of the stock as at the date of the fire can be easily arrived at.
(ii) Where either stock records are not available or where they are destroyed by the
fire the value of stock at the date of the fire has to be estimated. The usual method
of arriving at this value is to build up a trading account as from the date of last
accounting year. After allowing for the usual gross profit, the figure of closing stock
on the date of the fire can be ascertained as the balancing item.
(iii) Where books of account are destroyed the task of building up the trading account
become difficult. In that case information is obtained from the customers and suppliers
have to be circulated to ascertain the amount of sales and purchases.
(iv) After the insurance company makes payment for total loss, it has the same rights
which the insured had over the damaged stock. These are subrogated to the insurance
company. In practice, in determining the amount of the claim, credit is given for
damaged and salvaged stock.
INSURANCE CLAIM 175
(v) Frequently salvaged stock can be made saleable after it is reconditioned. In that case,
the cost of such stock must be credited to the trading account and debited an the
sales credited to this account, the final balance being transferred to the profit & loss
account.
Loss of Stock
Amount of loss of stock is calculated as under:
Value of stock on the date of fire xxxx
Less- Value of salvaged stock xxxx
Amount of loss of stock xxxx
QUESTION NO 1
Significance of “Average clause’ in a fire insurance policy.
ANSWER
In order to discourage under-insurance, fire insurance policies often include an average
clause. The effect of these clause is that if the insured value of the subject matter
concerned is less than the total cost then the average clause will apply, that is the loss will
be limited to that position of the loss as the insured value bears to the total cost.
The actual claim amount would therefore be determined by the following formula:
insured value
Claim = x Loss suffered
total cost
For example clause applies only when the insured value is less than the total value of the
insured subject matter
QUESTION NO 2
On 20th October, 2009 the Godown and business premises of Aman Ltd. were affected by
fire from the salvaged accounting records the following information is available
Rs.
Stock of goods@ 10% lower than cost as on 31st March 09 2,16,000
Purchases less returns (1.4.09 to 20.10.09) 2,80,000
Sales less returns (1.4.09 to 20.10.09) 6,20,000
176 ACCOUNTING
(1) sales up to 20th October, 09 includes Rs. 80,000 for which goods had not been
dispatched.
(2) purchase up to 20th October, 09 did not include Rs. 40,000 for which purchase invoices
had not been received from suppliers, though goods have been received in godown.
(3) Past records show he gross profit rate of 25%
(4) The value of goods salvaged from fire Rs.31,000.
(5) Aman Ltd. has insured their stock for Rs.1,00,000.
Compute the amount of claim to be lodged to the insurance company.
ANSWER
Memorandum trading A/c (1.4.09 to 20.10.09)

To opening stock (refer W.N.) 2,40,000 By sales 5,40,000
To purchase 3,20,000 (Rs.6,20,000 - Rs.80,000)
(Rs.2,80,000 + Rs.40,000) By closing stock 1,55,000
To gross profit (bal. fig.)
(Rs.5,40,000x25%) 1,35,000
6,95,000 6,95,000
Rs.
Stock on the date of fire (i.e. on 20.10.2009) 1,55,000
Less: stock salvaged (31,000)
Stock destroyed by fire 1,24,000
loss of stock
Insurance claim = x amount of policy
value of stock on the date of fire
1,24,000
= x 1,00,000 = Rs.80,000
1,55,000
Working Note:
Stock as on 1st April, 2009 was valued at 10% lower than cost.
Hence, original cost of the stock as on 1st April, 2009 would be
2,16,000
= x 100 = Rs.2,40,000
90
INSURANCE CLAIM 177
QUESTION NO 3
A fire occurred in the premises of M/s. kailash & co. on 30th September 2013. From the
following particulars relating to the period from 1st April 2013 to 30th September 2013. You
are following to ascertain the amount of claim to be filled with the insurance company for
the loss of stock. The company has taken an insurance policy for Rs.75,000 which is subject
to average clause. The value of goods salvaged was estimated at Rs. 27,000. The average
rate of Gross profit was 20% throughout the period.
Particular Amount
in Rs.
(i) Opening stock 1,20,000
(ii) Purchase made 2,40,000
(iii) Wages paid (including wages for the installation of machine (Rs.5,000) 75,000
(iv) Sales 3,10,000
(v) Goods taken by the proprietor (sale value) 25,000
(vi) Cost of goods sent to consignee on 20th September 2013, lying unsold 18.000
with them
(vii) Free samples distributed-cost 2,500
ANSWER
Memorandum Trading Account for the period
1st April, 2013 to 30th Sept. 2013
Rs. Rs.
To opening stock 1,20,000 By sales 3,10,000
To purchase 2,40,000 By consignment stock 18,000
Less: Advertisement (2,500) By closing stock (Bal.fig.) 1,41,500
Cost of goods
Taken by proprietor (20,000) 2,17,500
To wages 70,000
To gross profit 62,000
(20% of sales
4,69,500 4,69,500
178 ACCOUNTING
Statement of insurance claim
Rs.
Value of stock destroyed by fire 1,41,500
Less: salvaged stock (27,000)
Insurance claim 1,14,500
Note: since policy amount is less than claim amount, average clause will apply. Therefore,
claim amount will be computed by applying the formula
insured value
Claim = x Loss suffered
total cost
Claim amount = Rs.60,000 (11,4,500 x 75,000 /1,41,500)
QUESTION NO 4
On 12th June 2006, fire occurred in the premises of Patel, a paper merchant. Most of the
stocks were destroyed, cost of stock salvaged being Rs.11,200. In addition, some stock was
salvaged in a damaged condition and its value in that condition was agreed at Rs.10,500.
From the books of account, the following particulars were available:
(a) His stock at the close of account on December 31, 2005 was valued at Rs.83,500.
(b) His purchases from 1.1.2006 to 12.6.2006 amounted to Rs.1,12,000 and his sales during
that period amounted to Rs.1,54,000.
On the basis of his accounts for the past three years it appears that he earns on an average
a gross profit of 30% on sales.
Patel has insured his stock for Rs.60,000. Compute the amount of claim.
QUESTION NO 5
On 1st April, 2006 the stock of Shri Ramesh was destroyed by fire but sufficient records
were saved from which following particulars were ascertained:
Rs.
Stock at cost 1st January 2005 73,500
Stock at cost 31st December 2005 79,600
Purchases- year ended 31st December 2005 3,98,000
Sales- year ended 31st December 2005 4,87,000
Purchases 1.1.2006-31.3.2006 1,62,000
Sales 1.1.2006-31.3.2006 2,31,200
INSURANCE CLAIM 179
In valuing the stock for the balance sheet at 31st December, 2005 Rs.2,300 had been
written off on certain stock which was a poor selling line having the cost Rs.6900. A portion
of these goods were sold in March,2006 at loss of Rs.250 on original cost of Rs.3450. The
remainder of this stock was now estimated to be worth its original cost. Subject to the
above exception, gross profit had remained at a uniform rate throughout year.
The value of stock salvaged was Rs.5,800. The policy was for Rs.50,000 and was subject to
the average clause. Work out the amount of the claim of loss by fire.
QUESTION NO 6
On 19th May, 2011, the premises of shri Graib das were destroyed by fire, but sufficient
records were saved, wherefrom the following particulars were ascertained:
Rs.
Stock at cost on 1.1.2010 36,750
Stock at cost on 31.12.2010 39,800
Purchase less returns during 2010 1,99,000
Sales less return during 2010 2,43,500
Purchases less returns during 1.1.2011 to 19.5.2011 81,000
Sales less returns during 1.1.2011 to 19.5.2011 1,15,600
Is valuing the stock for the balance sheet as at 31st December,2010,Rs1,150 had been
written off on certain stock which was a poor selling line having the cost Rs.3,450. A portion
of these goods were sold in March, 2011 at a loss of Rs.125 on original cost of Rs.1,725.
The remainder of this stock was now estimated to be worth the original cost. Subject to
the above exceptions, gross profit has remained at a uniform rate throughout. The stock
salvaged was Rs.2,900.
Show the amount of the claim of stock destroyed by fire. Memorandum trading account to
be prepared for the period from 1-1-2011 to 19-5-2011 for normal and abnormal items.
180 ACCOUNTING
ANSWER
Shri Garib Das
Trading Account for the year ended on 31st December, 2010
Rs. Rs. Rs.

To Opening stock 36,750 By Sales A/c 2,43,500
To Purchase 1,99,000 By Closing stock:
To Gross Profit 48,700 As valued 39,800
Add: amount written off to
restore stock to full cost 1,150 40,950
2,84,450 2,84,450
48,700
The normal rate of gross profit to sales is = x 100 = 20%
2,43,500
Memorandum trading account upto 19, may 2011
Normal Abnormal Total Normal Abnormal total
Items Items Items Itmes
Rs. Rs. Rs. Rs. Rs. Rs.
To opening stock 37,500 3,450 40,950 By sales 1,14,000 1,600 1,15,600
To purchase 81,000 -- 81,000 By loss -- 125 125
To gross profit By closing
(20% on Rs. 1,14,000) 22,800 -- 22,800 stock

(bal. fig.) 27,300 1,725 29,025
1,41,300 3,450 1,44,750 1,41,300 3,450 1,44,750
Calculation of insurance claim

Rs.
Value of stock on 19th May,2011 29,025
Less: salvage (2,900)
Loss of stock 26,125
Therefore, insurance claim will be for Rs.26,125 only.
INSURANCE CLAIM 181
QUESTION NO 7
On 30th March, 2012 fire occurred in the premises of M/s Suraj brothers. The concern had
taken an insurance policy of Rs.60,000 which was subject to the average clause. From the
books of accounts, the following particulars are available relating to the period 1st January
to 30th March 2012.
(1) Stock as per balance sheet at 31st December, 2011 Rs.95,600.

(2) Purchase (including purchase of machinery costing Rs.30,000) Rs.1,70,000
(3) Wages (including wages Rs.3,000 for installation of machinery) Rs.50,000.
(4) sales (including goods sold on approval basis amounting to Rs.49,500) Rs.2,75,000. No
approval has been received in respect of 2/3rd of the goods sold on approval.
(5) The average rate of gross profit is 20% sales.
(6) The value of the salvaged goods was Rs.12,300.
You are required to compute the amount of the claim to be lodged to the insurance
company.
ANSWER
Computation of claim for loss of stock
Rs.
Stock on the date of fire i.e. on 30th March , 2012 (W.N.1) 62,600
Less: value of salvaged stock (12,300)
insured value
Amount of claim = x Loss of stock 48,211
total cost of stock on the date of fire
(approx.)
60,000
= x 50,300
62,600
A claim of Rs.48,211 (approx.) should be lodged by M/s Suraj brother to the insurance
company.
182 ACCOUNTING
Working Note:
1. Calculation of closing stock as on 30th March 2012

Memorandum trading account for
(from 1st January, 2012 to 30th March 2012)

Rs. Rs.
To opening stock 95,600 By sales (W.N.3) 2,42,000
To purchases By goods with cutomers
(1,70,000-30,000) 1,40,000 (for approval) (W.N.2) 26,400
To wages (50,000-3,000) 47,000 By closing stock (Bal. fig.) 62,600
To gross profit
(20% on sales) 48,400
3,31,000 3,31,000
2. Calculate of goods with customers
Since no approval for sale has been received for the goods of Rs. 33,000 (i.e. 2/3 of
Rs.49,500) hence these should be valued at cost i.e. Rs.33,000-20% of Rs. 33,000= Rs.26,400
3. Calculation of actual sales
Total sales – sale of goods on approval (2/3rd) = Rs.33,000 = Rs.2,42,000.
QUESTION NO 8
A fire occurred in the premises of M/s . fireproof co. on 31st August 2011 from the following
particulars relating to the period from 1st April 2011to 31st August you are requested to
ascertain the amount of claim to be filed with the insurance company for the loss of stock.
The concern had taken an insurance policy for Rs.60,000 which is subject to an average
clause.
INSURANCE CLAIM 183
Rs.
(i) Stock as per balance sheet at 31-03-211 99,000
(ii) Purchase 1,70,000
(iii) Wages (including wages for the installation of machine Rs.3,000) 50,000
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignee on 16th august 2011,lying unsold 16,500
with them
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March 2011. Rs.1,000 were written off in respect of a slow
moving items. The cost of which was Rs.5,000. A portion of these goods were sold at a loss
of Rs.500 on the original cost of Rs.2,500. The remainder of the stock in now estimated to
be worth the original cost. The value of goods salvaged was estimated at Rs.20,000. The
average rate of gross profit was 20% throughout.
ANSWER
Memorandum Trading Account for the period 1st April, 2011 to 31st August, 2011
Normal Abnormal Total Normal Abnormal Total
Items Items Items Items
Rs. Rs. Rs. Rs. Rs. Rs.
To opening stock 95,000 5,000 1,00,000 By sales 2,40,000 2,000 2,42,000
To purchase By goods 16,500 - 16,500
(refer W.N.) 1,56,500 - 1,56,500 Sent to
To wages 47,000 - 47,000 consignee
To gross 48,000 48000 By loss - 500 500

profit@20% By closing 90,000
stock (Bal.
fig.)
3,46,500 5,000 3,51,500 3,46,500 5,000 3,51,500

184 ACCOUNTING
Statement Of claim for loss of Stock
Rs.
Book value of stock as on 31.08.2011 92,500
Less: stock salvaged (20.000)
Less of stock 72,500
Amount of claim to be lodged with insurance company

policy value
= less of stock x
value of stock on the date of fire
60,000
= 72,500 x = Rs.47,027
92,500
Working Note:
Calculation of adjusted purchase
Rs.
Purchase 1,70,000
Less: Drawings (12,000)
Free samples (1,500)
Adjusted purchases 1,56,500
QUESTION NO 9
On 29th august, 2012 the godown of a trader caught fire and a large part of the stock of
goods was destroyed. However goods costing Rs.1,08,000 could be salvaged incurring the
fighting expenses amounting to Rs.4,700.
The trader provides you the following additional information:
Rs.
Cost of stock on 1st April,2011 7,10,500
Cost of Stock on 31st March, 2012 7,90,100
Purchase during the year ended 31st March, 2012 56,79,600
Purchase from 1st April 2012 to the date of fire 33,10,700
INSURANCE CLAIM 185
Cost of goods distributed as samples for advertising from 1st April 2012 41,000
to the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2012 2,000
to the date of fire
Sales for the year ended 31st March, 2012 80,00,000
Sales from 1st April, 2012 to the date of fire 45,36.000
The insurance company also admitted firefighting expenses. The trader had taken the fire
insurance policy for Rs.9,00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
ANSWER
Memorandum trading account for the period 1st April, 2012 to 29th august 2012
Rs. Rs.
To purchases 33,10,700 By closing stock ( Bal. fig.) 8,82,600
Less advertisement (41,000)
Drawings (2,000) 32,67,700
To gross profit [30% of sales –
refer working Note] 13,60,800
54,18,600 54,18,600
Statement of insurance claim
Rs.
Less: salvaged stock (1,08,000)
Add: fire fighting expenses 4,700
Insurance claim 7,79,300
Note: since policy amount is more than claim amount, average caluse will not apply.
Therefore claim amount of Rs.7,79,300 will be admitted by the insurance company.
186 ACCOUNTING
Working Note:
Trading account for the year ended 31st March 2012
Rs. Rs.
To purchases 56,79,600 By closing stock 7,90,100
To gross profit 24,00,000
87,90,100 87,90,100
Rate of Gross Profit in 2011-12

Gross Profit 24,00,000
x 100 = x 100 = 30%
Sales 80,00,000
QUESTION NO 10
From the following information ascertain the value of stock as on 31st March 2012:
Rs.
Stock as on 01-04-2011 28,500
Purchase 1,52,500
Manufacturing expenses 30,000
Selling expenses 12,100
Administration expenses 6,000
Financial expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31st March, 2011 a sum of Rs.3,500 was written off on a
particular item, which was originally purchased for Rs.10,000 and was sold during the year
for Rs.9,000. Barring the transaction relating to this item, the gross profit earned during
the year was 20% on sales.
INSURANCE CLAIM 187
ANSWER
Statement showing valuation of stock as on 31.3.2012
Rs. Rs.
Stock as on 01.04.211 28,500
Less: Book value of abnormal stock (Rs.10,000- Rs. 3,500) 6,500 22,000
Add: purchases 1,52,500
Manufacturing expenses 30,000
Less: cost of sales: 2,04,500
Sales as per books 2,49,000
Less: sales of abnormal item (9,000)
Less: gross profit @ 20% 2,40,000
Value of stock as on 31st March, 2012 (48,000) (1,92,000)
12,500
QUESTION NO 11
On 15th December, 2012 a fire occurred in the premises of M/s OM Exports. Most of
the stocks were destroyed. Cost of stock salvaged being Rs.1,40,000. From the books of
account, the following particulars were available:
(i) stock at the close of account on 31st March 2012 was valued at Rs.9,40,000.
(ii) purchase from 01-04-2012 to 15-12-2012 amounted to Rs.13,20,000 and the sales
during that period amounted to Rs.20,25,000.
On the basis of his accounts for the past three years. It appears that average gross profit
ratio is 20% on sales.
Compute the amount of the claim, If the stock were insured for Rs.4,00,000.
ANSWER
Memorandum Trading Account
For the period 01.04.2012 to 15.12.2012

To purchase 13,20,000 By closing stock 6,40,000
To gross profit @20% 4,05,000 (bal. figure)
26,65,000 26,65,000
188 ACCOUNTING
Statement of claim
Rs.
Estimated value of stock as at date of fire 6,40,000
Less: value of salvaged stock 1,40,000
Estimated value of stock lost by fire 5,00,000
As the value of stock is more than insured value, amount of claim would be subject to
average clause.
amount of policy
Amount of claim = x actual Loss of Stock
value of stock
4,00,000
Amount of claim = x 5,00,000=Rs.3,12,500
6,40,000
QUESTION NO 12
Out of goods costing Rs.2,00,000, 3/4 are destroyed by fire. Find out the amount under
following conditions:
(1) Sum insured – Rs.2,00,000
(2) Sum insured without average clause 1,00,000
(3) Sum insured with average clause 1,00,000***
SOLUTION
3
Turnover Lost = 2,00,000 × =Rs.1,50,000
4
(i) Policy taken = 2,00,000
Claim = 1,50,000
(ii) Policy taken = 1,00,000
Claim = 1,00,000
(iii) Policy taken = 1,00,000
Sum insured
Claim = Loss suffered ×
Actual Insurable Value
1,00,000
= 1,50,000 × = 75,000
2,00,000
Note Average clause applies only where the insured value is Less than the total cost.
INSURANCE CLAIM 189
QUESTION NO 13
Calculation the Gross profit Ratio for the for Calender year 2006.
Opening Stock Rs. 3,20,000

Purchases Rs. 1,776,000
Wages Rs. 2,00,000
Sales Rs. 23,20,000
Closing Stock Rs. 4,40,000
SOLUTION
Trading A/c for the year ending on 31.12.06

Opening Stock 3,20,000 Sales 2,320,000
Purchases 1,77,6000 Closing Stock 4,40,000
Wages 2,00,000
G.P (Balance figure) 4,64,000
2,760,000 2,760,000
Gross Profit
G.P Ratio = × 100
Net Sales
4,64,000
= × 100 = 20%
23,20,000
QUESTION NO 14
Due to fire on July 2004 the entire Stock was bunt except. Some costing Rs.35,000. The
information available from the books of accounts saved were as follows:
(i) The average G.P was 25% on Sales

(ii) The wages for the period is 72,000
(iii) The Stock on 31st December 2003 valued as per practice at 10% above Cost was
Rs.1,10,000
(iv) The Purchase & Sales from 1.1.2003 upto date of fire were Rs.1,50,000 & 3,40,000
respectively,
190 ACCOUNTING
(v) The Company insured Stock for Rs.60,000

(vi) The policy had an average clause.
Prepare a Statement showing the amount of stock Lost by fire and the amount of claim to
be collaged with the insurance company.
SOLUTION
For the period 1.1.2003 to 1.7.04

Opening Stock Sales 3,40,000
100 1,00,000
1,10,000 ×
110
Purchase 1,50,000
Wages 72,000
Gross profit Closing Stock
(25% of 3,40,000) 85,000 (Balance figure) 67,000
4,07,000 407,000
Loss suffered = 67,000 – 35,000 = 32,000

Sum insured
Claim = Loss suffered ×
Actual Insurable Value
60,000
= 32,000 × = 28,656
67,000
QUESTION NO 15
A fire occurred in the premises of Agni On 25th August 2003 when a large pant of the
Stock was destroyed. Salvage was Rs. 15,000. Agni gives you the following information for
the period of January 1, 2003 to August 25, 2003
(a) Purchases Rs.85,000
(b) Sales Rs.90,000
(c) Goods costing Rs.5,000 were taken by Agni for personal use.
(d) Cost price of Stock On January 1. was Rs.40,000

INSURANCE CLAIM 191
Over the past few years, Agni has been selling goods at a consistent gross profit
margin of 33 – 1/3%.
The insurance policy was Rs.50,000. It included an average clause Agni asks you to prepare
a statement of claim to be made on the insurance company.
SOLUTION
Statement of Claim

Less salvage 15.000
Loss 45,000
Application of average clause :
Value of stock on hand 60,000
Amount of policy 50,000
50,000 37,500
Admissible claim (45,000 × )
60,000
Memorandum Trading A/c

For the period ending 25.8.03

To Opening Stock 40,000 Sales 90,000
To Purchase 85000
Less: Drawinq 5000 80,000 By Closing Stock 60,000
To G.P (Balance figure)
(33 – 1/3 of 90,000) 30,000
1,50,000 1,50,000
QUESTION NO 16
Mr. A prepares accounts on 30th September each year but on 31.12.2001 fire destroyed the
great in part of his Stock. Following information was collected form his book:
Stock as On 1.10.1 29,700

Purchase from 1.10to31.12.01 75,000
Wages from 1.10.to 31.12.01 33,000
Sales from 1.10 to 31.12.01 1,40,000
192 ACCOUNTING
The rate of gross profit is 33.33% on Cost Stock to the value of Rs.3,000 was salvaged.
Insurance policy was for Rs.25,000 and claim was subject to average clause.
Additional information’s:
(a) Stock in the beginning was calculated at 10% less than cost.
(b) A plant was installed by firm’s own worker. He was paid Rs.500. Which was included in
wages?
(c) Purchases include the purchase of the plant for Rs.5,000
You are required to calculate claim for the Loss of stock the Loss of Stock
SOLUTION
Compulation of claim for Loss of stock
Stock on the date of fire 30,500

Less: salvage stock 3,000
Insured Values
Amount of claim = × loss of stock
Total cost of stock on the date a fire
25,000
= × 27,500 = 22,541
30,500

For period from 1.10 to 31.12.01

To Opening Stock 33,000 Sales 1,40,000
100 Closing Stock 30,500
(29,700 × )
9 (Balance figure)
Purchase 75,000
( – ) Cost of Plant 5,000 70,000
Wages 33,000
( – ) Waqes paid 500 32,500
G.P (25% on sales). 35,000
1,70,500 1,70,500
Note:– G.P 33.33% On Cost or 25% on Sales = 35,000

INSURANCE CLAIM 193
QUESTION NO 17
Mr. ‘A’ prepares accounts on 30th September each year, but on 31st December, 2001 fire
destroyed the greater part of this stock. Following information was collected from his
books;
Rs.
Stock as on 1.10.2001 29,700
Purchase from 1.10.2001 to 31.12.2001 75,000
Wages from 1.10.2001 to 31.12.2001 33,000
Sales form 1.10.2001 to 31.12.2001 1,40,000
The rate of Gross Profit is 33 1/3 % on cost. Stock to the value of Rs. 3,000 was salvaged.
Insurance policy was for Rs. 25,000 and claim was subject to average clause.
Additional Information’s:
(i) Stock in the beginning was calculated at 10% less than cost.
(ii) A plant was installed by firm’s worker. He was paid Rs. 500, which was included in
wages
(iii) Purchase included the purchase of the plant for Rs. 5,000.
You are required to calculate the claim for the loss of Stock.
QUESTION NO 18
A fire occurred in the workshop of Mr. on 31st March, 2006 where a large part of stock was
destroyed. Scarp realized Rs. 7,500. Mr. A gives you’re the following information for the
period of 1st January to 31st March, 2006:
Rs.
(i) Purchase 42,500
(ii) Sales 45,000
(iii) Goods costing Rs. 1,000 were taken by Mr. A for personal use.
(iv) Cost price of stock on 1st January, 2006 was Rs. 20,000.
(v) Over the past few years, Mrs. A has been selling goods at a consistent
gross profit margin of 30%
(vi) The Insurance policy was for Rs. 25,000. It included an average clause.
Prepare a statement of claim to be made on the Insurance Company by
Mr. A
194 ACCOUNTING
QUESTION NO 19
On 2.6.2007 the stock of Mr. Black was destroyed by fire. However, following
particulars were furnished form the recorders saved:
Rs.
Stock at cost on 1.4.2006 1,35,000
Stock at 90% of cost on 31.3.2007 1,62,000
Purchases for the year ended 31.3.2007 6,45,000
Sales for the year ended 31.3.2007 9,00,000
Purchases from 1.4.2007 to 2.6.2007 2,25,000
Sales from 1.4.2007 to 2.6.2007 4,80,000
Sales upto 2.6.2007 includes Rs. 75,000 being the goods not dispatched to the customers.
The sales invoice price is Rs. 75, 000.Purchase upto 2.6.2007 includes a machinery acquired
for Rs. 15, 000. Purchases upto 2.6.2007 does not included goods worth Rs. 30,000 received
from suppliers, as invoice not received upto the date of fire. These goods have remained
in the godown at the time of fire. Value of stock salvaged from fire Rs. 22,500 and this has
been handed over the insurance company.
The insurance policy is for Rs. 1,20,000 and it is subject to average clause . Ascertain the
amount of claim for loss of stock.
QUESTION NO 20
On 11.11.2007 the premises of Rocky Ltd. Was destroyed by fire. The following information
is made available :
Rs
Stock as on 1.4.2006 3,75,000
Purchase from 1.4.2006 to 31.3.2007 5,20,000
Sales from 1.4.2006 top 31.3.2007 8,55,000
Stock as on 31.36.2007 2,00,000
Purchase from 1.4.2004 to 11.11.2007 3,41,000
Sales from 1.4.2007 to 11.11.2007 4,35,500
In valuing the stock on 31.3.2007, due to damage 50% of the value of the stock which
originally cost Rs. 22,000 was written off.
INSURANCE CLAIM 195
In June, 2007 about 50% of this stock was sold for Rs. 5,500 and the balance of obsolete
stock is expected to relies the same price (.i.e 50% of the original cost).
The gross profit ratio is to be assumed as uniform in respect of other sales. Stock salvaged
from fire amounts to Rs. 11,500.
Compute the value of stock lost in fire
QUESTION NO 21
A fire broke out in the godown of a business house on 8th July, 2009 Goods costing
Rs. 2,03,000 in a small sub- godown remain un-affected by fire. The goods retrieved in a
damaged condition from the main godown were valued at Rs. 1,97,000
The following particulars were available from the books of accounts:
Stock on the last Balance Sheet date at 31st March, 2009 was Rs. 15,72,000. Purchases for
the period from 1st April, 2009 to 8th July, 2009 were Rs. 37,10,000 and sales during the
same period amounted to Rs. 52,60,000. The average gross profit margin was 30% on sales.
The business house has a fire insurance policy for Rs. 10,00,000 in respect of its entire
stock. Assist accountant of the business house in computing amount of claim of loss by fire
QUESTION NO 22
In January, 2010 a firm took an insurance policy for Rs. 60 lakhs to insure goods in its godown
against fire subject to average clause, On 7th March, 2010 a fire broke out destroying good
costing Rs. 44 lakhs. Stock in the godown was estimated at Rs. 80 lakhs. Computer the
amount of insurance claim.
QUESTION NO 23
On 20th July, 1991, the godown and business premises of a merchant were affected by fire
and from accounting records salvaged, the following information is made available to you.
Stock of goods at cost on 1st April , 1990 1,00,000

Stock of goods at 10% lower than cost as on 31st March, 1991 1,08,000
Purchase of goods for the year from 1st April, 1990 to 31st march, 1991 4,20,000
Sale for the same period 6,00,000
Purchase less return for the period from 1st April to 20th July, 1991 1,40,000
Sales less returns for the above period 3,10,000
196 ACCOUNTING
Sale upto 20th July 1991 included Rs. 40,000 for which goods had not been dispatched.
Purchases upto 20th July, 1991 did not include Rs. 20,000 for which purchase invoices had
not been received from suppliers, thought goods have been received at the godown.
Goods salvaged from the accident were worth Rs. 12,000 and these were handed over to
the insurance company.
Ascertain the value of the claim for loss of goods/ stock which could be preferred on the
insurer.
SOLUTION
Trading A/c 1.4.90 to 31.3.90)

To Opening stock 1,00,000 By sales 6,00,000
To purchases 4,20,000 By closing stock ( 100%) 1,20,000
To Gross profit 2,00,000
7,20,000 7,20,000
2,00,000
GP ratio = x 100 = 33.33%
6,00,500
Memorandum Trading A/c ( 1.4..01 to 20.7.01)

To Opening stock 1,20,000 By sales 2,70,000
To purchases 1,60,000 ( 3,10,000-40, 000)
( 1,40,000 + 20,000) By closing stock 1,00,000
To gross profit 90,000 ( bal. figure)
3,70,000 3,70,000
Stock on the date of fire = 1,00,000

Insurance claim= 1,00,000 because salvaged goods have been handed over to insurance
company
QUESTION NO 24
On 2.6.2007 the stock of Mr. Black was destroyed by fire. However following particulars
were furnished from the records saved:
INSURANCE CLAIM 197
Rs.
Stock at cost on 1.4.2006 1,35,000
Stock at 90% of cost on 31.3.2007 1,62,000
Purchase for the year ended 31.3.2007 6,45,000
Sales for the year ended 31.3.2007 9,00,000
Purchases from 1.4.2007 to 2.6.2007 2,25,000
Sales from 1.4.2007 to 2.6.2007 4,80,000
Sale upto 2.6.2007 includes Rs .75,000 being the goods not dispatched to the customers.
The sales invoice price is Rs 75,000.
Purchase upto 2.6.2007 includes a machinery acquired for. Rs .15,000
Purchase upto 2.6.2007 does not includes goods worth Rs. 30,000
Received from suppliers, but invoice not received upto the date of fire.
These goods have remained in the godown at the time of fire.
Value of stock salvaged from fire Rs. 22,500 and this has been handed over to the insurance
company.
The insurance policy is for Rs. 1,20,000 and it is subject to average clause. Ascertain the
amount of claim for loss of stock.
SOLUTION
In the books of Mr. Black
Trading Account for the year ended 31.3.2007
Rs. Rs.
To purchase 6,45,000 By Closing stock at cost 1,80,000
To Gross profit 3,00,000 ( 1,62,000 x 100 ¸ 90)
10,80,000 10,80,000
198 ACCOUNTING
Memorandum Trading A/c

For the period from 1.4.2007 to 02.06.2007
To opening stock at cost 1,80,000 By sales 4,80,000

To purchases 2,25,000 Less: Goods not
Add: Goods received but 30,000 Dispatched 75,000 4,05,000
invoice not received 2,55,00
Less: Machinery 15,000 2,40,000 By Closing Stock 1,50,000
(Balancing Figure)
To Gross Profit (Refer working note) 1,35,000 5,55,000
5,55,00
Calculation of Insurance Claim
Claim subject to average clause = Actual loss of stock x Amount of policy / Value of stock
on the date of fire
= 1,50,000 x ( 1,20,000 ÷ 1,50,000) = Rs. 1,20,000
Working Note :
G.P. ratio = ( 3,00,000 ÷ 9,00,000) x 100 = 33.33%
Amount of Gross profit = Rs. 4,05,000 x 33.33%
= Rs. 1,35,0000
• Salvaged stock amounting Rs. 22,500 handed over to the insurance company is also a
loss to Mr. Black.
QUESTION NO 25
On 30th June, 1996, accidental fire destroyed a major part of , the stocks in the godown of
Jay Associates. Stocks costing Rs. 30,000 could be salvaged but not their stores ledgers.
A fire insurance policy was in force under which the sum insured was Rs. 3,50,000. From
available records, the following information was retrieved:
(i) Total of sales invoices during the period April-June amounted to Rs. 30,20,000. An
analysis showed that goods of the value of Rs. 3,00,000 had been returned by the
customers before the date of the fire.
(ii) Opening stock on 1-4-96 was Rs. 2,20,000 including stocks of value of Rs. 20,000 being
lower of cost and net value subsequently realized.
INSURANCE CLAIM 199
(iii) Purchases between 1-4-96 and 30.6.96 were Rs. 21,00,000.

(iv) Normal gross profit rate was 331/3% on sales.
(v) A sum of Rs. 30,000 was incurred by way of fire fighting expenses on the day of the
fire.
Prepare a statement showing the insurance claim recoverable.
QUESTION 26
On 1st April 2016 the stock of Mr. Hariprasad was destroyed by fire but sufficient records
were saved from which following particulars were ascertained:
Stock at cost 1 Jan. 2015 1,47,000
Stock at cost 31 Dec. 2015 1,59,200
Purchases year ended 31stDec. 2015 7,96,000
Sales year ended 31st Dec. 2015 9,74,000
Purchases 1.1.2016 to 31.3.2016 3,24,000
Sales 1.1.2016 to 31.3.2016 4,62,400
In valuing the stock for the Balance Sheet at 31st dec.2015 Rs. 4,600 had been written
off on certain stock which was a poor selling line having the cost Rs. 13,800. A portion of
these goods were sold in March 2016 at a loss of rs.500on original cost of Rs. 6,900. The
remainder of this stock was now estimated to be worth its original cost. Subject to the
above exception gross profit had remained at a uniform rate throughout the year.
The value of stock salvaged was Rs. 11,600. The policy was for Rs.1,00,000 and was subject
to average clause.
Work out the amount of the claim of Loss by fire.
ANSWER
Trading Account for the year ending on 31.12.2015

To gross profit 1,94,800 (1,59,200+4600)
11,37,800 11,37,800
GP RATIO = (194800/974000) × 100 = 20%

200 ACCOUNTING

(1.1.2016-1.4.2016)
Particulars Normal Abnormal Particulars Normal Abnormal

To opening stock 1,50,000 13,800 By sales 4,56,000 6,400
To Purchases 3,24,000 - By gross loss - 500
To Gross Profit 91,200 By closing stock 1,09,200 6,900
@20% (bal.fig.)
5,65,200 13,800 5,65,200 13,800
CALCULATION OF CLAIM
Closing stock : Normal goods 109200

Abnormal goods 6900
Total stock 116100
Salvaged goods 11600
Damaged goods 104500
Claim = (100000/116100) x 104500 = 90009

INSURANCE CLAIM 201
Claim for Loss of Profit

When a fire occurs, apart from the direct loss on account of stock or other assets destroyed,
there is also a consequential loss because, for some time, the business is disorganized or
has to be discontinued and during that period the standing expenses of the business like
rent salaries etc. continue moreover there is loss of profits which the business would have
earned during the period. This loss can be insured against by a loss of profit or consequential
loss policy there must be a separate policy in respect of the consequential loss but claim
will be admitted in respect of the policy unless the claim on account of fire is also admitted
under other policies.
The loss of profit policy normally covers the following items:
(1) Loss of net profit
(2) Standing charges.
(3) Any increased cost of working e.g., renting of temporary premises.
In every business there is some standard by which its activity or progress can be accurately
judged: it may be sales affected or the quantity of goods (or services) produced. To measure
the loss suffered by a firm due to fire, it is necessary to set up some standard expressed
in such units to represents the volume of work. There should be a direct relation between
the amount of standard and the amount of profit raised. A comparison between the amount
of the standard before and after the fire will give a reliable indication of the loss of profit
sustained.
The most satisfactory unit of measuring the prosperity (and therefore profits) is usually
turnover:
A claim for loss of profits can be established only if:
(i) The insured’s premises or the property therein are destroyed or damaged by the peril
defined in the policy; and
(ii) The insured business carried on the premises is interrupted or interfered with as a
result of such damage.
A claim for loss of profit cannot arise if the claim for loss of property as a result of the fire
is not also admitted. This is very convenient as it avoids independent investigation into loss
of property for purposes of loss of profits policy. It is possible that the business of the
insured may suffer because of fire in the neighborhood, not causing damage to the property
of the insured say by closing the street for some time. Such eventualities may be covered
by agreement with the insurer on payment of extra premium. If fire does not affect the
volume of business there can be no claim for loss of profits.
Also, it does not follow that if there is a large property claim, there will be necessarily a
large claim for loss of profit or vice versa.
202 ACCOUNTING
Terms defined
The following terms should be noted:
Gross profit is the sum produced by adding to the net profit the amount of the insured
standing charges or if there be no net profit, the amount of the insured standing charges
less such a proportion of any net trading loss as the amount of the insured standing charges
bears to all the standing charges of the business.
Net profit is the net trading profit (exclusive of all capital) receipts and accretion and all
outlay properly (chargeable to capital) resulting from the business of the insured at the
premises after due provision has been made for all standing and other charges including
depreciation.
Insured standing charges: interest on debentures mortgage loans and bank overdrafts,
rent, Rates and taxes (other than taxes which form part of net profit) salaries of permanent
staff and wages to skilled employees boarding and lodging of resident directors and/or
Manager, directors fees, unspecified standing charges [not exceeding 5% (five per cent) of
the amount recoverable in respect of specified standing charges].
Conditions included in a loss of profit insurance policy

Insurance policies covering loss of profit contain the following conditions usually:
Rate of Gross Profit: the rate of gross profit earned on turnover during the financial year
immediately before the date of damage.
Annual turnover: the turnover during the twelve months immediately before the damage.
Standard turnover: the turnover during that period in the twelve months immediately
before the date of damage which corresponds with the indemnity period.To which such
adjustment shall be made as may be necessary to provide for the trend of the business and
for variations in or special circumstances affecting the business either before or after the
damage or which would have affected the business had the damage not occurred, so that
the figures thus adjusted shall represent, as nearly as may be reasonably practicable the
results which but for the damage would have been obtained during the relative period after
damage.
Indemnity Period: the period beginning with the occurrence of the damage and ending
not later than twelve months thereafter during which the results of the business shall be
affected in consequence of the damage.
Memo 1: if during the indemnity period goods shall be sold or services shall be rendered
elsewhere than at the premises for the benefit of the business either by the insured or by
others on the insured’s behalf the money paid or payable in respect of such sales or service
shall be brought into account in arriving at the turnover during the indemnity period.
INSURANCE CLAIM 203
Memo 2: if any standing charges of the business be not insured by this policy then in
computing the amount recoverable hereunder as increase in cost of workings that proportion
only of the additional expenditure shall be brought into account which the sum of the net
profit and the insured standing charges beat to the sum of the net profit and all standing
charges.
Memo3: This insurance does not cover loss occasioned by or happening though or in
consequence of destruction of or damage to a dynamo motor, transformer, rectifier or any
part of an electrical installation resulting from electric current however arising.
The student should note the following:
(I) The word turnover used above may be replaced by any other term denoting the basis
for arriving at the loss of profit e.g., output.
(ii) Insured standing charges may include additional items, by agreement with the insurer.
(iii) Net profit means profit before income tax based on profit.
(iv) Depending upon the nature of business, the indemnity period may extend beyond 12
months (it may be as long as 6 years). Indemnity period shall not be confused with the
period of insurance which cannot be more than one year.
The insurance for loss of profit is limited to loss of gross profit due to:
(i) reduction in turnover and
(ii) increase in the cost of working.
The amount payable as indemnity is the sum of (a) and (b) below:
(a) in respect of reduction in turnover: the sum produced by applying the rate of gross
profit to the amount by which the turnover during the indemnity period shall, in
consequence of the damage falls short of the standard turnover.
(b) in respect of increase in cost of working: the additional expenditure[subject to the
provision of memo (2) given above] necessarily and reasonably incurred for the sole
purpose of avoiding or diminishing the reduction in turnover which, but for that
expenditure would have taken place during the indemnity period in consequence of the
damage : the amount allowable under this provision cannot exceed the sum produced by
applying the rate of gross profit to the amount of reduction avoided by the additional
expenditure.
The amount payable arrived at as above is reduced by any sum saved during the indemnity
period in respect of such of the insured standard charges as may cease or be reduced in
consequence of the damage.
Insurance policies provide that if the sum insured in respect of loss of profit is less than
the sum produced by applying the rate of gross profit to he annual turnover (as adjusted
204 ACCOUNTING
by the trend of the business of variation in special circumstances affecting the business
either before or after the damage or which would have affected the business had the
damage not occurred), the amount payable by the insurer shall be proportionately reduced.
This is nothing but application of the average clause.
The turnover of a business rarely remains constant and where there has been an upward
or downward trend since the date of the last accounts and upto the date of the fire, the
standard turnover should be appropriately adjusted as per definition given above.
QUESTION NO 27
The premises of XY Ltd. were partially destroyed by fire on 1st March 2006 and as a result,
the business was practically disorganized upto 31st August 2006. The company is insured
under a loss of profit policy for Rs.1,65,000 having an indemnity period of 6 months.
From the following information, prepare a claim under the policy:
(i) Actual turnover during period of dislocation (1.3.2006-31.8.2006) Rs.80,000

(ii) Turnover for the corresponding period (dislocation) in the 12 months immediately
before the fire (1.3.2005 to 31.8.2005) Rs.240000
(iii) Turnover for the 12 months immediately preceding the fire (1.3.2005 to 28.2.2006)
Rs.6,00,000
(iv) Net profit for the last financial year Rs.90,000
(v) Insured standing charges for the last financial year Rs.60,000
(vi) Uninsured standing charges Rs.5,000
(vii) Turnover for the last financial year Rs.5,00,000
Due to substantial increase in trade, before and up to the time of the fire, it was agreed
that an adjustment of 10% should be made in respect of the upward trend in turnover. The
company incurred additional expenses amounting to Rs.9300 immediately after the fire and
but for this expenditure, the turnover during the period of dislocation would have been
only Rs.55,000. There was also a saving during the indemnity period of Rs.2700 in insured
standing charges as a result of the fire.
QUESTION NO 28
From the following data, compute a consequential loss claim:
1. Financial year end on 31st December, Turnover Rs. 2,00,000.

2. Indemnity period 6 months, Period of interruption 1st July to 31st October.,
INSURANCE CLAIM 205
3. Net profit Rs. 18,000.

4. Standing charges Rs. 42,000 out of which Rs. 10,000 have not been insured.
5. Sum assured Rs. 50,000. Standard turnover 65,000
6. Turnover in the period of interruption Rs. 25,000 out of which Rs. 6,000 was from a
rented place at Rs. 600 per month.
7. Annual turnover Rs. 2,40,000. Saving in standing charges Rs. 4,725 per annum.
Date of fire night of 30th June. It was agreed to between the insured that the business
trends would lead to an increase of 10% in the turnover.
[Ans Rs. 8750]
QUESTION NO 29
The premises of a company was partly destroyed by fire on 1st March 1992, as a result of
which the business was disorganized from 1st March to 31st July, 1992 A/cs are closed on
31st December every year. The company is insured under a ‘loss of profit’ policy for Rs.
7,50,000. The period of indemnity specified in the policy is 6 months. From the following
information, you are required to compute the amount of claim under the loss of profit
policy. (all figures in Rs.)
Turnover for the year 1991 40,00,000

Standard turnover for the corresponding period i.e., from 1.3.91 to 31.7.91 20,00,000
Net profit fro preceding year 4,80,000
Insured standing charges 2,40,000
Annual turnover for the year immediately preceding i.e., 1.3.91 to 29.2.92 44,00,000
Uninsured standing charges 80,000
Turnover during the period of disorganisation i.e., from 1.3.92 to 31.7.92 8,00,000
Increased cost of working 1,50,000
Saving in insured standing charges 30,000
Reduction in turnover avoided through increase in working cost 4,00,000
Owing to reasons acceptable to the insurer, the “Special circumstances clause” stipulates
for: (a) Increases of turnover (standard and annual) by 10% and (b) Increase of rate gross
profit by 2%.
206 ACCOUNTING
QUESTION NO 30
Find out the amount of net claim for loss of profit by applying clauses from the following in
formation:
(i) Adjusted annual turnover preceding the date of fire 50,000
(ii) Policy amount 7,500
(iii) Loss suffered 2,500
(iv) Adjusted Insured G.P rate 20%
SOLUTION
G.P rate = 20%
Loss suffered = 2,500
Policy amount
Amount of Claim = × Loss suffered
Insured profit
7,500
= × 2,500
20% of 50,500
7,500
= × 2,500 = 1,875
10,000
QUESTION NO 31
On account of fire on 15th June 2002 in the business house of a company the working
remained disturbed upto 15 December, 2002 as a result of which it was not possible to
affect any sales. The company had taken out an insurance policy with an average clause
against cons Consequential losses for Rs. 1,40,000 and a period of 7 months has been agreed
upon as indemnity period. An increased of 25% was marked in the current year’s sales as
compared to the last year. The company incurred an additional expenditure of Rs. 12,000 to
make sales possible and made a Saving of Rs.2,000 in the insured standing changes.
Actual sales from 15 June, 2002 to 15 December, 2002 70,000
Sales from 15. June, 2001 to 15 December, 2001 2,40,000
Net profit for last financial year 80,000
Insured standing changes for the last financial year 70,000
Total standing changes for the last financial year 1,20,000
Turnover for the last financial year 6,00,000
Turnover for the year: 16 June, 2001 to 15 June, 2002 5,60,000
INSURANCE CLAIM 207
SOLUTION
(1) Period of Claim = 6 months (15 June to 15 December)

Net profit + Insured Standing Changes
(2) Gross profit ratio = × 100
Turnover
80,000 + 70,000
= × 100 = 25%
6,00,000
(3) Turnover Lost = Standard – Actual
= 2,40,000+ (25% of 2,40,000) – 70,000 = 2,30,000
Loss of profit = 25% of 2,30,000 = 57,500
(4) Calculation of Claim for increased (Cost of Working)
(i) Actual expense = 12,000
(ii) Gross profit or Sale generated by additional expenditure= 25% of 70,000 =17,500
Gross profit on adjusted turnover
(iii) Additional expense ×
G.P. as above + Uninsured Standing Charges
12,000 × 25% × 7,00,000
=
25% × 7,00,000 + (1,20,000 70,000)
= 9,333 (approx)
Adjusted annual turnover = 5,60,000 + 25% = 7,00,000
Rs.9,333 being the Least Shall be increased cost of working
(5) Total Claim = 57,500 + 9,333 – 2,000 = 64,833
Insured Amount
(6) Net Claim = × Total Claim
Insurable Amount
1,40,000
= × 64,833 =51,866.40
25% of 7,00,000
QUESTION NO 32
On account of a fire on 15 June, 2002 in the business house of a company, the working
remained disturbed upto 15 Dec., 2002 as a result of which, it was not possible to affect
any sales. The company had taken out an insurance policy with an average clause against
consequential losses for Rs. 1,40,000 and a period of 7 months has been agreed upon as
indemnity period. An increase of 25% was marked in the current years’ sales as compared
to last year. The company incurred an additional expenditure of Rs. 12,000 to make sales
possible and made a saving of Rs. 2,000 in the insured standing charges.
208 ACCOUNTING
Ascertain the claim under the consequential loss policy keeping the following additional
information in view.
Rs.
Actual sales form 15 June, 2002 to 15 Dec., 2002 70,000
Sales from 15 June, 2001 to 15 Dec., 2001 2,40,000
Net Profit for last Financial year 80,000
Insured standing charges for the last Financial year 70,000
Total standing charges for the last Financial year 1,20,000
Turnover for the last Financial year 6,00,000
Turnover for one year : 16 June , 2001 to 15 June, 2002 5,60,000
QUESTION NO 33
From the following details, calculate consequential loss claim :
1. Date of fire : 1st September, following :

2. Indemnity period : 6 months:
3. Period of disruption : 1st September, 1st February:
4. Sum insured: Rs. 1,08,900:
5. Sales were Rs. 6,00,000 for preceding financial year ended on 31st March.
6. Net Profit for preceding financial year Rs. 36,000 plus insured standing charges .Rs.
72,000;
7. Rate of Gross profit 18%.
8. Unisnured standing charges Rs. 6,000:
9. Turnover during the destitution period Rs. 67, 500:
10. Annual turnover for 12 months immediately preceding the date of fire Rs. 6,60,000;
11. Standard turnover i.e. for corresponding month ( 1st September to 1st February ) in
the year preceding the date of fire Rs. 2,25,000
12. Increase in the cost of Working capital Rs. 12,000 with a saving of insured standing
charges Rs. 4,500 during the disruption period;
13. Reduced turnover avoided through increase in Working capital Rs. 3,000;
14. Special clause stipulated :
(a) Increase in rate of G.P. 2%
(b) Increase in turnover ( Standard and Annual ) 10%
INSURANCE CLAIM 209
QUESTION NO 34
X Ltd. has insured itself under a loss of profit policy for Rs. 3,63,000.
The indemnity period under the policy is six month. On 1st September, 1998 a fire occurred
in the factory of X Ltd. and the normal business was affected upto 1st March, 1999.
The following information is complied for the year ended on 31st March, 1998:
Rs.
Sales 20,00,000
Insured standing charges 2,40,000
Uninsured standing charges 20,000
Net profit 1,20,000
Following further details of turnover are furnished:
(a) Turnover during the period of 12 months ending on the date of fire was Rs. 22,00,000.
(b) Turnover during the period of interruption was Rs. 2,25,000;
(c) Actual turnover during the period from 1.9.1997 to 1-3-1998 during the preceding
year corresponding to the indemnity period was Rs. 7,50,000;
X Ltd spent an amount of Rs. 40,000 as additional cost of working. During the indemnity
period. On account of this additional expenditure :
(a) There was a saving of Rs. 15,000 in insured standing charges during the period of
indemnity;
(b) Reduced turnover avoided was Rs. 1,00,000 i.e. , but for this expenditure, the turnover
after the date of fire would have been only Rs. 1,25,000.
A special clause in the policy stipulates that owing to the reasons acceptable to the insurer
under the special circumstances the following increases are to be made :
(a) Increase of turnover standard and actual-by 10%.

(b) Increase in rate of gross profit by 2% from previous year’s level.
X Ltd asks you to compute the claim for loss of profit. All calculations should be made to
the nearest rupee.
210 ACCOUNTING
ANSWER
Computation of loss of Profit for insurance claim
(1) Rate of gross profit

net profit for the last financial year+insured standing charges
x100
turnover for the last financial year
2%
Add: Adjustment for increase in gross profit rate =
20%
(2) Calculation of short sales:
Rs.
Turnover from 1.9.2009 to 1.3.2010 7,50,000
Add: adjustment for increase in turnover @ 10% 75,000
Adjusted turnover 8,25,000
Less: Actual Turnover from 1.9.2010 to 1.3.2011 2,25,000
Short sales 6,,00,000
(3) Additional expenses:
Rs.
(i) Actual expenses 40,000
(ii) gross profit on sale generated by additional expenses
[(20/100)xRs.1,00,000] 20,000
Gross profit on annual adjusted turnover

(iii) additional expenses x
gross profit on annual adjusted turnover+uninsured standing charges
20% on Rs. 24,20,000*

= Rs.40,000 x
(20% on Rs. 24,20,000) + Rs. 20,000
Rs. 4,84,000
= Rs.40,000 x
Rs. 5,04,000
= Rs.38,413
Least of the above three figures i.e. Rs.20,000 Is allowable.

*Rs.22,00,000 x (110/100)
INSURANCE CLAIM 211
(4) Amount of claim before application of average clause
Rs.
Gross profit on short sales(20% on Rs.6,00,000) 1,20,000
Add: allowable additional expenses 20,000
1,40,000
Less: Saving in insured standing charges (15,000)
1,25,000
(5) Application of average clause
Rs.
Annual turnover i.e. turnover from 1.9.2009 to 31.8.2010 22,00,000
Add: adjustments for increase in turnover (10% of Rs.22,00,00) 2,20,000
24,20,000
Gross profit on annual adjusted turnover (20% on Rs.24,20,000) 4,84,000
Loss of profit policy value 3,63,000
Since the policy-value is less than profit on adjusted annual turnover, the average clause is
applicable.
Hence the amount of claim = Rs. 1,25,000 x (Rs.3,63,000/Rs.4,84,000) = Rs.93,750
QUESTION NO 35
A fire occurred on 1st February, 2006, in the premises of Pioneer Ltd., a retail store and
business was partially disorganized upto 30th June, 2006. The company was insured under
a loss of profits for Rs.1,25,000 with a six months period indemnity. From the following
information, compute the amount of claim under the loss of profit policy.
Rs.
Actual Turnover from 1st February to 30th June 2006 80,000
Turnover from 1st February to 30th June 2005 2,00,000
Turnover from 1st February 2005 to 31st January 2006 4,50,000
Net profit for last financial year 70,000
Insured standing charges for last financial year 56,000
Total standing charges for last financial year 64,000
Turnover for the last financial year 4,20,000
212 ACCOUNTING
The company incurred additional expenses amounting to Rs.6700 which reduced the loss
in turnover. There was also a saving during the indemnity period of Rs.2450 in the insured
standing charges as a result of the fire.
There had been a considerable increase in trade since the date of the last annual accounts
and it has been agreed that an adjustment of 15% be made in respect of the upward trend
in turnover.
INSURANCE CLAIM 213
MIXED QUESTIONS
(DUAL POLICY CONSITING STOCK & PROFIT)
QUESTION NO 36
Remote & Sons had taken out policies (without average clause) both against loss of stock
and loss of profit for Rs.2,10,000 and Rs.3,20,000 respectively. A fire occurred on 1st July ,
2011 and as a result of which sales were seriously affected for a period of 3 months.
Trading and profit & loss A/c of ramda & sons for the years ended on 31st March, 2011 is
given below:
Particular Amount Particulars Amount

Rs. Rs.
To opening stock 96,000 By sales 12,00,000
To wages 1,58,000
To manufacturing expenses 75,000
To gross profit c/d 3,00,000
13,85,000 13,85,000
To administrative expenses 83,600 By gross Profit b/d 3,00,000
To selling expenses (fixed) 72,400
To commission on sales 34,200
To carriage outward 49,800
To net profit 60,000
3,00,000 3,00,000
Further detail provided is as below:

(a) sales purchases wages and manufacturing expenses for the period 1.04.2011to
30.06.2011 were Rs,3,36,000, Rs.2,14,000, Rs.51,000 and Rs.12,000 respectively
(b) other sales figure were as follows
Rs.
form 01.04.2010 to 30.06.2010 3,00,000
from 01.07.2010 to 30.09.2010 3,20,000
from 01.07.2011 to 30.09.2011 48,000
214 ACCOUNTING
(c) due to decrease in the material cost, gross profit during 2011-12 was expected to increase
by 5% on sales.
(d) Rs.1,98,000 were additionally incurred during the period after fire. The amount of
policy included Rs.1,56,,000 for expenses leaving Rs.42,000 uncovered.
Compute the claim for stock,. Loss of profit and additional expenses
ANSWER
Claim for loss of stock
Memorandum trading account for the period 1st April to 1st July, 2011
Rs. Rs.
To purchase 2,14,000 By closing
To wages 51,000 (Bal. fig.) 2,26,800
To manufacturing expenses 12,000
To gross profit (336000 x 30%) 1,00,800
Claim for loss of stock will be limited to Rs.2,10,000 only which is the amount of insurance
policy and no average clause will be applied.
(Note: We have calculated GP Ratio from trading account of previous year which is already
given in question. (i.e., 300000/1200000 = 25% plus increase in GP ratio by 5%)
Loss of profit
(a) Short sales:
Sales from 1st july, 2010 to 30th Sept. 2010 3,20,000

Add: 12% rise observed in 2011-12 over 2010-11
(April-June Rs.3,36,000 instead of Rs.3,00,000) 38,400
3,58,400
Less: Sales from 1st July, 2011 to 30th Sept. 2011 (48,000)
Short sales 3,10,400
INSURANCE CLAIM 215
(b) Gross profit ratio

Net profit+insured standing charges (2010-11)
= × 100
sales (2010-11)
60,000 + 1,56,000
= × 100 18%
12,00,000
Add: Expected rise due to decline in material cost 5% 23%

(c) loss of gross profit
23% on short sales Rs.3,10,400 = Rs.71,392
(d) Annual turnover (12months to 1st July,2011)
Amount(Rs.)
Sales for april 2010-March,2011 12,00,000
Less: from 1-4-2010 to 30-6-2010 (3,00,000)
9,00,000
Add: from 1-4-2011 to 30-6-2011 3,36,000
12,36,600
Add:12% increasing trend 1,48,320
13,84,320
Gross profit on annual turnover @23% 3,18,394
(e) amount allowable in respect of additional expenses
Amount (Rs.)
Least of the following:
(i) actual expenses 1,98,000
(ii) Gross profit on sales during indemnity period 23% of 48,000 11,040
gross profit on annual (adjusted)turnover
(iii) x additional Expenses
gross profit as above+uninsured charges
(3,18,394/3,60,394)x1,98,000 Least i.e. Rs.11,040 is admissible. 1,74,925
Claim Rs.71,392.
Loss of Gross profit Rs.11,040
Add: Addition expenses Rs.82,432
Insurance claim for loss of profit will be of Rs.82,432 only.
216 ACCOUNTING
Working Note:
Rate of Gross profit in 2010-11

gross Profit
= x 100
Sales
3,00,000
= x 100=25%
12,00,000
In 2011-12, Gross profit is expected to increase by 5% as a result of decline material cost,

hence the rate of Gross profit for loss of stock is taken at 30%
QUESTION NO 37
Monalisa & Co. runs plastic goods shop. Following details are available from quarterly sales
tax return filed.
Sales 2009 2010 2011 2012

Rs. Rs. Rs. Rs.
From 1st January to 31st March 1,80,000 1,70,000 2,05,950 1,62,000
From 1st April to 30th June 1,28,000 1,86,000 1,93,000 2,21,000
From 1st July to 30th September 1,53,000 2,10,000 2,31,000 1,75,000
From 1st October to 31st December 1,59,000 1,47,000 1,90,000 1,48,000
Total 6,20,000 7,13,000 8,19,950 7,06,000
Period Rs.
Sales from 16-09-2011 to 30-09-2011 34,000
Sales from 16-09-2012 to 30-09-2012 Nil
Sales from 16-12-2011 to 31-12-2011 60,000
Sales from 16-12-2012 to 31-12-2012 20,000
A loss of profit policy was taken for Rs.1,00,000. Fire occurred on 15th September, 2012
indemnity period was for 3 months. Net profit was Rs.1,20,000 and standing charges (all
insured) amounted to Rs.43,990 for year ending 31st December, 2011.
Determine the insurance claim.
INSURANCE CLAIM 217
QUESTION NO 38
From the following particulars, you are required to calculate the amount of claim for
buildwell Ltd., whose business premises was party destroyed by fire:
Sum insured (from 31st December 2013) Rs.4,00,000

Period of indemnity 12 months
Date of damage 1st January, 2014
Date on which disruption of business ceased 31st October, 2014
The subject matter of the policy was gross profit but only net profit and insured standing
charges are included.
(a) The gross profit for the financial year 2013 was Rs.3, 60,000.
(b) The actual turnover for financial year 2013 was Rs.12, 00,000 which was also the
turnover in this case.
(c) The turnover for the period 1st January to 31st October, in the year preceding the loss,
was Rs.10, 00,000.
During dislocation of the position, it was learnt that in November-December 2013, there
has been an upward trend in business done (compared with the figure of the previous years)
and it was stated that had the loss not occurred, the trading results for 2014 would have
been better than those of the previous year.
The insurance company official appointed to assess the loss accepted this view and
adjustments were made to the pre-damaged figures to bring them up to the estimated
amounts which would have resulted in 2014.
The pre-damaged figures together with agreed adjustments were:
Period Pre-damaged Adjustments to Adjusted

figures be added standard
turnover
Rs. Rs. Rs.
January 90,000 10,000 1,00,000
Feb.to October 9,10,000 50,000 9,60,000
November to December 2,00,000 10,000 2,10,000
12,00,000 70,000 12,70,000
Gross profit 3,60,000 46,400 4,06,400
218 ACCOUNTING
Rate of gross profit 30% (actual for 2013), 32% (adjusted for 2014).
Increased cost of working amounted to Rs.1,80,000.
There was a clause in the policy relating to savings in insured standard charges during the
indemnity period and this amounted to Rs.28,000
Standing Charges not covered by insurance amounted to Rs.20,000 p.a. the annual turnover
for January was nil and for the period February to October 2014 Rs.8,00,000
QUESTION NO 39
S & M Ltd. give the following Trading and Profit and Loss Account for year ended 31st
December, 2005:
Trading and Profit and Loss Account for the year ended 31st December, 2005
Rs. Rs.
To Opening Stock 50,000 By Sales 8,00,000
To Purchases 3,00,000 By Closing Stock 70,000
To Wages
(Rs. 20,000 for skilled labour) 1,60,000
To Manufacturing Expenses 1,20,000
To Gross Profit 2,40,000 ——
8,70,000 8,70,000
To Office Administrative 60,000 By Gross Profit 2,40,000
Expenses
To Advertising 20,000
To Selling Expenses (Fixed) 40,000
To Commission on Sales 48,000
To Carriage Outward 16,000
To Net Profit 56,000 -
2,40,000 2,40,000
The company had taken out policies both against loss to stock and against loss of profit,
the amounts being Rs. 80,000 and Rs. 1,72,000. A fire occurred on 1st May, 2006 and as a
result of which sales were seriously affected for a period of 4 months. You are given the
following further information:
INSURANCE CLAIM 219
(a) Purchases, wages and other manufacturing expenses for the first 4 months of 2006
were Rs. 1,00,000, Rs. 50,000 and Rs. 36,000 respectively.
(b) Sales for the same period were Rs. 2,40,000.
(c) Other sales figures were as follows:
Rs.
From 1st January 2005 to 30th April, 2005 3,00,000
From 1st May 2005 to 31st August, 2005 3,60,000
From 1st May, 2006 to 31st August, 2006 60,000
(d) Due to rise in wages, gross profit during 2006 was expected to decline by 2% on sales.
(e) Additional expenses incurred during the period after fire amounted to Rs. 1,40,000.
The amount of the policy included Rs. 1,20,000 for expenses leaving Rs. 20,000
uncovered. Ascertain the claim for stock and for loss profit.
All workings should form part of your answers.
QUESTION NO 40
Sony Ltd.’s. Trading and profit and loss account for the year ended 31st December, 2005
were as follows:
Trading and profit and Loss Account for the year ended 31.12.2005
Rs. Rs.
Opening stock 20,000 Sales 10,00,000
Purchases 6,50,000 Closing stock 90,000
Manufacturing expenses 1,70,000
Gross profit 2,50,000 -
10,90,000 10,90,000
Administrative expenses 80,000 Gross profit 2,50,000
Selling expenses 20,000
Finance charges 1,00,000
Net profit 50,000
2,50,000 2,50,000
The company had taken out a fire policy for Rs. 3,00,000 and a loss of profits policy for
Rs. 1,00,000 having an indemnity period of 6 months. A fire occurred on 1.4.2006 at the
premises and entire stock were gutted with nil salvage value. The net quarter sales i.e.
1.4.2006 to 30.6.2006 was severely affected. The following are the other information:
220 ACCOUNTING
Sales during the period 1.1.06 to 31.3.06 2,50,000

Purchases during the period 1.1.06 to 31.3.06 3,00,000
Manufacturing expenses 1.1.06 to 31.3.06 70,000
Sales during the period 1.4.06 to 30.6.06 87,500
Standing charges insured 50,000
Actual expense incurred after fire 60,000
The general trend of the industry shows an increase of sales by 15% and decrease in GP by
5% due to increased cost.
Ascertain the claim for stock and loss of profits.
INSURANCE CLAIM 221
CALCULATION OF SUM INSURED
QUESTION 41
A firm has decided to take out a loss of profit policy for the year 2016 and given the
following information for the last accounting year 2015.Variable manufacturing expenses
Rs. 14,20,000. Standing charges Rs. 1,50,000 Net profits Rs. 80,000 Non-operating income
Rs. 2,5000. Sales Rs. 18,00,000.
Compute the sum to be insured in each of the following alternative cases showing the
anticipating for the year 2016:
(i) If sales will increase by 15%.

(ii) If sales will increase by 15% and only 50% of the present standing charges are to be
insured.
(iii) If sales and variable expenses will increase by 15% and standing charges will increase
by 10%.
(iv) If sales will increase by 15% and variable expenses will decrease by 5%.
(v) If sales will increase by 10% and standing charges will increase by 15%.
(vi) If the turnover and standing charges will increase by 15% and variable expenses will
decrease by 10% but only 50% of the present standing charges are to be insured
ANSWER
Calculation of amount of insurance policy to be taken
I II III IV V VI
Sales (existing) 18 18 18 18 18 18
Increase 2.7 2.7 2.7 2.7 1.8 2.7
Expected sales 20.7 20.7 20.7 20.7 19.8 20.7

Variable exp. 16.33 16.33 16.33 15.51 15.62 14.70
Gross profit 4.37 4.37 4.37 5.19 4.18 6

Increase in fixed
expenses - - .15 - .225 .1125
Uninsured fixed exp. - (.75) - - - (.75)
Sum to be insured 4.37 3.62 4.52 5.19 4.41 5.3625

222 ACCOUNTING
QUESTION NO 42
A trader intends to take a loss of profit policy with indemnity period of 6 months, however,
he could not decide the policy amount. From the following details, suggest the policy amount:
`
Turnover in last financial year 4,50,000
Standing charges in last financial year 90,000
Net profit earned in last year was 10% of turnover and the same trend expected in
subsequent year.
Increase in turnover expected 25%.
To achieve additional sales, trader has to incur additional expenditure of ` 31,250.
INSURANCE CLAIM 223
SELF PRACTICE QUESTIONS
A fire occurred in the premises of M/s Kirti & Co. on 15th December, 2018. The working
remained disturbed upto 15th March, 2019 as a result of which sales got adversely affected.
The firm had taken out an insurance policy with an average clause against consequential
losses for ` 2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed:
Sales 2015-16 2016-17 2017-18 2018-19

(`) (`) (`) (`)
From 1st April to 30th June 3,80,000 3,15,000 4,11,900 3,24,000
From 1st July to 30th September 1,86,000 3,92,000 3,86,000 4,42,000
From 1st October to 31st December 3,86,000 4,00,000 4,62,000 3,50,000
From 1st January to 31st March 2,88,000 3,19,000 3,80,000 2,96,000
Total 12,40,000 14,26,000 16,39,900 14,12,000
A period of 3 months (i.e. from 16-12-2018 to 15-3-2019) has been agreed upon as indemnity
period.
Sales from 16-12-2017 to 31-12-2017 68,000
Sales from 16-12-2018 to 31-12-2018 Nil
Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16-03-2019 to 31-03-2019 40,000
Net profit was ` 2,50,000 and standing charges (all insured) amounted to ` 77,980 for the
year ending 31st March, 2018. You are required to calculate the loss of profit claim amount.
SOLUTION
Gross profit ratio `
Net profit for the year 2017-18 2,50,000
Add: Insured standing charges 77,980
3,27,980
Ratio of Gross profit = = 20% 3,27,980
16,39,900
224 ACCOUNTING
Calculation of Short sales

Indemnity period: 16.12.2018 to 15.3.19
Standard sales to be calculated on basis of corresponding period of year 2017-18
`
Sales for period 16.12.2017 to 31.12.17 68,000
Sales for period 1.1.2018 to 15.3.2018 (Note 1) 2,60,000
Sales for period 16.12.2017 to 15.3.2018 3,28,000
Add: upward trend in sales (15%) (Note 2) 49,200
Standard Sales (adjusted) 3,77,200
Actual sales of disorganized period
Calculation of sales from 16.12.18 to 15.3.19
Sales for period 16.12.18 to 31.12.18 Nil
Sales for 1.1.19 to 15.3.19 (` 2,96,000 – ` 40,000) 2,56,000
Actual Sales 2,56,000
Short Sales (` 3,77,200 - ` 2,56,000) 1,21,200
Loss of gross profit

Short sales x gross profit ratio = 1,21,200 x 20% 24,240
Application of average clause
policy value
Net claim = Gross claim ×
gross profit on annual turnover
2,50,000
= 24.240 ×
3,26,240 (W.N.3)
Amount of loss of profit claim = ` 18,575
Working Notes:
1. Sales for period 1.1.18 to 15.3.18 `

Sales for 1 Jan. to 31 March (2017-18) (given) 3,80,000
Less: Sales for 16.3.18 to 31.3.18 (given) (1,20,000)
Sales for period 1.1.18 to 15.3.18 2,60,000
2. Calculation of upward trend in sales
Total sales in year 2015-16 = ` 12,40,000
Increase in sales in year 2016-17 as compared to 2015-16 =` 1,86,000
INSURANCE CLAIM 225
1,86,000 (14,26,000-12,40,000)
% increase = = 15%
12,40,000
Increase in sales in year 2017-18 as compared to year 2016-17
2,13,900 (16,39,900-14,26,000)
% increase = = 15%
14,26,000
Thus annual percentage increase trend is of 15%
3. Gross profit on annual turnover `
Sales from 16.12.17 to 30.12.17 (adjusted) (68,000 x 1.15) 78,200
1.1.18 to 31.3.18 (adjusted) (3,80,000 x1.15) 4,37,000
1.4.18 to 30.6.18 3,24,000
1.7.18 to 30.9.18 4,42,000
1.10.18 to 15.12.18 (3,50,000 – Nil) 3,50,000
Sales for 12 months just before date of fire* 16,31,200
Gross profit on adjusted annual sales @ 20% 3,26,240
NOTE*: Alternatively, the annual adjusted turnover may be computed as `17,98,000

(` 15,64,000 X 1.15) considering the annual % increase trend for the entire period of
last 12 months preceding to the date of fire. In that case, the gross profit on adjusted
annual sales @ 20% will be computed as ` 3,59,720 and net claim will be computed
accordingly.
QUESTION 44 (CA INTER NOV 2020)(10 MARKS)
A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had
taken an insurance policy for ` 1,20,000 which was subject to an average clause. Following
particulars were ascertained from the available records for the period from 1st April, 2018
to 30th September, 2019:
Amount (`)
Stock at cost on 1-04-2018 2,11,000
Stock at cost on 31-03-2019 2,52,000
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
226 ACCOUNTING
Purchases from 01-04-2019 to 30-09-2019 (including purchase of 4,48,000

machinery costing ` 58,000)
Wages from 01-04-2019 to 30-09-2019 (including wages for installation 85,000
of machinery costing ` 7,000)
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19) 52,000
Cost of Goods sent to consignee on 18th September, 2019 lying unsold 44,800
with them
Cost of Goods distributed as free samples(1-4-19 to 30-9-19) 8,500
While valuing the Stock at 31st March, 2019, ` 8,000 were written off in respect of a slow
moving item, cost of which was ` 12,000. A portion of these goods was sold at a loss of `
4,000 on the original cost of ` 9,000. The remainder of the stock is estimated to be worth
the original cost. The value of Goods salvaged was estimated at ` 35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance Company
for the loss of stock.
SOLUTION
for the period 1st April, 2019 to 30th September, 2019
Normal Abnormal Total Normal Abnormal Total

Items Items ` Items Items `
` ` ` `
To Opening 2,48,000 12,000 2,60,000 By Sales 5,97,000 5,000 6,02,000

stock
To Purchases 3,39,900 - 3,39,900 By Goods sent 44,800 - 44,800

(W.N. 2) to consignee
To Wages 78,000 - 78,000 By Loss - 4,000 4,000

(85,000 –
7,000)
To Gross 1,19,400 - 1,19,400 By Closing 1,43,500 3,000 1,46,500
profit @20% stock
(Bal. fig.)
7,85,300 12,000 7,97,300 7,85,300 12,000 7,97,300
INSURANCE CLAIM 227
Statement of Claim for Loss of Stock
`
Book value of stock as on 30.9.2019 1,46,500
Less: Stock salvaged (35,000)
Loss of stock 1,11,500
Amount of claim to be lodged with insurance company

Policy value
= Loss of stock ×
Value of stock on the date of fire
= ` 1,11,500 x 1,20,000/1,46,500 = `91,331 (approx.)
Working Notes:
1. Rate of gross profit for the year ended 31st March, 2019
Trading Account for the year ended 31st March, 2019
` `
To Purchases 6,55,000 By Closing stock 2,52,000

Add: written off 8,000
To Wages 82,000 2,60,000
To Gross Profit (b.f.) 1,72,000
11,20,000 11,20,000
Rate of Gross Profit in 2018-19

Gross Profit
× 100
Sales
= 1,72,000 X 100 / 8,60,000 = 20%
2. Calculation of Adjusted Purchases
`
Purchases (4,48,000 – 58,000) 3,90,000
Less: Drawings [52,000 – (20 % of 52,000)] (41,600)
Free samples (8,500)
Adjusted purchases 3,39,900
228 ACCOUNTING
Note: The answer has been given considering that the value of stock (at cost) on 31.3.19
amounting ` 2,52,000 is after adjustment of written off amount in respect of slow-moving
item.
QUESTION 45 (CA INTER JAN 21) (10MARKS)
A Fire occurred in the premises of M/S MJ & Co., on 31st December, 2019. From the
following particulars related to the period from 1st April 2019 to 31st December 2019, you
are required to ascertain the amount of claim to be filed with the insurance policy for `
1,00,000 which is subject to average clause. The value of goods salvaged was estimated at
` 31,000. The average rate of gross profit was 20% throughout the period:
Particulars Amount (`)

(i) Opening stock as on 1st April,2019 1,50,000
(ii) Purchases during the year 4,20,000
(iii) Goods withdrawn by the proprietor for his self-use at Sales Vales 10,000
(iv) Goods distributed as charity at cost 4,000
(v) Purchases include ` 5,000 of Tools purchased, these tools should

have been capitalized.
(vi) Wages (include wages paid for the installation of machinery 90,000
`6,000)
(vii) Sales during the year 6,10,000
(viii) Cost of goods sent to consignee on 1st November, 2019, lying 25,000
unsold with the consignee.
(ix) Sales Return 10,000
SOLUTION:
Memorandum Trading Account for the period 1st April, 2019 to 31st Dec 2019
` `
(6,10,000 - 10,000)
INSURANCE CLAIM 229
To Purchases 4,20,000 By Consignment stock By 25,000

Less: Tools purchased (5,000) Closing Stock (Bal. fig.) 1,32,000
Goods distributed as (4,000)
Charity
Cost of goods taken
by proprietor (8,000)
To Wages (90,000 – 6,000) 4,03,000
To Gross Profit 84,000
[20% of Sales) 1,20,000
7,57,000 7,57,000
* For financial statement purposes, this would form part of closing stock (since there is no
sale). However, this has been shown separately for computation of claim for loss of stock
since the goods were physically not with the concern and, hence, there was no loss of such
stock.
Statement of Insurance Claim
`
Less: Salvaged Stock (31,000)
Loss of stock 1,01,000
Note:
Since policy amount is less than value of stock on date of fire, average clause will apply.
Therefore, claim amount will be computed by applying the formula:
Insured value
Claim = × Loss suffered
Total Cost
Claim amount = ` 1,01,000/1,32,000 X 1,00,000 = ` 76,515 (Rounded off)
NOTE: The average rate of 20% has been given in the question. In the above solution,
Gross Profit is calculated @ 20% on sales. Alternative answer considering Gross Profit of
20% is also possible
230 ACCOUNTING
QUESTION 46(CA INTER JULY 21)(5 MARKS)
On 13th Jan, 2021 fire occurred in the premises of Mr. X, a cloth merchant. The goods were
totally destroyed. From the books of account, for the period 01 -04-2020 to the date of
fire the following particulars were available:
Particulars `
Stock as on 01-04-2020 57,000
Purchases 3,05,000
Manufacturing Expenses 60,000
Selling Expenses 24,200
Sales 4,98,000
At the time of valuing stock as on 31st March, 2020, a sum of ` 7,000 was written off on
a particular item, which was originally purchased for ` 20,000 and was sold during the year
for ` 18,000. Barring the transaction relating to this item, the gross profit earned during
the period was 25% on sales. Mr. X has insured his stock for ` 40,000. Compute the amount
of the claim.
SOLUTION:
Computation of claim for loss of stock
Memorandum Trading Account as on 13.01.2021
Particulars Normal Abnormal Total Particulars Normal Abnormal Total

To Opening Stock 44,000 13,000 57,000 By Sales 4,80,000 18,000 4,98,000
To Purchases 3,05,000 - 3,05,000 By Closing 49,000 - 49,000

Stock
To Manufacturing 60,000 - 60,000
Expenses
To Gross Profit 1,20,000 5,000 1,25,000
Total 5,29,000 18,000 5,47,000 Total 5,29,000 18,000 5,47,000
Insurance policy was for ` 40,000 as such goods are under-insured. The amount of claim
should be restricted to the policy amount, ie. ` 40,000.
ACCOUNTING FOR INCOMPLETE RECORDS 231
ACCOUNTING FOR INCOMPLETE RECORDS
QUESTION NO 1
The following information relates to the business of Mr.Shiv Kumar, who requests you to
prepare a Trading and profit and loss account for the year ended 31.3.2003 and Balance
Sheet as on that date:
Balance as on 31.3.2002 Balance as on 31.03.2003

Building 3,20,000 3,60,000
Furniture 60,000 68,000
Motor car 80,000 80,000
Stocks - 40,000
Bills payable 28,000 16,000
Cash and bank balances 1,80,000 1,04,000
Sundry Debtors 1,60,000 -
Bills receivables 32,000 28,000
Sundry creditors 1,20,000 -
Cash transactions during the year included the following besides certain other items:
Sale of old papers and miscellaneous income 20,000
Miscellaneous trade expenses (including salaries) 80,000
Collection from Debtors 2,00,000
Cash purchases 48,000
Payment to creditors 1,84,000
Cash sales 80,000
The following are the other information:
1) Bills receivable drawn during the year amount to Rs. 20,000 and Bills payable accepted
Rs. 16,000.
2) Some items of old furniture, whose written down value on 31st march, 2002 was Rs.
20,000 was sold on 30th September 2002 for Rs. 8,000. Depreciation is to be provided
on building and furniture @ 10% p.a. and on Motorcar @ 20% p.a. Depreciation on sale
of furniture to be provided for 6 months and for additions to Building for whole year.
232 ACCOUNTS
3) Of the Debtors, a sum of Rs. 8,000 should be written off as Bad debts and a reserve
for doubtful is to be provided @ 2%.
4) Mr. Shivkumar has been maintaining a steady gross profit rate of 30% on turnover.
5) Outstanding salary on 31.3.2002 was Rs. 8,000 and on 31.3.2003 was Rs. 10,000. On
31.3.2002 profit and loss account had a credit balance of Rs. 40,000.
6) 20% of total sales and total purchases are to be treated as for cash.
7) Additions in furniture account took place in the beginning of the year and there was
no opening provision for doubtful debts.
ANSWER:
TRADING AND PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31ST March 2003

To Opening stocks 80,000 By Sales: 4,00,000
To Purchase 2,40,000 By Closing Stock 40,000
To Gross profits(30% on sales) 1,20,000
------------ --------------
---- ----4,40,000
4,40,000
To mis. Expenses By Gross profits 1,20,000
(80,000-8,000+10,000) 82,000 By misc. incomes 20,000
To depreciation: By net loss 25,840
Building 36,000 transferred to capital
account
Furniture 7,800
Motor car 16,000
To loss on sale of furniture 11,000
To bad debts 8,000
To provision for doubtful debts 5,040
------------- ------------
---1,65,840 ---
1,65,840
BALANCE SHEET AS ON 31.03.2003

(‘000)

Capital 7,16,000 Building 3,24,000
Profit and loss account: Furniture 61,200
Opening balance 40,000 Motor car 64,000
Less: loss (C.Y) (25,840) 14,160 Stock in trade 40,000
Debtors 2,52,000
Creditors 1,12,000 Less; Provision (5,040) 2,46,960
Bills payable 16,000 Bills receivable 28,000
Outstanding salary 10,000 Cash in hand and Bank 1,04,000
-------------- ---------------
8,68,160 8,68,160
WORKING NOTES:
Debtors Account

To balance b/d 1,60,000 By bank (collection) 2,00,000
By bills receivable 20,000
To credit sale 3,20,000 By bad debts 8,000
By balance c/d 2,52,000
4,80,000 4,80,000
Creditors Account

To bank (payment) 1,84,000 By balance b/d 1,20,000
To bills payable 16,000
To balance c/d 1,12,000 By credit purchases 1,92,000

(balancing figure)
3,26,000 3,26,000
234 ACCOUNTS
Bills Receivable Account

To balance b/d 32,000 By bank (balancing fig. 24,000
To Debtors account 20,000 By balance c/d 28,000
52,000 52,000
Bills Payable Account

To cash/bank (bal.fig.) 28,000 By balance b/d 28,000
To balance c/d 16,000 By creditors account 16,000
44,000 44,000
Furniture Account

To balance b/d 60,000 By bank/cash account 8,000
To bank 28,000 By depreciation 1,000
By profit and loss account
(loss on sale) 11,000
By depreciation account 6,800
By balance c/d 61,200
88,000 88,000
Cash and Bank Account

To balance b/d 1,80,000 By misc. expenses 80,000
To misc. Expenses 20,000 By purchases 48,000
To Debtors account 2,00,000 By furniture 28,000
To sales 80,000 By creditors account 1,84,000
To furniture 8,000 By bills payable account 28,000
To bills receivable 24,000 By building account 40,000
5,12,000 5,12,000
OPENING BALANCE SHEET AS ON 31.03.2002

(‘000)

Capital (balancing figure) 7,16,000 Building 3,20,000
Profit and loss account 40,000 Furniture 60,000
Creditors 1,20,000 Motor car 80,000
Bills payable 28,000 Stock in trade 80,000
O/s salary 8,000 Debtors 1,60,000
Bills receivable 32,000
Cash in hand and Bank 1,80,000
-------------- --------------
9,12,000 9,12,000
Motor Car Account

To balance b/d 80,000 By depreciation 16,000
80,000 88,000
Building Account

To balance b/d 3,20,000 By depreciation 36,000
To cash/bank account 40,000 By balance c/d 3,24,000
3,60,000 3,60,000
(Hint: In the given question, it is mentioned that depreciation is to be provided on fixed

assets. So we have revised closing balances in fixed assets)
QUESTION NO 2 (SAME AS QUESTION NO.29)
Lucky does not maintain proper books of accounts. However he maintains a record of his
bank transactions and also is able to give the following information from which you are
requested to prepare his final accounts for the year 2003:
236 ACCOUNTS
1.1.2003 31.12.2003
Debtors 1,02,500 -
Creditors - 46,000
Stock 50,000 62,500
Bank balance - 50,000
Fixed assets 7,500 9,000
Details of his bank transaction were as follows:

Received from debtors Rs.3,40,000
Additional capital brought in Rs. 5,000
Sale of fixed assets (books value Rs.2500) Rs. 1,750
Paid to creditors Rs.2,80,000
Expenses paid Rs. 49,250
Personal drawings Rs. 25,000
Purchase of fixed assets Rs. 5,000
No cash transaction took place during the year. Goods are sold at cost plus 25%. Cost of
goods sold was Rs.2,60,000.
ANSWER:
FOR THE YEAR ENDING ON 31.12.2003

TO opening stock 50,000 By sales 3,25,000
To purchases 2,72,500 By closing stock 62,500
3,87,500 3,87,500
To depreciation 1,000 By gross profit 65,000

To loss on sale of asset 750
To expenses 49,250
65,000 65,000
LIABILITIES Amount ASSETS Amount

Capital 1,63,000 Fixed assets 9,000
Stock 62,500
Creditors 46,000 Debtors 87,500
Bank account 50,000
2,09,000 2,09,000
WORKING NOTES:
Debtors Account

To credit sale 3,25,000 By balance c/d 87,500
4,27,500 4,27,500
Creditors Account

To bank (payment) 2,80,000 By balance b/d 53,500
(balancing figure)
To balance c/d 46,000
By credit purchases 2,72,500
3,26,000 3,26,000
238 ACCOUNTS
Bank Account

To balance b/d 62,500 By creditors account 2,80,000
(balancing figure) By expenses 49,250
To debtors account 3,40,000 By drawings 25,000
To capital account 5,000 By fixed assets 5,000
To fixed assets account 1,750 By balance c/d 50,000
4,09,250 4,09,250
Fixed Assets account

To balance b/d 7,500 By bank account 1,750
To bank account 5,000 By profit and loss 750
(loss on sale)
By depreciation 1000
(balancing figure)
12,500 12,500
Calculation of closing capital

Opening balance of capital 1,69,000
ADD: Profits 14,000
Additional capital employed during the year 5,000
LESS Drawings 25,000
Closing capital 1,63,000
Calculation of purchases made during the year

Cost of goods sold during the year 2,60,000
ADD: Closing stock 62,500
LESS: Opening stock 50,000
2,72,500
STATEMENT OF AFFAIRS AS ON 1.1.2003

Capital (bal. fig.) 1,69,000 Fixed assets 7,500
Stock 50,000
Creditors 53,500 Debtors 1,02,500
Bank account 62,500
2,22,500 2,22,500
QUESTION NO 3
The following is the balance sheet of Sri Agni dev as on 31st March 2001:
Rs. Rs.
Capital 2,52,500 Machinery 1,20,000
Creditors 45,000 Furniture 20,000
Stock 33,000
Debtors 1,00,000
Cash in hand 8,000
Cash at bank 16,500
2,97,500 2,97,500
Riots occurred and fire broke out on the enening of 31st March.2002 destroying the books
of account and furniture. The cahier was grievously hurt and the cash available in the cash
box was stolen. The trader gives you the following information:
(a) Sales are effected as 25% for cash and balance on credit. His total sales for the year
ended 31st March 2002 were 20% higher than the previous year. All the sales and
purchases of goods were evenly spread throughout the year (as also in the last year).
(b) Terms of credit
i. Debtors 2 months
ii. Creditors 1 month
(c) Stock level was maintained at Rs.33000 all throughout the year.
(d) A steady gross profit rate of 25% on the turnover was maintained throughout.
Creditors are paid by cheque only, except for cash purchase of Rs.50000.
240 ACCOUNTS
(e) His private records and the bank pass book disclosed the following transaction for the
year
i. Miscellaneous business expenses (Rs.157500 including Rs.5000 paid by cheque
and Rs.7500 was outstanding as on 31st march 2002)
ii. Repairs Rs.3500 by cash
iii. Addition to machinery Rs.60000 paid by cheque
iv. Private drawings Rs.30000 paid by cash
v. Travelling expenses Rs.18000 paid by cash
vi. Introduction of Additional capital by depositing in to the bank Rs.5000
vii. Collection from Debtors were all through cheques
viii. Depreciation on machinery is to be provided @15% on the closing book value
ix. The cash stolen is to be charged to the profit and loss account
x. Loss of furniture is to be adjusted from the capital account
Prepare trading, profit and loss account for the year ending 31st March and a balance sheet
as on that date. Make appropriate assumptions wherever necessary. All workings should
form part of your answer.
ANSWER:
FOR THE YEAR ENDED 31ST March 2002

To Opening stocks 33,000 By Sales: 9,60,000
To Purchase 7,20,000 By Closing Stock 33,000
To Gross profits 2,40,000
------------- --------------
9,93,000 9,93,000
To expenses 1,57,500 By Gross profits 2,40,000

To Repairs 3,500
To traveling expenses 18,000
To loss by theft 1,500
-------------- --------------
2,40,000 2,40,000

(‘000)

Capital 2,52,500 Machinery
Add: additional capital 5,000 (1,80,000-27,000) 1,53,000
Add: net profit 32,500 Closing Stock 33,000
Less: Drawings 30,000 Debtors 1,20,000
Less: furniture 20,000
---------- 2,40,000
Bank overdraft 2,667
Creditors 55,833
Outstanding expenses 7,500
-------------- --------------
3,06,000 3,06,000
WORKING NOTES:
Particulars Cash Bank Particulars Cash Bank

To balance b/d 8,000 16,500 By creditors a/c 50,000 6,59,167
To Debtors a/c - 7,00,000 By Misc. expenses 1,45,000 5,000
To sales 2,40,000 - By repairs 3,500 -
To additional By machinery a/c - 60,000
capital - 5,000 By traveling exp. 18,000 -
To balance c/d - 2,667 By drawings 30,000 -
(Bank overdraft) By balance c/d 1,500 -
(Lost by theft)
---------- ------------ -------- --------
2,48,000 7,24,167 2,48,000 7,24,167
242 ACCOUNTS
Rs
1.Sales during 2001-2002
Debtors as on 31.3.2001 1,00,000
(being equal to 2 months sales)
Total credit sales in 2000-2001, Rs.1,00,000*6 6,00,000
Cash sales, being equal to 1/3rd of credit sales or 1/4th of the 2,00,000
total 8,00,000
Sales in 2000-2001 1,60,000
Increase, 20% as stated in the problem 9,60,000
Total sales during 2001-2002 2,40,000
Cash sales 1/4th
7,20,000
Credit sales 3/4th
2.Debtors equal to two months credit sales (720000*2/12) 1,20,000

3.Purchases
Sales in 2001-2002 9,60,000
Gross profit @25% 2,40,000
Cost of goods sold being purchases 7,20,000
(since there is no change in stock level)
4.Creditors for the goods(720000-50000/12) 55,833

5.Collection from Debtors
Opening balance 1,00,000
Add: credit sales 7,20,000
Less: closing balance 1,20,000
-------------------
7,00,000
Payment to creditors
Opening balance 45,000
Add: Credit purchases (720000-50000) 6,70,000
Less: Closing balance 55,833
---------------
Payment by cheque 5,69,167
QUESTION NO 4
Mr. X runs a retail business. Suddenly he finds on 31.3.2006 that his cash and bank balances
have reduced considerably. He provides you the following information:
31.03.2005 31.03.2005
Rs. Rs.
Sundry debtors 35,400 58,800
Sundry creditors 84,400 22,400
Bank 1,08,400 2,500
Cash 10,400 500
Rent outstanding for one month 2,400 3,000
Stock 11,400 20,000
Electricity and telephone bills - 6,400
Pass book reveals the following:
Rs.
Total deposits 10,34,000
Withdrawals:
Creditors 8,90,000
Professional Expenses 34,000
Furniture and fixtures (acquired on 1.10.05) 54,000
Proprietor 1,61,900
Rent had been increased since January 2006.

II. The proprietor deposited all cash sales and collections after meeting shop expenses,
payment of rent, electricity and telephone bills and wages.
III. He made all purchases on credit.
IV. Monthly wages Rs.6, 500.
V. Electricity and Telephone bills paid Rs.24,000, Shop expenses Rs.18,000 paid
VI. He maintained all statements of credit sales from which he ascertained that credit
sales were Rs.9, 00,000.
VII. Charge depreciation @ 10% p.a. on furniture.
Finalize the accounts of Mr. X.
244 ACCOUNTS
ANSWER:

To opening stock 11,400 By sales :
To purchases 8,28,000 Cash 2,97,500
(w.n#2) (w.n#6)
To wages (6500*12) 78,000 Credit 9,00,000 11,97,500
To gross profit 3,00,100 -----------
By closing stock 20,000
12,17,500 12,17,500
To depreciation 2,700 By gross profit 3,00,100

To rent 30,600
(w.n#7)
To elect. & telephone. 30,400
(w.n#8)
To shop expenses 18,000
To professional charges 34,000
To net profit 1,84,400
3,00,100 3,00,100

Capital (w.n#5) 1,01,300 Furniture (w.n#4) 51,300
Stock 20,000
O/s Rent 3,000 Bank account 2,500
O/s tele. & electri. 6,400 Cash account 500
1,33,100 1,33,100
WORKING NOTES:
Debtors Account (1)

To balance b/d 35,400 By bank (collection) 8,76,600
(balancing figure)
To credit sale 9,00,000 By balance c/d 58,800
9,35,400 9,35,400
Creditors Account (2)

To balance c/d 22,400 By credit purchases 8,28,000

(balancing figure)
9,12,400 9,12,400
Bank Account (3)

To balance b/d 1,08,400 By creditors account 8,90,000
To cash account 10,34,000 By professional exp. 34,000
(deposits) By furniture 54,000
By drawings 1,61,900
11,42,400 11,42,400
Furniture account (4)

To balance b/d Nil By depreciation 2,700
To bank account 54,000 (54000*10%*6/12)
54,000 54,000
246 ACCOUNTS
Calculation of closing capital (5)

Opening balance of capital 78,800
ADD: Profits 1, 84,400
LESS: Drawings (1, 61,900)
------------
Closing capital 1, 01,300
------------
Cash account (6)

To balance b/d 10,400 By bank 10,34000
To debtors 8,76,600 (deposits)
To cash sales 2,97,500 By wages 78,000
(balancing figure) By electricity 24,000
By shop exp. 18,000
By rent 30,000
By balance c/d 500
11,84,500 11,84,500
Rent account (7)

To cash account 30,000 By balance b/d 2,400
(balancing figure)
By profit and loss a/c:
To balance c/d 3,000 April to Dec
(2400*9) 21,600
Jan to March
(3000*3) 9,000
33,000 33,000
Electricity and Telephone bills (8)

To cash account 24,000 By balance b/d Nil
By profit and loss a/c:
To balance c/d 6,400 (balancing figure) 30,400
30,400 30,400
STATEMENT OF AFFAIRS AS ON 31.03.2005 (9)

Capital (bal. fig.) 78,800 Stock 11,400
Debtors 35,400
Creditors 84,400 Bank account 1,08,400
Rent outstanding 2,400 Cash account 10,400
1,65,600 1,65,600
Mr. X runs a retail business. Suddenly he finds on 31.12.1992 that his bank account shows a
balance of Rs.1,100 only and his cash in hand is only Rs.150. But he did a good business during
the year. He provides you the following information:
(i)
Balance 31.12.1991 31.12.1992

Rs. Rs.
Bank 54,200 1,100
Cash 5,200 150
Rent outstanding for one month 1,200 1,500
Stock 5,700 10,000
248 ACCOUNTS
(ii) Pass book reveals the following:
Rs.
Total deposits 5,67,000
Withdrawals:
Creditors 4,45,000
Legal expenses 17,000
Showcase 27,000
Proprietor 1,31,100
(iii) Rent had been increased since September 1992.

(iv) The proprietor deposited all cash sales and collections after meeting shop expenses,
payment of rent, electricity and telephone bills and wages. But he made all purchases
on credit. Monthly wages Rs.5,600; Electricity and Telephone bills paid Rs.18,200 and
due Rs.4,200; Shop expenses Rs.500 per month.
(v) He maintained all statements of credit sales from which he ascertained that credit
sales were Rs.4,50,000.
Finalise accounts of Mr. X to show his profit. Prepare statement of Affairs and reconcile
the profit balance.
QUESTION NO 6
Suresh does not maintain his books of accounts under the double entry system but keeps
slips of papers from which he makes up his annual accounts. He has borrowed moneys from
a bank to whom he has to render figures of profits every year. He has given the bank the
following profit figures:
Year ending Profits

31st December Rs.
1994 20,000
1995 32,000
1996 35,000
1997 48,000
1998 55,000
The appoints you to audit the statements and verify whether the figures of profits report
are correct or not; for this purpose the following figures are made available to you:
(a) Position as on 31st December 1993: Sundry debtors Rs.20,000; Stock in trade (at 95%
of the cost) Rs.47,500; Cash in hand and at bank Rs.12,600; Trade creditors Rs.6,000;
Expenses due Rs.1,600.
(b) He had borrowed Rs.5,000 from his wife on 30th September 1993 on which he had
agreed to pay simple interest at 12% p.a. The loan was repaid along-with interest on
31st December 1995.
(c) In December 1994 he had advanced Rs.8,000 to A for purchase of a vacant land. The
property was registered in March 1996 after payment of balance consideration of
Rs.32,000. Costs of registration incurred for this were Rs.7,500.
(d) Suresh purchased jewellery of Rs.15,000 for his daughter in October 1996 Marriage
expenses incurred in January were Rs.24,000.
(e) A new VCR was purchased by him in March 1998 for Rs.18,000 and presented by him
to his friend in November 1998.
(f) His annual household expenses amounted to a minimum of Rs.24,000.
(g) The position of assets and liabilities as on 31st December 1998 was found to be
overdraft with bank (secured against property) Rs.12,000; Trade creditors Rs.10,000;
Expenses payable Rs.600; Sundry debtors (including Rs.600 due from a peon declared
insolvent by court) Rs.28,800; Stock in trade (at 125% of cost to reflect market
value) Rs.60,000 and cash in hand Rs.250.
It is found that the rate of profit has been uniform throughout the period and the proportion
of sales during the years to total sales for the period was in the ratio of 3:4:4:6:8.
Ascertain the annual profits and indicate differences, if any, with those reported by Suresh
to the bank earlier.
All workings should form part of your answer.
QUESTION NO 7
A Adamjee keeps his books on single entry basis. The analysis of the cash-book for the year
ended on 31st December 1992 is given below:
Receipts Rs. Payments Rs.

Bank balance as on 1st January 1992 2,800 Payments to sundry creditors 35,000
Received from sundry debtors 48,000 Salaries 6,500
250 ACCOUNTS
Cash sales 11,000 General expenses 2,500

Capital brought during the year 6,000 Rent and taxes 1,500
Interest on investments 200 Drawings 3,600
Balance at bank on 31st
December 1992 6,400
Cash in hand on 31st
December 1992 500
68,000 68,000
Particulars of other assets and liabilities are as follows:
1st January 1992 31st December 1992

Machinery 7,500 7,500
Furniture 1,200 1,200
Stock 3,900 5,700
Investments 5,000 5,000
Prepare final accounts for the year ending 31st December 1992 after providing depreciation
at 10% on machinery and furniture and Rs.800 against doubtful debts.
SOLUTION:
Statement of Affairs of A. Adamjee as on 1.1.2010
Rs Rs
Sundry Creditors 5,800 Machinery 7,500
A. Adamjee’s Capital 29,100 Furniture 1,200
(balancing figure) Stock 3,900
Sundry Debtors 14,500
Investment 5,000
Bank balance (from Cash Statement) 2,800
34,900 34,900
A. Adamjee’s Capital Account
Rs Rs
To Drawings 3,600 Jan.1 By Balance 29,100
To Balance c/d 31,500 Dec.31 By Cash 6,000
35,100 35,100
Sales Account
Dec. 31 To Trading A/c 62,100 Dec. 31 By Cash 11,000

Dec. 31 By total Debtors Account 51,100
62,100 62,100
Total Debtors Account
Rs Rs
Jan. 1 To Balance b/d 14,500 Dec. 31 By Cash 48,000
Dec. 31 To Credit Sales 51,100 Dec. 31 By Balance c/d 17,600
(balancing figure)
65,600 65,600
Total Creditors Account
Rs Rs
Dec. 31 To Cash 35,000 Jan.1 By Balance b/d 5,800
Dec. 31 To Balance b/d 7,900 Dec. 31 By Credit
Purchases 37,100
42,900 (Balancing figure) 42,900
A. Adamjee
Trading and Profit & Loss Account for the year ended 31.12.2010
Rs Rs
To Opening stock 3900 By sales 62,100
To purchases 49100 By Closing Stock 5700
252 ACCOUNTS
To Gross Profit c/d 14800 __

67800 67800
To Salaries 6,500 By Gross Profit b/d 14800
To Rent and Taxes 1500 By Interest on Investment 200
To General Expenses 2500
To Deprecation :
Machinery Rs 750
Furniture Rs 120 870
To provision for 800
Doubtful Debts
To Balance being
profit
Carried to Capital 2830
A/c
15,000 15,000
Balance Sheet as on 31st December, 2010
Liabilities Rs Rs Assets Rs Rs
A. Adamjee’s Capital Machinery 7,500
On 1st January, 2010 29,100 Less: Depreciation ( 750) 6750
Add: Fresh Capital 6,000 Furniture 1200
Add: Profit for the 2830 Less: Depreciation ( 120) 1080
year
37930
Less: Drawings ( 3,600) 34330 Stock -in-trade 5700
Sundry Debtors 17600
Sundry Creditors 7900 Less: Provision for
Doubtful debts (800) 16800
Investment 5,000
Cash at Bank 6400
Cash in Hand 500
42230 42230
QUESTION NO 8
From the following date, you are required to prepare a Trading and Profit and Loss account
for the year ended 31st March 1992 and a Balance Sheet as at that date.
Assets and Liabilities
As on 1st April 1991 As on 31st March 1992

Rs. Rs.
Creditors 15,770 12,400
Sundry expenses outstanding 600 330
Sundry assets 11,610 12,040
Stock in trade 8,040 11,120
Cash in hand and at bank 6,960 8,080
Trade debtors X 17,870
Details relating to transactions in the year:
Rs.
Cash and discount credited to debtors 64,000
Sales return 1,450
Bad debts 420
Sales (cash and credit) 71,810
Discount allowed by trade creditors 700
Purchase returns 400
Additional capital-paid into bank 8,500
Realizations from debtors-paid into bank 62,500
Cash expenses 9,570
Paid by cheque for machinery purchased 430
House hold expenses drawn from bank 3,180
Cash paid into bank 5,000
Cash drawn from bank 9,240
Cash in hand on 31.3.1992 1,200
Cheques issued to trade creditors 60,270
254 ACCOUNTS
QUESTION NO 9 (NOV 2005)
From the following furnished by Shri Ramji, you are required to prepare a Trading and
Profit and Loss account for the year ended 31.03.2005 and a Balance Sheet as at that date.
Assets and Liabilities
1.4.2004 31.3.2005
Rs. Rs.
Creditors 3,15,400 2,48,600
Sundry expenses O/S 12,000 6,600
Sundry assets 2,32,200 2,40,800
Stock in trade 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Trade debtors 3,30,600 ?
Details relating to transactions in the year:
Rs.
Cash and discount credited to debtors 12,80,000
Sales return 29,000
Bad debts 8,400
Sales (cash and credit) 14,36,200
Discount allowed by trade creditors 14,000
Purchase returns 8,000
Additional capital-paid into bank 1,70,000
Realizations from debtors-paid into bank 12,50,000
Cash expenses 1,91,400
Paid by cheque for machinery purchased 8,600
House hold expenses drawn from bank 63,600
Cash paid into bank 1,00,000
Cash drawn from bank 1,84,800
Cash sales 92,000
Cheques issued to trade creditors 12,05,400
Note: Ramji has not sold any fixed asset during the year.
ANSWER
In the boos of Shri Ramji
Trading and profit and loss account
For the year ended 31st March ,2011
Rs. Rs. Rs. Rs.

To opening stock By sales:
To purchase Cash 92,000
Cash 20,600 Credit 13,44,200
Credit (W.N.3) 11,60,000 14,36,200
11,80,600 Less: returns (29,000) 14,07,200
Less: return (8,000) 11,72,600
To gross profit c/d 2,96,200 By closing stock 2,22,400
16,29,600 16,29,600
To discount By gross profit 2,96,200
Allowed 30,000
To bad debts 8,400 By discount 14,000
To general
expenses (W.N.5) 1,86,000
To depreciation
(W.N.4) 55,000
3,10,200 3,10,200
Balance sheet as at 31st March, 2011

Capital (w.N.1) 5,35,400 Sundry assets 2,32,200
Add: Additional 1,70,000 Add: new machinery 63,600
capital 2,95,800
Net profit 30,800 Less : depreciation (55,000) 2,40,800
Less: drawings 7,36,200 7,27,600 Stock in trade 2,22,400
256 ACCOUNTS
Sundry creditors (8,600) 2,48,000 Sundry debtors 3,57,400

Expenses outstanding 6,600 (W.N2)
Cash in hand 24,000
Cash in bank 1,37,600
9,82,200 9,82,200
Working Notes:
(1) Statement of Affairs as At 31st March 2011

Sundry creditors 3,15,400 Sundry assets 2,32,200
Outstanding expenses 12,000 Stock 1,60,800
Ramjis capital Debtors 3,30,600
(balancing figure) 5,35,400 Cash in hand 59,200
Cash at bank 80,000
8,62,800 8,62,800
(2) Sundry debtors account
Rs. Rs
To balance b/d 3,30,600 By cash 12,50,000
To sales (14,36,200-92,000 13,44,200 By discount 30,000
By returns (sales ) 29,000

By bad debts 8,400
By balance c/d (bal. fig.) 3,57,400
16,74,800 16,74,800
(3) Sundry creditors Account
Rs. Rs.
To bank- payments 12,05,400 By balance b/d 3,15,400
To discount 14,000 by purchases credit 11,60,000
To returns 8,000 (balancing figure)
To balance c/d (closing balance) 2,48,000
14,75,400 14,75,400
(4)
Depreciation on fixed assets: Rs.

Opening balance 2,32,200
Add: Additions 63,600
2,95,800
Less: closing balance (2,40,800)
Depreciation 55,000
(5) expenses to be shown in profit and loss account

Expenses in cash 1,91,400
Add: outstanding of 2011 6,600
1,98,000
Less: outstanding of 2010 12,000
1,86,000
(6) Cash and bank account
Cash Bank Cash Bank

Rs. Rs. Rs. Rs.
To balance b/d 59,200 80,000 By purchases 20,600
To capital 1,70,000 By expenses 1,91,400
To debtors 12,50,000 By plant and 63,600
machinery
To bank 1,84,800 By drawings 8,600
To cash 1,00,000 By creditors 12,05,400
To sales 92,000 By cash 1,84,800
By bank 1,00,000
By balance c/d 24,000 1,37,600
3,36,000 16,00,000 3,360,000 16,00,000

258 ACCOUNTS
Mr. Anup runs a wholesale business where in all purchases and sales are made on credit. He
furnishes the following closing balances:
31-12-91 31-12-92
Bills receivable 15,000 6,000
Bills payable 12,000 14,000
Stock 1,10,000 1,90,000
Bank 90,000 87,000
Cash 5,200 5,300
Summary of cash transactions during 1991-92:
(i) Deposited to bank after payment of shop expenses @ Rs.600 p.m., wages @ Rs.9,200
p.m. and personal expenses @ Rs.1,400 p.m. Rs.7,62,750.
(ii) Withdrawals Rs.1,21,000
(iii) Cash payment to suppliers Rs.77,200 for supplies and Rs.25,000 for furniture.
(iv) Cheques collected from customers but dishonored Rs.5,700
(v) Bills accepted by customers Rs.40,000
(vi) Bills endorsed Rs.10,000.
(vii) Bills discounted Rs.20,000 discount Rs.750
(viii) Bills matured and duly collected Rs.16,000
(ix) Bills accepted Rs.24,000
(x) Paid suppliers by cheque Rs.3,20,000
(xi) Received Rs.20,000 on maturity of one LIC policy of the proprietor by cheque.
(xii) Rent received Rs.14,000 by cheque.
(xiii) A building was purchased on 30-11-92 for opening a branch for Rs. 3,50,000 and
some expenses were incurred details of which are not maintained.
(xiv) Electricity and telephone bills paid by cash Rs.18,700, due Rs.2,200
Other transactions:
(a) Claim against the firm for damages Rs.1,55,000 is under legal dispute. Legal expenses
Rs.17,000. The firm anticipates defeat in the suit.
(b) Goods returned to suppliers Rs.4,200

(c) Goods returned by customers Rs.1,200
(d) Discount offered by suppliers Rs.2,700
(e) Discount offered to the customers Rs.2,400
(f) The business is carried on at the premises owned by the proprietor. 50% of the ground
floor space is used for business and remaining 50% is let out for an annual rent of
Rs.20,000.
Prepare Trading and Profit and Loss account of Mr. Anup for the year ended 31-12-1992 and
a Balance Sheet as on that date.
AVL is an unemployed science graduate with typewriting qualification. Being unable to get
employment for more than Rs.500 p.m. he decided to start his own typewriting institute.
He approached U.B.C. Bank which sanctioned him a loan of Rs.20,000 on 1.1.1992. His father
gifted him Rs.5,000 on the same date. He purchased 6 typewriters worth Rs.24,000.
Unable to understand the accounts properly, he seeks your help in preparing a Profit and
Loss account and a Balance Sheet relating to the year ending 31-12-1992. His pass book
reveals the following:
(a) Expenses of the institute Rs.8,400

(b) Salary to self Rs.4,000
(c) Monthly fees collected Rs.32,700 (Totaled)
(d) Examination fees collected Rs.4,200
The following other additional details available:
(a) During the year AVL purchased a second hand cycle costing Rs.400 from a student who
owed monthly fees of Rs.100. The balance was paid. The cycle is used for the institute
only.
(b) AVL helped a friend by en-cashing a cheque for Rs.1,000 which was dishonored. The
friend has so far repaid only Rs.400
(c) AVL has taken Rs.600 per month for personal expenses in addition to his salary.
(d) AVL runs the institute from his house for which a rent of Rs.600 per month is paid.
50% may reasonably be allocated for his own living.
260 ACCOUNTS
(e) The following are outstanding as at end of 31-12-1992:
Rs.
Fees receivable 2,200
Expenses payable 1,000
Salary to self for November and Dec.,
Stock of stationary on hand 200
Provide depreciation 20% on typewriters and cycle.

(g) The loan from bank is repayable at Rs.500 per month from the beginning of July
onwards. Interest is payable at 12% per annum in addition to installments for principal.
(h) Assume that all transactions are routed through bank and no cash is handled.
Indian Travel Agency sells tickets for Inland Transport Limited Bharat Air Lines and
Government Railways. The rate of commission due to Agency on account of sales of tickets
are 10 per cent, 7.5 per cent and 5 per cent, respectively on the sale price of tickets. The
firm closes its books on 31st December. The balances as on 31st December 1991 were as
follows:
Rs. Rs.
Capital 50,000
Deposits from customers of Inland Transport Limited 10,000
Deposits from general public 10,000
Interest due for half year on above 500
Auditors’ fees 1,500
Advertising 1,000
Rates and taxes 500
Fixtures and fittings 20,000
Motor car 18,000
Debtors for Rail Tickets 5,000
Debtors for Air Tickets 2,000
Rent paid in advance 1,250
Bank balance 27,250
73,500 73,500
Other available particulars are:
(a) From the bank statements, returned cheques and the pay-in-slips for the year ended
31st December 1992.
Rs.
Banking (DEPOSITS) 8,97,500
Payment for tickets
Inland Transport Limited 6,20,000
Bharat Air Lines 1,69,000
Government Railways 84,000
Rent paid for 4 quarters 5,000
Electricity 5,000
Rates and taxes 3,000
Interest paid to public on their deposits 1,000
Amount paid to auditors 1,500
Advertising 6,250
Bank balance as on 31st December 1992 30,000
Weekly expenditure (52 weeks) defrayed from cash receipts before banking:
Staff wages 1,100
Petty expenses (total for 52 weeks) 4,200
In addition to the above, the owner, has drawn Rs.2,000 per month to meet personal
expenses and spent Rs.1,000 per month for maintenance of car in the interest of
Agency out of the cash receipts before banking.
(c) Liabilities of the firm as on 31st December 1992 include:
Rs.
Auditors 1,500
Advertising charges 1,250
Inland Transport Limited 5,500
Bharat Air Lines 16,000
Government Railways 11,000
262 ACCOUNTS
Customers deposits on 31st December 1992 were for Inland Transport Limited Rs.8,000
(e) Debtors for air and rail tickets on 31st December 1992 were Rs.2,500 and Rs.800
respectively.
(f) Depreciation on car and fixtures is allowed at the rate of 20% and 10% of the last
year’s balance respectively.
(g) Owner agrees to treat the cash differences, if any, as his drawings.
You are required to draw a Profit and Loss account showing commission earned for each
class of tickets sold for the year ending 31st December 1992 and a Balance Sheet as on the
same date.
QUESTION NO 13 (TRADE DISCOUNT)
From the following information of M/s Pradip & Company prepare the Trading and Profit and
Loss account for the year ended 31st March 1993 and the Balance Sheet as on that date:
Liabilities and assets 31.3.1992 31.3.1993

Rs. Rs.
Car 90,000 90,000
Furniture 10,000 10,000
Stock 70,000 90,000
Debtors 62,000 46,000
Bank 9,000 16,000
Creditors 60,000 ?
The following further information is also available:
(a) M/s Pradip & Company purchases goods for resale from manufactures who allow
discount of 3% on goods purchased in excess of Rs.5,00,000 in a year. The discount
for the year ended 31st March 1993 was Rs.12,480.
(b) All goods are sold at a gross profit margin of 30% on selling price.
(c) Bank statements for the year reveal the following payments:
Rs.
Creditors 9,03,520
Salaries 60,000
Car expenses 23,000
Rent 30,000
Printing and stationary 6,400
Carriage outward 18,600
Traveling expenses 14,900
Delivery van purchase 1,70,000
Miscellaneous expenses 9,580
Drawings 50,000
Depreciation on car and van @ 20% and furniture @ 10% is to be provided on balances as
on 31.3.1993.
(Hint: In the given question, it is mentioned that depreciation is to be provided on fixed
assets. So we have revised closing balances in fixed assets)
K. Azad who is in business as a wholesaler in sunflower oil, is a client of your accounting firm.
You are required to draw up his final accounts for the year ended 31.3.1996.
From the files your pick up his Balance Sheet as at 31.3.1995 reading as below:
Balance Sheet as at 31.3.1995
Liabilities Rs. Rs.

K. Azad’s capital 1,50,000
Creditors for oil purchases 2,00,000
12% Security Deposits from customers 50,000
Creditors for expenses:
Rent 6,000
Salaries 4,000
Commission 20,000
4,30,000
264 ACCOUNTS
Assets Rs. Rs.

Cash and bank balance 75,000
Debtors 1,60,000
Stock of oil (125 tins) 1,25,000
Furniture 30,000
Less: Depreciation 3,000 27,000
Rent advance 12,000
Electricity deposit 1,000
3-Wheeler Tempo Van 40,000
Less: Depreciation 10,000 30,000
4,30,000
A summary of the rough cash book of K. Azad for the year ended 31.3.1996 is as below:
Cash and Bank Summary
Rs.
Receipts:
Cash sales 5,26,500
Collections from debtors 26,73,500
Payments:
To Landlord 79,000
Salaries 48,000
Miscellaneous office expenses 12,000
Commission 20,000
Personal income-tax 50,000
Transfer on 1.10.1995 to 12% Fixed Deposit 6,00,000
To Creditors for oil supplies 24,00,000
A scrutiny of the other records gives you the following information:

(a) During the year oil was purchased at 250 tins per month basis at a unit cost of Rs.1,000.
5 tins were damaged in transit in respect of which insurance claim has been preferred.
The surveyors have since approved the claim at 80%. The damaged ones were sold for
Rs.1,500 which is included in the cash sales. One tin has been used up for personal
consumption. Total number of tins sold during the year was 3,000 at a unit price of
Rs.1,750.
(b) Rent until 30.9.1995 was Rs.6,000 per month and was increased thereafter by Rs.1,000
per month. Additional advance rent of Rs.2,000 was paid and this is included in the
figure of payments to landlord.
(c) Provide depreciation at 10% and 25% of WDV on furniture and tempo van respectively.
(d) It is further noticed that a customer has paid Rs.10,000 on 31.3.1996 as security
deposit by cash. One of the staff has defalcated. The claim against the insurance
company is pending.
You are required to prepare the final accounts for the year ended 31.3.1996.
QUESTION NO 15
The following is the Balance Sheet of Sanjay, a small trader as on 31.3.1996:

(Figures in Rs.‘000)

Capital 200 Fixed assets 145
Creditors 50 Stock 40
Debtors 50
Cash on hand 5
Cash at bank 10
250 250
A fire destroyed the accounting records as well as the closing cash of the trader on
31.3.1997. However, the following information was available:
(a) Debtors and Creditors on 31.3.1997 showed an increase of 20% as compared to

31.3.1996.
(b) Credit period:
Debtors—1 month Creditors—2 months
(c) Stock was maintained at the same level throughout the year.
(d) Cash sales constituted 20% of total sales.
(e) All purchases were for credit only.
(f) Current ratio as on 31.3.1997 was exactly 2.
(g) Total expenses excluding depreciation for the year amounted to Rs.2,50,000.
(h) Depreciation was provided at 10% on the closing value of fixed assets.
(i) Bank and cash transactions:
266 ACCOUNTS
a. Payments to creditors included Rs.50,000 by cash.

b. Receipts from debtors included Rs.5,90,000 by way of cheques.
c. Cash deposited into the bank Rs.1,20,000
d. Personal drawings from bank Rs.50,000
e. Fixed assets purchased and paid by cheques Rs.2,25,000.
(1) The Trading and Profit and Loss account for the year ended 31.3.1997 and
(2) A Balance Sheet on that date.
For your exercise, assume cash destroyed by fire is written off in the Profit and Loss
account.
QUESTION NO 16
Following is the abridged Balance Sheet of the Everest Company Limited as at 31st March
1996:
Balance Sheet as on 31st March 1996
Rs. Rs. Rs.

Paid-up share capital 5,00,000 Freehold property 4,00,000
Profit and Loss Plant and machinery 2,50,000
account 85,000 Depreciation 75,000 1,75,000
Current liabilities 2,00,000 Stocks 1,05,000
Debtors 1,00,000
Bank 5,000
7,85,000 7,85,000
From the following information you are required to prepare the Profit and Loss account and
Balance Sheet as at 31st March 1997:
(a) The composition of the total of the ‘Liabilities’ side of the company’s Balance Sheet as
at 31.3.1997 (the paid-up share capital remaining the same as at 31.3.1996) was:
Share capital 50%
Profit and Loss account 15%
7% Debentures 10%
Creditors 25%
The debentures were issued on 1st April 1996, interest being paid on 30th September
1996 and 31st March 1997.
(b) During the year ended on 31.3.1997, Additional Plant and machinery had been bought and
a further Rs.25,000 depreciation written off. Freehold property remained unchanged.
The total fixed assets then constituted 60 per cent of total fixed and current assets.
(c) The current ratio was 1.6 : 1. The quick assets ratio was 1 : 1.
(d) The debtors (four-fifths of the quick assets) to sales ratio revealed a credit period
of two months.
(e) Gross profit was at the ratio of 15 per cent of selling price and return on net worth as
at 31.3.1997 was 10%.
Ignore taxation.
Shri Rashid furnishes you with the following information relating to his business:
Assets and Liabilities:
Assets and liabilities as on 1.1.1997 31.12.1997

Rs. Rs.
Furniture (w.d.v.) 6,000 6,350
Stock at cost 8,000 7,000
Sundry debtors 16,000 ?
Prepaid expenses 600 700
Unpaid expenses 2,000 1,800
Cash in hand and at bank 1,200 625
Receipts and payments during 1997:

Collections from debtors after allowing discount of Rs.1,500 amounted to Rs.58,500.
Collections on discounting of bills of exchange after deduction of discount of Rs.125 by the
bank, totalled to Rs.6,125.
Creditors of Rs.40,000 were paid Rs.39,200 in full settlement of their dues.
Payment for freight inward Rs.3,000
Amounts withdrawn for personal use Rs.7,000.
Payment for office furniture Rs.1,000.
268 ACCOUNTS
Investment carrying annual interest of 4% were purchased at Rs.96 on 1st July 1997
and payment made therefore.
Expenses including salaries paid Rs.14,500.
Miscellaneous receipts Rs.500.
(b) Bills of exchange drawn on and accepted by customers during the year amounted to
Rs.10,000. Of these bills of exchange of Rs.2,000 were endorsed in favour of creditors.
An endorsed bill of exchange of Rs.400 was dishonoured.
(c) Goods costing Rs.900 were used as advertising materials.
(d) Goods are invariably sold to show a gross profit of 33 and 1/3% on sales.
(e) Difference in cash book, if any, is to be treated as further drawing or introduction by
Shri Rashid.
(f) Provide at 2.5% for doubtful debts on closing debtors.
Rashid asks you to prepare Trading and Profit and Loss account for the year ended 31st
December 1997 and the Balance Sheet as on that date.
QUESTION NO 18 (GOOD QUESTION)
The following is the Balance Sheet of the retail business of Sri Srinivas as at 31st December
1998:

Sri Srinivas’s capital 1,00,000 Furniture 10,000
Liabilities for goods 20,500 Stock 70,000
Rent 1,000 Debtors 25,000
Cash in bank 14,500
Cash in hand 2,000
1,21,500 1,21,500
You are furnished with the following information:
(a) Sri Srinivas sells his goods at a profit of 20% on sales.

(b) Goods are sold for cash and credit. Credit customers pay by cheques only.
(c) Payments for purchases are always made by cheques.
(d) It is the practice of Sri Srinivas to send to the bank every weekend the collections of
the week after paying the every week, salary of Rs.300 to the clerk, sundry expenses
of Rs.50 and personal expenses Rs.100.
Analysis of the bank Pass-book for the 13 weeks period ending 31st March 1999 disclosed
the following:
Rs.
Payments to creditors 75,000
Payments of rent upto 31.3.1999 4,000
Amounts deposited into the bank 1,25,000
(include Rs.30,000 received from debtors by cheqeus)
The following are the balances as on 31st March 1999:

Stock 40,000
Debtors 30,000
Creditors for goods 36,500
On the evening of 31st March 1999 the Cashier absconded with the available cash in the
cash box. There was no cash deposit in the week ended on that date.
You are required to prepare a statement showing the amount of cash defalcated by cashier
and also a Profit and Loss account for the period ended 31st March 1999 and a Balance Sheet
as on that date.
QUESTION NO 19 (OUT OF COURSE NOW)
Shri Kisan, a farmer, maintains a cash book, through which he records all receipts and
payments and a diary in which he records other relevant information. On 31st March 1999
he had cash in hand Rs.1,000 and balance of Rs.500 with local Grameen Bank. He also owed
Rs.600 to Beej Bhandar for seeds purchased by that date.
During the year ended 31st March 2000 he realised:
Rs.
Sale proceeds of crops 59,100
Sale proceeds of cattle and cattle products 12,500
Sale proceeds of wood and grass 3,000
Sale of cowdung 5,000
Receipt on account from Babu (a credit customer) 12,000
Grant from Zilla Parishad for installing tubewell—cheque 10,000
270 ACCOUNTS
During the year ended 31st March 2000 he paid:
Rs.
Wages 65,000
Beej Bhandar 600
Seeds, feeds and fertilizer 3,000
Power 5,000
Land revenue 2,000
Tools purchased 2,500
Household expenses 10,000
During the year ended 31st March 2000 his other transactions were:
Rs.
(i) Sale of crop to Babu on credit 20,000
(ii) Purchase on 25th March 2000 from Beej Bhandar on credit of
one month seeds of 2,000
(iii) Efforts put in by self and family members of the farm were
conservatively valued at
60,000
(iv) Value of crop used for consumption by:
Self and family
30,000
Agricultural labourers
40,000
On 31st March 2000 his cash in hand was only Rs.2,500.

The rest was banked. He did not have any stock of seeds.
The tubewell for which the grant cheque was realized in the last week of March 2000 is to
be installed in April 2000.
Shri Kisan asks you to prepare his cash and income summaries for the year ended 31st March
2000 and his statement of financial position as on that date.
QUESTION NO 20 (GOOD QUESTION)
A trader keeps his books of account under single entry system. On 31st March 2000 his
statement of affairs stood as follows:

Trade creditors 5,80,000 Furniture, Fixtures and Fittings 1,00,000
Bills payable 1,25,000 Stock 6,10,000
Outstanding expenses 45,000 Trade debtors 1,48,000
Capital account 2,50,000 Bills receivables 60,000
Unexpired insurance 2,000
Cash in hand and at bank 80,000
10,00,000 10,00,000
The following was the summary of Cash-book for the year ended 31st March 2001:

Cash in hand and at bank as on Payment to trade creditors 75,07,000
1st April 2000 80,000 Payment for bills payable 8,15,000
Cash sales 73,80,000 Sundry expenses paid 6,20,700
Receipts from trade debtors 15,10,000 Drawings 2,40,000
Receipts for bills receivable 3,40,000 Cash in hand and at bank as
on 31st March 2001 1,27,300
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to
Rs.36,000 and Rs.28,000 respectively. Bills endorsed amounted to Rs.15,000. Annual Fire
Insurance premium of Rs.6,000 was paid every year on 1st August for the renewal of the
policy. Furniture, Fixtures and Fittings were subject to depreciation @ 15% per annum on
diminishing balances method.
You are informed about the following balances as on 31st March 2001:
Rs.
Stock 6,50,000
Trade Debtors 1,52,000
Bills Receivables 75,000
Bills Payables 1,40,000
Outstanding expenses 5,000
272 ACCOUNTS
The trader maintains a steady gross profit ratio of 10% on sales.

Prepare the Trading and Profit and Loss account for the year ended 31st March 2001 and
Balance Sheet as at that date.
QUESTION NO 21
The following is the Balance Sheet of a concern on 31st March 2000:
Rs. Rs.
Capital 10,00,000 Fixed assets 4,00,000
Creditors (Trade) 1,40,000 Stock 3,00,000
Profit and Loss account 60,000 Debtors 1,50,000
Cash and bank 3,50,000
12,00,000 12,00,000
The management estimates the purchases and sales for the year ended 31st March 2001 as
under:
Up-to March
28.2.2001 2001
Purchases Rs. 14,10,000 1,10,000

Sales 19,20,000 2,00,000
It was decided to invest Rs.1,00,000 in purchases of fixed assets, which are depreciated
@ 10% on cost.
The time lag for payment to trade creditors for purchase and receipt from sales is one
month. The business earns a gross profit of 30% on turnover. The expenses against gross
profit amount to 10% of the turnover. The amount of depreciation is not included in these
expenses.
Draft a Balance Sheet as at 31st March 2001 assuming that creditors are all trade creditors
for purchases and debtors for sales and there is no other item of current assets and
liabilities apart from stock and cash and bank balances.
QUESTION NO 22
Assets and liabilities of Mr. X as on 31-12-97 and 31-12-98 are as follows:
31-12-97 31-12-98
Rs. Rs.
Assets:
Building 1,00,000
Furniture 50,000
Stock 1,20,000 2,70,000
Cash at bank 70,000 85,000
Cash in hand 1,200 3,200
Liabilities:
Loans 1,00,000 80,000
Decided to depreciate building by 2.5% and furniture by 10%. One life insurance policy of
the proprietor was matured during the period and the amount Rs.40,000 is retained in the
business. Proprietor took @ Rs.2000 p.m. for meeting family expenses.
Prepare statement of affairs.
QUESTION NO 23
Assets and liabilities of Mr. X as on 31-12-97 and 31-12-98 are as follows:
31-12-97 31-12-98
Rs. Rs.
Assets:
Building 1,00,000
Furniture 50,000
Stock 1,20,000 2,70,000
Cash at bank 70,000 85,000
Cash in hand 1,200 3,200
274 ACCOUNTS
Liabilities:
Loans 1,00,000 80,000
Decided to depreciate building by 2.5% and furniture by 10%. One life insurance policy of
the proprietor was matured during the period and the amount Rs.40,000 is retained in the
business. Proprietor took @ Rs.2000 p.m. for meeting family expenses.
Find out profit of Mr. X.
QUESTION NO 24
Mr. X started a business with Rs.1,00,000 as on 1.1.98. He took a loan of Rs.50,000 from
State Bank of India @ 18% p.a. He purchased/invested for the following assets:
Rs.
Furniture 15,000
Telephone 8,000
Deposit with Electric Supply Authority 10,000
He did not maintain any books of accounts. But he maintained accounts for his debtors and
creditors. Debtors as on 31.12.1998 were Rs.1,40,000 and creditors Rs.70,000. He repaid
first installment of loan Rs.10,000 with interest.
During the year, he withdraw @ Rs.1,000 p.m. It appeared that stock in hand was Rs.30,000.
His other liabilities were:
Rs.
Unpaid wages for December 1998 1,500
Unpaid shop rent 4,500
Unpaid electricity bill 8,000
Unpaid telephone bill 2,500
He found that the following advances were made:
For advertisement 2,000
For purchase of a showcase 7,000
Suppliers 8,000
On scrutiny it was found, he sent goods worth Rs.70,000 on consignment basis to Mr. YK.
YK sold 50% of the consignment at 120% of cost. Mr. X met all related cost. Mr. YK paid
60% of the sale proceeds. He is entitled to 20% commission on sales. Furniture should be
depreciated by 10% per annum. Cash at the end Rs.56,100. Deposits with telephone and
electricity supply authorities have been adjusted against current year’s bill.
Find out profit earned by Mr. X during 1998.
QUESTION NO 25
The following is the Balance Sheet of Mr. Rama shankar as on 30th June 2000:
Rs. Rs.
Rama Shankar’s Capital 96,000 Building 60,000
General Reserve 30,500 Furniture 12,000
Creditors 62,000 Motor car 18,000
Stock 40,000
Debtors 34,000
Cash in hand 7,500
Cash at Bank 17,000
1,88,500 1,88,500
A fire occurred in the evening of 30th June,2001 in the premises of the trader destroying
all the books and records. The cashier absconded with the available cash. Mr. Rama shankar
gives you the following information:
a. His sales for the year 20% higher than the previous year’s. He sells his goods at cost
plus 25%: 20% of the total sales were for cash. There were no cash purchases.
b. From 1st July 2001, the stock level was raised to Rs. 50,000 and maintained at that
level all throughout the year.
c. Collection from Debtors amounted to Rs.2,60,000 of which Rs.60,000 was received in
cash. Business expenses amounted Rs.42,000 of which of Rs.10,000 was outstanding
on 30th June 2001 and Rs.12,000 was paid by cheques. Creditors were paid by Cheques
only.
d. Analysis of the pass book revealed the following:
i. Payment to creditors Rs.2,75,000
ii. Personal drawings Rs.15,000
iii. Cash deposited in bank Rs.1,33,700
iv. Cash withdrawn from bank Rs.24,000
276 ACCOUNTS
e. Gross profit as per last year’s audited accounts was Rs.60,000. Provide depreciation
on building and furniture at 5% and motor car 20%.
You are required to ascertain the amount defalcated by the cashier and prepare the trading
and Profit and Loss Account for the year the ended 30th June 2001 and a Balance Sheet as
on the that date after defalcation.
QUESTION NO 26
The ITO, assuming the income of Shri Moti for the financial year 1997-98 and 1998-99
feels that Shri Moti has not disclosed the full income. He gives you the following particulars
of assets and liabilities of Shri Moti on 1st April 1997 and 1st April 1999:
Rs.
1-4-1997 Assets: Cash in hand 25,500
Stock 56,000
Sundry debtors 41,500
Land and building 1,99,000
Wife’s jewellery 75,000
Liabilities: Owing to Moti’s Brother 40,000
1-4-1999 Assets: Cash in hand 16,000
Stock 91,500
Land and building 1,90,000
Motor car 1,25,000
Wife’s jewellery 1,25,000
Loan to Moti’s Brother 20,000
Liabilities: Sundry creditors 55,000
During the two years the domestic expenditure was Rs.4,000 p.m. The declared income of
the financial years were Rs.1,05,000 for 1997-98 and Rs.1,23,000 for 1998-99 respectively.
State whether the ITO’s contention is correct. Explain by giving your workings.
QUESTION NO 27
Mr. Ashok Keep his books in Single Entry system. From the following Information, prepare
Trading and Profit & Loss Account for the year ended 31st ended 31st March, 2006 and the
Balance Sheet as on that date:
Assets and Liabilities 31.3.2005 31.3.2006

(Rs.) (Rs.)
Sundry Creditors 30,000 25,000
Outstanding expenses 1,000 500
Fixes Assets 23,000 22,000
Stock 16,000 22,500
Cash in Hand and at Bank 14,000 16,000
Sundry Debtors ? 36,000
Following further details are available for the Current Year
Rs. Rs.
Cash receivable from 1,30,000 Cash purchases 2,000
debtors
Returns inward 3,000 Fixed Assets purchased

Bad Debts 1,000 And paid by cheque 1,000
Total Sales 1,50,000 Drawings by cheqeus 6,500
Discount received 1,500 Deposited into the bank 10,000
Return outwards 1,000 Withdrawn from bank 18,500
Capital introduced Cash in hand at the end 2,500
(paid into bank ) 15,000 Paid to creditors by cheques 1,20,000
Cheques received from 1,25,000 Expenses paid 20,000
debtors
278 ACCOUNTS
ANSWER

TO opening stock 16,000 By sales
To purchases Cash 11,500
Cash 2,000 Credit 1,38,500
Credit W.N # 3 1,17,500 By Purchase return 1,000
To sale return 3,000 By closing stock 22,500
1,73,500 1,73,500
To Expenses 19,500 By gross profit 35,000

(20000+500-1000) By discount received 1,500
To bad debts 1,000
To Discount 1,000
36,500 36,500

Capital 49500 Fixed Assets 22000
Profit 13000 Stock 22500
Drawings (6500) Debtors 36000
Additional 15000 Cash on hand 16000
------------- 71000
Creditors 25000
Outstanding exp. 500
96500 96500
W.N # 1

To balance b/d 14,000 By cash purchases 2,000
To capital 15,000 By fixed assets 1,000
To debtors 1,25,000 By drawings 6,500
To cash sales 11,500 By creditors 1,20,000
(bal.fig) By expenses 20,000
1,65,500 1,65,500
W.N # 2
Debtors Account

To balance b/d 27,500 By bank (collection) 1,25,000
By bad debts 1,000
To credit sale 1,38,500 By sales return 3,000
(150000-11500) By discount 1,000
1,66,000 1,66,000
W.N # 3
Creditors Account

To purchase return 1,000 By credit purchases 1,17,500
To discount 1,500 (bal.fig)
1,47,500 1,47,500
280 ACCOUNTS
W.N # 4

Capital (BAL.FIG.) 49,500 Fixed Assets 23,000
Stock 16,000
Outstanding exp. 1,000 Cash on hand (4500 + 9500) 14,000
80,500 80,500
W.N # 5
Fixed Assets account

To balance b/d 23,000 By depreciation 2,000
To bank 1,000 By balance c/d 22,000
24,000 24,000
W.N # 6
Cash receivable from debtors 130000
Collection (125000)
Bad debts (1000)
Return inward (3000)
------------
Discount 1000
QUESTION NO 28 (SAME QUESTION AS Q.20)
Mr. Y Keeps his books under single entry system. On 31st March, 2006 his balance Sheet
was as follows:

Capital of Mr. Y 4,50,000 Fixed assets 2,25,000
Creditors 8,70,000 Stock 9,15,000
Bills payable 1,87,500 Debtors 2,22,000
Expenses outstanding 67,500 Bills receivable 90,000

Prepaid insurance 3,000
Cash/ Bank balance 1,20,000
15,75,000 15,75,000
(i) Following are the summary of cash and bank transactions for the year ended 31st
March, 2007:
Rs.
(i) Cash sales 1,10,70,000
Collection from debtors 22,65,000
Payments to creditors 1,12,60,500
Paid for bills payable 12,22,500
Sundry expenses paid 9,31,050
Drawing for domestic expenses by Mr. Y. 3,60,000
Cash and bank balance as on 31.3.2007 1,90,950
(ii) Following further details are finished :
Gross profit on sales @ 10%
Bills receivable from debtors during the year 6,52,500
Discount allowed to debtors 54,000
Discount received from creditors 42,000
Bills receivable endorsed to creditors 22,500
Annul fire insurance premium paid
(This is paid on 1st August every year 9,000
Depreciate fixed assets @ 10%
(iii) Balances as on 31.3.2007 are given below : Rs.
Stock in hand 9,75,000
Debtors 2,28,000
Bills receivable 2,10,000
Bills payable 2,10,000
Outstanding expense 7,500
Prepare Trading profit and Loss Account for the year ended 31st March, 2007 and Balances
sheet on that date .
282 ACCOUNTS
ANSWER:

TO opening stock 9,15,000 By sales
To purchases W.N # 5 1,27,02,750 Cash 1,10,70,000
To gross profit 14,04,750 Credit W.N # 2 29,77,500
By closing stock 9,75,000
1,50,22,500 1,50,22,500
To Expenses(w.n#6) 8,71,050 By gross profit 14,04,750

To Discount 54,000 By discount received 42,000
14,46,750 14,46,750

Capital 450000 Fixed Assets 202500
Profit 499200 (225000-22500)
Drawings (360000) Stock 975000
------------- 589200 Debtors 228000
Bills receivable 210000
Bills payable 210000 Prepaid insurance 3000
Creditors 1002750 Cash on hand 190950
Outstanding expenses 7500
1809450 1809450
WORKING NOTES:
W.N # 1
Bills Receivable Account

To balance b/d 90,000 By cash (bal.fig) 5,10,000
To Debtors 6,52,500 By Creditors 22,500
7,42,500 7,42,500
W.N # 2
Debtors Account

By discount 54,000
To credit sale (Bal.fig) 29,77,500 By bills receivable 6,52,500
31,99,500 31,99,500
W.N # 3

To bank (payment) 12,22,500 By balance b/d 1,87,500
By creditors 12,45,000
To balance c/d 2,10,000 (bal.fig)
14,32,500 14,32,500
284 ACCOUNTS
W.N # 4
Creditors Account

To bank (payment) 1,12,60,500 By balance b/d 8,70,000
To discount 42,000 By credit purchases 1,27,02,750
To BR endorsed 22,500
To B/P 12,45000
To balance c/d (bal.fig) 10,02,750
1,35,72,750 1,35,72,750
W.N # 5
Calculation of Purchases
COGS = Opening Stock + Purchases - Closing Stock
14047500 - 10% = 915000 + Purchases - 975000
Purchases = 12702750
W.N # 6
Expenses Account

To balance b/d 3000 By balance b/d 67500
To cash 931050 By profit loss 871050
To balance c/d 7500 (bal.fig)
By balance c/d 3000
941550 941550
QUESTION NO 29
The books of Mr. Z showed the following information:
1.1.2007 31.12.2007
Rs. Rs.
Bank balance - 50,000
Debtors - 87,500
Creditors - 46,000
Stock 50,000 62,500

Fixed Assets 7,500 9,000
The following are the details of the bank transactions:

Rs.
Receipt from customers 3,40,000
Capital brought in 5,000
Sale of Fixed assets 1,750
Expenses paid 49,250
Drawings 25,000
Purchase of Fixed assets 5,000
Other information :
(i) Cost of goods sold 2,60,000
(ii) Gross profit 25% on cost of goods sold
(iii) Books value of assets sold 2,500
Prepare Trading, Profit & Loss account for the year ended 31.12.2007 and Balance Sheet
as at 31..12.2007.
QUESTION NO 30 (ALL FIGURES ARE DOUBLE OF Q.15)
Following is the balance Sheet of Mr. Ram, a small trader, as on 31st March, 2008;

Creditors 1,00,000 Cash 10,000
Capital 4,00,000 Bank 20,000
Stock 80,000
Debtors 1,00,000
Fixed Assets 2,90,000
5,00,000 5,00,000
A fire occurred on the night of 31st March, 2009, destroying the accounting records as well
as the closing cash of the trader. However, the following information was available:
286 ACCOUNTS
(i) Debtors and creditors as on 31st March, 2009 showed an increase of 20% as compared
to 31st March, 2008.
(ii) Credit period:
Debtors: 1 month
Creditors: 2 months
(iii) Stock was maintained at the same level throughout the year.
(iv) Cash sales constituted at 20% of the total sales.
(v) All purchases were on credit basis only.
(vi) Current ratio on 31st March, 2009 was exactly 2.
(vii) Total expenses excluding depreciation for the year amounted to Rs. 5,00,000.
(viii) Depreciation was provided @ 10% on the closing book value of fixed assets.
(ix) Bank and cash transactions for the financial year 2008-09 were as under:
(a) Payment to creditors included Rs. 1,00,000 by cash.
(b) Received from debtors included Rs. 11,80,000 by way of chequye.
(c) Cash deposited into the bank Rs. 2,40,000.
(d) Personal drawings from Bank Rs. 1,00,000.
(e) Fixed assets purchased and paid by cheques Rs. 4,50,000.
(f) Assume that cash destroyed by fire is written off in the Profit and Loss account
you are required to prepare :
(i) Trading and Profit and Loss account of Shri Ram for the year ended 31st March,
2009.
(ii) A Balance Sheet as at that date.
QUESTION NO 31
The books of account of Ruk Maan of Mumbai showed the following figures :
31.3.2008 31.3.2008
Rs. Rs.
Furniture & Fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000
Cash in hand & bank 1,10,000
Creditors 1,35,000 1,90,000

Bills Payable 70,000 80,000
Outstanding Salaries 19,000 20,000
An analysis of the cash book revealed the following :

Rs.
Cash Sales 16,20,000
Collection from debtors 10,58,000
Cash purchases 6,15,000
Payment to Creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
Depreciation is provided on furniture & fixtures @ 10% p.a. on diminishing balances method.
Ruk Ruk Maan maintains a steady gross profit rate of 25% on sales.
You are required to prepare trading and profit and loss account for year ended 31st March,
2009 and Balance sheet as on that date.
ANSWER

To opening stock 2,45,000 By sales
To purchases Cash 16,20,000
Cash 6,15,000 Credit W.N # 3 11,00,000
Credit W.N # 1 15,00,000 By closing stock 3,20,000
To gross profit 6,80,000
30,40,000 30,40,000
288 ACCOUNTS
To salaries (w.n#6) 2,37,000 By gross profit 6,80,000

To Rent 1,32,000 By discount received 32,000
To trade expenses 81,000
To Discount 20,000
7,12,000 7,12,000

Capital 516000 Fixed Assets :
Profit 216000 Furniture 234000
Drawings (120000) 612000 Stock 320000
------------- Debtors (W.N#4) 147000
Cash on hand 201000
Bills payable 80000
Creditors 190000
Outstanding SALARIES 20000
902000 902000
W.N # 1

To bank (payment) 430000 By balance b/d 70000
By creditors 440000
To balance c/d 80000 (bal.fig)
510000 510000
W.N # 2
Creditors Account

To bank (payment) 973000 By balance b/d 135000
To discount 32000 By credit purchases 1500000
To B/P 440000 (bal.fig)
To balance c/d 190000
1635000 1635000
W.N # 3
CALCULATION OF CREDIT SALES
Particulars Amount
Opening Stock 245000
Add: Purchases (615000 + 1500000) 2115000
Less: Closing stock (320000)
Cogs 2040000
Gp Ratio On Sales 25%
Total Sales (2040000/75) X 100 2720000
Less:credit Sales (1620000)
1100000
W.N # 4
Debtors Account

By discount 20,000
To credit sale 11,00,000 By balance c/d 1,47,000
(BAL.FIG)
12,25,000 12,25,000
290 ACCOUNTS
W.N # 5
Salaries Account

To cash 236000 By balance b/d 19000
To balance c/d 20000 By profit loss 237000
256000 (bal.fig) 256000
W.N # 6

To balance b/d 1,10,000 By cash purchases 6,15,000
To cash sales 16,20,000 By creditors 9,73,000
To debtors 10,58,000 By bills payable 4,30,000
By drawings 1,20,000
By salaries 2,36,000
By rent 1,32,000
By trade expenses 81,000
27,88,000 27,88,000
W.N # 7

Capital (BAL.FIG.) 5,16,000 Fixed Assets :
Furniture 2,60,000
Bills payable 70,000 Stock 2,45,000
Creditors 1,35,000 Debtors 1,25,000
Outstanding SALARIES 19,000 Cash on hand 1,10,000
7,40,000 7,40,000
QUESTION NO 32
Mr. A runs business of readymade garments. He closes the books of accounts on 31st March.
The balance sheet as on 31st March , 2011 was as follows:

A’s capital a/c 4,04,000 Furniture 40,000
Creditors 82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4,86,000 4,86,000
You are furnished with the following information:
(1) His sales for the year ended 31st March, 2012 were 20% higher than the sales of
previous year, out of which 20% sales was cash sales.-Total sales during the year
2010-11 were Rs.5,00,000.
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit cutomers pay be cheques only.
(4) Depreciation on furniture is to be charged 10% p.a.
(5) Mr. A sent to the bank collection of the month at the last date of the each month
after paying salary of Rs.2,000 to the clerk, office expenses Rs.1,200 and personal
expenses Rs.500
Analysis of bank pass book for the year ending 31st March 2012 disclosed the following:
Rs.
Payment of rent up to 31st March 2012 16,000
Cash deposited into the bank during the year 80,000
292 ACCOUNTS
The following are the balances on 31st March 2012:
Rs.
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March 2012, the cashier absconded with the available cash in the
cash back.
You are required to prepare trading and profit and loss A/c for the year ended 31st March.
2012 and balance sheet as on that date. All the working should from part of the answer.
ANSWER
Trading and profit and loss Account for the year ending 31st March 2011
Particulars Rs. Partiulars Rs.

To opening stock 2,80,000 By sales (W.N.3)
To purchase (W.N.1) 3,64,000 Credit 4,80,000
To gross profit 1,16,000 Cash 1,20,000 6,00,000
7,60,000 By closing stock 1,60,000
To salary 24,000 7,60,000
To rent 16,000 By gross profit 1,16,000
To office expenses 14,400
To loss of cash (W.N.6) 23,600
To depreciation on furniture 4,000
1,16,000 1,16,000
Balance sheet as on 31st March, 2011

A’s capital 4,04,000 Furniture 40,000
Add: Net Profit 34,000 Less: depreciation (4,000) 36,000
Less: Drawings (6,000) 4,32,000 Stock 1,60,000
Creditors 1,46,000 debtors 1,20,000
Cash at bank 2,62,000
5,78,000 5,78,000
Working Notes:
(1) Calculation of purchase
Creditors accounts

To bank A/c 3,00,000 By balance b/d 82,000
To balane c/d 1,46,000 By purchase (bal. fig.) 3,64,000
4,46,000 4,46,000
Calculation of total sales
Rs.
Sales for the year 2010-11 5,00,000
Add: 20% increase 1,00,000
Total sales for the year 2011-10 6,00,000
Calculation of credit sales
Rs.
Total sales 6,00,000
Less: cash sales (20%of total sales) (1,20,000)
4,80,000
Calculation of cash collected from debtors

Debtors account

To balance 1,00,000 By bank A/c (bal. fig.) 4,60,000
To sales A/c 4,80,000 By balance c/d 1,20,000
5,80,000 5,80,000
294 ACCOUNTS
Calculation of closing balance of cash at bank

Bank account

To balance b/d 38,000 By creditors A/c 3,00,000
To debtors A/c 4,60,000 By rent A/c 16,000
To cash A/c 80,000 By balance c/d 2,62,000
5,78,000 5,78,000
Calculation of the amount of cash defalcated by the cashier
Rs.
Cash balance as on 1st Aprill 2011 28,000
Add: cash sale during the year 1,20,000
1,48,000
Less: salary (Rs.2,000x12) 24,000
Office expenses (Rs.1,200x12 14,400
Drawings of A (Rs.500x12) 6,000
Cash deposited into bank during the year 80,000 (1,24,400)
Cash balance as on 31st March 2012(defalcated by the cashier) 23,600
QUESTION NO 33
Ram carried on business as retail merchant. He has not maintained regular account books.
However, he always maintained Rs.10,000 in cash and deposited the balance into the bank
account. He informs you that he has sold goods at profit of 25% on sales.
Following information is given to you:
Assets and liabilities As on 1.4.2010 As on 31.3.2011
Cash in hand 10,000 10,000

sundry creditors 40,000 90,000
Cash at bank 50,000(Cr.) 80,000(Cr.)
Sundry debtors 1,00,000 3,50,000
Stock in trade 2,80,000 ?
Analysis of his bank pass book reveals the following information:
(a) payment to creditors Rs.7,00,000

(b) payment for business expenses Rs.1,20,000
(c) receipts from debtors Rs.7,50,000
(d) loan from laxman Rs. 1,00,000 taken on 1.1.2010 at 10% per annum
(e) cash depostited in the bank Rs.1,00,000
He informs you that he paid creditors for goods Rs..20,000 in cash and salaries Rs.40,000
in cash. He has drawn Rs.80,000 in cash for personal expenses. During the year ram had not
introduced any addition capital. Surplus cash if any , to be taken as cash sales.
Prepare:
(i) trading and profit and loss account for the year ended 31.3.2011.
(ii) balance sheet as at 31st March 2011.
ANSWER
For the year ended 31st March 2011
Rs. Rs.
To opening stock 2,80,000 By sales
To purchase 7,70,000 Cash 2,40,000
To gross profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By closing stock (bal. fig.) 1,20,000
13,60,000 13,60,000
To salaries 40,000 By gross profit 3,10,000

To business expenses 1,20,000
To interest on loan 5,000
(10% of 1,00,000*6/12)
3,10,000 3,10,000
296 ACCOUNTS
Balance sheet as at 31st March, 2011
Liabilities Rs. Rs. Assets Rs.

Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at bank 80,000
Add: net profit 1,45,000 Sundry debtors 3,50,000
4,45,000 Stock in hand 1,20,000
Less: drawings (80,000) 3,65,000
Loan from laxman 1,05,000
(including interest due)
5,60,000 5,60,000
Working Notes:
1. Sundry debtors account
Rs. Rs.
to balance b/d 1,00,000 By bank A/c 7,50,000
to credit sales (Bal. fig.) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundry creditors account
Rs. Rs.
To bank A/c 7,00,000 By balance b/d 40,000
To cash A/c 20,000 By purchase (Bal. fig.) 7,70,000
8,10,000 8,10,000
3. Cash and bank account
CASH Bank Cash Bank

Rs. Rs. Rs. Rs.
To balance b/d 10,000 By balance b/d 50,000
To sales (bal. fig.) 2,40,000 By bank A/c (C) 1,00,000
To cash (C) 1,00,000 By salaries 40,000
To debtors 7,50,000 By creditors 20,000 7,00,00
To laxman’s loan 1,00,000 By Drawings 80,000
By business
expenses 1,20,000
By balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000
4. calculation of Ram’s capital on 1st April, 2010
Balance sheet as at 01.04.2010

Ram’s capital (bal. fig) 3,00,000 Cash in hand 10,000
Bank overdraft 50,000 Sundry debtors 1,00,000
Sundry creditors 40,000 Stock in trade 2,80,000
3,90,000 3,90,000
QUESTION NO 34
The closing capital of Mr. B as on 31.3.2010 was Rs. 4,00,000. On 1.4.2009 his capital was
Rs.3,50,000. His net profit for the year ended 31.3.2010 was Rs.1,00,000. He introduced
Rs.30,000 as additional capital in February, 2010. Find out the amount drawn by Mr. B for
his domestic expenses.
298 ACCOUNTS
ANSWER
Computation of drawings during the year
Rs.
Opening capital as on 01.4.2009 3,50,000
Add: Net profit 1,00, 000
4,50,000
Add: additional capital introduced in February, 2010 30,000
4,80,000
Less: closing capital as on 31.3.2010 (4,00,000)
Drawings by Mr. ‘B’ during the year 2009-2010 80,000
QUESTION NO 35
Lokesh, who keeps books by single entry had submitted his income-tax returns to income
tax
Authorities showing his incomes to be as follows:
Rs.
Year ending March 31,2005 = 33,075
The income tax office is not satisfied as to the accuracy of the incomes returned. You are
appointed as a consultant to assist in establishing correctness of the incomes returned and
for that purpose you are given the following information:
(a) business liabilities and assets 31.2004 were:

Creditors Rs.32,940, furniture & fittings: Rs.22,500, stock: Rs.24,390 ( at selling
price which is 25% above cost), debtors: Rs.11,025, cash at bank and in hand Rs.15,615.
(b) lokesh owned his brother Rs.18,000 on March 31,2004. On February 15,2007 he repaid
this amount and on April 1,2009, he lent his brother Rs.13,500.
(c) lokesh owns a house which he purchased in 1999 for Rs.90,000 and a car which he
purchased in October, 2005 for Rs.33,750. In January, 2009, he bought debentures
in X Ltd. having face value of Rs.40,000 for Rs.33,750
(d) in may, 2009 a sum of Rs.13,500 was stolen from his house.
(e) lokesh estimates that his living expenses have been 2004-05-Rs.13,500; 2005-06-
Rs.18,000; 2006-07-Rs.27,000; 2007-08, 2008-09 and 2009-10-Rs.31,500 p.a.
exclusive of the amount stolen.
(f) on March 31, 2010 business liabilities and assets were: creditors Rs.37,800, furniture,
fixture and fitting Rs.40,500, stock Rs.54,330(at selling price with a gross profit of
25%), debtors Rs.26,640, cash in hand and at bank Rs.29,025.
From the information submitted prepare statements showing whether or not the incomes
declared by lokesh are correct.
ANSWER
Statement of affairs of Lokesh As on March 31,2004

Creditors 32,940 Furniture, fixture & fittings 22,500
Loan from brother 18,000 Stock (24,390 x 100/125) 19,512
Capital (bal. fig.) 1,07,712 Debtors 11,025
Building (house) 90,000
1,58,652 1,58,652
Statement of affairs of Lokesh as on March 31.2010

Creditors 37,800 Furniture fixtures & fittings 40,500
Capital (Bal. Fig.) 2,70,112 Stock (54,330 x 75%) 40,747
Debtors 26,640
Loan to brother 13,500
Building (House) 90,000
Car 33,750
Debentures in ‘X Ltd.’ 33,750
3,07,912 3,07,912
300 ACCOUNTS
Statement of Profit:
Particulas Rs.
Capital as on March 31.2010 2,70,112
Add: drawings
2004-05 13,500
2005-06 18,000
2006-07 27,000
2007-08 31,500
2009-09 31,500
2009-10 31,500 1,53,000
4,23,112
Add: Amount stolen in May 2009 13,500
4,36,612
Less: opening Capital as on March 31.2004 (1,07,712)
3,28,900
Less: profit as shown by I.T.O.
For the year ending March 31.2005 33,075
For the year ending March 31,2006 33,300
For the year ending March 31,2007 35,415
For the year ending March 31, 2008 61,875
For the year ending March 31, 2009 54,6303
For the year ending March 31,2010 41,670 (2,59,965)
Understatement of income 68,935
Note: in the absence of the information regarding depreciation in the question, no

depreciation has been provided on building (house) and car. The candidates may assume any
appropriate rate of depreciation and can provide depreciation.
QUESTION NO 36
M/s ice limited gives you the following information to find out total sales and total
purchases:
Particulars Amount
Debtors as on 01.04.2011 70,000
Creditors as on 01.04.2011 81,000
Bills receivables received during the year 47,000
Bills payable issued during the year 53,000
Cash received from customers 1,56,000
Cash paid to suppliers 1,72,000
Bad debts recovered 16,000
Bills receivables endorsed to creditors 27,000
Bills receivables dishonored by customers 5,000
Discount allowed by suppliers 7,000
Discount allowed to customers 9,000
Endorsed bills receivables dishonored 3,000
sales return 11,000
Bills receivable discounted 8,000
Discounted bills receivable dishonored 2,000
Cash sales 1,68,500
Cash purchases 1,97,800
Debtors as on 31.3.2012 82,000
Creditors as on 31.3.2012 95,000
ANSWER
1. total sales = cash sales + credit sales

= Rs. 1,68,500+ Rs. 2,25,000(W.N.1)
= Rs. 3,93,500
2. total purchase = cash purchases + credit purchases
= rs. 1,68,500+Rs.2,70,000(W.N.2)
= Rs.4,67,800
302 ACCOUNTS
Working Notes:
1. Debtors Account

To balance b/d 70,000 By bills receivable 47,000
To bills receivable dishonored 5,000 By cash 1,56,000
To bills receivable dishonored 3,000 By discount allowed 9,000
(endorses) By sales return 11,000
To bills receivable dishonored 2,000 By balance c/d 82,000
(discounted)
To credit sales (Bal.fig.) 2,25,000
3,05,000 3,05,000
2. Creditors account

To bills payable 53,000 By Balance b/d 81,000
To cash 1,72,000 By Bills receivable dishonored 3,000
To discount received 7,000 (endorsed)
To bills receivable endorsed 27,000 By credit purchase (Bal. fig. 2,70,000
3,54,000 3,54,000
Note: it Is assumed that sales return is out of credit sales only.
QUESTION NO 37
A sole trader requests you to prepare his trading and profit & Loss account for the year
ended 31st March 2013 and balance sheet as at that date. He provides you to following
Information:
Statement of affairs as at 31st March 2012

Bank overdraft 4,270 Furniture 96,000
Outstanding expenses Computer 24,300
Salaries 8,000 Mobile phone 8,000
Rent 6,000 14,000 Stock 89,500
Bills payable 22,500 Trade debtors 55,000
Trade creditors 52,500 Bills receivable 15,000
Capital Unexpired insurance 2,400
(balancing figure) 1,97,430 Stock of stationery 200
Cash in hand 300
Total 2,90,700 Total 2,90,700
He informs you that there has been no addition to or sale of furniture, computer and mobile
phone during the accounting year 2012-13. The other assets and liabilities on 31t March.
2013 are as follows:
Rs.
Stock 95,400
Trade debtors 65,000
Bills receivable 20,000
Stock of stationary 250
Cash at bank 18,000
Cash at hand 7,230
Salaries outstanding 8,300
Rent outstanding 6,000
Bills payable 26,500
Trade creditors 76,000
304 ACCOUNTS
He also provides you to following summary of his cash transaction:

Cash sales 5,09,800 Trade creditors 3,06,000
Trade debtors 1,51,900 Bills payable 80,000
Bills receivable 65,000 Salaries 99,000
Rent 72,000
Insurance premium 10,000
Stationery 1,500
Mobile phone expenses 9,000
Drawings 1,20,000
It is found prudent to depreciate furniture @ 5% compute @10% and mobile phone @25%
A provision for bad debts @ 5% on trade debtors is also considered desirable.
ANSWER
Trading and profit and loss account For the year ended 31st March 2013
Particulars Rs. Particulars Rs Rs.

To opening stock 89,500 By sales:
To purchase (W.N.3) 4,13,500 Credit (W.N.1 2,31,900
To gross profit c/d(Bal. Fig.) 3,34,100 Cash 5,09,800 7,41,700
To insurance (W.N.5) 8,37,100 By closing stock 95,400
To salaries (W.N.6) 9,900 8,37,100
To rent (W.N.7) 99,300 By gross profit b/d 3,34,100
To stationery (W.N.8) 72,000
To mobile phone expenses 1,450
To provision for doubtful 9,000
Debts (5% of 65,000) 3,250
To depreciation:
Furniture 4,800
Computer 2,430
Mobile Phone 2,000 9,230
3,34,100 3,34,100
Balance sheet as on 31st March 2013
Liabilities Rs. Rs. Assets Rs. Rs.

Capital A/c: Furniture 96,000
Opening balance 1,97,300 Less: depreciation 4,800 91,200
Less: Drawing s (1,20,000) Computer 24,300
77,430 Less: depreciation 2,430 21,870
Add: net profit 1,29,970 2,07,400 Mobile phone 8,000
Bills payable 26,500 Less : depreciation 2,000 6,000
Trade creditors 76,000 Trade debtors 65,000
Outstanding Less: provision for 3,250 61,750
Expenses: doubtful debts
Salaries 8,300 Bills receivable 20,000
Rent 6,000 Closing sock 95,400
Stock of stationary 250
Cash at bank 18,000
Cash in hand 7,230
3,24,200 3,24,200
Working Notes:
1. Trade debtors account
Rs. Rs.
To balance 55,000 By cash bank 1,51,900
To credit sales (bal. fig.) 2,31,900 By bills receivable A/c (W.N.2) 70,000
By balance c/d(given) 65,000
2,86,900 2,86,900
2. Bills receivable account
Rs. Rs.
To balance b/d 15,000 by cash/Bank 65,000
To sundry debtors (bal. fig.) 70,000 by bal. c/d (given) 20,000
85,000 85,000
306 ACCOUNTS
3. Trade creditors account
Rs, Rs.
To bank/ cash 3,06,000 By Bal.b/d 52,500
To bills payable A/c (W.N.4) 84,000 By credit purchase (Bal. fig.) 4,13,500
To Bal. c/d(given) 76,000
4,66,000 4,66,000
4. Bills payable account
Rs. Rs.
To cash/bank A/c 80,000 By bal. b/d 22,500
To bal. c/d(given) 26,500 By sundry crediters (bal. fig.) 84,000
1,06,500 1,06,500
5. Insurance expenses for the year 2012-2013
Rs.
Insurance paid during the year 10,000
Add: unexpired insurance as on 1.4.2012 2,400
Less: unexpired insurance as on 31.3.2013 (2,500)
9,900
6. Salaries for the year 2012-2013
Rs.
Salaries paid during the year 99,000
Add: salaries outstanding as on 31.3.2013 8,300
1,07,300
Less: salaries outstanding as on 1.4.2012 (8,000)
99,300
7. Rent expenses for the year 2012-2013
Rs.
Rent paid during the year 72,000
Add: rent outstanding as on 31.3.2013 6,000
78,000
Less: rent outstanding as on 1.04.2012 (6,000)
72,000
8. stationary expenses for the year 2012-2013
Rs.
Stock of stationery as on 1.4.2012 200
Add: stationery purchased during the year 1,500
1,700
Less: stock of stationer as on 31.3.2013 (250)
1,450
QUESTION NO 38
The details of assets and liabilities of Mr. ‘A’ as on 31-3-2012 and 31-3-2013 are as follows:
31.3.2012 31.3.2013
Rs. Rs.
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000
Sundry debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at bank 60,000 75,000
Liabilities:
Loans 90,000 70,000
308 ACCOUNTS
Mr. ‘A’ decided to provide depreciation on building by 2.5% and furniture by 10% for the
period ended on 31-3-2013. Mr. ‘A’ purchased jewellery for Rs.24,000 for his daughter in
December 2012 he sold his car on 30-3-2013 and the amount of Rs.40,000 is retained in
the business.
You are required to :
(i) Prepare statement of affairs as on 31-3-2012 and 31-3-2013.
(ii) Calculate the profit received by ‘A’ during the year ended 31-3-2013
SOLUTION
(i) Statement of affairs
Liabilities 31.3.12 31.3.13 Assets 31.3.12 31.3.13

Rs. Rs. Rs. Rs,
Loans 90,000 70,000 Furniture 50,000 45,000
Creditors 50,000 80,000 Building 1,00,000 97,500
Capital A/c 2,41,200 4,40,700 Stock 1,00,000 2,50,000
Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at bank 60,000 75,000
3,81,200 5,90,700 3,81,200 5,90,700
Working Note:
Dep. On Building Rs. 2,500 (2.5% of Rs 1,00,000)
Dep. On furniture Rs. 5,000 (10% of Rs. 50.000)
(ii) Calculation of profit earned by a during the year ended 31st March,2013
Capital account
Rs. Rs.
To drawings 24,000 By bal. b/d 2,41,200
To Bal. c/d 4,40,700 By additional capital 40,000
(car sale proceeds)
By P&L A/c (Bal. fig.) 1,83,500
4,64,700 4,64,700
Note: internal on drawings and capital has been ignored in the balance of information
QUESTION NO 39
The following is the balance sheet of M/s. care traders as on 1-4-2014
Rs.
Source of funds
Share capital 10,00,000
Profit and loss 1,47,800
Unsecured loan @ 10% 1,75,000
Trade payables 45,800
13,68,600
Application of funds
Machinery 8,25,500
Furniture 1,28,700
Inventory 1,72,000
Trade receivables 2,29,600
Bank balance 12,800
13,68,600
A fire broke out in the premises on 31.3.2015 and destroyed the books of account. The
accountant could however provide the following information:
(1) Sales for the year ended 31-3-2015 was Rs.18,60,000. Sales for the current year was
20% higher than the last year.
(2) 25% sales were made in cash and the balance was on credit.
(3) Gross profit on sales is 30%
(4) Terms of credit
Debtors: 2months
Creditors: 1 month
All creditors are paid by cheque and all credit sales are collected in cheque.
(5) the bank pass book has the following details (other than payment to creditors and
collected in cheque.
310 ACCOUNTS
Rs.
Machinery purchased 1,14,000
Rent paid 1,32,000
Advertisement expenses 80,000
Travelling expenses 78,400
Repairs 36,500
Sales of furniture 9,500
Cash withdrawn for pretty expenses 28,300
Interest paid on unsecured loan 8,750
(6) Machinery was purchased on 1-10-2014.

(7) Rent was paid for 11 months only and 25% of the advertisement expenses relates to
the next year.
(8) Travelling expenses of Rs.7,800 for which cheques were issued but not presented in
bank.
(9) Furniture was sold on 1-4-2014 at a loss of Rs.2,900 on book value.
(10) Physical verification as on 31-3-2015 ascertained the stock position at Rs. 1,81,000
and petty cash balance at nil.
(11) There was no change in unsecured loan during the year.
(12) Depreciation is to be provided at 10% on machinery and 20% on furniture.
Prepare bank account. Trading and profit and loss account for the year ended 31-3-2015
in the books of M/s care traders and a balance sheet as on that date. Make necessary
assumptions wherever necessary.
ANSWER
In the book of M/s care traders
Bank account as on 31.3.2015
Particulars Amount Particualrs Amount

Rs. Rs
To opening balance 12,800 By creditors 14,86,250
(payment made) (WN6)
To cash sales (WN 1) 5,58,000 By machinery ( purchased) 1,14,000
To debtors (collection made) 16,24,600 By advertisement 80,000

(WN 4) expenses
To furniture (sold) 9,500 By rent 1,32,000
By traveling expenses 86,200
(78,400+7,800)
By repairs 36,500
By petty cash 28,300
By interest on unsecured loan 8,750
By balance c/d (bal. fig.) 2,32,900
22,04,900 22,04,900

For the year ended 31st March 2015
Particulars Amount Rs. Particulars Amount Rs.

To opening stock 1,72,000 By sales (WN1) 22,32,000
To purchases (WN2) 15,71,400 By closing stock 1,81,000
To gross Profit b/d (WN1) 6,69,600
24,13,000 24,13,000
To rent (1,32,000x12/11) 1,44,000 By gross Profit c/d 6,69,600
To advertisement expenses 60,000
To travelling expenses 86,200
To repairs 36,500
To petty cash expenses 28,300
To interest on unsecured loan 17,500
To loss on sale of furniture 2,900
To depreciation
machinery (W.N.8) 88,250
Furniture 23,260
6,69,600 6,69,600
312 ACCOUNTS
Balance sheet of M/s. care traders as on 01.4.2015
Liabilities Rs.
Share capital
Profit and loss 10,00,000
Opening balance
Add: profit for the year 1,47,800
1,82,690 3,30,490
Unsecured loan @10% 1,75,000
Interest on unsecured loan 8,750
Trade payables (W.N.5) 1,30,950
Outstanding expenses rent 12,000
16,57,190
Assets
Machinery
Gross block value (WN7) 9,39,500
Less: depreciation (88,250) 8,51,250
Furniture
Gross block value (WN9) 1,16,300
Less: depreciation (23,260) 93,040
Inventory 1,81,000
Trade receivables (WM 3) 2,79,000
Prepaid expenses (advertisement) 20,000
Bank balance 2,32,900
16,57,190
Working Notes:
1. sales for the year endd 31.03.2015
Last years sales 18,60,000

Add: growth @20% 3,72,000
Sale for 2014-15(A) 22,32,000
Cash sales (25%of Rs.22,32,000) 5,58,000
Credit sales (22,32,000-5,58,000) 16,74,000
Gross profit 30% on sales (B) 6,69,600
2. Purchases for the year ended 31.03.2015
Cost of sales (A-B) (22,32,000-6,69,600 15,62,400

Add Closing stock 1,81,000
17,43,400
Less: opening stock (1,72,000)
Purchases during the year 15,71,400
3. Trade receivables (debtors) as on 31.03.2015 Rs.
Total credit sales 16,74,000

Debtors 2 months credit
(16,74,000x2/12) 2,79,900
4. Collection from Debtors account
Amount Amount
Rs. Rs.
To opening balance 2,29,600 By bank (collection) Bal. fig. 16,24,600
To credit sales 16,74,000 By closing balance 2,79,000
19,03,600 19,03.600
5. trade payables (creditors) as on 31.03.2015
Total credit purchases 15,71,400

(all creditors paid by cheque, hence there are no cash purchases)
Creditors 1 month credit 1,30,950
(15,71,400x1/12)
6. Payment to creditors account
Amount Amount
Rs. Rs.
To bank (Payment) Bal. Fig. 14,86,2550 By opening Balance 45,800
To closing balance 1,30,950 By credit purchases 15,71,400
16,17,200 16,17,200
314 ACCOUNTS
7. Machinery account
Amount Rs. Amount Rs.

To opening balance 8,25,500 By closing balance (Bal. fig) 9,39,500
To machinery purchased 1,14,000
9,39,500 9,39,500
8. Depreciation on machinery
Existing machinery for 1 year (Rs.8,25,500x10%) 82,550

New Machinery (purchased on 1,10,2014 5,700
For 6 months (Rs.1,14,400 x ½ x 10%)
88,250
9. Furniture account
Amount Amount
Rs. Rs.
To Opening balance 1,28,700 By bank (sales) 9,500
By loss on sale 2,900
By closing balance 1,16,300
1,28,700 1,28,700
ASSUMPTIONS FOR SINGLE ENTRY SYSTEM

(1) In case cash sales & cash purchases are not given or cannot be calculated on the basis
of given information then we should always assume that all sales & all purchases
are on credit basis.
(2) In case Bills receivable or Bills payable are given in questions then we should close
these accounts before closing sundry debtors & sundry creditors account.
(3) In addition collections from Bills receivable & payment for Bills Payable is always to be
assumed in Bank Account if cash and bank accounts are prepared separately.
(4) In case sales or purchases are not given for the year but credit period is given for
debtor or creditors then we should assume uniform sales or purchases on the basis of
given credit periods (Refer question 15).
(5) If incomes or expenses are missing in any question but profit is required to be calculated
then we should apply capital comparison method for the calculation of profit.
(6) If any stock is consumed by proprietor or distributed as free samples as advertisement
then we should not consider such stock but we should transfer such stock in drawings
or profit and loss account (Refer question 17 & 14)
(7) If depreciation is to provided is written in question then we should assume that closing
balances in fixed assets are before charging depreciation and we should revise closing
balances after charging depreciation (Refer question 13,7 & 1)
(8) if date of acquisition of fixed assets is not given in questions then assumption of
purchase in the beginning of the year should be preferred.
(9) In case outstanding expenses or prepaid expenses are given in questions then we should
these balances in a single account “ Expenses Account” rather than separate accounts
for prepaid or outstanding. The following format may be considered:

To Balance b/d(prepaid) xxxx By Balance b/d(O/S) xxxx
To Cash/Bank xxxx By Profit & loss xxxx
To Balance c/d(O/S) xxxx ByBalance c/d(Prepaid) xxxx
xxxx xxxx
316 ACCOUNTS
(10) if cash & bank balances are not given separately then we should prepare cash and
bank account in combined. In addition, we should ignore contra entries in such account
because net effect of contra entries will be zero in such account.
(11) NOTIONAL EXPENSES:
In case notional expenses are given in the form of salary to self or rent for own
property then we can ignore these transactions or we can also consider these expenses
in profit and loss account as well as a saving due to non-payment to any outside party.
Archana Enterprises maintain their books of accounts under single entry system. The
Balance-Sheet as on 31st March, 2018 was as follows :
Liabilities Amount (`) Assets Amount (`)

Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding expenses 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000
Cash in hand & at bank 1,20,000
15,00,000 15,00,000
The following was the summary of cash and bank book for the year ended 31st March, 2019:
Receipts Amount (`) Payments Amount (`)

Cash in hand & at Bank on 1st 1,20,000 Payment to trade 1,24,83,000
April, 2018 creditors
Cash sales 1,10,70,000 Sundry expenses paid 9,31,050
Receipts from trade debtors 27,75,000 Drawings 3,60,000
Cash in hand & at Bank on 1,90,950

31st March, 2019
1,39,65,000 1,39,65,000
Additional Information:
(i) Discount allowed to trade debtors and received from trade creditors amounted to `
54,000 and ` 42,500 respectively (for the year ended 31st March, 2019).
(ii) Annual fire insurance premium of ` 9,000 was paid every year on 1st August for the
renewal of the policy.
(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on diminishing balance
method.
318 ACCOUNTS
(iv) The following are the balances as on 31st March, 2019:

Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.
You are required to prepare Trading and Profit & Loss account for the year ended 31st
March, 2019, and Balance Sheet as on that date.
SOLUTION:
Trading and Profit and Loss Account of Archana Enterprises
` `
To Opening Stock 9,15,000 By Sales
To Purchases (W.N. 2) 125,97,000 Cash
To Gross profit c/d 13,93,000 Credit (W.N. 1) 110,70,000
(10% of 139,30,000) By Closing stock 28,60,000 139,30,000
9,75,000
149,05,000 149,05,000
To Sundry expenses 9,18,750 By Gross profit b/d 13,93,000
(W.N. 4)
To Discount allowed 54,000 By Discount received 42,500
(15% ` 1,50,000)
To Net Profit (b.f.) 4,40,250
14,35,500 14,35,500
Balance Sheet of Archana Enterprises as at 31st March, 2019

` `
Capital Furniture & Fittings 1,50,000
Opening balance 6,75,000 Less: Depreciation (22,500) 1,27,500

Less: Drawing (3,60,000) Stock 9,75,000
3,15,000 Trade Debtors 3,43,000

Add: Net profit for 4,40,250 7,55,250 Unexpired insurance 3,000
the years
Trade creditors 8,29,000 Cash in hand & at bank 1,90,950
(W.N. 3)
Outstanding 55,200
expenses
16,39,450 16,39,450
Working Notes:
1. Trade Debtors Account
` `
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales 28,60,000 By Discount allowed 54,000
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000
2. Memorandum Trading Account
` `
To Opening stock 9,15,000 By Sales 139,30,000
To Purchase (balancing figure) 125,97,000 By Closing stock 9,75,000
To Gross Profit (10% on sales) 13,93,000
149,05,000 149,05,000
3. Trade Creditors Account
` `
To Cash/Bank 124,83,000 By Balance b/d 7,57,500
To Discount received 42,500 By Purchases 125,97,000
To Balance c/d (as calculated in W.N. 2)
(balancing figure) 8,29,000

133,54,500 133,54,500
320 ACCOUNTS
4. Computation of sundry expenses to be charged to Profit & Loss A/c
`
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July, 2019)
(9,000 x 4/12) (3,000)
9,18,750
M/s Rohan & Sons runs a business of Electrical goods on wholesale basis. The books of
accounts are closed on 31st March every year. The Balance Sheet as on 31st March, 2019
is as follows :
Capital 12,50,000 Fixed Assets 6 50,000
Closing stock 3,75,000
Trade Debtors 3,65,000
Trade Creditors 1,90,000 Cash & Bank 1,95,000
Profit & Loss A/c 1,45,000
15,85,000 15,85,000
The management estimates the purchase & sales for the year ended 31st March,2020 as
under:
Particulars Upto 31.01.2020 (`) February 2020 (`) March 2020 (`)
Purchases 16,20,000 1,40,000 1,25,000

Sales 20,75,000 2,10,000 1,75,000
All Sales and Purchases are on credit basis. It was decided to invest ` 1,50,000 in purchase
of Fixed assets, which are depreciated @ 10% on book value. A Fixed Asset of book value
as on 01.04.2019, ` 60,000 was sold for ` 56,000 on 31st March, 2020.
The time lag for payment to Trade Creditors for purchases is one month and receipt
from Trade debtors for sales, is two months. The business earns a gross profit of 25% on
turnover. The expenses against gross profit amounts to 15% of the turnover. The amount
of depreciation is not included in these expenses.
Prepare Trading & profit & Loss Account for the year ending 31st March, 2020 and draft a
Balance Sheet as at 31st March, 2020 assuming that creditors are all Trade creditors for
purchases and debtors are all Trade debtors for sales and there is no other current asset
and liability apart from stock and cash and bank balances.
Also, prepare Cash & Bank account and Fixed Assets account for the year ending 31st
March, 2020.
SOLUTION:
Trading and Profit and Loss Account of M/s Rohan & Sons
` `
To Opening stock 3,75,000 By Sales 24,60,000
To Purchases 18,85,000 By Closing stock 4,15,000
To Gross Profit c/d 6,15,000 (Balancing Figure)
(25%)
28,75,000 28,75,000
To Depreciation 80,000 By Gross profit b/d 6,15,000
To Expenses (15% of 3,69,000 By Profit on sale of Fixed 2,000
` 24,60,000) Assets
To Net Profit (b.f.) 1,68,000
6,17,000 6,17,000
Balance Sheet of M/s Rohan Sons as on 31st March, 2020
Capital 12,50,000 Fixed assets (less Dep.) 6,66,000
Profit & Loss A/c 3,13,000 Stock 4,15,000
(1,45,000 + 1,68,000)
322 ACCOUNTS
Trade Creditors 1,25,000 Debtors 3,85,000

_____ Cash and bank 2,22,000
16,88,000 16,88,000
` `
To Bal. b/d 1,95,000 By Creditors (1,90,000 + 19,50,000
16,20,000 + 1,40,000)
To Debtors 24,40,000 By Expenses 3,69,000
(3,65,000 + 20,75,000)
To Fixed assets 56,000 By Fixed assets 1,50,000
By Bal. c/d 2,22,000
26,91,000 26,91,000
Fixed Assets Account
` `
To Bal. b/d 6,50,000 By Cash 56,000
To Profit on sale of Fixed 2,000 By Depreciation on sold 6,000
asset fixed asset
By Depreciation 74,000
(59,000 + 15,000)
To Bank A/c 1,50,000 By Bal. c/d 6,66,000
8,02,000 8,02,000
QUESTION 42 (CA INTER JAN 21)(10 MARKS)
Mr. Prakash furnishes following information for his readymade garments business:
(i) Receipts and Payments during 2019-20:
Receipts Amount ` Payments Amount `

Bank Balance as on 1-4- 16,250 Payment to Sundry 3,43,000
2019 Creditors
Received from Sundry 4,81,000 Salaries 75,000

Debtors
Cash sales 1,70,800 General Expenses 22,500
Capital brought in the 50,000 Rent and Taxes 11,800
Business during the year
Interest on Investment 9,750 Drawings 96,000
Received
Cash Purchases 1,22,750
Balance at Bank on 31-03- 36,600
2020
Cash in hand on 31-03- 20,150
2020
7,27,800 7,27,800
(ii) Particulars of other Assets and Liabilities are as follows:
1st April, 2019 (`) 31st March, 2020 (`)
Machinery 85,000 85,000

Furniture 24,500 24,500
Trade Debtors 1,55,000 ?
Trade Creditors 60,200 ?
Stock 38,600 55,700
12% Investment 85,000 85,000
Outstanding Salaries 12,000 14,000
(iii) Additional information:

(1) 20% of Total sales and 20% of total purchases are in cash.
(2) Of the Debtors, a sum of ` 7,200 should be written off as Bad debt and
further a provision for doubtful debts is to be provided @2%.
(3) Provide depreciation @10% p.a. on Machinery and Furniture.
You are required to prepare Trading and Profit & Loss account for the year ended 31st
March, 2020, and Balance Sheet as on that date.
324 ACCOUNTS
SOLUTION:
Trading and Profit & Loss Account for the year ended 31-03-2020
` ` `
To Opening Inventory 38,600 By Sales 8,54,000
To Purchases 6,13,750 By Closing Inventory 55,700
To Gross profit c/d 2,57,350
(b.f.)
9,09,700 9,09,700
To Salaries 77,000 By Gross Profit b/d 2,57,350
(75,000+14,000-12,000)
To Rent 11,800 By Interest on investment 10,200

(9,750+450)
To General expenses 22,500
To Depreciation:
Machinery @ 10% 8,500
Furniture @ 10% 2,450 10,950
To Bad Debts 7,200
To Provision for 7,000 14,200
doubtful debts
To Balance being
profit carried to
Capital A/c (b.f.) 1,31,100
2,67,550 2,67,550
Balance Sheet as on 31st March, 2020
Liabilities ` ` Assets ` `
A. Adamjee’s Capital Machinery 85,000
on 1st April, 2019 3,32,150 Less: Depreciation (8,500) 76,500
Add: Fresh Capital 50,000 Furniture 24,500
Add: Profit for the year 1,31,100 Less: Depreciation (2,450) 22,050
5,13,250
Less: Drawings (96,000) 4,17,250 Inventory-in-trade 55,700

Sundry creditors 2,08,200 Sundry debtors 3,57,200
Outstanding expenses 14,000 Less: Provision for (14,200) 3,43,000
Doubtful debts
Investment (including 85,450
accrued interest ` 450)
Cash at bank 36,600
Cash in hand 20,150
6,39,450 6,39,450
Working Notes:
1. Balance sheet as on 1-4-2019
` `
Sundry creditors 60,200 Machinery 85,000
Capital 3,32,150 Furniture 24,500
(balancing figure) Inventory 38,600
Outstanding salaries 12,000 Sundry debtors 1,55,000
Investments 85,000
Bank balance (from Cash statement) 16,250
4,04,350 4,04,350
2. Total Debtors Account
` `
1.4.19 To Balance b/d 1,55,000 31.3.20 By Cash 4,81,000
31.3.20 To Credit sales 6,83,200 31.3.20 By Bad debts 7,200
(1,70800/20x80) By Balance c/d 3,50,000
8,38,200 (Bal. Fig.) 8,38,200

326 ACCOUNTS
3. Total Creditors Account
` `
31.3.20 To Cash 3,43,000 1.4.19 By Balance b/d 60,200
31.3.20 To Balance 2,08,200 31.3.20 By Credit Purchases 4,91,000
c/d (1,22,750/20x80)
(Bal. Fig.) 5,51,200 5,51,200
QUESTION 43 (CA INTER JULY 21 EXAM)(10MARKS)
Mr. Arun runs a business of readymade garments. He closes the books of accounts on 31st
March. The Balance Sheet as on 31st March, 2020 was as follows :
Capital A/c 5,05,000 Furniture 50,000
Creditors 1,02,500 Closing Stock 3,50,000
Debtors 1,25,000
Cash in Hand 35,000
Cash at Bank 47,500
6,07,500 6,07,500
You are furnished with following information :

(1) His sales, for the year ended 31st March, 2021 were 20% higher than the sales of
previous year, out of which 20% sales was cash sales.
Total Sales during the year 2019-20 were ` 6,25,000
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay by cheques only.
(4) Deprecation on furniture is to be charged 10% p.a.
(5) Mr. Arun sent to the bank the collection of the month at the last date of each month
after paying salary of ` 2,500 to the clerk, office expenses ` 1,500 and personal
expenses ` 625.
Analysis of bank pass book for the year ending 31st March, 2021 disclosed the following:
`
Payment to rent up to 31st March, 2021 20,000
Cash deposited into bank during the year 1,00,000
The following are the balances on 31st March, 2021:
`
Stock 2,00,000
Debtors 1,50,000
Creditors for goods 1,82,500
On the evening of 31st March, 2021, the cashier absconded with the available cash in the
cash book.
You are required to prepare Trading and Profit and Loss A /c for the year ended 31st
March, 2021 and Balance Sheet as on that date. All the working should form part of the
answer.
SOLUTION:
In the books of Mr. Arun
Trading and Profit and Loss Account for the Year Ended 31 st March 2021

(`) (`)
To Opening Stock 3,50,000 By Sales (W.N. 3)
To Purchases (W.N.1) 4,55,000 Credit 6,00,000
To Gross Profit (b.f.) 1,45,000 Cash 1,50,000
By Closing Stock 2,00,000
Total 9,50,000 Total 9,50,000
To Salary (` 2,500 x 12) 30,000 By Gross Profit 1,45,000
To Rent 20,000
To Office Expenses 18,000
(` 1,500 x 12)
328 ACCOUNTS
To Loss of Cash (W.N.6) 29,500

To Depreciation on 5,000
furniture
To Net Profit (b.f.) 42,500
Total 1,45,000 Total 1,45,000
Balance Sheet
As on 31st March 2021

(`) (`)
Arun’s Capital 5,05,000 Furniture 50,000
Add: Profit 42,500 Less: Depreciation (5,000) 45,000
Less: Drawings (7,500) 5,40,000 Stock 2,00,000
(` 625 X12) Debtors 1,50,000
Creditors 1,82,500 Cash at bank 3,27,500
Total 7,22,500 Total 7,22,500
Working Notes:
(1) Calculation of Purchases
Creditors Account
To Bank A/c 3,75,000 By Balance b/d 1,02,500
To Balance c/d 1,82,500 By Purchases (Bal Fig) 4,55,000
Total 5,57,500 Total 5,57,500
(2) Calculation of Total Sales

Sales for the year 2019-20 6,25,000
Add: 20% increase 1,25,000
Total sales for the year 2020-21 7,50,000
(3) Calculation of Credit Sales

Total Sales 7,50,000
Less : Cash sales (20% of total sales) (1,50,000)
Credit sales 6,00,000
(4) Calculation of cash collected from debtors

Debtors Account
Particulars (`) Particulars (`)

To Balance b/d 1,25,000 By Bank A/c (Bal Fig) 5,75,000
To Sales A/c 6,00,000 By Balance c/d 1,50,000
Total 7,25,000 Total 7,25,000
(5) Calculation of closing balance of cash at bank

Bank Account
Particulars (`) Particulars (`)

To Balance b/d 47,500 By Creditors A/c 3,75,000
To Debtors A/c 5,75,000 By Rent A/c 20,000
To Cash A/c 1,00,000 By Balance c/d (b.f) 3,27,500
Total 7,22,500 Total 7,22,500
(6) Calculation of the amount of cash defalcated by the cashier

Cash Balance as on 1st April 2020 35,000
Add: Cash sales during the year 1,50,000
Less: Salary (30,000)
Office Expenses (18,000)
Drawings of Arun (7,500)
Cash deposited into bank during the year (1,00,000)
Cash Balance as on 31 March 2021 (defalcated by the cashier) 29,500
330 ACCOUNTS
NOTES
AS-11: FOREIGN EXCHANGE TRANSACTIONS 331
ACCOUNTING STANDARD 11
FOREIGN EXCHANGE TRANSACTIONS
QUESTION NO 1
Compute the Loss/Gain for the financial year ending 31st March 20X1 and 20X2 from the
following:-
Raw Materials imported on 1st Jan.20X1 Rate of Exchange Rs.55 Per USD
USD 10,000
Financial Year ending on 31st March 20X1 Rate of Exchange Rs. 54 per USD
Date of Actual Payment 7th July 20X1 Rate of Exchange Rs. 53 Per USD
The Chief Accountant of Company passed an entry on 31st March 20X1, adjusting the cost
of Raw Material Consumed for the difference between Rs.55 and Rs. 53 per USD. Discuss
whether this treatment is justified.
SOLUTION
The Raw Material Purchase should be recorded at the Transaction Rate, i.e. USD = Rs.55 =
Rs 5,50,000. The treatment of Exchange Differences will be as under:-
Purchase of Goods for Financial Year Ending Payment to Supplier

10,000 USD
Transaction Date 1st Jan.20X1 Balance Sheet Date Settlement Date 7th July
31st March 20X1
USD = Rs. 55.00 USD = Rs. 54.00 USD = Rs. 53.00
Exchange Diff. = Rs.1.00 Per USD (Gain) Exchange Diff. = Rs.1.00 Per USD (Gain)
(due to Reporting) i.e.Rs.10,000 (due to Settlement) i.e. Rs. 10,000
Credited to P&L A/c. for the Credited to P&L A/c. in next FY i.e.
year ending 31st March 20X1 after 31st March 20X1
Conclusion:
For the year ended 31st March 20X1, the gain of Rs. 10,000 should be separately credited
to P&L A/c. as an Exchange Difference and disclosed as required under AS-11, and Schedule
III which requires specific disclosure of Net Gain/Loss on Foreign Currency Transaction
and Translation. It should not be adjusted to the Cost of Materials Consumed.
332 ACCOUNTING
QUESTION NO 2
Rudra Ltd. exported goods for USD 2,00,000 in February (Exchange Rate Rs. 54.38). The
amount was received in June (Exchange Rate Rs. 54.43). The Company closes its books of
accounts on 31st March every year. The Exchange Rate on 31st March current year was Rs.
54.50. Find out the Exchange Fluctuation Gain/Loss on the Balance Sheet date, and on the
date of receipt.
SOLUTION
Export of Goods USD 2,00,000 Financial Year Ending Receipt from Customer
Transaction Date=February Balance Sheet Date= Settlement Date= June
March
USD = Rs. 54.38 USD = Rs. 54.50 USD = Rs. 54.43
Exchange Diff. = Rs.0.12 Per USD (Gain) Exchange Diff. = Rs.0.07 Per USD (Loss)
(due to Reporting) i.e.Rs.24,000 (due to Settlement) i.e. Rs. 14,000
Credited to P&L A/c. for the Debited to P&L A/c. in next FY i.e.
year ending 31st March after 31st March
QUESTION NO 3
Ambikapati Ltd. imported certain stock worth USD 60,000 on 30th June when 1 USD = Rs.
54.00. The payment is made on 31st December when 1 USD = Rs.55.40. The Stock is in hand
and lying unsold as on 30th September when the Company closes its accounts. Give Journal
Entries under AS-11, if the rate on the Balance Sheet date was 1 USD = Rs. 53.85.
SOLUTION
Date Particulars Dr.(Rs.) Cr. (Rs.)

30th June Purchases A/c. Dr. 32,40,000
(Transaction To Vendor/Foreign Supplier A/c. 32,40,000
Date) (Being import of raw materials, recorded at
spot rate, i.e. USD 60,000x Rs.54.00)
30th Sept. Vendor/Foreign Supplier A/c. Dr. 9,000

(FY end) To Profit and Loss A/c. (Exchange Rate 9,000
Difference)
(Being translation of payable, i.e. monetary
item at the Closing Rate and recognition of
gain due to exchange difference (60,000 x
(54.00 – 53.85)
30th Sept. Closing stock A/c. Dr. 32,40,000

(FY end) To Trading A/c. 32,40,000
(Being Stock, non-monetary item, carried
at Fair Value, presumed equal to Rs.32.40
Lakhs, i.e. cost)
Next Fy Vendor/Foreign Supplier A/c. Dr. 32,31,000

31st Dec. Profit & Loss A/c. (Exch. Rate Diff.) Dr. 93,000
(Settlement To Bank A/c. 33,24,000
Date) (Being payment made to Vendor at Rs.55.40
x USD 60,000, the difference due to
settlement (Rs. 53.85 – Rs.55.40) x USD
60,000, being loss transferred to P&L A/c.)
QUESTION NO 4
Tejas Ltd. borrowed US $ 5,00,000 on 1st Jan. 2013 which will be repaid (settled) as on
30th June 2013. The Company prepares its Financial Statements ending on 31st March 2013.
Assume that Exchange Rate between Reporting Currency (Rupee) and Foreign Currency (US
$) on different dates are as under:-
1st Jan. 2013 : 1 US $ = Rs. 54.00 31st March 2013 30th June 2013
1 US $ = Rs.54.50 1 US $ = Rs.54.75
(a) Calculate the Borrowing in reporting currency to be recognised in the books on above
mentioned dates. Also show the Journal Entries for the same.
334 ACCOUNTING
(b) If Borrowings was repaid (settled) on 28th Feb. 2013 (Take Exchange Rate 1 US $ = Rs.
54.20) what entry should be passed in such case?
SOLUTION
Date Particulars Dr.(Rs.) Cr. (Rs.)

1. 1 Jan. Bank A/c. Dr. 2,70,00,000
2013 To Foreign Currency Loan Borrowing 2,70,00,000
(5,00,000 USD at 54)
(Being Foreign Currency Loan at 54 per
USD, spot rate)
2. 31 Profit & Loss A/c. (Exchange Rate Diff.) 2,50,000

Mar (5,00,000 x (54.50 – 54) Dr.
2013 To Foreign Currency Loan Borrowings 2,50,000
(Being Foreign Currency Monetary Item,
i.e. Loan reported using Closing Rate of
Rs.54.50), Carrying Amount of Loan =
Rs.272,50,000, difference being loss due
to reporting difference, written off to P&L)
3A. 30 Foreign Currency Loan Borrowings Dr. 2,72,50,000

Jun Profit & Loss A/c. (Exchange Rate 1,25,000
2013 Difference) (5,00,000 x (54.75 – 54.50)Dr
To Bank A/c. (5,00,000 x 54.75) 2,73,75,000
(Being Foreign Currency Loan settled at
54.75 per USD, difference being exchanged
loss on settlement, written off to P&L A/c.)
If Loan repaid (settled) on 28th Feb.2013:
3B. 28 Foreign Currency Loan Borrowings Dr. 2,70,00,000
Feb Profit & Loss A/c. (Exchange Rate 1,00,000
2013 Difference) (5,00,000 x (54.20 – 54.00)Dr 2,71,00,000
(Being Foreign Currency Loan settled at
54.20 per USD, difference being exchanged
loss on settlement, written off to P&L A/c.)
QUESTION NO 5
Amaresh bought a Forward Contract for three months of USD 1,00,000 on 1st December
20X1 at 1 USD = Rs. 52.10 when the Exchange Rate was 1 USD = Rs.52.02. On 31st December
20X1, when he closed his books, the Exchange Rate was 1 USD = Rs. 52.15. On 31st January
20X2, he decided to sell the Contract at Rs.52.18 per Dollar. Show how the profits from
the Contract will be recognized in the books. Give the full accounting treatment assuming
that the above transaction is on ‘non-speculative basis”.
Also discuss the accounting treatment, if the above transaction is on “speculative basis”, on
the assumption that on 31st December 20X2, the 2 months Forward Rate is 1 USD = Rs. 53.
SOLUTION
Situation A : If the above Forward Contract has been entered on “non-speculative” basis.
S.No. Particulars Dr.(Rs.) Cr. (Rs.)

1st Foreign Currency Receivable A/c.(1,00,000 USD x 52,02,000
Dec. Rs.52.02 Spot Rate) Dr.
20X1 Forward Contract Deferred Premium A/c. 8,000

(1,00,000 USD x (Rs.52.10 – Rs. 52.02) Dr.
To Forward Contract Payable A/c. 52,10,000
(1,00,000 USD x Rs.52.10 Fwrd Rate)
(Being 3 months Forward Contract entered into for
1,00,000 USD)
31st Foreign Currency Receivable A/c. Dr. 13,000
Dec. (1,00,000 USD x (Rs.52.15-Rs.52.02)
20X1 To Profit and Loss A/c. 13,000
(Being re-statement of FC Receivable to Reporting
Date Rate, gain adjusted)
31st Profit and Loss A/c. Dr. 2,667
Dec. To Forward Contract Deferred Premium A/c.
20X1
(Being the amortization of Forward Contract Premium 2,667
Rs. 8,000 for 3 months, now transferred to P&L
proportionately for 1 month period)
336 ACCOUNTING
31st Forward Contract Payable A/c. Dr. 52,10,000

Jan. Bank A/c. (1,00,000 USD x Dr. 8,000
20X2
(Rs.52.18-Rs.52.10)
To Foreign Currency Receivable A/c. 52,15,000
To Profit and Loss A/c. (difference Gain adjusted) 3,000
(Being settlement of Forward Contract)
31st Profit and Loss A/c. Dr. 5,333
Jan. To Forward Contract Deferred Premium A/c. 5,333
20X2
(Being the amortization of balance Forward Contract
Premium)
(STUDENTS ARE ADVISED TO PASS ENTRIES AS WE PASSED IN CLASS: CA PARVEEN

JINDAL)
Situation B: If the above Forward Contract has been entered on “speculative” basis.

31st Foreign Contract Asset Receivable A/c.(1,00,000 USD 90,000
Dec. x Rs.53.00-Rs.52.10) Dr.
20X1 To Profit and Loss A/c. 90,000

(Being adjustment of difference between Contract
Forward Rate and B/s Date Rate of Forward Contract
for remaining maturity period, Gain credited to P&L)
31st Profit and Loss A/c. (balancing figure) Dr. 82,000

J a n . Bank A/c. (1,00,000 USD x (Rs.52.18 – Rs.52.10) 8,000
20X2 To Forward Contract Asset Rec’ble A/c. (reversal of 90,000
B/s recognised amt)
(Being settlement of Forward Contract, loss adjusted
to P&L A/c)
QUESTION NO 6
On 1st February 2013, an Indian Company sold goods to an American Company at an Invoice
Price of USD 20,000 when the Spot Market Rate was 1 USD = Rs.54.10. Payment was to be
made in three months time, namely by 1st May 2013.
To avoid the risk of Foreign Exchange fluctuations, the Indian Exporter acquired a Forward
Contract to sell USD 20,000 at Rs. 53.90 per USD on 1st May 2013.
The Indian Company’s accounting year ended on 31st March 2013, and the Spot Rate on this
date was Rs. 53.20 per USD. The Spot Rate on 1st May 2013, the date by which the money
was due from the American Buyer, was Rs.56 per USD.
Show the accounting entries in the books sof the Indian Exporter at the relevant period
of time. .
SOLUTION
Journal Entries in the books of Indian Exporter (assumed as SME)

01.02.13 Sundry Debtors (American Company) A/c. Dr. 10,82,000
To Sales A/c. 10,82,000
(Being Sales recorded at Rs.10,82,000 (USD 20,000
x Rs. 54.10)
01.02.13 Forward (Rs.) Contract Receivable A/c. Dr. 10,78,000
(USD 20,000 x Rs. 53.90)
Deferred Discount A/c. Dr. 4,000
(USD 20,000 x Rs. 0.20)
To Forward ($) Contract Payable A/c. 10,82,000
(USD 20,000 x Rs. 54.10)
(Being Translation Loss USD 20,000 x (Rs.54.10-
Rs.53.20) by re-statement of Debtors, Difference
between Rates on Date of Transaction and Reporting
Date)
31.03.13 Profit & Loss A/c. Dr. 18,000
To Sundry Debtors (American Company) A/c. 18,000
Rs.53.20) by re-statement of Debtors, Difference
between Rates on Date of Transaction and Reporting
Date)
338 ACCOUNTING
31.03.13 Forward ($) Contract Payable A/c. Dr. 18,000

To Profit and Loss A/c. 18,000
Rs.53.20) as less Rupees becoming payable to
Exchange Dealer based on Spot Rate at year end)
31.03.13 Discount A/c. Dr. 2,666
To Deferred Discount A/c. 2,666
(Being proportionate discount (2/3rd of Rs.4,000)
charged as Discount Expense)
01.05.13 Bank A/c. (USD 20,000 x 56,000) Dr. 11,20,000
To Sundry Debtors A/c.(USD 20,000xRs.53.20) 10,64,000
To Profit and Loss A/c.(USD 20,000axRs.2.80) 56,000
(Being actual receipt of money from the Buyer
recorded)
01.05.13 Forward ($) Contract Payable A/c. Dr. 10,64,000
(USD 20,000 x Rs. 53.20)
Profit and Loss A/c. (USD 20,000 x Rs.2.80) 56,000
To Bank A/c. (USD 20,000xRs. 56.00) 11,20,000
(Being delivery of 20,000 USD against Forward
Contract at Spot Rate on 1st May)
01.05.13 Bank A/c. Dr. 10,78,000
To Forward (Rs.) Contract Receivable A/c. 10,78,000
(Being Forward Contract Settled)
01.05.13 Discount A/c. Dr. 1,334
To Deferred Discount A/c. 1,334
(Being balance amount of Discount recognized/
transferred to P&L)
QUESTION NO 7
Kapali Ltd. purchased a Plant for USD 20,000 on 31st December 2012, payable after 4
months. The Company entered into a Forward Contract for 4 months at Rs.54.85 per USD.
On 31st December 2012, the Exchange Rate was Rs.53.50 per USD.
How will you recognize the Profit or Loss on the Forward Contract in the books of Kapali
Ltd. for the year ended 31st March 2013? (Journal Entries are not required).
SOLUTION
Particulars Rs.
1. Value at the rate prevailing at the inception of Forward Contract 10,70,000
(USD 20,000 x 53.50)
2. Value at the Forward Rate (USD 20,000 x 54.85) 10,97,000
3. Total Loss on entering into the Forward Contract = arising at inception 27,000
for 4 months Contract Period
4. Loss to be recognised for the year ended 31st March 2013, i.e. 20,250
for 3 months = 27,000 x ¾
QUESTION NO 8
How would you deal with the following foreign exchange transactions on the annual accounts
for the year ending March 31, 2002?
• Insight India Ltd. imports a Plant & Machinery on 31st July, 2001 on deferred payment
basis for US $ 200000. On March 31, 2002 the exchange rate, which was rs. 38 per
dollar on 31st July, 2001, has gone up to Rs. 42.
(Ans: Rs. 800000 to be included in fixed assets
QUESTION NO 9
AD Softex India Ltd. imports certain stock worth US $ 600000 on 15th Aug., 2009 at
which date the exchange rate is Rs.46 per dollar. The payment are made on March 31, 2010.
When the exchange rate is Rs. 47.10 per dollar. The stock is in hand as on 31st March 2002.
(Ans: Rs. 660000 debited to P&L Account)
QUESTION NO 10
Almaz Impex Ltd. obtains a short term foreign exchange loan of US $ 20,00,000 on 2nd
Sept., 2006 when the exchange rate is Rs. 44.50 per dollar. On 31st March 2007, the
exchange rate has gone up to Rs. 47.40 per dollar.
(Ans: Rs. 58 Lakhs debited in P&L Account).
340 ACCOUNTING
QUESTION NO 11
AD Softex India Ltd. imported goods worth US $ 5,00,000 from a US based company ACS
Inc. on 12.8.2009 when the exchange rate was 1 US $= 43.90. AD Softex India Ltd. agreed
to pay its creditors in four equal instalments falling on 12.9.2009, 12.10.2009, 12.11.2009
and 12.12.2009. The exchange rates on the settlement dates were 43.80, 44.60, 44.90 and
45.60 respectively. Prepare ledger accounts of ACS Inc. in books of AD Softex India Ltd.
and calculate net exchange fluctuation loss/gain.
(Ans: Loss of Rs. 412.500 Dr. to Profit and Loss Account).
QUESTION NO 12
Almaz Impex Ltd. an Indian Company took a foreign currency loan of US $ 5,00,000 @ 10%
p.a. on 1.1.2009. Interest is payable half-yearly with an instalment for principal of US $
50,000. The company closes books of account as on 31st March every year. Exchange rates
are :-
1.1.2009 42.25
31.3.2009 42.50
31.6.2009 42.90
31.12.2009 43.90
31.3.2010 43.50
Prepare loan account of the company and calculate the exchange fluctuation loss/gain for
the financial year ended on 31.3.2009 and 31.3.2010 respectively.
(Ans: Loss – Rs. 1,25,000 (31.3.2009): Loss – Rs. 4,95,000 (31.3.2010)
QUESTION NO 13
Stem Ltd. purchased a Plant for US$ 30,000 on 30th November 2013, payable after 6
months. The Company entered into a forward contract for 6 months @ rs.62.15 per Dollar.
On 30th November 2013, the Exchange Rate wass.60.75 per Dollar. How will you recognize
the Profit or Loss on Forward Contact in the books of Stem Ltd. for the year ended 31st
March 2014?
SOLUTION
The treatment under AS-11 is as under:-
Particulars Rs.
1. Value at the rate prevailing at the inception of forward Contract 18,22,500
30,000 $ x 60.75
2. Value at the forward rate 30,000 $ x 62.15 18,64,500
3. Total Loss on entering into forward contract = arising at inception for 42,000
6 months contract (1-2)
4. Loss to be recognized for the year ended 31st March 2014 28,000
i.e .for 4 months = 42000 x 4/6
Interest Payments should be charged to Profit and Loss Account of each year at the
Transaction Value on payment dates.
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on
31.03.2020
(i) Debtors include amount due from Mr. S ` 9,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $1 = ` 72.00
US $ 1=` 73.50 on 31st March,2020
US $ 1= ` 72.50 on 1st April,2019.
(ii) Long term loan taken on 1st April, 2019 from a U.S. company amounting to ` 75,00,000.
`5,00,000 was repaid on 31st December, 2019, recorded at US $ 1 = ` 70.50. interest
has been paid as and when debited by the US company.
US $1= ` 73.50 on 31st March,2020
US $1=1` 72.50 on 1st April, 2019
SOLUTION
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences
arising on the settlement of monetary items or on reporting an enterprise’s monetary items
at rates different from those at which they were initially recorded during the period, or
reported in previous financial statements, should be recognized as income or as expenses in
the period in which they arise.
342 ACCOUNTING
However, at the option of an entity, exchange differences arising on reporting of long -

term foreign currency monetary items at rates different from those at which they were
initially recorded during the period, or reported in previous financial statements, in so far
as they relate to the acquisition of a non-depreciable capital asset can be accumulated in
a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s
financial statements and amortized over the balance period of such long-term asset/
liability, by recognition as income or expense in each of such periods.
Foreign Currency `
Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = `72 9,00,000
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Gain US $ 12,500 X (73.50-72) 18,750
Treatment: Credit Profit and Loss A/c by ` 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 1 US $ = ` 73.50 75,00,000
(75,00,000/72.50)
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Loss after adjustment of
exchange gain on repayment of ` 5,00,000
` 67,987.48 [82,171.88 (US $ 96,356.08 X ` 73.5
less ` 70,00,000) less profit 14,184.40
US $ 7,092.2 (5,00,000/70.5) X ` 2)] NET LOSS 67,987.48*

Treatment: Credit Loan A/c and Debit FCMITD A/C
or Profit and Loss A/c by ` 67,987.48
Thus, Exchange Difference on Long term loan amounting ` 67,987.48 may either be charged
to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account
but exchange difference on debtors amounting ` 18,750 is required to be transferred to
Profit and Loss A/c.
NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment
of ` 5,00,000) has been calculated in the above solution. Alternative considering otherwise
also possible.
NOTE 2: Date of sales transaction of ` 9 lakhs has not been given in the question and hence
it has been assumed that the transaction took place during the year ended 31 March 2020.
BRANCH ACCOUNTS
343
BRANCH ACCOUNTS
PART -1
DEPENDENT BRANCHES
QUESTION NO 1 (DEBTORS METHOD)

Buckingham Bros. Bombay have a branch at Nagpur. They send goods at cost to their
branch at Nagpur. However, direct purchases are also made by the branch for which payments
are made at head office. All the daily collections are transferred from the branch to the
Head Office.
From the following, prepare Nagpur branch account in the books of head office:
Opening balances:- 01-01-1998
Imprest Cash 2,000
Stock of transferred goods from Head office 24,000
Stock of direct purchases 16,000
Cash sales 45,000
Direct purchases 45,000
Returns from customers 3,000
Goods sent to branch from H.O 60,000
Transfer from H.O for Petty Cash expenses 4,000
Bad debts 1,000
Discount to customers 2,000
Remittances to H.O
(Received by H.O) 1,65,000
Remittances to H.O
(Not received by H.O) 5,000
Branch Exp directly paid by H.O 30,000
Closing balances: on 31.12.1998
Stock: Direct purchases 10,000
Transfer from H.O 15,000
Debtors ?
Imprest cash ?
QUESTION NO 2 (ALL THREE METHODS)

The Bombay trading company invoiced goods to its Delhi branch at cost. Head office paid
all the branch expenses from its bank account except petty cash expenses, which were met by
the Branch. All the cash collected by the branch was banked on the same day to the credit of the
Head office. The following is a summary of the transactions entered into at the branch during
the year ended December 31, 1998.
Stock January 1 7,000
ACCOUNTING
344
Debtors January 1 12,600

Petty cash January 1 200
Goods sent from H.O 26,000
Goods returned to H.O 1,000
Cash sales 17,500
Credit sales 28,400
Allowances to customers 200
Discount to customers 1,400
Bad debts 600
Goods returned by customers 500
Sundry expenses 800
Cash received from sundry debtors 28,500
Stock at end of year 6,500
Debtors at the end of year 9,800
Petty cash at end of year 100
Prepare: (a) Branch account (debtors method), (b) Memorandum Branch Trading and Profit
and Loss account to prove the results as disclosed by the branch account and (c) Branch Stock
account, branch Profit and Loss account, Branch debtors and Branch Expenses account by
adopting the stock and debtors Method.
QUESTION NO 3 (STOCK & DEBTORS METHOD: GIT)

Harrison Limited, Madras has a branch at New Delhi to which goods are sent @ 20% above
cost. The branch makes both cash and credit sales. Branch expenses are met partly from H.O and
partly by the branch. The statement of expenses incurred by the branch every month is sent to
head office for recording.
Following further details are given for the year ended 31st December 1998.
Cost of goods sent to branch at cost 2,00,000
Goods received by branch till 31.12.1998 at invoice price 2,20,000
Credit sales for the year @ invoice price 1,65,000
Cash sales for the year @ invoice price 59,000
Cash remitted to head office 2,22,500
Expenses paid by H.O 12,000
Bad debts written off 750
Balances as on 1.1.1998
Stock (at cost) 25,000
Debtors 32,750
Cash in hand 5,000
Balance as on 31.12.1998
Stock (at invoice price) 28,000
Debtors 26,000
Cash in hand 2,500
BRANCH ACCOUNTS
345
Show the necessary ledger accounts in the books of the head office and determine the profit
and loss of the Branch for the year ended 31st December 1998.
QUESTION NO 4 (STOCK & DEBTORS METHOD)

Sell Well Limited who carried on a retail business opened a branch X on January 1st,
1999 where all sales were on credit basis. All goods required by the branch were supplied
from the Head Office and were invoiced to the branch at 10% above cost. The following were
the transactions:-
Jan`99 Feb`99 March`99
Goods sent to Branch (purchase price) 40,000 50,000 60,000
Sales as shown by the branch monthly 38,000 42,000 55,000
Cash received from debtors and remitted 20,000 51,000 35,000
Returns to H.O (invoice price to Branch) 1,200 600 2,400
The stock of goods held by the branch on March 31, 1999 amounted to Rs.53,400 at
invoice to branch.
Record these transactions in the Head Office books, showing balances as on 31st March
1999 and the branch gross profit for the three months ended on that date.
All working should form part of your solution.

Hindustan Industries Bombay has a branch in Cochin to which office goods are invoiced
at cost plus 25%. The branch sells both for cash and on credit, Branch expenses are paid
direct from head office and the Branch has to remit all cash received into the Head office
Bank account.
From the following details, relating to calendar year 1998, prepare the accounts in the
Head office ledger and ascertain the Branch profit. Branch does not maintain any books of
account but sends weekly returns to the head office.
Goods received from Head office at invoice price 6,00,000
Returns to Head office at invoice price 12,000
st
Stock at Cochin as on 1 Jan, 1998 60,000
Sales in the year-cash 2,00,000
Credit 3,60,000
st
Sundry debtors at cochin as on 1 January 1998 72,000
Cash received from debtors 3,20,000
Bad debts in the year 4,000
Sales returns at cochin branch 8,000
Rent, rates, Taxes at Branch 18,000
Salaries, wages, Bonus at Branch 60,000
Office expenses 6,000
st
Stock at branch on 31 December 1998 at invoice price 1,20,000
ACCOUNTING
346

X Limited Bombay started on 1st January 1988 has two branches at Kanpur and Lucknow.
All goods sold at the Branches are received from the Head office invoiced at cost plus 25
per cent. All expenses relating to branches are paid by the Head office. All cash collections
are remitted daily to Head-office by the Branches. The following particulars relating to the
year ended 31st December, 1988 have been extracted from the weekly statements sent by
the branches:
Kanpur Lucknow
Rs. Rs.
Credit sales 1,25,200 1,10,000
Cash sales 78,600 85,200
Sales returns 2,300 1,200
Rent and rates 3,200 4,500
Bad debts 6,000
Salaries 16,000 18,000
General expenses 2,600 1,500
Goods received from H.O 1,50,000 1,25,000
Advertisement 7,500 5,200
st
Stock on 31 December 1988 45,000 35,000
You are required to prepare the Branch accounts as they would appear in the books of
the Head office.
QUESTION NO 7 (ABNORMAL LOSSES)

Bombay Traders Limited sends goods its Madras Branch at cost plus 25 per cent. The
following particulars are available in respect of the Branch for the year ended 31st March,
1988.
Opening stock at Branch at cost to Branch 80,000
Goods sent to Branch at invoice price 12,00,000
Loss in Transit at invoice price 15,000
Pilferage at invoice price 6,000
Sales 12,19,000
Expenses 60,000
Closing stock at Branch at cost to Branch 40,000
Recovered from insurance company against loss in transit 10,000
Show ledger accounts in the head office books for:-
(a) Branch stock account
(b) Goods sent to branch account
(c) Branch adjustment account
(d) Branch Profit and Loss account
BRANCH ACCOUNTS
347
QUESTION NO 8 (RETAIL BRANCH)

New Textiles Limited operates a number of retails shops to which goods are invoiced
at wholesale price, which is cost plus 20%. Shops sell the goods at the list price, which is
wholesale price plus 10%. From the following particulars ascertain the profit or loss for 1997
at shop no: 143:
Stock at shop on January 1 1997 15,000
Goods invoiced to shop during 1997 1,40,000
Sale at the shop during the year 1,54,770
Goods destroyed by accident (retail value) 660
Expenses at the shop 7,200

Arnold BROS. Delhi trades in Ghee and Oil. It has a branch at Lucknow. The company
dispatches 25 tins of Oil @ Rs.1,000 per tin and 15 tins of Ghee @ Rs.1,500 per tin on 1st of
every month. The branch incurs some expenditure, which is met out of its collections this is
in addition to expenditure directly paid by Head Office.
Following are the other details:
Delhi Lucknow
Rs. Rs.
Purchases Ghee 14,75,000
Oil 29,32,000
Direct expenses 3,83,275
Expenses paid by H.O. 14,250
Sales Ghee 18,46,350 3,42,750
Oil 27,41,250 3,15,730
Collection during the year (including cash 6,47,330
sales)
Remittance by Branch to Head Office 6,13,250
(DELHI)
Balance as on: 1-1-98 31-12-98
Stock: Ghee 1,50,000 3,12,500
Oil 3,50,000 4,17,250
Debtors 7,32,750
Cash on hand 70,520 55,250
Furniture and fixtures 21,500 19,350
Plant and machinery 3,07,250 7,73,500
(LUCKNOW)
Balance as on: 1-1-98 31-12-98
Stock: Ghee 17,000 13,250
Oil 27,000 44,750
Debtors 75,750 ---
Cash on hand 7,540 12,350
ACCOUNTING
348
Furniture and fixtures 6,250 5,625

Plant and machinery --- ---
Addition to plant and machinery on 1-1-98 Rs.6,02,750.
Rate of depreciation: Furniture/fittings @ 10% and Plant/machinery @ 15% (already adjusted
in the above figures).
The branch manager is entitled to 10% commission after charging such commission
whereas, the general manager is entitled to 10% commission on overall company profits after
charging such commission. General manager is also entitled to a salary of Rs.2000 p.m. General
expense incurred by the Head Office Rs.24,000.
Prepare the branch account in the head office books and also prepare the company`s
Trading and Profit and Loss account (excluding branch transactions).
QUESTION NO 10 (NOV 1997) (BRANCH OPENED FOR PURCHASES)

T of Calcutta has a branch at Dibrugarh. The branch does not maintain separate books
of accounts. The branch has the following assets and liabilities on 31st August 1997 and 30th
September 1997:
31st August 1997 30th September 1997
Stock of tea 1,80,000 1,50,000
Advance to suppliers 5,00,000 4,50,000
Bank balance 75,000 1,00,000
Prepaid expenses 10,000 12,000
Outstanding expenses 13,000 11,000
Creditors for purchases 3,00,000 to be ascertained
During the month, Dibrugarh branch:
(a) Received by electronic mail transfer Rs.10,00,000 from Calcutta head office
(b) Purchased tea worth Rs.12,00,000
(c) Sent tea costing Rs.12,30,000 to Calcutta freight of Rs.80,000 being payable at the
destination by the receiver
(d) Spent Rs.25,000 on office expenses
(e) Paid Rs.3,00,000 as advance to suppliers
(f) Paid Rs.6,50,000 to suppliers in settlement of outstanding dues.
In addition, T informs you that the Calcutta office had directly paid Rs.3,50,000 to
Dibrugarh suppliers by cheques drawn on bank accounts in Calcutta during the month.
T informs you that for the purpose of accounting Dibrugarh branch is not treated as an
outsider. He wants you to write the detailed accounts relating to the transactions of the
Dibrugarh branch as would appear in the books of Calcutta head office.
QUESTION NO 11 (MAY 2001) (DEBTORS METHOD)

Widespread ltd. invoices goods to its branch at cost plus 20 %. The branch sells goods for
cash as well as on credit. The branch meets its expenses out of cash collected from its
debtors and cash sales and remits the balance of cash to head office after withholding
Rs.10000 necessary for meeting immediate requirements of cash. On 31.3.2000 the assets at
the branch were as follows:
BRANCH ACCOUNTS
349
Rs.(`000)
Cash in hand 10
Trade debtors 384
Stock at Invoice Price 1080
Furniture and Fittings 500
During the accounting year ended 31.3.2001 the invoice price of goods dispatched by
the head office to the branch amounted to Rs.1 crore 32 lakh. Out of the goods received by
it the branch sent back to head office goods invoiced at Rs.72,000. Other transactions at
the branch during the year were as follows: Rs.
(`000)
Cash sales 9700
Credit sales 3140
Cash collected by branch from credit customers 2842
Cash discount allowed to debtors 58
Returns by customers 102
Bad debts written off 37
Expenses paid by the branch 842
st
On 1 January 2001 the branch purchased new furniture for Rs.1 lakh for which
payment was made by head office through a cheque.
On 31st March 2001 branch expenses amounting to Rs.6000 were outstanding and cash
in hand was, again Rs.10000. Furniture is subject to depreciation @ 16 % per annum on
diminishing balances method.
Prepare branch account in the books of head office for the year ended 31st March 2001.
QUESTION NO 12 (STOCK & DEBTORS: IBT)

Sell well Limited has two branches in Cochin and Bangalore. During the year ended 31st
March 1989, goods have been invoiced to the Cochin branch at 20% above cost and to the
Banglore branch at 25% above cost. The branches do not maintain complete books of accounts
but the following figures are available for the year ended 31st March 1989:-
Cochin Bangalore
Rs. Rs.
Opening stock at invoice price 10,000 10,000
Goods sent to branch at cost 50,000 40,000
Amount remitted Branch 80,000 80,000
Amount remitted by Head office 15,000 15,000
Goods returned by branch at invoice price 3,000
Cash as on 1.4.1988 2,000 1,000
Cash as on 31.3.1989 1,000 500
Goods returned by customer at branch at selling 5,000 4,000
price
Expenses at Branch in cash 9,000 3,000
ACCOUNTING
350
All sales at the branches are for cash. During the year Cochin branch purchased fixed
assets worth Rs.4,000 and this amount is included in the figure of branch expenses. Cochin
branch transferred to the Bangalore branch stock costing Rs.5000 during the year. The
Bangalore branch remitted Rs.2000 to the Cochin branch also during the year. There was a
closing stock of Rs.24000 valued at invoice price at the Cochin Branch. There was no closing
stock at the Bangalore branch. The branch stock adjustment account in the head office books
showed the following position as on 1st April, 1988:-
For Cochin:-Rs.2500(cr.) For Bangalore-Rs.2,000(cr.)
Prepare branch stock account, branch adjustment account. Goods sent to Branch
account, cash accounts of Branches and Profit and Loss account of branches in the books of
Head office books ignoring depreciation.
QUESTION NO 13 (NOV 1992) (BRANCH FINAL A/CS)

M/s Bright & Co. with its head office in Madras invoiced goods to its branch at Bombay
at 20% less than the catalogue price which is cost plus 50%, with instructions that cash sales
were to be made at invoice price and credit sales at catalogue price. Discount on credit sale
at 15 % on prompt payment will be allowed. From the following particulars available from the
branch prepare the branch trading and profit and loss account for the year ended 31st March
1992 in the books of head office, so as to show the actual profit or loss of the branch for
the year 1991-92:
Rs.
Stock 1-4-1991 (invoice price) 12,000
Goods received form head office (invoice price) 1,32,000
Debtors on 1-4-1991 10,000
Sales (cash) 46,000
Sales (credit) 1,00,000
Cash received from debtors 85,635
Expenses at the branch 6,000
Remittance to the head office 1,20,000
Debtors on 31-3-1992 11,000
Cash in hand on 31-3-1992 5,635
Stock on 31-3-1992 (invoice price) 15,000
It was reported that a part of stock at the branch was lost by fire during the year
whose value is to be ascertained and provision should be made for discount to be allowed to
debtors as on 31-3-1992 on the basis of the year`s trend of prompt payment.
QUESTION N0 14 (MAY 1997) (RETAIL BRANCH)

Rahul Limited operates a number of retail outlets to which goods are invoiced at
wholesale price, which is cost plus 25 %. These outlets sells the goods at the retail price,
which is wholesale price plus 20 %.
Following is the information regarding one of the outlets for the year ended 31.3.97:
BRANCH ACCOUNTS
351
Rs.
Stock at the outlet 1.4.96 30,000
Goods invoiced to outlet during the year 3,24,000
Gross profit made by the outlet 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet 31.3.97 36,000
You are required to prepare the following accounts in the books of Rahul Limited for the
year ended 31.3.97:
(a) Outlet stock account
(b) Outlet profit and loss account
QUESTION NO 15 (ACCOUNTING FOR LOSSES)

The Empire store Limited invoice goods to their various branches at cost and the
branches sell on credit as well as for cash. For the following details relating to the Bombay
branch, prepare the necessary accounts in the Head Office books:-
Debtors 1st January 1992 26,200
st
Debtors 31 December 1992 31,100
st
Cash balance 1 January 1992 300
Stock, 1st January 1992 15,000
st
Stock 31 December 1992 13,900
Goods received from Head office 50,800
Cash received from Head office 1,500
Goods returned to Head office 700
Cash sales 33,500
Credit sales 60,000
Allowances to customers 320
Returns from customers 580
Discount allowed to customers 2,400
Bad debts 600
Remittance to Head office 74,900
Wages and salaries 6,000
General Trade charges 1,300
Normal loss of goods due to Wastage 1,200
Abnormal loss of goods due to pilferage 3000

During the year ended 31st December 2002, X & company of Madras sent to their
branch at Bombay goods costing Rs.1,00,000. They used to invoice to the branch at a price
designed to show a gross profit of 33-1/3 per cent on invoice price.
ACCOUNTING
352
Collections at the branch from debtors amounting to Rs.26,390 were all sent to Head
office. Branch transactions during the year were:-
Cash sales - Rs.1,21,050
Credit sales-Rs.27,600
Goods returned by customers- Rs.300
Goods returned to Head office – Rs.780 (invoice price).
Opening balances:
Stock 2,250
Debtors 1,320
Closing balances:
Stock 2,700
Debtors 2,230
Goods at the branch of Rs.1260 (invoice price) were lost. Insurances Company paid
Rs.730 on the claim. Branch expenses, paid by Head office amount to Rs.36,780.
Show the necessary ledger accounts as would appear in the Head office books
recording the above the transactions relating to branch Profit and Loss account.
QUESTION NO 17 (ACCOUNTING FOR LOSSES)

Atlantic paper products send goods to Bhopal branch at cost plus 20%. You are given
the following particulars:
Opening stock at branch at its cost 5,000
Goods sent to branch at invoice price 20,000
Loss in transit at invoice price 2,500
Theft at invoice price 1,000
Loss in weight (normal) at invoice price 500
Sales 25,500
Expenses 8,000
Closing stock at branch at cost to Branch 6,000
Claim received from the insurance company for loss in 2,000
transit.
You are required to prepare in the head office books:
1. Branch stock account.
2. Branch adjustment account
3. Branch Profit and Loss account
QUESTION NO 18 (HOME WORK: LOSS 800)

On 1st January 1980 goods costing Rs.132000 were invoiced by Madras Head office to
its branch at Delhi and charged at selling price to produce a gross profit of 25 per cent on
the selling price. At the end of the month the return from Delhi branch showed that the
sales were Rs.150000. Goods invoiced at Rs.1200 to Delhi branch had been returned to
Madras Head office. The closing stock at Delhi branch was Rs.24000 at selling price. Record
BRANCH ACCOUNTS
353
the above transactions in Branch stock account in the Head office books and close the said
accounts on 31st January 1980.
QUESTION NO 19 (MAY 2006)

Concept & company with its Head office at Mumbai has a branch at Nagpur. Goods are
invoiced to the branch at cost plus 33.33%. The following information is given in respect of
the Branch for the year ended 31.3.2006:
Rs.
Goods send to branch (invoice price) 4,80,000
Stock at branch on 1.4.2005 (invoice price) 24,000
Cash sales 1,80,000
Return of goods by customers to the branch 6,000
Branch expenses paid in cash 53,500
Branch Debtors balance on 1.4.2005 30,000
Discount allowed 1,000
Bad debts 1,500
Collection from Debtors 2,70,000
Branch Debtors cheques returned dishonored 5,000
Stock at branch on 31.3.2006( invoice price) 48,000
Branch Debtors balance on 31..03.2006 36,500
Prepare under the stock and Debtors system the following ledger accounts in the books of
the head office:
(i) Nagpur branch stock account
(ii) Nagpur branch Debtors account
(iii) Nagpur branch adjustment account
Also compute shortage of stock at branch, if any?
ANSWER:
Branch Stock Account
To Balance b/d 24,000 By Cash sales 1,80,000
To Goods sent to branch 3,60,000 By Branch Debtors 2,80,000
(cost) (credit sales)
To Branch adjustment 1,20,000 By Branch PL a/c 1,500
(loading) By Branch adjust. 500
To Branch Debtors 6,000 (w.n#1)
By Balance c/d 48,000
5,10,000 5,10,000
ACCOUNTING
354
Branch Debtors Account

To Balance b/d 30,000 By Discounts 1,000
To Bank (dishonored 5,000 By B. stock 6,000
cheque) (goods returned)
To Branch stock By Bad debts 1,500
(credit sales) 2,80,000 By Bank (collection) 2,70,000
(Balancing Figure)
36,500
By Balance c/d
3,15,000 3,15,000
Branch Adjustment Account
To Branch Stock 5,00 By Stock reserve 6,000
(Shortage) (opening)
To Stock Reserve 12,000 By Branch stock 1,20,000
(closing) (loading on goods)
To Branch profit and 1,13,500
loss account
(Balancing Figure)
1,26,000 1,26,000
Working note:1
Calculation of shortage (invoice price)
Goods sent to branch 4,80,000
Goods from Debtors (returned) 6,000
Less: Cash sales 1,80,000
----------
Shortage (balancing figure) 2,000
Cost of shortage(2,000*100/133.33) 1,500
Loading (2,000*33.33/133.33) 500
Notes:
(i) Shortage is calculated at invoice price. We have assumed that the shortage is an
abnormal shortage so it should be divided into two break ups of cost and loading.
Cost should be debited to branch profit and loss account and loading in adjustment
account.
(ii) In the question, there is no requirement in relation to calculation of profit, so we
have not prepared the profit and loss account.
BRANCH ACCOUNTS
355
QUESTION NO 20 (C A MAY 2010) (HOMEWORK)

Ram Limited of Chennai has a branch at Nagpur to which office, goods are invoiced at
cost plus 25% . the branch makes sales both for cash and on credit. Branch expenses are
paid direct from Head Office and the branch has to remit all cash received into the head
Office bank Account at Nagpur.
From the following details , relating to the year 2009, prepare the accounts in Head office
Ledgr and ascertain branch
Profit. Branch does not maintain any books of accounts , but sends weekly returns to Head
Office :
Rs.
Goods received from Head Office at 1,20,000
invoice price
Returns of head office at invoice price 2,400
Stock at Nagpur Branch on 1.1.2009 12,000
Sale during the year – cash 40,000
Credit 72,000
Debtors at Nagpur Branch 14,400
Cash received from Debtors 64,000
Discounts allowed to debtors 1,200
Bad debts during the year 800
Sales Returns at Nagpur Branch 1,600
Salaries and wages at Branch 12,000
Rent, Rates and taxes at Branch 3,600
Office Expenses at Nagpur Branch 1,200
Stock at Branch on 30.12.2009 at invoice 24,000
price
ANSWER
Branch net profit 7120
QUESTION NO 21 (C A MAY 2007)(HOMEWORK)

Red and Co. of Mumbai started a branch at Bangalore on 1.4.2006 to which goods were
sent at 20% above cost. The branch makes both cash sales and credit sales. Branch expenses
are met from branch cash and balance money remitted to H.O. the branch does not maintain
double entry books of account and necessary accounts relating to branch are maintained in
H.O. following further details are given for the year ending on 31.3.2007 :
Rs.
Cost of goods sent to branch 1,00,000
Goods received by branch till 31.3.2007 at 1,08,000
invoice price
Credit sales for the year 1,16,000
Closing debtors on 31.3.2007 41,600
Bad Debts written off during the year 400
ACCOUNTING
356
Cash remitted to H.O. 86,000

Closing cash on hadn at branch on 31.3.2007 4,000
Cash remitted by H.O. to branch during the year 6,000
Closing stock in hand at branch at invoice price 12,000
Expenses incurred at branch 24,000
Draw up the necessary Ledger accounts like branch Debtors Account, branch stock account ,
goods sent to branch account, branch cash Account, branch Expenses Account and branch
Adjustments A/c for ascertaining gross profit and branch Profit and loss a/c for
ascertaining branch profit.
SOLUTION
To Balance b/d NIL By Cash sales 34,000
To Goods sent to branch 1,20,000 (REFER CASH A/C)
(IP) By credit sale 1,16,000
(credit sales)
By Balance c/d
Transit 12,000
Hand 12,000
1,74,000 1,74,000

To credit sale 1,16,000 By bad debts 400
(credit sales) By cash (bal.fig) 74000
By Balance c/d 41600
1,16,000 1,16,000
Branch cash Account

To branch debtors 74,000 By HO cash 86,000
To ho cash (received) 6,000 By Branch expenses 24,000
To branch sales (bal.fig) 34,000 By Balance c/d 4,000
1,14,000 1,14,000
BRANCH ACCOUNTS
357
Branch Adjustment Account

To Stock Reserve 4,000 By GSTB 20,000
(closing) (loading on goods)
(24000X20/120)
TO GP 70,000 BY GP 54,000
74,000 74,000
Branch Expenses Account

To Branch cash 24,000 By branch P&L 24,400
To bad debts 400
24,400 24,400
Branch P&L Account

TO BRANCH EXPENSES 24,400 BY GP 70,000
TO NP 45,600
70,000 70,000
QUESTION NO 22 (C A NOV 2010) (RETAIL BRANCH)
Following is the information of the Jammu branch of Best Ltd. New Delhi for the year
ending 31st March 2010 from the following:
(1) Goods are invoiced to the branch at cost plus 20%
(2) The sale price is cost plus 50%
(3) Other information:
Rs.
Stock as on 1.4.2009 2,20,000
Goods sent during the year 11,00,000
Sale during the year 12,00,000
Expenses incurred at the branch 45,000
Ascertain (i) the profit earned by the branch during the year (ii) branch stock reserve in
respect of unrealized profit.

ACCOUNTING
358
QUESTION 23 (HOMEWORK)
Fanna Cloth Mills opened a branch at Mumbai on is April, 2011. The goods were invoiced to
the branch at selling price which was 125% of the cost to the head office.
The following are the particulars of the transactions relating to branch during the year ended
31sf March, 2012:
Rs Rs
Goods sent to branch at cost to head office 4212600
Sales
Cash 1876050
Credit 2661450 4537500
Cash collected from debtors 2355000
Discount allowed to debtors 23550
Returns from debtors 15000
Spoiled cloth in bales written off at invoice 7500
price
Cheques sent to branch for:
Rent
Salaries 108000
Other Expenses 270000
52500 430500
Prepare Branch Account based on invoice price under Debtors method for ascertaining profit
for the year ended 31sf March, 2012.
Solution
Branch Account
Rs Rs Rs Rs
To Good sent to 5265750 By H.O.Cash
Branch account (Remittances)
To Bank- Sale 1876050
Rent 108000 Collection from 2355000 4231050
Salaries 270000 debtors
Other Expenses 52500 430500
To Branch Stock Goods sent to
Reserve 147150 branch 1053150
( 7,35,750x25/125) Account (Loading)
To H.O. Profit and 444450 (52,65,750x25/125)
loss Account
- Transfer of profit Balance c/d
BRANCH ACCOUNTS
359
Branch Stock 735750

Branch Debtors 267900 1003650
6287850 6287850
Working Notes:
Memorandum Branch Stock Account
To Goods Sent to By Cash- Sale 1876050
Branch By Credit Sales 2661450
Cost 4212600 By Abnormal Loss 7500
Add: Loading @ 25% 1053150 5265750 -spoiled cloth
To Returns from By Balance c\d 735750
Debtors 15000 (Bal.fig. )
5280750 5280750
Memorandum Branch Debtors Account

Rs Rs
To Credit Sales 2661450 By Cash collected 2355000
By Discount allowed 23550
______
By Returns 15000
_______ By Balance c/d (Balancing 2,67,900
2661450 figure 2661450
ACCOUNTING
360
QUESTION 24 (DEBTORS METHOD)

LMN is having branch at Mumbai. Goods are invoiced to the branch at 25% profit on
sale. B ranch has been instructed to send all cash daily to head office. All expenses are paid
by head office except petty expenses, which are met by the Branch. From the following
particulars, prepare branch account in the books of head office:
Particular Amounts Particular Amounts
(Rs) (Rs)
Stock as on 1st April, 2013 (Invoice 40000 Discount allowed to debtors 300
price)
Sundry Debtors as on 1st April, 2013 25,000 Expenses paid by head office :
Cash in hand as on 1st April, 2013 1,000 Salary 4,000
Office Furniture as on 1st April, 2013 4,000 Staff Welfare 750
Goods invoiced from head office 1,80,000 Telephone Expenses 1,200
(invoice price) Other Misc. Expenses paid by branch 700
Goods return to head office 6,000 Stock as on 31st March, 2014
(at invoice price) 35,000
Goods return by debtors 1,250 Depreciation to be provided on 10% p. a.
cash received from Debtors 65,000 branch furniture
Cash Sales 1,20,000
Credit sales 70,000
Answer
In the books of Head office -LMN
Mumbai Branch Account (At invoice price)
Particular Amount Particular Amount
(Rs) (Rs)
To Balance b/d : By Stock Reserve (opening) 10,000
Stock 40,000 By Remittances
Debtors 25,000 Cash Sales 1,20,000
cash in hand 1,000 Cash from Debtors 65,000 1,85,000
Furniture 4,000 By Goods sent to Branch (loading) 45,000
To Goods send to branch 1,80,000 By Good returned by branch
To Goods returned by branch 1,500 (Returns to HO) 6,000
(loading) By Balance c/d:
Stock 35,000
To Bank (Expenses paid by Head Debtors 28,450
office) Cash (Rs 1,000- Rs 700) 300
Salary 4000 Furniture ( Rs 4,000- Rs 400) 3,600
Staff 750
Telephone 1200 5950
To Stock Reserve (closing) 8750
To profit Transferred to General 47,150 ______
profit & Loss A/c _____ 3,13,350
3,13,350
BRANCH ACCOUNTS
361
Working Note :
Debtors Account
Particular Amount (Rs) Particular Amount (Rs)
To Balance b/d 25,000 By Cash A/c 65,000
To Sales A/c (Credit) 70,000 By Sales Return 1,250
______ By Discount allowed 300
95,000 By Balance c/d 28,450
95,000
QUESTION 25 {2011 May}

XYZ Company is having its` branch at Kolkata. Goods are invoiced to the branch at 20%
profit on sale. Branch has been instructed to send all cash daily to head office. All expenses
are paid by head office except petty expenses which are met by the branch manager. from
the following particulars prepare branch account in the books of Head office.
Rs Rs
Stock on 1st April 2010 (invoice 30,000 Discount allowed to debtors 160
price)
Sundry debtors on 1st April, 2010 18,000 Expenses paid by head office :
Cash in hand as on 1st April, 2010 800 Rent 1800
Salary 3200
Office furniture on 1st April, 3,000 Stationary & Printing 800
2010 petty exp. paid by the branch 600
Goods invoiced from the head 1,60,000 Depreciation to be
office ( invoice price)
Goods return by Branch 2000 Provided on branch
furniture at 10% p.a.
Goods return by debtors 960
Cash received from debtors 60,000
Cash sales 1,00,000 Stock on 31st March
Credit sales 60,000 2011 (at invoice price) 28,000
Answer :
In the books of Head Office - XYZ Company
Kolkata branch Account (at invoice)
Particular Amt. (Rs) Particular Amt. (Rs)
To Balance b/d By Stock reserve (Opening ) 6,000
Stock 30,000 By H O CASH(remittances)

ACCOUNTING
362
Debtors 18,000 (Daily= 1,00,000+ 60,000) 1,60,000
Petty cash 800 By Loading in GSTB 32,000
Furniture 3,000 By goods returned by
To goods sent to branch 1,60,000 Branch (Return to H.O.) 2,000
To Goods returned branch By Balance c/d
(loading ) 400 Stock 28,000
To Bank (expenses paid by H.O.) Debtors 16,880
Rent 1800 Cash ( 800-600 ) 200
Salary 3200 Furniture ( 3,000-300) 2,700
Stationery & Printing 800 5,800
To stock reserve (Closing ) 5,600
To Profit transferred to 24,180
General Profit & Loss A/c
2,47,780 2,47,780
Working Note :
Debtors Account
Rs Rs
To Balance b/d 18,000 By cash account 60,000
To sales account (credit) 60,000 By Sales return account 960
By Discount allowed account 160
By balance c/d
16,880
78,000 78,000
Note : It is assumed that goods returned by branch are at invoice price.

BRANCH ACCOUNTS
363
PART-2
INDEPENDENT BRANCHES
QUESTION NO 26
Ring Bell Limited Delhi has a branch at Bombay where a separate set of books is used.
The following is the trial balance extracted on 31st December 1998.
Head Office Trial Balance
Rs. Rs.
Share capital (Authorised: 10,000
equity shares of Rs.100 each)
Issued: 8,000 equity shares 8,00,000
Profit and Loss account 1.1.98 25,310
Interim dividend paid--August 1998 30,000
fixed assets 5,30,000
Stock 2,22,470
Debtors and creditors 50,500 21,900
Profit for the year 1998 82,200
Cash balance 62,730
Branch current account 1,33,710
10,29,410 10,29,410
Branch Trial Balance
Rs. Rs.
Fixed assets 95,000
Profit for 1998 31,700
Stock 50,460
Debtors and creditors 19,100 10,400
Cash balance 6,550
Head office current account 1,29,010
1,71,110 1,71,110
The difference between the balances of the current account in the two sets of books is
accounted for as follows:
(a) Cash remitted by the branch on 31st December 1998 but received by the Head office
on 1st January 1999—Rs.3,000
(b) Stock stolen in transit from Head office and charged to branch by the Head office
but not credited to Head office in the branch books as the branch manager declined
to admit any liability (not covered by insurance) – Rs.1,700.
Give the branch current account in the Head office books after incorporating branch trial
balance through journal. Also prepare the company`s Balance Sheet as on 31st December
1998.
ACCOUNTING
364
QUESTION NO 27
Ashwin, a trader commenced business on 1st January 1995 with a Head office and one
branch. Purchases were made exclusively by the Head office where the goods were processed
before sale. There was no loss or wastage.
Only processed goods received from head office were handled by the branch and these
were charged to the branch at processed cost plus 10 per cent.
All sales whether by head office or the branch were at uniform gross profit of 25 per
cent on their respective cost.
The following Trial Balance as on 31st December 1995 was extracted from the books.
Head office
Branch
Debit Credit Debit Credit
Rs. Rs. Rs. Rs.
Capital 2,20,000
Drawings 25,000
Purchases 19,93,350
Cost of processing 34,650
Sales 14,20,000 6,40,000
Goods sent to branch/
Received by branch 6,51,200 6,40,200
Selling & General expenses 2,24,000 27,000
Debtors/Creditors 2,30,000 5,83,350 92,000 2,400
Branch/H.O. current a/c 2,05,550 1,50,800
Balance at bank 1,62,000 34,000
Total 28,74,550 28,74,550 7,93,200 7,93,200
Further details are:
(a) Goods charged by head office to branch in December 1995 at Rs.11,000, were not
received by the branch until January 1996. A remittance of Rs.43,750 from the branch
to head office in December 1996 is still in transit.
(b) Stock taking at branch disclosed shortage of Rs.5,000 (at selling price).
(c) Cost of unprocessed goods at head office as on 31st December 1995 was Rs.1,80,000.
You are required to prepare in columnar form Profit and Loss account and Balance Sheet
of the head office, branch and the business as whole.
QUESTION NO 28 (NOV.2005)
M/s. Shah & Co. commenced business on 1.4.2004 with a Head office and one branch.
Purchases were made exclusively by the Head office where the goods were processed before
sale. There was no loss or wastage.
Only processed goods received from head office were handled by the branch and these
were charged to the branch at processed cost plus 10 per cent.
All sales whether by head office or the branch were at uniform gross profit of 25 per
cent on their respective cost.
BRANCH ACCOUNTS
365
The following Trial Balance as on 31.03.2005 was extracted from the books.
Head office
Branch
Rs. Rs. Rs. Rs.
Capital 3,10,000
Drawings 55,000
Purchases 19,69,500
Cost of processing 50,500
Sales 12,80,000 8,20,000
Goods sent to branch/
Received by branch 9,24,000 8,80,000
Selling & General expenses 50,000 6,200
Administrative expenses 1,39,000 15,000
Debtors/Creditors 3,09,600 6,01,400 1,13,600 10,800
Branch/H.O. current a/c 3,89,800 2,61,500
Balance at bank 1,52,000 77,500
Total 31,15,400 31,15,400 10,92,300 10,92,300
Further details are:
(d) Goods charged by head office to branch in March, 2005 at Rs.44,000, were not
received by the branch until 2.4.2005.
(e) A remittance of Rs.84,300 from the branch to head office was also similarly not
received up to 31.3.2005.
(f) Stock taking at branch disclosed shortage of Rs.20,000 (at selling price).
(g) Cost of unprocessed goods at head office as on 31.03.2005 was Rs.1,00,000.
You are required to prepare in columnar form Profit and Loss account and Balance Sheet
of the head office, branch and the business as whole.
QUESTION NO 29
KP Limited manufactures a range of goods which it sells to wholesale customers only
from its head office. In addition the head office transfers goods to a newly opened branch
at factory cost plus 15%. The branch then sells these goods to the general public on only cash
basis. The selling price to wholesale customers is designed to give a factory profit which
amounts to 30% of the sales value. the selling price to the general public is designed to give
a gross margin (i.e., selling price less cost of goods from head office) of 30% of the sales
value. The company operates from rented premises and leases all other types of fixed assets.
The rent and hire charges for these are include in the overhead costs shown in the trial
balances.
From the information given below you are required to prepare for the year ended 31st
December 1998 in columnar form:
(a) A Profit and Loss Account for (i) H.O. (ii) the branch (iii) the entire business.
ACCOUNTING
366
(b) A Balance Sheet as on 31st December 1998 for the entire business.
Head Office Branch
Rs. Rs. Rs. Rs.
Raw materials purchased 35,000
Direct wages 1,08,500
Factory overheads 39,000
Stock on 1-1-98
Raw material 1,800
Finished goods 13,000 9,200
Debtors 37,000
Cash 22,000 1,000
Administrative salaries 13,900 4,000
Salesmen`s salaries 22,500 6,200
Other administrative &
selling overheads 12,500 2,300
Inter-unit accounts 5,000 2,000
Capital 50,000
Provision for unrealized
profit in stock 1,200
Sales 2,00,000 65,200
Goods sent to branch 46,000
Goods received from H.O. 44,500
3,10,200 3,10,200 67,200 67,200
Notes:
(a) On 28th December 1998 the branch remitted Rs.1,500 to head office and this has not
yet been recorded in the head office books. Also on the same date, the head office
dispatched goods to the branch invoiced at Rs.1,500 and these too have not yet been
entered into the branch books. It is the company`s policy to adjust items in transit in
the books of the recipient.
(b) The stock of raw materials held at the head office on 31st December 1998 was valued
at Rs.2,300
(c) You are advised that:
(i) There were no stock losses incurred at the head office or at the branch.
(ii) It is the company `s practice to value finished goods stock at the head office
at factory cost.
(iii) There were no opening or closing stock of work-in-progress.
(d) Branch employees are entitled to a bonus of Rs.156 under a bilateral agreement.
BRANCH ACCOUNTS
367
QUESTION NO 30
AFFIX Limited of Calcutta has a branch at Delhi to which the goods are supplied from
Calcutta but the cost thereof is not recorded in the Head office books. On 31st March 1997
the Branch Balance Sheet was as follows:
Creditors balance 40,000 Debtors balance 2,00,000
Head office 1,68,000 Building Extension A/c
closed by transfer to
H.O. a/c
Cash at bank 8,000
2,08,000 2,08,000
During the six months ending on 30-9-97 the following transactions took place at Delhi.
Rs. Rs.
Sales 2,40,000 Manager`s salary 4,800
Purchases 48,000 Collections from debtors 1,60,000
Wages paid 20,000 Discounts allowed 8,000
Salaries (inclusive of Discount earned 1,200
advance of Rs.2,000) 6,400 Cash paid to creditors 60,000
General expenses 1,600 Building account (further
Fire insurance (paid for payment) 4,000
one year) 3,200 Cash in hand 1,600
Remittance to head office 38,400 Cash at bank 28,000
Set out the head office account in Delhi books and the Branch Balance Sheet as on 30-
9-1997. Also give journal entries in the Delhi books.
QUESTION NO 31
The following trial balances as at 31st December 1997 have been extracted from the
books of Major Limited and its branch at a stage where the only adjustments requiring to be
made prior to the preparation of a Balance Sheet for the undertaking as a whole:
Head Office Branch
Rs. Rs. Rs. Rs.
Share capital 1,50,000
Sundry fixed assets 75,125 18,901
Sundry current assets 1,21,089 23,715 (Note 3)
Sundry current liabilities 34,567 9,721
Stock reserve, 1 Jan. 997
st
(Note 2) 693
Revenue account 43,210 10,250
Branch account 31,536
Head office account 22,645
2,28,470 2,28,470 42,616 42,616
ACCOUNTING
368
Notes:
(1) Goods transferred from head office to the branch are invoiced at cost plus 10% and
both revenue accounts have been prepared on the basis of the prices charged.
(2) Relating to the head office goods held by the branch on 1st January 1997.
(3) Includes goods received from head office at invoice price Rs.4,565.
(4) Goods invoiced by head office to branch at Rs.3,641 were in transit at 31st December
1997 as was also a remittance of Rs.3,500 from the branch.
(5) At 31st December 1997 the following transactions were reflected in the head office
books but unrecorded in the branch books:
(a) The purchase price of lorry, Rs.2,500 which reached the branch on Dec.
25;
(b) A sum received on December 30,1997 from one of the branch debtors
Rs.750.
You are required:
(i) To record the foregoing in the appropriate ledger accounts in both set of books.
(ii) To prepare a Balance Sheet as on 31st December 1997 for the undertaking as a
whole.

Head office passes adjustment entry at the end of each month to adjust the position
arising out of inter-branch transactions during the month. Form the following inter-branch
transactions in January, 1996, make the entry in the books of Head office:
(a) Bombay branch
(i) Received Goods: Rs.6000 from Calcutta Branch, Rs.4000 from Patna Branch.
(ii) Sent Goods to: Rs.10000 to Patna, Rs.8000 to Calcutta.
(iii) Received B/R: Rs.6000 from Patna
(iv) Sent Acceptance: Rs.4000 to Calcutta, Rs.2000 to Patna.
(b) Madras Branch (Apart from the above):
(v) Received goods: Rs.10000 from Calcutta, Rs.4000 from Bombay.
(vi) Cash sent: Rs.2000 to Calcutta, Rs.6000 to Bombay
(c) Calcutta Branch (apart from the above):
(i) Sent goods to Patna Rs.6000
(ii) Paid B/P: Rs.4000 to Patna, Rs.4000 cash to Patna.

On 31st March 2000 Kanpur branch submits the following trial balance to its head office at
Lucknow:
Debit balances (Rs. in lacs)

Furniture and equipment 18
Depreciation on furniture 2
Salaries 25
BRANCH ACCOUNTS
369
Rent 10
Advertising 6
Telephone, Postage and Stationary 3
Sundry office expenses 1
Stock on 1.4.1999 60
Goods received from head office 288
Debtors 20
Cash at bank and in hand 8
Carriage inwards 7
--------
448
--------
Credit balances
Outstanding expenses 3
Goods returned to head office 5
Sales 360
Head office 80
-------
448
-------
Stock on 31st March 2000 was valued at Rs.62 lacs on 29th March 2000 the head office
dispatched goods costing Rs.10 lacs to its branch. Branch did not receive these goods before
1st April 2000. Hence the figure of goods received from head office does not include these
goods. Also the head office has charged the branch Rs.1,00,000 for centralized services for
which the branch has no passed the entry.
(i) Pass journal entries in the books of the branch to make the necessary adjustments.
(ii) Prepare final accounts of the branch including balance sheet and
(iii) Pass journal entries in the books of the head office to incorporate the whole of the
Branch Trial Balance.
QUESTION NO 34
A Madras Head office has an independent Branch at Ahmedabad. From the following
particulars, close the books of the Ahmedabad Branch.
Ahmedabad Branch
Trial balance as at 31st December, 2002
Debit balances Amount Credit balances Amount
st
Stock on 1 Jan 2002 8,200 Creditors 2,700
Purchases 12,800 Sales 34,950
Wages 6,550 Head office A/c 14,000
Discount 150
ACCOUNTING
370
Manufacturing 3,400 Purchase returns 300

expenses 1,700
Rent 5,500
Salaries 4,000
Debtors 2,000
General expenses
Goods received from 7,200
H.O 750
Cash at bank
52,100 52,100
(a) Closing stock at branch Rs.14,350
(b) The branch fixed assets maintained in H.O books were: machinery Rs.25,000, furniture
Rs.1,000. Depreciation is to be charged at 10 per cent on machinery and 15 per cent on
furniture.
(c) Rent due Rs.150
(d) A remittance of Rs.4000 made by the branch on 28th December, 2002 was received by
the H.O on 4th January 2003.
ANS: Loss Rs.400
QUESTION NO 35
A Calcutta H.O passes one entry at the end of each month to adjust the position arising
out of inter branch transactions during the month, from the following inter-branch
transaction in April 19—make the entries in the books of Calcutta Head office: (give details
of working)
(a) Delhi Branch:
a. Received goods from Nagpur Branch Rs.9000 and Ahmedabad Branch Rs.6000.
b. Sent goods to Ahmedabad branch Rs.15,000 and Nagpur Branch Rs.12,000.
c. Received bills receivables from Ahmedabad Branch Rs.9,000.
d. Sent Acceptances to Nagpur Rs.6,000 and Ahmedabad 3,000.
(b) Kanpur Branch: (in addition to the above)
a. Received goods from Nagpur branch Rs.15,000 and Delhi Branch Rs.6,000.
b. Cash sent to Nagpur Branch Rs.3,000 and Delhi Branch Rs.6,000.
(c) Nagpur Branch: (in addition to the above)
a. Sent goods to Ahmedabad Branch Rs.9,000.
b. Received bills receivable from Ahmedabad Branch Rs.9,000.
c. Received cash from Ahmedabad Branch Rs.5000.
BRANCH ACCOUNTS
371
QUESTION NO 36
A Bombay merchant opens a new branch in Delhi, which trades independently of the head
office. The transactions of the branch for the year ended 31st March 1990 are as under:
Rs. Rs.
Goods supplied by Head office 2,00,000
Purchases from outsiders:
Credit 1,55,500
Cash 30,000 1,85,500
Sales:
Credit 2,50,500
Cash 46,000 2,96,500
Cash received from customers 3,04,500
Cash paid to creditors 1,42,500
Expenses paid by branch 89,500
Furniture purchased by branch on credit 35,000
Cash received from Head office initially 40,000
Remittance to Head office 1,10,000
Prepare the Branch Final Accounts and the Branch Account in Head office books on incorporation
of the Brach trial balance in the Head office books after taking the following into consideration:
(a) The accounts of the branch fixed assets are maintained in the Head office books.
(b) Write off depreciation on furniture at 5 per cent per annum for full year.
(c) A remittance of Rs.20,000 from the branch to head office is in transit.
(d) The branch values its closing stock at Rs.1,20,000.
QUESTION NO 37
Anil and Sunil are partners of a business having head office in Delhi and Branch at Calcutta.
Anil looks after the Delhi office and Sunil books after the Calcutta Branch. Anil is entitled to 40% of
the profits made at Delhi while Sunil is entitled to 30% of the profits at Calcutta. The balance
profits/losses are shared equally.
The following trial balances as on 31st December, 1981 are furnished to you.
DELHI HEAD OFFICE CALCUTTA BRANCH

Dr. Cr. Dr. Cr.
Opening stock at cost 30,000 - 40,000 -
Purchases and returns 1,80,000 10,000 2,75,000 15,000
Goods sent to:
Calcutta - 50,000 - -
Delhi - - - 70,000
Goods received from:
Calcutta 65,000 - - -
Delhi - - 48,000 -
Sales and returns 15,000 3,15,000 20,000 3,70,000
Expenses 28,000 - 39,000 -
Customer accounts 64,000 4,000 71,000 3,000
Suppliers accounts 2,000 32,000 1,000 51,000
Bank account 70,000 - - 6,000
ACCOUNTING
372
Fixed assets opening 50,000 - 80,000 -

WDV - 5,000 - -
Calcutta branch A/c - - 17,000 -
Delhi H.O. A/c
Capital and drawing : 30,000 83,000 4,000 35,000
Anil 5,000 40,000 25,000 70,000
Sunil 5,39,000 5,39,000 6,20,000 6,20,000
You are informed that:

(a) On 30th December 1981 Delhi head office remitted Rs.5000 by bank draft to Calcutta branch.
The envelope was received by the branch on 2nd January 1982.
(b) Stock at cost on 31st December 1981, was worth:-
a. Rs.46,000 at Delhi and
b. Rs.54,000 at Calcutta
(c) Depreciation is to be provided at 10%.
(d) 10% of the cash expenses relating to the Head office are to be treated as overheads incurred
on behalf of the branch.
(e) You are required to prepare the:-
i. Trading and Profit and Loss account both for the branch and H.O.
ii. Consolidated balance sheet of the firm as on 31st December 1981,
iii. Branch and head office accounts of the respective books.
(Ans:- Net profit:-branch =76,200, Head office=1,00,800. Balance Sheet total=4,37,000
branch and head office accounts balances in the respective books 7200)
QUESTION NO 38
Unique products operates from a head office in Cuttack and a branch in Ranchi. The following
trial balance have been extracted from the books of accounts as at 31st March 2000:
HEAD OFFICE RANCHI BRANCH
Dr. Cr. Dr. Cr.
Capital 20,50,000
Cash and bank 77,500 65,000
Debtors and creditors 3,00,000 2,50,000 3,00,000
Operating expenses 14,02,500 1,07,500
Branch current account 8,75,000
Head office account 6,00,000
Bad debt provisions 45,000 12,500
Provision for depreciation 7,00,000 1,50,000
Provision for unrealized
profit 20,000
Opening stock 40,000 1,00,000
Fixed assets (at cost) 17,50,000 5,00,000
Drawings 2,00,000
Sales 42,50,000 21,85,000
Goods sent to branch at
invoice price 19,00,000 18,75,000
Purchases 45,70,000
92,15,000 92,15,000 29,47,500 29,47,500
BRANCH ACCOUNTS
373
(a) Sock at 31st March 2000 are valued at
1. head office Rs.60,000
2. branch Rs.75,000( invoice price)
(b) All goods are invoiced at cost plus 25%.
(c) Fixed assets are depreciated at 10% on costs.
(d) Provisions for bad debts are to be maintained at 5% on debtors.
(e) Goods in transit at invoice price from the head office to the branch at Rs.25,000
(f) Cash in transit from the branch to the head office Rs.2,50,000.
Prepare, in columnar form, the head office and the branch trading and Profit and
Loss account for the year ended 31st March 2000 and a Balance Sheet for the
business as a whole.
(Ans:- H.O= gross profit and net profits =16,00,000 and 52,500)
Branch = Gross profit and net profits= 2,85,000 and 1,25,000)
(Balance total is 22,77,500)

Give journal entries in the books of Branch A to rectify or adjust the following:
(a) Head office expenses Rs.3,500 allocated to the Branch, but not recorded in the branch books.
(b) Depreciation of branch assets, whose accounts are kept by the head office not provided for
Rs.1,500.
(c) Branch paid Rs.2,000 as salary to a H.O. Inspector, but the amount paid has been debited by
the branch to salaries account.
(d) H.O collected Rs.10,000 directly from a customer on behalf of the branch, but no intimation
to this effect has been received by the branch
(e) A remittance of Rs.15,000 sent by the branch has not yet been received by the head office.
(f) Branch A incurred advertisement expenses of Rs.3,000 on behalf of Branch B.
ANSWER:
JOURNAL ENTRIES
(I) Expenses Account Dr. 3500

To Head Office Account 3500
(ii) Depreciation Account Dr. 1500

To Head office Account 1500
(iii) Head office Account Dr. 2000
To Salaries Account 2000
(iv) Head Office Account Dr. 10000
To Branch Debtors Account 10000
(v) -----------------------NO ENTRY------------------------------
(vi) Head office Account Dr. 3000
To bank account 3000
(being expenditure is paid on the direction of head office)
ACCOUNTING
374

Show adjustment journal entries in the books of head office at end of April 2003 for
incorporation of inter branch transactions assuming that only head office maintains
different branch accounts in its books:
(A) Delhi branch
a. Received goods from Mumbai: Rs.35,000 and 15,000 from Kolkata
b. Sent goods to Chennai Rs.25,000 and Kolkata Rs.20,000
c. Bills receivables received Rs.20,000 from Chennai
d. Acceptances sent to Mumbai Rs.25,000, Kolkata Rs.10,000
(B) Mumbai Branch (apart from above)
a. Received goods from Kolkata Rs.15,000, Delhi Rs.20,000
b. Cash sent to Delhi RS.15,000 and Kolkata Rs.7,000
(C) Chennai Branch (apart from above)
a. Received goods from Kolkata Rs.30,000
b. Acceptances and cash sent to Kolkata Rs.20,000 and Rs.10,000 respectively
(D) Kolkata Branch (apart from above)
a. Sent to goods to Chennai Rs.35,000
b. Paid cash to Chennai Rs.15,000
c. Acceptances sent to Chennai Rs.15,000
All working should form part of the answer.
QUESTION NO 41
The following is the Trial Balance of ICS branch as at 30th june 2002:
Debit Credit
H.O account 32,400
Purchases 1,78,000
Goods received from H.O 90,000
Sales 3,80,000
Goods supplied to H.O 60,000
Salaries 15,000
Debtors 37,000
Creditors 18,500
Rent 9,600
Office expenses 4,700
Furniture 14,000
------------------- ---------------
4,58,500 4,58,500
(a) Stock on hand was valued at Rs.27,000
(b) The branch account in the head office books on 30th June 2002 stood at Rs.4600 debit
BRANCH ACCOUNTS
375
(c) On 28th June 2002, the Head office forwarded goods to the value of Rs.25,000 to the
branch where they were received on 3rd July 2002.
(d) A cash remittance of Rs.12,000 by branch on 24th June was received by H.O on July 1.
Required:
(a) Journal entries necessary to incorporate the above trial balance
(b) The results of trading at branch
(c) ICS branch account in the books of H.O
ANS: 1,09,700
QUESTION NO 42
The head office of Ganpati company and its branch keep their own books prepare own profit
and loss account. The following are the balances appearing in the two sets of the books as on
31.3.2004 after ascertainment of profits and after making all adjustments except those
referred to below:
Particulars Head office Branch office
Capital - 10,00,000 - -
Fixed assets 3,60,000 - 1,60,000 -
Stock 3,42,000 - 1,07,400 -
Debtors and creditors 78,200 39,600 48,400 19,200
Cash 1,07,400 - 14,200 -
Profit and loss account - 1,46,600 - 30,600
Branch account 2,98,600 - - -
Head office account - - - 2,80,200
Total 11,86,200 11,86,200 3,30,000 3,30,000
Set out the Balance Sheet of the business as on 31.03.2004 and the journal entries necessary
(in both sets of books) to record the adjustments dealing with the following:
1. On 31.3.2004 the branch had sent a cheque for Rs.10,000 to the head office, not
received by the head office nor credited to the branch till next month.
2. Goods valued at Rs.4400 had been forwarded by the head office to the branch and
invoiced on 30.3.2004 but were not received by the branch nor dealt with in their books
till next month.
3. It was agreed that the branch should be charged with Rs.3000 for administration
services rendered by the head office during the year.
4. Stock stolen in transit from the head office to the branch and charged to the branch
by the head office but not credited to the head office in the branch books as the
manager declined to admit any liability , Rs.4000 (not covered by the insurance)
5. Depreciation of branch assets of which accounts are maintained by head office not
provided for Rs.2500.
6. The balance profits shown by the branch is to be transferred to head office books.
ACCOUNTING
376
ANSWER:
Balance Sheet Of Ganpati Co. as at 31.03.2004
Liabilities Rs Rs Assets Rs Rs
Capital 10,00,000 Fixed assets:
Add: net profit: Head office 3,60,000
Head office 1,45,600 Branch 1,60,000
Branch 25,100 11,70,700 Less: 5,17,500
depreciation (2,500)
Creditors: Stock:
Head office 39,600 Head office 3,42,000
Branch 19,200 58,800 Branch 1,07,400
In transit 4,400 4,53,800
Debtors:
Head office 78,200
Branch 48,400 1,26,600
Cash:
Head office 1,07,400
Branch 14,200
In transit 10,000 1,31,600
----------- -----------
12,29,500 12,29,500
Journal entries in the books of Head office

S.No. Particulars Dr Cr
1. Cash in transit A/c Dr. 10,000
To Branch A/c 10,000
2. Branch A/c Dr. 3,000
To profit and loss a/c 3,000
3. Profit and loss account Dr. 4,000
To Branch A/c 4,000
4. Branch A/c Dr. 2,500
To fixed Assets account 2,500
5. Branch profit and loss account Dr. 25,100
To profit and loss account 25,100
HEAD OFFICE PROFIT AND LOSS ACCOUNT

To branch-stock stolen 4,000 By balance b/d 1,46,600
To profit -transferred 1,45,600 By branch- expenses 3,000
------------ -------------
1,49,600 1,49,600
BRANCH ACCOUNTS
377
Journal entries in the Books of Branch

S.No. Particulars Dr Cr
1. Goods in Transit A/c Dr. 4,400
To Head office A/c 4,400
To Head office a/c 3,000
To head office A/c 2,500
To Head office Account 25,100
(being profit transferred to head office account)
BRANH OFFICE PROFIT AND LOSS ACCOUNT

To head office-expenses 3,000 By balance b/d 30,600
To head office- 2,500
depreciation 25,100
To profit-transferred to ------------ -------------
H.O 30,600 30,600
QUESTION NO 43 (C A NOV 2008)(2MARKS)

Goods worth Rs. 50,000 sent by head office but the branch has received till the closing
date goods only Rs. 40,000. Give journal entry in the books of H.O. and branch for goods in
transit.
ANSWER Goods in transit Ac/ Dr. 10,000

To Head Office A/c 10,000
QUESTION NO 44 (C A MAY 2007)(2MARKS)

Alpha & Co. Having head office in Mumbai has a branch in Nagpur. The branch at Nagpur
is an independent branch maintaining separate books of account .on 31.3.2007, it was found
that the goods dispatched by head office for R.s 2,00,000 was received by the branch only
to the extent of Rs. 1,50,000. The balance goods are in transit. What is the accounting entry
to be passed by the branch for recording the goods in transit, in its books?
ANSWER
Nagpur branch must include the inventory in its books as goods in transit.
The following journal entry must be made by the branch:
Goods in transit A/c Dr. 50,000
To Head office A/c 50,000
[ Being goods sent by head office is still in transit on the closing date ]
ACCOUNTING
378
QUESTION 45
Messrs Ramhand & Co., Hydera bad have a branch in Delhi. The Delhi Branch deals not only in
the goods from Head Office but also buys some auxiliary goods and deals in them. They,
however, do not prepare any Profit & Loss Account but close all accounts to the Head Office
at the end of the year and open them afresh on the basis of advice from their Head Office.
The fixed assets accounts are also maintained at the Head Office.
The goods from the Head Office are in voiced at selling prices to give a profit of 20 per cent
on the sale price. The goods sent from the branch to Head Office are at cost. From the
following prepare Branch Trading and Profit & Loss Account and Branch Assets Account in
the Head Office Books.
Trail Balance of the Delhi Branch as on 31-12-2012
Debit Rs Credit Rs
Head office opening balance on 1-1-12 15000 Sales 100000
Goods from H.O 50000 Goods to H.O 3000
Purchase 20000 Head office current A/c 15000
Opening stock Sundry Creditors 3000
( H.O. goods at invoice prices) 4000
Opening stock of other goods 500
Salaries 7000
Rent 3000
Office expenditure 2000
Cash on Hand 500
Cash at Bank 4000
Sundry Debtors 15000
121000 121000
The Branch balances as on 1st January, 2012, were as under: Furniture 5,000 Sundry Debtors Rs
9,500: Cash 1,000. Creditors 30,000: Stock (HO. goods at invoice price) 4,000; other goods 500. The
closing stock at branch of the head office goods at invoice price is 3,000 and that of purchased goods
at cost is 1,000. Depreciation is to be provided at 10 per cent on branch assets.
Solution
Delhi Branch Trading and Profit & Loss Account
for the year ended 31st Dec., 2012
Rs Rs
To opening Stock By Sales 1,00,000
Head office Goods 3,200 By Goods from Branch 3,000
Other 500 3700 By Closing Stock:
To Goods to Branch 40000 Head Office goods 2,400
To Purchase 20000 Other 1,000 3,400
To Gross profit c/d 42700
1,06,400 1,06,400
To Salaries 7,000 By Gross profit b/d 42,700
To Rent 3000
To office Expenses 2000
To Dep. on furniture @ 10% 500
To Net Profit 30,200
42,700 42700
BRANCH ACCOUNTS
379
Branch (Fixed) Assets Account ( In Head office Books)

2012 Rs 2012 Rs
Jan.1 To Balance b/d 5000 Dec. 31 By Delhi Branch A/c 500
(Depreciation )
__ By Balance c/d 4,500
5000 5000
2013 To Balance b/d 4500

Jan.1
Working Notes
Cash/ Bank Account (Branch Books)
Rs Rs Rs
To Balance b/d 1000 By Salaries 7,000
To Debtors By Rent 3000
Sales 1,00,000 By Office Exp. 2000
Opening balance By Creditors 47000
Of Debtors 9,500 By Head Office 32000
1,09,500 (balancing fig).
Less: Closing balance (15,000) 94,500 By Cash balance 500
By Bank Balance 4000
95,500 95,500
* Opening Balance + Purchase- Closing balance = payment

Rs 30,000+ Rs 2000- Rs 3,000= Rs 47000
Trial Balance of Delhi Branch as on 1-1-2012
Dr. Cr.
Rs Rs
Debtors 9500
Cash 1000
Stock H.O. Goods 4000
Others 500 4500
Creditors 30000
Head Office Account 15,000
30,000 30000
Head Office
Rs Rs
To Balance (transfer 15000 By Goods From Head 50000
To Cash 32000 office
To Goods Sent 3000
50000 50000
Credit balance in Head Office Account before this transfer will be 15,000 credit.
Note : Furniture A/c is maintained in head office books it is not a part of either opening or
closing balance.
ACCOUNTING
380
QUESTION 46 {2007 - Nov [ 4]}

Beta Ltd. having office at Mumbai has a branch at Nagpur. The Head office does wholesale
trade only at cost plus 80%. The goods are sent to branch at the wholesale price viz.., Cost
plus 80%. The branch at Nagpur is wholly engaged in retail trade and the goods are sold at
cost to H.O. plus 100%.
Following details are furnished for the year ended 31st march, 2007:
Head Office Branch

Rs Rs
Opening Stock (as on 1.4.2006) 2,25,000 -
Purchases 25,50,000 -
Goods sent to Brach 9,54,000 -
(Cost to H.O. plus 80%)
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Staff Salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the Head Office and
Branch for the year ended 31st March, 2007.
ANSWER:
Trading & P&L A/c of the Branch
To Op Stock - By Sales 9,50,000
To Goods received from 9,54,000 By closing (W.N.-1) 99,000
H.O. 95,000
To Gross Profit c/d 10,49,000 10,49,000

By Gross Profit b/d 95,000
To Office exp. 8,500
To Selling exp. 6,300
To Staff salary 12,000
To Net profit 68,200
95,000 95,000
BRANCH ACCOUNTS
381
Trading & P&L A/c the of H.O.
To purchase 25,50,000 By goods sold to branch 9,54,000
To G.P. c/d 16,60,000 By closing (W.N.-2) 7,00,000
44,35,000 44,35,000
To Office expenses 90,000 By Gross Profit b/d 16,60,000
To selling expenses 72,000
To Staff Salary 65,000
To Branch Stock Revenue 44,000
(WN-1)
To Net Profit 13,89,000
16,60,000 16,60,000
Working Notes:
1. Calculation of closing stock of branch:
Rs.
Goods received from head office [ at invoice value ] 9,54,000
Less : Invoice value of goods sold [ 9,50,000 x 180/200] 8,55,000
2. Calculation of closing stock of head office: Rs
Opening stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
Less: Cost of goods sold
[ ( 27,81,000 + 9,54,000 ) x 100/ 180 ] 20,75,000
7,00,000
3. Calculation of unrealised profit in branch stock : Rs
Branch stock 99,000

ACCOUNTING
382
Profit included 80% of cost
Therefore , unrealised profit would be = Rs 99,000 x Rs 44, 000
80/180
QUESTION 47 {2014- May [6]}
Pass necessary Journal entries in the books of an independent Branch of a company, wherever
required, to rectify or adjust the following :
(i) Income of Rs 2,800 allocated to the branch by Head office but not recorded in the
branch books
(ii) Provision for doubtful debts, whose accounts are kept by the Head office, not
provided earlier for Rs 1,000.
(iii) Branch paid Rs 3,000 as salary to a Head Office Manager , but the amount paid has
been debited by the Branch to Salaries Account.
(iv) Branch incurred travelling expenses of Rs 5,000 on behalf of Branches, but not
recorded in the books of Branch.
(v) A remittance of Rs 1,50,000 sent by the branch has not received by Head office on
the date of reconciliation Accounts.
(vi) Head office allocated Rs 75,000 to the branch as Head office expenses, which has
not yet been recorded by the Branch.
(vii) Head office collected Rs 30,000 directly from a branch Customer. The intimation of
the fact has been received by the branch only now.
(viii) Goods dispatched by the Head Office amounting Rs 10,000, but not received by
the Branch till date of reconciliation. The Goods have been received
subsequently.
QUESTION 48 {2011- Nov}

Global Limited has a branch which closes its books of account every year on 31st March,
This is an independent branch which maintains comprehensive books of account for
recording their transactions.
You are required to show journal entries in the books of branch on 31st March, 2011
to rectify or adjust the following :
(i) Head Office allocates Rs 1,35,000 to the branch as head office expenses, which
have not yet been recorded by branch.
(ii) Deprecation of branch fixed assets, whose account are kept by head office in its
books, not yet recorded in the branch books Rs 1,15,000.
(iii) Branch paid Rs 1,40,000 as salary to an official from head office on visit to branch
and debited the amount to its Salaries Account.
(iv) Head office collected Rs 1,30,000 directly from a branch customer on behalf of
the branch, but no intimation was received earlier by the branch.
Now the branch learns about it.
BRANCH ACCOUNTS
383
(v) It is learnt that a remittance of Rs 1,50,000 sent by the branch has not been
received by head office till date.
Answer :
In the books of Branch
Journal Entries
S.No. Particulars Dr. (R) Cr. (R)
(i) Expenses A/c Dr. 1,35,000
To Global Limited (H.O.) A/c 1,35,000
(Being expenses allocated to branch by head office
(ii) Deprecation a/c Dr. 1,15,000
To Global Limited (H.O.) A/c 1,15,000
(Being depreciation on fixed assets of branch ,
whose account are maintained by head office)
(iii) Global Limited (H.O.) A/c Dr. 1,40,000
To Salaries A/c 1,40,000
(Being the rectification of salary paid, on behalf of
the head office)
(iv) Global Limited (H.O.) A/c Dr. 1,30,000
To Debtors A/c 1,30,000
(Being adjustment of direct collection from branch
debtors, by head office)
( v) No. entry shall be passed in the books of Branch but will be shown in the books of Head
office as cash-in-transit.
QUESTION 49 {2012- Nov}

Give Journal Entries in the books of Head office to rectify or adjusted the following :
(i) Goods sent to branch Rs 12,000 stolen during transit, branch manager refused to
accept any liability.
(ii) Branch paid Rs 15,000 as salary to the officer of head office on his visit to the branch.
(iii) On 28th March, 2012, The H.O. dispatched goods to the branch invoiced at Rs
25,000 which was not received by branch till 31st March, 2012.
(iv) A remittance of Rs 10,000 sent by the branch on 30th March, 2012, received by the
head office on 1st April, 2012.
Answer :
In the books head office

Journal entries
Particulars Dr. Cr.
Amount Rs. Amount
(i) Loss of goods due to theft during transit Dr. 12,000
To Branch Account 12,000
(Being goods lost on account of theft during
transit.
ACCOUNTING
384
(ii) Salaries account Dr. 15,000

To Branch account 15,000
(Being salary paid by the branch for H.O. employee)
(iii) No entry in the books of head office for goods
sent to branch not received by branch till 31st
March, 2012.
(iv) Cash in transit account Dr. 10,000
To branch account 10,000
(being remittance by branch not received by 31st
March, 2012)
BRANCH ACCOUNTS
385
PART-3
FOREIGN BRANCHES (AS 11)
QUESTION NO 50
The New York branch of Fine Textiles Limited, Delhi sent the following Trial Balances
as on 31st December 19X9.
$ $
Fixed assets 1,20,000
st
Stock 1 January 19X9 56,000
Goods from head office 3,20,000
Sales 4,20,000
Expenses 25,000
Debtors and Creditors 24,000 17,000
Cash at bank 6,000
Head office account 1,14,000
5,51,000 5,51,000
In the head office books the branch account stood as shown below:
New York Branch Account
Debit Credit
Rs. Rs.
To Balance b/d 10,05,000 By Cash 26,08,000
To Goods sent to branch 24,63,000 By Balance c/d 8,60,000
34,68,000 34,68,000
Goods are invoiced to the branch at cost plus 10% and branch has instruction to sell at
invoice price plus 25%. Fixed assets were acquired on 1st January 19X1 when $ 100 = Rs.380.
Rates of exchange were:
1st January 19X9 $ 100 = Rs.760
31st December 19X9$ 100 = Rs.770
Average $ 100 = Rs.750
Fixed assets have to be depreciated by 10% and the branch manager is entitled to
commission of 5% on the profit of the branch (on invoice price basis).
You are required to convert the branch Trial Balance into rupees and prepare the
Branch Trading and Profit and Loss account and the Branch Account.
QUESTION NO 51
The New York branch of Delhi Export House sent the following Trial Balance as on 31-
12-19X3.
$ $
Debit Credit
Fixed assets 17,500
Loan (taken to purchase fixed assets) 13,000
ACCOUNTING
386
Depreciation 2,500
Stock 1-1-X3 8,200
Goods from Head office 58,800
Sales 1,05,200
Interest 2,880
Cash at bank 1,700
Debtors 21,200
Head Office account 9,780
1,27,980 1,27,980
Fixed assets were purchased on 1-1-X1 when $1 = Rs.25.50, life was estimated to be
10 years. To finance the fixed asset a loan amounting to $ 22,000 was taken @ 18% interest
per annum. Annual loan instalment of 3,000 and interest were payable in every December.
Exchange Rates:
Average of 19X1 $1 = Rs.25.70
31-12-19X1 $1 = Rs.26.10
31-12-X2 $1 = Rs.26.40
31-12-X3 $1 = Rs.42.20
In the Head office books London Branch account appeared as follows:
New York Branch Account
$ Rs. $ Rs.
To Balance b/d 7,000 1,84,800 By Bank 56,020 20,44,730
To Goods 58,800 21,46,200 By Balance 9,780 4,12,716
To P & L a/c 1,26,446
Exchange gain
65,800 24,57,446 65,800 24,57,446
Closing Stock : $ 2,400
You are required to show:
(1) Branch Fixed A/c, (2) Branch Loan A/c, (3) Branch Trial Balance in Rupee Terms,
(4) Branch Profit and Loss A/c (5) Adjustment Entries to incorporate branch balances in the
head office loans.

An Indian company has a branch at Washington. Its trial balance as on 30th September
1998 is as follows:
Dr. Cr.
US $ US $
Plant and machinery 1,20,000 ------
Furniture and fixtures 8,000 ------
Stock, October 1,1997 56,000 ------
BRANCH ACCOUNTS
387
Purchases 2,40,000 ------

Sales ------ 4,16,000
Goods from Indian co. (H.O.) 80,000 ------
Wages 2,000 ------
Carriage inward 1,000 ------
Salaries 6,000 ------
Rent, rates and taxes 2,000 ------
Insurance 1,000 ------
Trade expenses 1,000 ------
Head Office a/c ------ 1,14,000
Trade debtors 24,000 ------
Trade creditors ------ 17,000
Cash at bank 5,000 ------
Cash in hand 1,000 ------
----------------------------------------
US $ 5,47,000 5,47,000
----------------------------------------
The following information is given:
(i) Wages outstanding-- $ 1000
(ii) Depreciation Plant and Machinery and furniture and fixtures @ 10 % p.a.
(iii) The head office sent goods to branch for Rs.39,40,000.
(iv) The head office shows an amount of Rs.43,00,000 due from branch.
(v) Stock on 30th September 1998 -- $ 52,000.
(vi) There were no in transit items either at the start or at the end of the year.
(vii) On September 1, 1996, when the fixed assets were purchased the rate of
exchange was Rs.38 to one $.
On October 1,1997 the rate was RS.39 to one $.
On September 30,1998 the rate was Rs.41 to one $.
Average rate during the year was Rs.40 to one $.
You are asked to prepare:

(a) Trial Balance incorporating adjustments given under 1 to 4 above, converting dollars
into rupees;
(b) Trading and profit and loss account for the year ended 30th September 1998 and
balance sheet as on that date depicting the profitability and net position of the branch
as would appear in India for the purpose of purpose of incorporating in the main balance
sheet.
ACCOUNTING
388

Carlin & Co. has head office at New York (U.S.A.) and branch at Mumbai (India). Mumbai
branch furnishes you with its trial balance as on 31.3.99 and the additional information given
thereafter:
Dr. Cr.
(Rupees in thousand)
Stock on 1.4.1998 300 ------
Purchases and sales 800 1,200
Sundry debtors and creditors 400 300
Bill of exchange 120 240
Wages and salaries 560 ----
Rent, rates and taxes 360 ----
Sundry charges 160 ----
Computers 240 ----
Bank balance 420 ----
New York office A/c ---- 1,620
-----------------------------------
Rs. 3,360 3,360
-----------------------------------
(a) Computers were acquired from a remittance of US $ 6000 received from New York
head office and paid to the suppliers. Depreciate computers at 60 % for the year.
(b) Unsold stock of Mumbai branch was worth Rs.4,20,000, on 31.3.1999.
(c) The rates of exchange may be taken as follows:
(i) On 1.4.1998 @ Rs.40 per US $
(ii) On 31.3.1999 @ Rs.42 per US $
(iii) Average exchange rate for the year @ Rs.41 per US $
(iv) Conversion in $ shall be made up to two decimal accuracy.
You are required to prepare in US dollars the revenue statement for the year
-ended 31.3.1999 and the balance sheet as on that date of Mumbai branch as would appear in
the books of New York head office of Carlin & Co. You are informed that Mumbai branch
account showed a debit balance of US $ 39609.18 on 31.3.1999 in New York books and there
were no items pending reconciliation.
BRANCH ACCOUNTS
389
QUESTION NO 54 (C A NOV 2009)

DM Ltd. Delhi has a branch in London. London branch is an integral foreign operation
of DM Ltd at the end of the year 31st March, 2009, the branch furnishes the following trial
balance in U.K. Pound :
Fixed assets (Acquired on 1st 24,000

April, 2005)
Stock as on 1st April, 2008 11,200
Goods from head office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
Head Office Account 22,800
Purchase 12,000
Sale 96,000
1,22,000 1,22,000
In head office books, the branch account stood as shown below :

London branch A/c
Dr. Cr.
Particular Amount Particular Amount

Rs. Rs.
To Balance b/d 20,10,000 By bank a/c 52,16,000
To Goods sent to branch 49,26,000 By bank c/d 17,20,000
69,36,000 69,36,000
The following further information are given:
(a) Fixed assets are to be depreciated @ 10% p.a. straight line basis.
(b) On 31st March , 2008:
Expenses outstanding £400
Prepared expenses £200
Closing stock £ 8,000
(C) Rate of Exchange :
1st April, 2005 - Rs. 70 to £1
1st April, 2008 - Rs. 76 to £1
31st April, 2009 - Rs. 77 to £1

AVERAGE RATE
- RS.75 to £1
ACCOUNTING
390

(1) Trial balance, incorporating adjustments of outstanding and prepaid expenses,
converting U.K. pound into Indian rupees.
(2) Trading and profit and Loss A/c for the year ended 31st march, 2009 and the Balance
sheet as on that date of Londaon branch as would appear in the books of Delhi head
office of DM Ltd.
ANSWER:
Gross profit 11,38,800 Net profit 6,08,200 B/S TOTAL 26,05,400
QUESTION NO 55 (C A MAY 2008)

The Washington branch of XYZ Ltd., Mumbai sent the following trial balance as on
st
31 December , 2007:
$ $
Head Office A/c - 22,800
Sales - 84,000
Debtors and 4,800
Creditors 3,400
Machinery 24,000 -
Cash at Bank 1,200 -
Stock, 1 January, 11,200 -
2007
Goods from HO 64,000 -
Expenses 5,000 -
1,10,200 1,10,200
In the books of head office, the Branch a/c stood as follows
Washington Branch
A/c
Rs. Rs.
To Balance b/d 810,000 By cash 28,76,000
To goods sent to 29,26,000 By Balances 8,60,000

branch c/d
37,36,000 37,36,000
Goods are sent to the branch at cost plus 10% and the branch sell goods at invoice price
plus 25% Machinery were acquired on 31st January, 2002.
When $ 1.00 = Rs. 40 .
Rate of Exchange were
1st January 2007 $ 1.00 = Rs. 46

31st December 2007 $ 41.00 – Rs. 48
Average $ 1.00 = Rs. 47
BRANCH ACCOUNTS
391
Machinery is depreciated @ 10% and the branch manager is entailed to a commission of

5% on the profit of the branch after charging such commission.
(i) Prepare the branch trading & Profit & Loss a/c in Dollars
(ii) Convert the trial balance of the branch into Indian Currency and prepare branch
trading & Profit and Loss a/c and the branch a/c in the books of head office.
ANSWER
(I)
Trading and Profit & Loss A/c ( In Dollars)
Particular Rs. Particular Rs.
To Opening Stock 11,200 By Sales 84,000
To Good from H.O. 64,000 By Closing 8,000
Stock
To Goods Profit c/d 16,800
92,000 92,000
To Expenses 5,000 By Gross 16,800
Profit b/d
To Depreciation 24000
To Manager`s 448
Commission
To Net Profit c/d 8,952
16,800 16,800
(ii) (a) Converted Trial Balance
Particular Rate per Re. (Dr. (Rs) Cr (Rs.)
Machinery 40 9,60,000
Stock Jan. 1,2007 46 5,15,200
Good from H.O. - 29,26,000
Sales 47 - 39,48,000
Expenses 47 2,35,000 -
Debtors & Creditors 48 2,30,400 163,200

ACCOUNTING
392
H.O. A/c - - 8,60,000
Cash at Bank - 57600 -
Difference of - 47000 -
Exchange
- 49,71,200 49,71,200
Closing Stock $ 8,000 48 3,64,000
(WN 2)
(b) Trading and Profit & Loss Account
Particular Rs. Particular Rs.
To Opening Stock 5,15,200 By sales 39,48,000
To Goods from H.O. 29,26,000 By Closing 3,84,000
Stock
To Gross Profit c/d 8,90,800
43,32,000 43,32,000
To Expenses 2,35,000 By Gross 8,90,000
Profit b/d
To Depreciation @ 96,000
10% on R.s 9,60,000
To Exchange 47,000
differences
To Manger`s 21,504
Commission (WN1)
TO Net Profit c/d 4,91,296
8,90,800 8,90,800
BRANCH ACCOUNTS
393
Working Notes
(i) (ii) (iii)Manager`s Commission = 5/105 of [ 16,800

– ( 5,000 + 2.400) ] = $ 448 (approx)
Manager`s Commission in Rs. $448 x 48 = 21,504
(iv) Calculation
of closing
stock
Add: Goods from H.O. 64,000
Less: Cost of Goods ( 67,200)

Sold (at invoice price)
[ 100/125 x 84,000 ]
Closing Stock 8,000
QUESTION 56 {2010- May [ 1]}
On 31st March, 2010, the following Ledger balances have been extracted from the
books of Washington branch office :
Ledger A/c $
Building 180
Stock as on 1.4.2009 26
Cash and bank balances 57
Purchases 96
Sales 110
Commission receipts 28
Debtors 46
Creditors 65
You are required to convert above ledger balances into Indian Rupees .
Use the following rates of exchanges:
Opening Rate $ = 46
Closing Rate $ = 50
Average rate $ = 48
For Fixed Assets $ = 42

ACCOUNTING
394
Answer :
Conversion of ledger balances ( in Dollars) into Rupees
Particulars $ Rate per $ Amount in
Rs
180 42 7560
Building
26 46 1196
Stock as on 01.04.2009
57 50 2850
Cash and bank balances 96 48 4608
110 48 5280
Purchases
28 48 1344
Sales
46 50 2300
Commission receipts
65 50 3250
Debtors
Creditors
QUESTION 57 {2013- May [6]}

ABCD Ltd . Delhi has a branch in New York, USA, which is an integral foreign operation of
the company. At the end on 31st March, 2013, the following ledger balances have been
extracted from the books of the Delhi office and the New York Branch.
Delhi New York
Particulars (Rs. thousands ) $ thousand
Share capital 1250
Reserves and Surplus 940
Land 475
Building (cost) 1,000
Buildings Depreciation Reserve 200
Plant & Machinery (cost) 2,000 100
Plant & Machinery Depreciation Reserve 500 20
Trade receivables/ payables 500 270 60 20
Stock ( 01-04-2012) 250 25
Branch stock Reserve 65
Cash & Bank Balances 125 4
Purchases/ Sales 275 600 25 125
Goods sent to branch 1,500 30
Managing Director`s salary 50
Wages & Salaries 100 18
Rent 6
Office Expenses 25 12
Commission receipts 275 100
BRANCH ACCOUNTS
395
Branch /H.O. current A/c 800 - - 15

Total 5,600 5,600 280 280
The following information is also available:
(1) Stock as at 31-01-2013
Delhi - Rs 2,00,000
New york - $ 10 (all stock received from Delhi)
(2) Head office always sent goods to the branch at cost plus 25%
(3) Provision is to be made for doubtful debts at 5%
(4) depreciation is to be provided on Building at 10% and on Building at 10% and on plant
and Machinery at 20% on written down values.
You are required.
(a) To convert the Branch Trial balance into rupees, using the following rates of
exchange :
Opening Rate 1$ = Rs 50
Closing rate 1$ = Rs 55
Average rate 1$ = Rs 52
For fixed assets 1$ = Rs 45
(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March ,
2013, showing to the extent possible, Head office result and branch results separately.
ABCD Ltd.
New York Branch Trial Balance
(As on 31st March, 2013)
( $ `000 (Rs `000)
Particular Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 100 Rs 45 4,500
Plant& Machinery Dep. Reserve 20 Rs 45 900
Trade receivable / payable 60 20 Rs 55 3,300 1,100
Stock ( 1.4.2012) 25 Rs 50 1,250
Cash & Bank Balances 4 Rs 55 220
Purchase /sales 25 125 Rs 52 1,300 6,500
Goods received from H.O. 30 1,500
Wages & Salaries 18 Rs 52 936
Rent 6 Rs 52 312
Office expenses 12 Rs 52 624
ACCOUNTING
396
Commission Receipts 100 Rs 52 5,200

H.O. Current A/c 15 800
13942 14,500
Exchange loss (bal. fig) 558
14500 14,500
(b)
Trading and Profit & Loss Account
H.O. Branch Total H.O. Branch Total
To Opening stock 250 1250.00 1500.00 By Sales 6600 500.00 7,100.00
To Purchase 275 1300.00 1575.00 By Goods Sent to 1500 - 1500.00
To Goods receive from Branch
Head Office - 1500.00 1500.00 Closing stock 200 0.55 200.55
To wages & salaries 100 936.00 1036.00
To Gross Profit c/d 1675 1514.55 3189.55
2,300 6500.55 8800.55 2300 6,500.55 3800.55
To Rent - 312.00 312.00 By Gross profit
To Office expenses 25 624.00 649.00 b/d 1675 1514.55 3189.55
To Provision for doubtful By Commission 275 5200.00 5475.00
debts @ 5% 25 165.00 190.00 receipt
To Deprecation (W.N.1) 380 720.00 1100.00
To Balance c/d 1520 4893.55 6413.55
1950 8664.55 1950 6714.55 8664.55
To Exchange loss 558.00 By Balance b/d 6413.55
To Managing director`s 50.00 By Branch stock 64.89
Salary Reserve (W.N.2)
To balances c/d 5870.44
6478.44 6478.44
BRANCH ACCOUNTS
397
Working Notes:
(1) Calculation of Deprecation (in `000)
Particular H.O.Rs Branch Rs.
Building Cost 1,000
(200)
Less: Dep. Reserve
800
WDV
80
Deprecation @ 10% (A)
Plant & Machinery Cost 2,000 4500
Less: Dep. Reserve (500) (900)
1,500 3,600
WDV
Depreciation @ 20% (B)

300 720
Total Depreciation (A+B) 380 720
(2) Calculation of Additional Branch Stock Reserve (Rs. in ` 000)

Particulars (Rs)
Closing stock of Branch 0.55
Reserve on closing stock ( 0.55 x 1/5) 0.11
Less: Branch stock reserve (as on
1.4.2012) (65)
Reversal of stock Reserve (64.89)
QUESTION 58
On 31st December, 2012 the following balances appeared in the books of Chennai Branch of
an English firm having its HO office in New York:
Amount in Rs Amount in Rs
Stock on 1st Jan., 2012 2,34,000
Purchases and Sales 1562500 2343750
Debtors and Creditors 765,000 510000
Bills Receivable and Payable 204,000 178500
Salaries and Wages 1,00,000
Rent, Rates and Taxes 1,06,250
Furniture 91,000
Bank A/c 5,68,650
ACCOUNTING
398
New York Account - 599150
3631400 3631400
Stock on 31st December, 2012 was 6,37,500.

Branch account in New York books showed a debit balance of $13,400 on 31 December,
2012 and Furniture appeared in the Head Office books at $1,750.
The rate of exchange for on 31 December, 2011 was 52 and on 31st December, 2012 was
51. The average rate for the year was 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the
Branch.
Solution
In the books of English Firm (Head Office in New York)
Chennai Branch Profit and Loss Account
for the year ended 31st December, 2012
$ $
To Opening stock 4500 By Sales 46875
To Purchases 31250 By Closing 12500
To Gross profit c/d 23625 ( 6,37,500/51)

59375
59375
To Salaries 2000 By gross profit

23625
To Rent, rates and taxes 2125
To Exchange translation 2000

loss
To Net Profit c/d

17500
23625
23625
Balance Sheet of Chennai Branch

as on 31st December, 2012
Liabilities $ $ Assets $
Head Office A/c 13400 Furniture 1750
Add: Net Profit 17500 30900 Closing Stock 12500
Trade Creditors 10000 Trade Debtors 15000
Bills Payable 3500 Bills Receivable 4000
BRANCH ACCOUNTS
399
Cash at bank 11150

44400 44400
Working Note:
Calculation of Exchange Translation Loss
Chennai Branch Trial Balance (converted in $)
as on 31st December, 2012
Dr. Cr. Conversion Dr. Cr.
Rs Rs Rate ($) ($)
Stock on lst Jan., 2012 234000 52 4500
Purchases & Sales 1562500 2343750 50 31250 46875
Debtors & creditors 765000 510000 51 15000 10000
Bills Receivable and Bills Payable 204000 178500 51 4000 3500
Salaries and wages 100000 50 2000
Rent, Rates and Taxes 106250 50 2125
Furniture 91000 1750
Bank A/c 568650 51 11150
New York Account 599150 13400
Exchange translation loss 2000
(bat. fig.)
3631400 3631400 73775 73775

ACCOUNTING
400
LATEST PAST EXAMINATION QUESTIONS

QUESTION NO 59 (6 MARKS)
Show Adjustment Journal Entry alongwith working notes in the books of head office at the end of
April, 2017 for incorporation of inter branch transactions assuming that only head office maintains
different branch account in its books:
(A) Delhi Branch:
(i) Received goods from Mumbai Rs. 1,40,000 and Rs. 60,000 from Kolkata.
(ii) Sent goods to Chennai Rs. 1,00,000, Kolkata Rs. 80,000
(iii) Bill receivable received Rs. 80,000 from Chennai.
(iv) Acceptances sent to Mumbai Rs. 1,00,000, Kolkata Rs. 40,000
(B) Mumbai Branch (Apart from the above):
(i) Received goods from Kolkata Rs. 60,000, Delhi Rs. 80,000
(ii) Cash sent to Delhi Rs. 60,000, Kolkata Rs. 28,000
(C) Chennai Branch (Apart from the above):
(i) Received goods from Kolkata Rs. 1,20,000
(ii) Acceptance and cash sent to Kolkata Rs. 80,000 and Rs.40,000 respectively.
(D) Kolkata Branch (Apart from the above)
(i) Sent goods to Chennai Rs. 1,40,000
(ii) Paid cash to Chennai Rs. 60,000
(iii) Acceptance sent to Chennai Rs. 60,000
QUESTION NO 60 (SAME QUESTION 9)
Mr. Chena Swami of Chennai trades in Refined Oil and Ghee. It has a branch at Salem. He
despatches 30 tins of Refined Oil @ Rs. 1,500 per tin and 20 tins of Ghee Rs.5,000 per tin on 1st
of every month. The Branch has incurred expenditure of Rs.45,890 which is met out of its
collections; this is in addition to expenditure directly paid by Head Office.
Following are the other details:
Chennai H.O. Salem B.O.
Amount (Rs.) Amount (Rs.)
Purchases:
Refind Oil 27,50,000
Ghee 48,28,000
Direct Expenses 6,35,800
Expenses paid by H.O. 76,800
Sales:
Refined Oil 24,10,000 5,95,000
Ghee 38,40,500 14,50,000
Collection during the year (including 20,15,000
cash sales)
Remittance by Branch to Head Office 19,50,000
Chennai H.O. 01.04.2015 31.03.2016

Balance as on Amount (Rs.) Amount (Rs.)
Stock:
Refined Oil 44,000 8,90,000
Ghee 10,65,000 15,70,000
BRANCH ACCOUNTS
401
Building 5,10,800 7,14,870

Furniture & Fixtures 88,600 79,740
Salem Branch Office
Balance as on 01.04.2015 31.03.2016
Amount (Rs.) Amount (Rs.)
Stock:
Refined Oil 22,500 19,500
Ghee 40,000 90,000
Sundry Debtors 1,80,000 ?
Cash in Hand 25,690 ?
Furniture & Fixtures 23,800 21,420
(i) Addition to Building on 01.04.2015 Rs. 2,41,600 by H.O.
(ii) Rate of depreciation : Furniture & Fixtures @ 10% and Building @ 5% (already adjusted
in the above figure)
(iii) The General manager is entitled to 10% commission on overall organizational profits
after charging such commission.
(iv) The General Manager is entitled to a salary of Rs. 20,000 per month.
(v) General expenses incurred by Head Office is Rs. 1,86,000.
You are requested to prepare Branch Account in the Head Office books and also prepare Chena
Swami`s Trading and Profit & Loss Account (excluding branch transactions) for the year ended
31st March, 2016.
SOLUTION
In the books of Mr. Chena Swami
Salem Branch Account.
Rs. Rs.
To Balance b/d By Bank (Remittance to H.O.) 19,50,000
Opening Stock: Balance c/d
Ghee 40,000 Closing Stock:
Oil 22,500 Refined Oil
Debtors 1,80,000 Ghee 19,500
Cash in Hand 25,690 Debtors (W.N.1) 90,000
Furniture & Fittings 23,800 Cash on hand (W.N.2) 2,10,000
To Goods sent to Branch Furniture & Fittings 44,800
A/c. 21,420
Refined Oil (30x1500x12) 5,40,000
Ghee (20x5000x12) 12,00,000
To Bank (Expenses paid by 76,800
H.O.)
To Net Profit transferred to 2,26,930
General P&L A/c.
23,25,720 23,35,720
ACCOUNTING
402
Mr. Chena Swami

Trading and Profit and Loss Account for the year
ended 31st March, 2016 (Excluding branch transactions)
Rs. Rs.
To Opening Stock: By Sales:
Refined Oil 44,000 Refined Oil 24,10,000
Ghee 10,65,000 Ghee 38,40,500
To Purchases: By GSTB 17,40,000
Refind Oil 27,50,000
Ghee 48,28,000 By Closing Stock:
Refined Oil
8,90,000
To Direct Expenses 6,35,800
Ghee
To Gross Profit 11,27,700 15,70,000
10450500 10450500
To Manager`s Salary 2,40,000 By Gross Profit 11,27,700
To General Expenses 1,86,000
To Depreciation
Furniture (88,600-79,740) 8,860
Building
(5,10,800+2,41,600-7,14,780) 37,620
10% (8,82,150x10/110)
To Net Profit 80,195
5,75,025
11,27,700 11,27,700
Working Notes:
(1) Debtors Account
Rs. Rs.
To Balance b/d 1,80,000 By Cash Collections 20,15,000
To Sales made during the year: By Balance c/d (Bal. 2,10,000
Refined Oil 5,95,000 Figure)
Ghee 14,50,000
22,25,000 22,25,000
(2) Branch Cash Account
Rs. Rs.
To Balance b/d 25,690 By Remittance 19,50,000
To Collections 20,15,000 By Exp. 45,890
By Balance c/d (Bal. Figure) 44,800
20,40,690 20,40,690
Note:
Since the amount of cash sales was not given specifically in the question, total amount of cash
collections during the year amounting Rs. 20,15,000 has been considered as collection from
Debtors in the above solution.
BRANCH ACCOUNTS
403
QUESTION NO 61
M/s. ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India).
Bangalore branch is an integral foreign operation of ABC & Co.
Bangalore branch furnishes you with its trial balance as on 31st March, 2015 and the additional
information given thereafter:
Dr. Cr.
(Rupees in thousands)
Stock on 1st April, 2014 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Bills of Exchange 120 240
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Computers 240 -
Bank Balance 420 -
New York Office A/c. - 1,620
3,360 3,360
(a) Computers were acquired from a remittance of US $ 6,000 received from New York head
office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Bangalore branch was worth Rs. 4,20,000 on 31st March, 2015.
(c) The rates of exchange may be taken as follows:
- On 01.04.2014 @ Rs. 55 per US $
- On 31.03.2015 @ Rs. 60 per US $
- Average exchange rate for the year @ Rs. 58 per US $
- Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st March, 2015
and the balance sheet as on that date of Bangalore branch as would appear in the books of New
York head office of ABC & Co. You are informed that Bangalore branch account showed a debit
balance of US $ 29845.35 on 31.3.2015 in New York books and there were no items pending
reconciliation.
SOLUTION
M/s. ABC & Co.
Bangalore Branch Trial Balance
in (US $) as on 31st March, 2015
Conversion rate per Dr. US $ Cr. US $
US $ (Rs.) Rs. Rs.
Stock on 1.4.14 55 5,454.55 -
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 -
Rent, rates and taxes 58 6,206.90 -
Sundry Charges 58 2,758.62 -
Computers - 6,000.00 -
Bank Balance 60 7,000.00 -
New York office A/c. - - 29,845.35
59,535.01 59,535.01
ACCOUNTING
404
Trading and Profit & Loss Account

US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing Stock 7,000.00
To Wages and Salaries 9,655.17 (Rs.4,20,000/60)
By Gross Loss c/d 1,213.16
28,902.82 28,902.82
To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry Charges 2,758.62
To Depreciation on computers 3,600.00
(US $ 6,000x0.6)
13,778.68 13,778.68
Balance Sheet of Bangalore
Branch as on 31st March, 2015
Liabilities US $ Assets US $ US $
New York 29,845.35 Computers 6,000.00
Office A/c. Less: Dep. (3,600,00) 2,400.00
Less:
Net Loss (13,778.68) 16,066.67 Closing Stock 7,000.00
Sundry 5,000.00 Sundry Debtors 6,666.67

Creditors
Bills receivable 2,000.00
Bills Payable 4,000.00
Bank Balance 7,000.00
25,066.67 25,066.67
QUESTION NO 62
Raju Industries, Kolkata has a branch in Delhi to which office goods are invoiced at cost
plus 25%. The branch sells both for cash and on credit. Branch expenses are paid direct from
head office, and branch has to remit ash received to the Head Office Bank Account.
From the following details, relating to calendar year 2014, prepare the accounts in the Head Office
Ledger ascertain the Branch Profit, Branch does not maintain any books of account, but sends
weekly returns to Head Office.
Particulars Amount in Rs.
Goods received from Head Office at Invoice Price 6,00,000
Returns to Head Office at Invoice Price 12,000
st
Stock at Delhi as on 1 Jan. 2014 60,000
Sales during the year – Cash 1,80,000
- Credit 3,80,000
Sundry Debtors at Delhi as on 1st Jan. 2014 72,000
Bad Debts in the year 6,000
Sales returns at Delhi Branch 6,000
Rent, Rates, Taxes at Branch 16,000
Salaries, Wages, Bonus at Branch 62,000
Office Expenses 6,000
Stock at Branch on 31st December, 2014 1,20,000
BRANCH ACCOUNTS
405
SOLUTION
Delhi Branch Stock Account
To Balance b/d 60,000 By Goods sent to branch A/c. 12,000
(Returns)
To Goods sent to branch A/c. 6,00,000 By Bank A/c. (Cash Sales) 1,80,000
To Branch Debtors A/c. 6,000 By Branch debtors A/c. 3,80,000
(Returns) (Credit sales)
To Branch adjustment A/c. 26,000 By Balance c/d 1,20,000
(Surplus over invoice price)
6,92,000 6,92,000
Delhi Branch Adjustment Account

To Stock reserve – 20% of 24,000 By Delhi Branch stock A/c. 26,000
Rs.1,20,000 (Closing Stock)
By Stock reserve – 20% of 12,000
To Branch profit & loss A/c. 1,31,600 Rs.60,000 (Opening Stock)
By Goods sent to branch A/c. 1,17,600

– 20% of Rs. 5,88,000
1,55,600 1,55,600

To Bank A/c. (Rent, rates & 16,000 By Branch profit and loss A/c. 84,000
taxes) (Transfer)
To Bank A/c.(Salaries & 62,000

Wages)
To Bank A/c.(Office exp.) 6,000
84,000 84,000

To Balance b/d 72,000 By Bank A/c. 4,32,000
To Branch stock A/c. 3,80,000 By Branch profit and loss A/c. 14,000
(Bad debts and discount)
By Branch stock A/c. (Sales 6,000
returns)
4,52,000 4,52,000
Goods sent to Branch Account

To Branch Stock A/c. 12,000 By Branch Stock A/c. 6,00,000
To Branch Adjustment A/c. 1,17,600
To Purchases A/c. 4,70,400
6,00,000 6,00,000
ACCOUNTING
406
Branch Profit & Loss Account

To Branch expenses A/c. 84,000 By Branch adjustment A/c. 1,31,600
To Branch debtors A/c. 8,000
(Discount)
* In the absence of information about closing balance of Branch debtors A/c. and cash received
from debtors closing balance of debtors is assumed as nil and balancing figure is considered as
cash received from debtors.
To Branch debtors A/c. (Bad 6,000
Debts)
To Net Profit (transferred to 33,600

Profit & Loss A/c)
1,31,600 1,31,600
BRANCH ACCOUNTS 407
Karan Enterprises having its Head Office in Mangalore, Karnataka has a branch in Greenville,
USA. Following is the trial balance of Branch as at 31 -3-2019:
Particulars Amount ($) Amount ($)

Dr. Cr.
Fixed assets 8,000
Opening inventory 800
Cash 700
Goods received from Head Office 2,800
Sales 24,050
Purchases 11,800
Expenses 1,800
Remittance to head office 2,450
Head office account 4,300
28,350 28,350
(i) Fixed assets were purchased on 1st April, 2015.

(ii) Depreciation at 10% p.a. is to be charged on fixed assets on straight line method.
(iii) Closing inventory at branch is $ 700 as on 31-3-2019.
(iv) Goods received from Head Office (HO) were recorded at ` 1,85,500 in HO books.
(v) Remittances to HO were recorded at ` 1,62,000 in HO books.
(vi) HO account is recorded in HO books at ` 2,84,500.
(vii) Exchange rates of US Dollar at different dates can be taken as :
1-4-2015 ` 63
1-4-2018 ` 65 and
31-3-2019 ` 67
Prepare the trial balance after been converted into Indian rupees in accordance with AS-11.
408 ACCOUNTING
SOLUTION
Trial Balance of Foreign Branch (converted into Indian Rupees) as on March 31, 2019
Particulars $ (Dr.) $ (Cr.) Conversion Basis Rate ` (Dr.) ` (Cr.)

Fixed Assets 8,000 Transaction Date 63 5,04,000
Rate
Opening Inventory 800 Opening Rate 65 52,000
Goods Received 2,800 Actuals 1,85,500
from HO
Sales 24,050 Average Rate 66 15,87,300
Purchases 11,800 Average Rate 66 7,78,800
Expenses 1,800 Average Rate 66 1,18,800
Cash 700 Closing Rate 67 46,900
Remittance to HO 2,450 Actuals 1,62,000
HO Account 4,300 Actuals 2,84,500
Exchange Rate Balancing Figure 23,800
Difference
28,350 28,350 18,71,800 18,71,800

Closing Stock 700 Closing Rate 67 46,900
Depreciation 800 Fixed Asset Rate 63 50,400
Vijay & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost. The
branch makes both cash & credit sales. Branch expenses are paid direct from Head office
and the branch has to remit all cash received into the bank account of Head office. Branch
doesn’t maintain any books of accounts, but sends monthly returns to the head office.
Following further details are given for the year ended 31st March, 2020:
Amount (`)
Goods received from Head office at Invoice Price 8,40,000
Goods returned to Head office at Invoice Price 60,000
BRANCH ACCOUNTS 409
Cash sales for the year 2019-20 1,85,000

Credit Sales for the year 2019-20 6,25,000
Stock at Branch as on 01-04-2019 at Invoice price 72,000
Sundry Debtors at Patna branch as on 01-04-2019 96,000
Cash received from Debtors 4,38,000
Discount allowed to Debtors 7,500
Goods returned by customer at Patna Branch 14,000
Bad debts written off 5,500
Amount recovered from Bad debts previously written off as Bad 1,000
Rent, Rates & taxes at Branch 24,000
Salaries & wages at Branch 72,000
Office Expenses (at Branch) 9,200
Stock at Branch as on 31-03-2020 at cost price 1,25,000
Prepare necessary ledger accounts in the books of Head office by following Stock and
Debtors method and ascertain Branch profit.
SOLUTION
` ` ` `
1.4.19 To Balance b/d 72,000 31.3.20 By Sales:

(opening Cash 1,85,000
stock) Credit 6,25,000
31.3.20 To Goods Sent 8,40,000 Less:
to Branch Return (14,000) 6,11,000 7,96,000
A/c By Goods 60,000
To Branch P&L 94,000 sent to
branch -
returns
By Balance 1,50,000
c/d
(closing
stock)
10,06,000 10,06,000
1.4.20 To Balance b/d 1,50,000
410 ACCOUNTING
` `
1.4.19 To Balance b/d 96,000 31.3.20 By Cash 4,38,000
31.3.20 To Sales 6,25,000 By Returns 14,000
By Discounts 7,500
By Bad debts 5,500

7,21,000 7,21,000
1.4.20 To Balance b/d 2,56,000
` `
31.3.20 To Salaries & 72,000 31.3.20 By Branch P&L 1,18,200
Wages A/c.
To Rent, Rates & 24,000
Taxes
To Office Expenses 9,200
To Discounts 7,500
To Bad Debts 5,500
1,18,200 1,18,200
Branch Profit & Loss Account for year ended 31.3.20
` `
31.3.20 To Branch Expenses 1,18,200 31.3.20 By Branch stock 94,000
A/c
To Net Profit 93,800 By Branch Stock 1,17,000
transferred to Adjustment
General P & L account
A/c
By Bad debts 1,000
recovered
2,12,000 2,12,000
BRANCH ACCOUNTS 411
Branch Stock Adjustment Account for year ended 31.3.20
` `
31.3.20 To Goods sent to 10,000 31.3.20 By Balance b/d 12,000
Branch (72,000x1/6)
(60,000x1/6) -
Returns
To Branch P & L 1,17,000 By Goods sent to 1,40,000
A/c branch
(8,40,000x1/6)
To Balance c/d 25,000
(1,50,000x1/6)
1,52,000 1,52,000
Give Journal Entries in the books of Branch to rectify or adjust the following:
(1) Branch paid ` 5,000 as salary to H.O supervisor, but the amount paid by branch has
been debited to salary account in the books of branch.
(2) Asset Purchased by branch for ` 25,000, but the Asset account was retained in H.O
Books.
(3) A remittance of `8,000 sent by the branch has not been received by H.O.
(4) H.O collected ` 25,000 directly from the customer of Branch but fails to give the
intimation to branch.
(5) Remittance of funds by H.O to branch `5,000 not entered in branch books.
SOLUTION
Journal Entries in Books of Branch A
Particulars Dr. Amount Cr. Amount

` `
(i) Head office account Dr. 5,000
To Salaries account 5,000
(Being the rectification of salary paid on behalf
of H.O.)
412 ACCOUNTING
(ii) Head office account Dr. 25,000

To Bank / Liability A/c 25,000
(Being Asset purchased by branch but Asset
account retained at head office books)
(iii) No Entry in Branch Books
(iv) Head office account Dr. 25,000
To Debtors account 25,000
(Being the amount of branch debtors collected
by H.O.)
(v) Bank A/c Dr. 5,000
To Head Office 5,000
(Remittance of Funds by H.O. to Branch)
QUESTION 66(CA INTER JULY 21)(10 MARKS)
Manohar of Mohali has a branch at Noida to which the goods are supplied from Mohali
but the cost thereof is not recorded in the Head Office books. On 31st March, 2020 the
Branch Balance Sheet was as follows:
Creditors Balance 62,000 Debtors Balance 2,24,000
Head Office 1,88,000 Building Extension A/c
Closed by transfer to H.O. A/c -
Cash at Bank 26,000
2,50,000 2,50,000
During the six months ending on 30-09-2020, the following transactions took place at Noida:
` `
Sales 2,78,000 Manager’s salary 16,400
Purchases 64,500 Collections from debtors 2,57,000
Wages Paid 24,000 Discounts allowed 16,000
BRANCH ACCOUNTS 413
Salaries (inclusive of 15,600 Discount earned 4,600

advance of ` 5,000)
General Expenses 7,800 Cash paid to creditors 88,500
Fire Insurance (Paid for 11,200 Building Account (further 14,000
one year) payment)
Remittance to H.O. 52,900 Cash in Hand 5,600
Cash at Bank 47,000
Set out the Head Office Account in Noida Books and the Branch Balance Sheet as on
30.09.2020. Also give journal entries in the Noida books.
SOLUTION:
Journal Entries in the Books of Noida Branch
Particulars Debit (`) Credit (`)
Salary Advance A/c Dr. 5,000
To Salaries A/c 5,000
(Being the amount paid as advance adjusted by

debit to Salary Advance A/c)
Prepaid Insurance A/c (11,200 X 6/12) Dr. 5,600
To Fire Insurance A/c 5,600
(Being the six months premium transferred to the

Prepaid Insurance A/c)
Head Office A/c Dr. 1,44,900
To Purchases A/c 64,500
To Wages A/c 24,000
To Salaries A/c (15,600 – 5,000) 10,600
To General Expenses A/c 7,800
To Fire Insurance A/c (11,200 X 6/12) 5,600
To Manager’s Salary A/c 16,400

414 ACCOUNTING
To Discount Allowed A/c 16,000
(Being the transfer of various revenue accounts to

the HO A/c for closing the accounts)
Sales A/c Dr. 2,78,000
Discount Earned A/c Dr. 4,600
To Head Office A/c 2,82,600
(Being the transfer of various revenue

accounts to HO)
Head Office A/c Dr. 14,000
To Building A/c 14,000
(Being the transfer of amounts spent on building

extension to HO A/c)
Head Office Account
2020 Particulars Amount 2020 Particulars Amount

(`) (`)
Sept 30 To Cash Remittance 52,900 April 1 By Balance b/d 1,88,000
To Sundries* (Revenue) 1,44,900 By Sundries* 2,82,600

(Revenue)
To Building A/c 14,000
Total 4,70,600 Total 4,70,600
* Instead of using Sundries (Revenue) A/c, the concerned revenue accounts can be posted
in the ledger.
BRANCH ACCOUNTS 415
Balance Sheet of Noida Branch

As at 30th Sept 2020

(`) (`)
Creditors 33,400 Debtors 2,29,000
Head Office A/c 2,58,800 Salary Advance 5,000
Building Extension A/c Prepaid Insurance 5,600

transferred to HO
Cash in Hand 5,600
Cash at Bank 47,000
Total 2,92,200 Total 2,92,200
Working Notes

(`) (`)
To Balance b/d 26,000 By Wages 24,000
To Collection from debtors 2,57,000 By Salaries 15,600
By Insurance 11,200
By General Expenses 7,800
By HO A/c 52,900
By Manager’s Salary 16,400
By Creditors 88,500
By Building A/c. 14,000
By Balance c/d
- Cash in Hand 5,600
- Cash at bank 47,000
Total 2,83,00 Total 2,83,000

416 ACCOUNTING
Debtors Account
To Balance b/d 2,24,000 By Cash Collection 2,57,000
To Sales A/c 2,78,000 By Discount (Allowed) 16,000
Total 5,02,000 Total 5,02,000
Creditors Account
To Cash A/c 88,500 By Balance b/d 62,000
To Discount (Earned) 4,600 By Purchases 64,500
To Balance c/d 33,400
Total 1,26,500 Total 1,26,500
Note: Since the date of payment of fire insurance has not been mentioned in the question,
it is assumed that it was paid on 01 April 2020. Alternative answer considering otherwise
also possible.
QUESTION 67
Beta, having head office at Mumbai has a branch at Nagpur. The head office does wholesale
trade only at cost plus 80%. The goods are sent to branch at the wholesale price viz., cost
plus 80%. The branch at Nagpur is wholly engaged in retail trade and the goods are sold at
cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 20X1:
Head Office Branch

(`) (`)
Opening stock 2,25,000
Purchases 25,50,000
Goods sent to branch (Cost to H.0. plus 80%) 9,54,000
BRANCH ACCOUNTS 417
Sales 27,81,000 9,50,000

Office expenses 90,000 8,500
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office and
branch for the year ended 31st March, 20X1.
SOLUTION
Trading and Profit and Loss A/c For the year ended 31st March 20X1
Head Branch Head Branch

office office
` ` ` `
To Opening stock 2,25,000 - By Sales 27,81,000 9,50,000
To Purchases 25,50,000 - By Goods sent 9,54,000 _
to branch
To Goods received - 9,54,000 By Closing 7,00,000 99,000
from head office stock (W.N.1
& 2)
To Gross profit c/d 16,60,000 95,000
44,35,000 10,49,000 44,35,000 10,49,000
To Office expenses 90,000 8,500 By Gross 16,60,000 95,000
profit b/d
To Selling expenses 72,000 6,300
To Staff salaries 65,000 12,000
To Branch Stock 44,000 _
Reserve (W.N.3)
To Net Profit 13,89,000 68,200
16,60,000 95,000 16,60,000 95,000

418 ACCOUNTING
Working Notes:
(1) Calculation of closing stock of head office: `

Opening Stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
Less: Cost of goods sold [37,35,000 x 100/180] (20,75,000)
7,00,000
(2) Calculation of closing stock of branch: `
Goods received from head office [At invoice value] 9,54,000
Less: Invoice value of goods sold [9,50,000 x 180/200] (8,55,000)
99,000
(3) Calculation of unrealized profit in branch stock:
Branch stock ` 99,000
Profit included 80% of cost
Hence, unrealized profit would be = ` 99,000 x 80/180 ` 44,000
AS-13 INVESTMENT ACCOUNT 419
AS-13 INVESTMENT ACCOUNT
QUESTION NO 1
In 2011, M/s wye Ltd. issued 12% fully paid debenture of Rs.100 each, interest being
payable half yearly on 30th September and 31st March of every accounting year.
On 1st December, 2012 M/s Bull & bear purchased 10,000 of these Debentures at Rs.101
cum-interest price, also paying brokerage @ 1% of cum-interest amount of the purchase.
On 1st March, 2013 the firm sold all of these debentures at Rs.106 cum interest price, again
paying brokerage @ 1% of cum-interest amount. Prepare investment account in the books
of M/s. Bull & Bear for the period 1st December, 2012 to 1st March, 2013.
ANSWER
In the books of M/s Bull & Bear
Investment account
For the period from 1st December 2012 to 1st March, 2013
(Scrip : 12% Debentures of M/s. Wye Ltd.)
Date Particular Nominal Interest Cost Date Particular Nominal Interest Cost
value (Rs) (Rs.) Value (Rs.)
(Rs.)
1.12.2012 To bank 10,00,000 20,000 10,00,100 1.03.2013 By bank 10,00, 000 50,000 9,99,400
A/c A/c
(W.N.1) (W.N.2)
1.3.2013 To Profit 30,000 1.3.2013 By profit 700
& loss & Loss
A/c A/c
10,00,000 50,000 10,00,100 10,00,000 50,000 10,00 ,100
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2012 Rs.

Cost Value (10,000 x Rs.101) = 10, 10,000
Add: Brokerage (1% of Rs.10,10,000) = 10,100
Less : Cum interest (10,000 x 100 x 12% x 2/12) = (20,000)
Total = 10, 00,100
420 ACCOUNTING
(ii) Sale proceeds of 12% Debentures sold on 31st March, 2013 Rs.
Sales Price (10,000xRs.106) = 10,60,000
Less: Brokerage (1% of Rs. 10,60,000) = (10,600)
Less: Cum interest (10,000x100x12%x5/12) = (50,000)
Total = 9,99,4000
QUESTION NO 2
On 1st April, 2009, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of Rs.15 per
share(face value Rs.10 per share). On 1st June, 2009, XY Ltd. acquired 5,000 equity shares
of ABC Ltd. for Rs.1,00,000. ABC Ltd. announced a bonus and right issue.
(1) Bonus was declared , at the rate of one equity share for every five shares held, on 1st
July 2009.
(2) Right shares are to be issued to the existing shareholders on 1st September 2009. The
company will issue one right share for every 6 shares at 20% premium. No dividend
was payable on these shares.
(3) dividend for the year ended 31.3.2009 were declared by ABC Ltd. @ 20% which was
received by XY Ltd. on 31st October 2009.
XY Ltd.
(i) Took up half the right issue
(ii) Sold the remaining rights for Rs.8 per share.
(iii) Sold half its share holdings on 1st January 2010 at Rs. 16.50 per share. Brokerage being
1%
You are required to prepare investment account of XY Ltd. for the year ended 31st March
2010 assuming the shares are being valued at average cost.
ANSWER
In the books of XY Ltd.
Investment in equity shares of ABC Ltd.
Date Particulars No Dividend Amount Date Particular No Dividend Amount
(Rs.) (Rs.) (Rs.) (Rs.)
2009 To balance 15,000 - 2,25,000 2009 By Bank - 30,000 10,000

April 1 b/d Oct.31 A/c(W.N.5)
June 1 To bank 5,000 - 1,00,000 2010 By Bank 13,000 - 2,12,355

A/c Jan.1 A/c(W.N4)
July 1 To bonus 4,000 - - March 31 By Balance 13,000 - 1,69,500

issue c/d (W.N.6)
(W.N1)
Sep.1 To Bank 2,000 - 24,000

2010 A/c W.N.2)
Jan.1 To P&L A/c - - 42,855

2010 (W.N.4)
March 31 To P&L A/c - 30,000 -
26,000 30,000 3,91,855 25,000 30,000 3,91,855
Working Notes:
1. Calculation of no. of bonus shares issued

15,000 shares + 5,000 shares
Bonus Shares = x 1 = 4,000 shares
5
2. Calculation of rights shares subscribed

15,000 shares + 5,000 shares + 4,000 shares
Rights share = =4,000 shares
6
4,000
Shares subscribed by XY Ltd. = = 2,000 shares
2
Value of right shares subscribed = 2,000 shares @ Rs.12 per share= Rs.24,000
3. Calculation of sale of right entitlement
2,000 shares x Rs.8 per share = Rs.16,000
Amount received from sale of tights will be credited to P&L A/c as per Para 13 of AS
13 ‘Accounting for investment’. IN THE GIVEN INVESTMENT ACCOUNT, WE HAVE
PREPARED COLUMN FOR DIVIDEND, SO RIGHT INCOME WILL BE TRANSFERRED
TO PL DIRECTLY.
4. Calculation of profit on sale of shares
Total holding = 15,000 shares original
5,000 shares purchased
4,000 shares bonus
2,000 shares right shares
26,000shares
50% of the holding were sold
422 ACCOUNTING
i.e. 13,000 shares( 26,000 shares (on average basis)

= Rs.2,25,000 + Rs.1,00,000 + Rs.24,000 - Rs.10,000
= Rs.3,39,000
Average cost of 13,000 shares would be
3,39,000
= x 13,000 = Rs.1,69,500
26,000
Sale proceeds of 13,000 shares (13,000 x Rs.16.50) 2,14,500
Less: 1% Brokerage (2,145)
2,12,355
Less: cost of 13,000 shares (1,69,500)
Profit on sale 42,855
5. Dividend received on investment held as on 1st April,2009
= 15,000 shares x Rs.10x20%
= Rs.30,000 will be transferred to profit and loss A/c
Dividend received on shares purchased on 1st June 2009
= 5,000 shares x Rs.10 x 20% = Rs.10,000 will be adjusted to investment A/c
Note: it is presumed that no dividend is received on bonus shares as bonus shares are
declared on 1st July 2009 and dividend pertains to the year ended 31.3.2009.
6. Calculation of closing value of shares (on average basis) as on 31st March, 2010
3,39,000
13,000 x = Rs.1,69,500.
26,000
QUESTION NO 3
The following information is presented by Mr. Z, relating to his holding in 9% Central

Government bonds.
Opening balance (face value) Rs.1,20,000 cost Rs.1,18,000(face value of each unit is Rs.100).
1.3.2008 Purchased 200 units, ex-interest at Rs. 98.

1.7.2008 Sold 500 units, ex-interest out of original holding at Rs.100.
1.10.2008 Purchased 150 units at Rs.98, cum interest.
1.11.2008 Sold 300 units, ex-interest at Rs.99 out of original holdings.
Interest dates are 30th September and 31st March. Mr. Z closes his books every 31st
December. Show the investment account as it would appear as it would in this books. Mr. Z
follows FIFO method.
ANSWER
In the books of Mr. Z
9% Central Government bonds (investment) account
Particulars Face value Interest Principal Particulars Face vale Interest Principle
2008 Rs. Rs. Rs. 2008 Rs. Rs. Rs.
Jan.1 To balance March By Bank
b/d 1,20,000 2,700 1,18,000 31 A/c - 6,300 -
March To bank July 1 By bank 50,000 1,125 50,000

1 A/c 20,000 750 19,600 A/c
July 1 To P&L - - 833 Sept. By Bank - 4,050

A/c 30 A/c
Oct.1 To bank 15,000 - 14,700 Nov.1 By Bank 30,000 225 29,700

A/c A/c
Nov.1 To P&L - - 200 Dec.31 By 75,000 1,688 73,633

A/c balance
c/d
Dec. To P&L 9,938
31 A/c
(transfer)
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333
Working Note:
Calculation of closing balance: Units Rs.

Bonds In hand remained in hand at
1,18,000
31st 2008 40,000 x 40,000= 39,333
1,20,000
From original holding
(1,20,000-50,000-30,000)=
Purchased on 1st March 20,000 19.600
Purchased on 1st October 15,000 14.700
TOTAL 75,000 73,633
424 ACCOUNTING
QUESTION NO 4
Mr. Purohit furnishes the following detail relating to his holding in 8% Debentures (Rs.100
each) of P Ltd., held as current assets:
1.4.2009 Opening balance- face Value Rs.1,20,000, cost Rs.1,18,000

1.7.2009 100 debentures purchased ex-interest at Rs.98
1.10.2009 Sold 200 Debentures ex-interest at Rs.100
1.1.2010 Purchased 50 Debentures at Rs.98 cum-interest
1.2.2010 Sold 200 Debentures ex-interest at Rs.99
Due dates for interest are 30th September and 31st march.
Mr. Purohit closes his books on 31.03.20x2. Brokerage is to be paid @ 1% for each transaction.
Prepare investment account in the books of investor assuming FIFO method for accounting.
Market value of debentures on balance sheet date is 99 per debenture.
SOLUTION
Investment A/c of Mr. Prohit
For the year ending on 31-3-2010
(Scrip: 8% Debentures of P Limited)
(Interest payable on 30th September and 31st March)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
(Rs.) (Rs.) (Rs.) (Rs.)
1.4.09 To balance 1,20,000 - 1,18,000 30.9.09 By Bank - 5,200 -

b/d 1.10.09 By Bank 20,000 - 19,800
1.7.09 To bank 10,000 200 9,898 1.12.10 By Bank 20,000 533 19,602
(exinterest) (ex interest
1.10.09 To profit & 133 1.2.10 By profit & 64
Loss A/c Loss A/c
1.1.10 To bank 5,000 100 4,849 31.3.10 By Bank - 3,800 -
(cum 31.3.10 By Balance 95,000 - 93,414
interest) c/d
31.3.10 To profit & - 9,233 -
Loss A/c
(Bal.fig.)
1,35,000 9.533 1,32,880 1,35,000 9,533 1,32,880

Working Notes:
1. Valuation of closing balance as on 31.3.2010:

Market value of 950 Debentures at Rs.99 = Rs.94,050
Cost Price of800 Debentures cost
1,18,000
=( × 80,000) = 78,667
1,20,000
100 Debentures cost = 9,898
50 Debentures cost- = 4,849
93,414
Value at the end = Rs.93,414 i.e. whichever is less
2. Profit on sale of debentures as on 1.10.2009
Rs.
Sales price of Debentures (200 x 100) 20,000
Less: Brokerage @ 1% (200)
19,800
1,18,000
Less: cost price of Debentures = ( × 20,000) (19,667)
1,20,000
Profit on sale 133
3. Loss on sale of debentures as on 1.2.2010
Rs.
Sale price of debentures (200x99) 19,800
Less: Broerage @ 1% (198)
19,602
1,18,000
Less: cost price of Debentures = ( × 20,000) (19,666)
1,20,000
Loss on sale 64
426 ACCOUNTING
QUESTION NO 5
Mr. Brown has made following transaction during the financial year 2011-12:
Date Particulars
01.05.2011 Purchased 24,000 12% bonds of Rs.100 each at Rs. 84 cum-interest. Interest
is payable on 30th September and 31st March every year.
15.06.2011 Purchased 1,50,000 equity shares of Rs.10 each in Alpha limited for Rs.25
each through a broker, who changed brokerage @2%
10.07.2011 Purchased 60,000 equity shares of Rs. 10 each in Beeta Limited for Rs44
each through a broker, who changed brokerage @ 2%
14.10.2011 Alpha limited made a bonus issue of two shares for every three shares held.
Sold 80,000 shares in alpha Limited for Rs.22 each.
31.10.2011 Received 15% interim dividend on equity shares of Alpha Limited.

01.01.2012
15.01.2012 Beeta Limited a right issue of One equity share for every four shares held
at Rs.5 per share. Mr. Brown exercised his option for 40% his entitlement
and sold the balance rights in the market at Rs.2.25 per share.
01.03.2012 Sold 15,000 12% bonds at Rs.90 ex-interest.
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.
Interest on 12% bonds was duly received on due dates

Prepare separate investment account for 12% Bonds. Equity shares of Alpha Limited and
Equity shares of Beeta Limited in the books of Mr. Brown for the year ended on 31st
March,2012
ANSWER
In the books of Mr. Brown
12% bonds for the year ended 31st March, 2012
Date Particulars No. Interest Amount Date Particulars No. Interest Amount
(Rs.) (Rs.) (Rs.) (Rs.)
2011 To Bank 24,000 24,000 19,92,000 2011 By bank - 1,44,000

May 1 A/c Sept 30 interest
2012 To P&L A/c - - 1,05,000 2012 By bank 15,000 75,000 13,50,000

Mar 1 (W.N.1) Mar 1 A/c
March To P&L A/c 2,49,000 2012 By Bank 54,000

31 Mar. 1 interest
By Balance 9,000 - 7,47,000
c/d (W.N.2)
24,000 2,73,000 20,97,000 24,000 2,73,000 20.,97,000
Investment in Equity shares of Alpha Ltd.

Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
(Rs.) (Rs.) (Rs.) (Rs.)
2011 To Bank A/c 1,50,000 - 38,25,000 2011

June 15 Oct. 31 By bank 80,000 - 17,60,000
A/c
Oct. 14 To bonus issue 1,00,000 - - 2012
(1,50,000/3x2) Jan. 1 By Bank 2,55,000
A/c
31 To P&L A/c - - 5,36,000 dividend
(W.N.3)
March 31 By Balance 1,70,000 - 26,01,000
2012 To PL - 2,55,000 - c/d (W.N.4)
Mar. 31
2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000
Investment in Equity shares of Beeta Ltd.

Rs. Rs. Rs. Rs.
2011 To bank A/c 60,000 - 26,92,800 2012 By Bank - 1,18,800

July 10 Mar.15 dividend
2012 To Bank A/c 6,000 - 30,000 March By Balance c/d 66,000 27,22,800
Jan. 15 (W.N.5) 31 (bal. fig.)
March To P&L A/c - 1,18,800 -

31
66,000 1,18,800 27,22,800 66,000 1,18,000 27,22,800
428 ACCOUNTING
Working Notes:
1. Profit on sale of 12% Bond

Sales Price Rs.13,50,000
19,92,000
Less: Cost of Bond sold = x 15,000 (Rs. 12,45,000)
24,000
Profit on sale Rs.1,05,000
2. Closing balance as on 31.3.2012 of 12% Bond
19,92,000
x 9,000 = Rs.7,47,000
24,000
3. Profit on sale of equity shares of Alpha Ltd.
Sales price Rs.17,60,000
Less cost of bond sold=80,000 Rs.(12,24,000)
Profit on sale Rs.5,36,000
4. closing Balance as on 31.3.2012 of equity shares of Alpha Ltd.
38,25,000
x 1,70,000 = Rs.26,01,000
2,50,000
5. Calculation of right subscribed by Beeta. Ltd.

60,000 shares
Right shares= x 1 = 15,000 shares
4
Shares subscribed by Mr. Brown = 15,000 x 40% = 6,000 shares
Value of right shares subscribed = 6,000 shares @ Rs.5 per share = Rs.30,000
6. calculation of sale of right entitlement by Beeta Ltd.
No. of right shares sold = 15,000-6,000 = 9,000 shares
Sale value of right = 9,000 shares x Rs.2.25 per share =Rs.20,250
Note: As per Para 13 of AS 13, sale proceeds of rights is to be credited to P&L
A/c. WE HAVE PREPARED DIVIDEND COLUMN IN INVESTMENT ACCOUNT,
SO WE WILL TRANSFER INCOME FROM RIGHT ISSUE DIRECTLY TO PL.
QUESTION NO 6
On 1st April, 2011, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs.15 per
share (face value rs.10 each). He provides you the further information:
(1) on 20th June, 2011 he purchased another 10,000 shares of P Ltd. at Rs.16 per share
(2) on 1st August, 2011, P Ltd. issued one equity bonus share for every six shares held by
the shareholders/
(3) on 31st October, 2011, the directors of P Ltd. announced a right issue which entitles
the holders to subscribe three shares for every seven shares at Rs.15 per share.
Shareholders can transfer their rights in full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of Rs.2 per share and subscribed
the rest on 5th November, 2011.
You are required to prepare investment A/c in the books of Rajat for the year ending 31st
March, 2012.
ANSWER
In the books of Rajat
Investment Account
(equity shares in P Ltd.)
Date Particulars No. of Amount Date Particulars No. of Amount

shares (Rs.) shares (Rs.)
1.4.11 To balance b/d 50,000 7,50,000 31.3.12 By balance c/d 90,000 12,10,000
20.6.11 To bank A/c 10,000 1,60,000 (bal. fig)
1.8.11 To bonus issue 10,000
(W.N.1)
5.11.2011 To bank A/c 20,000 3,00,000
(right shares)
(W.N.4)
90,000 12,10,000 90,000 12,10,000
Working Notes:
50,000 + 10,000
(1) Bonus shares = =10,000 shares
6
50,000 + 10,000 + 10,000
(2) right shares = x 3 = 30,000 shares
7
1
(3) Sale of Rights = 30,000 shares x x Rs.15 = Rs.3,00,000
3
Note: We have not shown income column in investment account, so income from sale of
right will be transferred to pl directly.
430 ACCOUNTING
QUESTION NO 7
On 01-04-2011, Mr. T. Shekharan purchased 5,000 equity shares of Rs.100 each in V Ltd.
@ Rs.120 each from a broker who charged 2% brokerage. He incurred 50 paisa per Rs.100
as cost of shares transfer stamps. On 31-01-2012 bonus was declared in the ratio of 1:2.
Before and after the record date of bonus shares, the shares were quoted at Rs.175 per
share and Rs.90 per share respectively. On 3103-2012, Mr. T. shekharan sold bonus shares
to a broker, who charged 2% brokerage.
Shoe the investment account in the books of T. Shekharan, who held the shares as current
Assets and closing value of investment shall be made at cost or market value whichever is
lower.
ANSWER
In the books of T. Shekharan
Investment Account
(Script : Equity Shares of V Ltd.)
Date Particulars Nominal Cost Date Particulars Nominal Cost

Value (Rs.) Value (Rs.)
(Rs.) (Rs.)
1.4.2011 To Bank A/c 5,00,000 6,15,000 31.3.2012 By Bank A/c 2,50,000 2,20,500
(W.N.1) (W.N.2)
31.01.2012 To bonus shares 2,50,000 -
31.3.2012 By Balance c/d 5,00,000 4,10,000
31.3.2012 To profit 15,500 (W.N.4)
and Loss A/c
(W.N.3)
7,50,000 6,3,500 7,50,000 6,30,500
Working Notes:
1. cost of equity shares purchased on 1st April, 2011

= cost + Brokerage+ cost of transfer stamps
=5,000 x Rs.120 + 2% of Rs.6,00,000 + ½% of Rs.6,00,000
=Rs.6,15,000
2. sale proceeds of equity shares sold on 31st March, 2012
= sale price – Brokerage
=2,500 x Rs.90 – 2% of Rs.2,25,000
=Rs.2,20,000.
3. profit on sale of bonus shares on 31st March, 2012

= sales proceeds – Average cost
Sales proceeds = Rs.2,20,500
Average cost = Rs. [6,15,000 x 2,50,00/7,50,000] = Rs. 2,05,000
Profit = Rs. 2,20,500 - Rs. 2,05,000 = Rs.15,500.
4. Valuation of equity shares on 31st March 2012
Cost = Rs.[6,15,000 x 5,00,000/7,50,000] = Rs.4,10,000 i.e. Rs. 82 per share
Market Value= 5,000 Shares x Rs.90 = Rs.4,50,000
Closing stock of equity shares has been valued at Rs.4,10,000 i.e. cost being lower than
the market value
QUESTION NO 8
Mr. Chatur had 12% Debentures of face value Rs. 100 of M/s Unnati Ltd. as current
investments.
He provides the following details relating to the investments.
1-4-2014 Opening balance 4,000 debentures costing Rs.98 each

1-6-2014 Purchased 2,000 debentures @ Rs.120 cum interest
1-9-2014 Sold 3,000 debentures @ Rs.110 cum interest
1-12-2014 Sold 2,000 debentures @ Rs.105 ex-interest
31-1-2015 Purchased 3,000 debentures @ Rs.100 ex-interest
31-1-2015 Market value of the investment Rs.105 each
Interest due date are 30th June and 31st December.

Mr. Chatur closes his books on 31-3-2015. He incurred 2% brokerage for all his transactions
show investment account in the books of Mr. Chatur assuming FIFO method is followed
QUESTION NO 9
A limited purchased 5,000 equity shares ( face value Rs.100 each) of Allianz limited for
Rs.105 each on 1st April, 2014. The shares were quoted cum dividend. On 15th may, 2014,
Allianz Limited declared & paid dividend of 2% for year ended 31st March, 2014. On 30th
June, 2014 Allianz limited issued bonus shares in ratio of 1:5 on 1st October, 2014 Allianz
Limited issued rights share in the ratio of 1:2 @ 45 per share. A Limited subscribed to half
of the rights issue and the balance was sold at Rs.5 per right entitlement. The company
432 ACCOUNTING
declared interim dividend of 1% on 30th November, 2014. Right shares were not entitled to
dividend. The company sold 3,000 shares on 31st December, 2014 at Rs. 95 per share. The
company A Ltd. incurred 2% as brokerage while buying and selling shares.
You are required to prepare investment account in books of A Ltd.
QUESTION NO 10
On 1.4.2014, sundar had 25,000 equity shares of ‘X’ Ltd. at a book valu of Rs.15 per share
(face value Rs 10). On 20.6.2014, he purchased another 5,000 shares of the company at
Rs.16 per share. The directors of ‘X’ Ltd. announced a bonus and rights issue. No dividend
was payable on these issues. The terms of the issue are as follows:
Bonus basis 1:6(date 16.8.2014).
Rights basis 3:7 (date 31.8.2014)price Rs.15 per share.
Due date for payment 30.9.2014.
Shareholders were entitled to transfer their rights in full or in part. Accordingly sundar
sold 33.33% of his entitlement to sekhar for a consideration of Rs.2 per share.
Dividends: dividend for the year ended 31.3.2014 at the rate of 20% were declared by X Ltd.
and received by sundar on 31.10.2014. dividends for shares acquired by him on 20.6.2014
are to be adjusted against the cost of purchase.
On 15.11.2014. sundar sold 25,000 equity shares at a premium of Rs.5 per share.
You are required to prepare in the books of sundar.
(1) investment account

(2) profit & Loss account.
For your exercise, assume that the books are closed on 31.12.2014 and shares are valued
at average cost.
QUESTION NO 11
On 1.4.2014, Mr Krishna murty purchased 1,000 equity shares of Rs.100 each in TELCO Ltd.
@ Rs.120 each from a broker, who charged 2% brokerage. He incurred 50 paise per Rs.100
as cost of shares transfer stamps. On 31.3.2015 bonus was declared in the ratio of 1 : 2
Before and after the record date of bonus shares the shares were quoted at Rs.175 per
share and Rs.90 per share respectively. On 31.3.2015 Mr. Krishna Murty sold bonus shares
to a broker, who charged 2% brokerage.
Show the investment Account in the books of Mr. Krishna Murty. Who held the shares as
Current assets and closing value of investments shall be made at cost of Market value which
ever is lower.
QUESTION NO 12
Mr. X purchased 500 equity shares of Rs.100 each in omega Co. Ltd. for Rs. 62,500 inclusive
of brokerage and stamp duty. Some years later the company resolved to capitalize its
profits and to issue to the holders of equity shares, one equity bonus share for every share
held by them. Prior to capitalization, the shares of omega co. Ltd. were quoted at Rs.175
per share. After the capitalization, the shares were quoted at Rs.92.50 per share. Mr. X.
sold the bonus shares and received at Rs.90 per share.
Prepare the investment account in X’s books on average cost basis.
QUESTION NO 13
On 1st January 2014, singh had 20,000 equity shares in X Ltd. face value of the shares was
on Rs.10 each but their book value was Rs. 16 per share. On 1st June 2014, Singh purchased
5,000 more equity shares in the company at a premium of Rs. 4 per share.
On 30th June, 2014, the directors of X Ltd. announced a bonus and rights issue. Bonus
was declared at the rate of one equity share for every five shares held and these were
received on 2nd august, 2014.
The terms of the rights issue were:
(a) rights shares to be issued to the existing holders on 10th august, 2014.
(b) rights issue would entitle the holders on 10 august, 2014.
(b) rights issue would entitle the holders to subscribe to additional equity shares in the
company at the rate of one share per every held at Rs. 15 per share the whole sum
being payable by 30th September, 2014.
(c) existing share holders were entitled to transfer their rights to outsiders, either
wholly or in part.
(d) Singh exercised his option under the issue for 50% of his entitlements and the balance
of rights he sold to ananth for a consideration of Rs.1.50 per share.
(e) dividends for the year ended 31st March, 2014, at the rate of 15% were declared by
the company and received by singh on 20th October, 2014.
(f) on 1st November, 2014, Singh sold 20,000 equity shares at a premium of Rs. 3 per
share.
The market price of share on 31-12-2014 was Rs.14. Show the investment Account as it
would appear is Singh’s books on 31-12-2014 and the value of shares held on that date.
434 ACCOUNTING
QUESTION NO 14
The following transaction of NIDHI took place during the year ended 31st March 2014:
1st April Purchased Rs.12.00,00, 8% bonds at Rs.80.50 cum-interest. Interest Is

payable on 1st November and 1st May.
12th April Purchased 1,00,000 equity shares of Rs.10 each in X Ltd. for Rs.40,00,000
1st May Received half-year’s interest on 8% bonds.
15th Mary X Ltd. made a bonus issue of three equity shares for every two held.
Nidhi sold 1,25,000 bonus shares for Rs. 20 each.
1st October Sold Rs. 3,00,000, 8% bonds at Rs.81 ex-interest.
1st November Received half years bond interest.
1st December Received 18% dividend on equity shares in X Ltd.
Prepare the relevant investment account in the books of Nidhi for the year ended 31st
March 2014.
QUESTION NO 15
Smart investment made the following investment in the year 2013-14

12% state Govermment bonds having face value Rs.100
Date Particulars
01.04.2013 Opening balance (1200 bonds) book value of Rs.126,000
02.05.2013 Purchased 2,000 bonds @ Rs.100 cum interest
30.09.2013 Sold 1,500 bonds at Rs.105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year.
Equity Shares of X Ltd.

15.04.2013 Purchased 5,00 equity shares @ Rs.200 on cum right basis
Brokerage of 1% was paid in addition (face value of shares Rs.10)
03.06.2013 The company announced a bonus issue of 2 shares for every 5 share held.
16.08.2013 The company made a rights issue of 1 share for every 7 shares held. At
Rs.250 per share.
The entire money was payable by 31.08.2013.
22.8.2013 Rights to the exlent of 20% was sold @ Rs.60. the remaining rights were
subscribed.
02.09.2013 Dividend @ 15% for the year ended 31.03.2013 was received on 16.09.2013
15.12.2013 Sold 3,000 shares @ Rs.300. Brokerage of 1%was incurred extra.
15.01.2014 Received interim dividend @ 10% for the year 2013-14
31.03.2014 The shares were quoted in the stock exchange @ Rs.220
Prepare investment Accounts in the books of Smart Investments. Assume that the average
cost method is followed.
QUESTION NO 16
Bonanzaa Limited held on 1st April 1993 ` 2,00,000 of 9% Government loan (2003) at `
1,90,000. (Face value of loan ` 100 each). Three month’s interest accrued on the above
date. On 31st May 1993 the company purchased the same government loan of the face
value of ` 80,000 at ` 95 (net) cum-interest. On 1st June 1993
60,000 face value of the loan was sold at ` 94 (net) ex-interest. Interest on the loan
was paid each year on 30th June and 31st December and was credited by the bank on
the same date. On 30th November 1993 ` 40,000 face value of the loan was sold at `
97 (net) cum-interest. On 1st December 1993 the company purchased the same loan `
10,000 at per ex-interest. On 1st March 1994 the company sold
10,000 face value of the loan at ` 95 ex-interest. The market price of the loan on 31st
March 1994 was ` 96. Draw up the 9% government loan (2003) account in the books of
the company. First in first out method shall be followed and the balance of the loan held
by the company shall be valued at total average cost or market price whichever is lower.
Calculation shall be made to the nearest rupee or multiple thereof.
QUESTION NO 17
A purchased on 1st March, ` 24,000 5% Bharat Debenture stock at 90 cum-interest

interest being payable on 31st March and 30th September each year, stamp and expenses
on purchase amounted to ` 20 and brokerage at 2% was charged on cost; interest for the
half-year was received on the due date. On 1st September ` 10,000 of the stock was sold at
92 ex-interest less brokerage at 2%. On 30th September ` 8,000 stock was purchased at
91 ex-interest plus brokerage at 2% and charges ` 10. On 1st December ` 6,000 stock was
sold at 94 cum-interest less brokerage at 2%. The market price of stock on 31st December
was 91%. Show the investment account for the year ended 31st December, marking all
calculations in months.
436 ACCOUNTING
QUESTION NO 18
Tee Limited purchased on 1st May 1997 13.5% Convertible Debentures in Dee Limited of
face value of ` 5,00,000 @ 105; Interest on the debentures is payable each year on 31st
March and 30th September. The accounting year adopted by Tee Limited is the calendar
year. The following other transactions were entered into in 1997 by Tee Limited in regard
to these debentures:
August 1 Purchased ` 2,50,000 debentures @ 107 cum interest. October 1 Sale of ` 2,00,000
debentures @ 103
December 31 Receipt of 10,000 equity shares in Dee Limited of ` 10 each in conversion of
20% of the debentures held.
The market value of the debentures and equity shares in Dee Limited at the end of 1997
was 106 and ` 15 respectively.
Prepare the debenture investment account in the books of Tee Limited on average cost
basis.
QUESTION NO 19
Y Limited purchases 25,000 shares of ` 10 each of X Limited on 15.4.1999 @ 120 per

share(cum-right cum dividend). The company paid brokerage 1.5% and stamp duties 1%. It
acquires another 30,000 shares of X Limited on 25.5.1999 @ ` 140 pr share( cum right
cum dividend). And paid for brokerage and stamp duties. The company offered 1:1 right
@ 80 per share on 30.5.99. Y Limited acquired 35,000 shares exercising the right and
sold the right for 20,000 shares @ ` 30 per right. The company received dividend @ 40%
on paid up value of shares for 1999-2000. It sold 15,000 shares @ ` 110 less brokerage
1.5% on 15.11.1999. Please calculate the cost of investment sold, carrying amount of unsold
investments and profit on sale of investments.
QUESTION NO 20
A Limited purchases 10000 shares of X Limited @ ` 80 and paid brokerage @ 1.5% and
stamp duties ` 8000 on 15.12.1999. The company purchases another 15000 shares of X
Limited @ 96 and paid brokerage @ 1.5% and stamp duties ` 14400 on 25.12.1999. It sold
12000 shares @ 105 and brokerage @ 1.5% on 15.2.2000.
Show the cost of investment balance In account in the balance sheet and amount of profit
or loss on the sale?
QUESTION NO 21
Continuing with the example above if X Limited issues one bonus share for every two shares
held on 2.1.2000 and X Limited sold 12000 shares on 15.2.2000.
Calculate the carrying amount of investments
QUESTION NO 22
Mr. Lal purchased 500 equity shares of ` 100 each in omega co Ltd. for ` 62500 inclusive
of brokerage and stamp duty on cum right basis. Later the company announced right issue
@ one equity share for every share held by them. X accepted 50% of right shares and sold
50% right. The shares of Omega co Ltd. were quoted at ` 110 per share pre right and the
shares were quoted at Rs92.50 per share after right issue. Mr. X sold the right @10 per
right share and paid at ` 80 per share as subscription charges for his 50% shares.
Prepare investment account on average cost basis valuation.
QUESTION NO 23
Sharma purchased 1000 equity shares of X Ltd. as ` 35 each on 1st April 2003. He further
purchased 300 equity shares @32 each on 1 july 2003. On 30 Sep, he received dividend
@ ` 2 per share for the year 2002-03. He sold 500 shares @38 per share on 1 Nov 2003.
Market value of share on 31st March 2004 was ` 33, prepare investment account(assume
permanent investment).
QUESTION NO 24
Mr. T purchased 1,000 nos. 10% debentures of ` 100 each on 1st April, 2009 at ` 96
com interest, the previous interest date being 31st December, 2008. Computer cost of
investment.
QUESTION NO 25
MY Ltd. Had acquired 200 equity shares of YZ Ltd. At ` 105 per share on 1.1.2009 and
paid ` 200 towards brokerage, stamp duty and STT. On 31st March, 2009 Share of YZ Ltd.
Were traded at ` 110 per share. At what value investment is to be shown in the Balance
Sheet of MY Ltd. As at 31st March, 2009.
438 ACCOUNTING
QUESTION NO 26
Rose Ltd. Had made an investment of ` 500 lakhs in the equity shares of Nose Ltd on
10.01.2009. The realizable value of such investment on 31.03.2009 became ` 200 laksh
as Nose Ltd. Lost a case of patent rights. Rose Ltd. Follows financial years as accounting
year. How will you recognize this reduction in Financial Statements for the year 2008-09.
QUESTION NO 27
Gamma Investment Company hold 1,000, 15% debentures of ` 100 each in Beta Industries
Ltd. As on April 1,2009 at a cost of ` 1,05,000. Interest is payable on June, 30 and December,
31 each year.
On may 1,2009, 500 debentures are purchased cum-interest at ` 53,500. On November,
1,2009, 600 debentures are sold ex-interest at ` 57,300. on November 30, 2009, 400
debentures are purchased ex-interest at ` 38,400. On December 31, 2009 400 debentures
are sold cum-interest for ` 55,000.
Prepare the investment account showing value of holdings on March 31, 2010 at cost, using
FIFO method.
QUESTION NO 28
Define investment as per Accounting Standard-13. How investments are classified by AS-
13? What are the items not dealt with by AS-13?
ANSWER:
Meaning of Investments: AS-13 defines investments as assets held by an enterprise for:
Earning income by way of dividends, interest, and rentals, e.g., investment in building
let out
Capital appreciation, e.g., increase in the value of land,
Other benefits to the investing enterprise, e.g., to control the investee,
Not held as stock-in-trade, e.g., held by investment company not investment
AS-13 does not deal with:

Bases for recognition of interest, dividends and rentals earned covered by AS-9;
Operating or finance leases;

Investments of retirement benefit plans and life insurance enterprises; and
Mutual funds, banks and public financial institutions
Classification of investments: An enterprise should disclose current investments and long-

term investments distinctly in its financial statements.
Current investment: A current investment is an investment that is-
By its nature readily realizable, e.g., land & building are not readily realizable, and
Intended to be held for not more than one year from the date of making such investment
(Evidence that held for not more than one year could be management representation)
Therefore,’ ready marketability is not the only criteria for classifying the investment in to
current or long term. To be classified as current investment, an investment must be made
for a period not more than one year.
Long-term investment: A long-term investment is an investment other than a current
investment, e.g., investment in property such as land and building should be accounted for
as long term investment.
Further classification of current and long-term investments should be as specified in the
statute governing the enterprise. In the absence of a statutory requirement, such further
classification should disclose, where applicable, investments in:
Government or Trust securities

Shares, debentures or bonds
Investment properties
Others—specifying nature
QUESTION NO 29
Briefly indicate, how would you determine the cost of investment?
ANSWER:
Cost of Investments: AS-13 lays down following with regard to determination of cost:
Acquisition against monetary consideration: The cost of an investment should include

purchase price and acquisition charges such as brokerage, fees and duties.
It is also possible that an investment has been purchased on cum-interest or cum-

dividend basis, the subsequent receipt of interest/dividend is allocated between pre-
acquisition and post-acquisition periods; the pre-acquisition portion is deducted from
cost as it represents recovery of cost.
Acquisition of right shares: When right shares are acquired, the cost of the right
shares is added to the carrying amount of the original holding. If rights are not acquired
but sold in the market, the sale proceeds are taken to the profit and loss account.
440 ACCOUNTING
However, where the investments are acquired on cum-right basis and the market value
of investments immediately after their becoming ex-right is lower than the cost for
which they were acquired, it may be appropriate to apply the sale proceeds of rights
to reduce the carrying amount of such investments to the market value.
QUESTION NO 30
Summarize the provision contained in the Accounting Standard-13 in respect of valuation

of investments in the financial statements.
ANSWER:
Valuation of Investments: Valuation depends upon classification of investments:
Current investments:
Present in the financial statements at the lower of cost and fair value.
Cost or fair value should be determined either on an individual investment basis (i.e.,
cost and fair value of each investment should be compared separately) or by category
of investment (all types preference shares constitute a category), but not on an
overall/global basis.
Long-term investments:
Present at cost
Provision for diminution (reduction) in the value of the investments, shall be made to
recognise a decline, other than temporary,
Such reduction being determined on individual investment basis
Changes in Carrying Amounts of Investments:

Any reduction in the carrying amount and any reversals of such reductions should be charged
or credited to the profit and loss account.
Disposal of Investments: On disposal of an investment, the difference between the carrying
amount and net disposal proceeds should be charged or credited to the profit and loss
account.
When disposing of a part of the holding of an individual investment, the carrying amount to
be allocated to that part is to be determined on the basis of the average carrying amount
of the total holding of the investment.
QUESTION NO 31
Briefly summarize the discloser requirements of Accounting Standard-13.
ANSWER:
Disclosure: The following information should be disclosed in the financial statements:
Accounting policies for valuation of investments;
Classification of investments;
Amounts included in profit and loss account for interest, dividends from subsidiary
companies, other dividends and rentals separately from long term and current investments.
Gross income should be stated, the TDS being included under Advance Taxes Paid;
Profits and losses on disposal of current and long term investments and changes in the
earning amount of such investments;
Significant restrictions on the right of ownership, realisability of investments or the
remittance of income and proceeds of disposal;
Aggregate amount of quoted and unquoted investments along with market value;
Other disclosures as specifically required by the relevant statute.
QUESTION NO 32
On 01-05-2012, Mr. Mishra purchased 800 equity shares of Rs. 10 each in Fillco Ltd.
@ Rs.50 each from a broker who charged 5%. He incurred 20 paisa per Rs. 100 as cost
of shares transfer stamps. On 31-10-2012, bonus was declared in the ratio 1:4 The
shares were quoted at Rs. 110 and Rs. 60 per share before and after the record date of
bonus shares respectively. On 30-11-2012, Mr. Mishra sold the bonus shares to a broker
who charged 5%. You are required to prepare Investment Account in the books of Mr.
Mishra for the year ending 31-12-2012 and closing value of Investment shall be made at
cost or market value whichever is lower.
ANSWER:
In the books of Mr. MISHRA Investment Account for the year ended 31.12.2012
Date Particular No. of Amount Date Particular No. of Amount

shars shares
(Rs.) (Rs.) (Rs.) (Rs.)
1.5.2012 To bank A/c 800 42,080 30.11.2012 By bank A/c 200 11,400
31.10.2012 To Bonus
Shares 200 - 31.12.2012 By Bal. c/d 800 33,664
442 ACCOUNTING
31.12.2012 To profit on 2,984

sale
1,000 45,064 1,000 45,064
W.N#1
CALCULATION OF COST OF INVESTMENTS PURCHASED ON 1.5.2012
Particulars Amount
Purchase price (800*50) 40,000
Brokerage @ 5% 2,000
Stamp duty (40000*.20/100) 80
Total acquisition cost 42,080
W.N#2
CALCULATION OF PROFIT OR LOSS
ON SALE OF INVESTMENTS ON 30.11.2012
Particulars Amount
Selling price (200*60) 12,000
Brokerage @ 5% (600)
Net selling price 11,400
Cost for sold portion on weighted average cost basis 8,416
(42080/1000shares x 200shares)
W.N#3
VALUATION OF INVESTMENTS
Particulars Amount
Cost Of Investments (42080/1000 X800) 33664
Or
Market Value On Balance Sheet Date (800*60) 48000
Whichever Is Lower 33664
(Note: In the given case, cost of investment is lower than market value due to which there
is no valuation loss)
SELF PRACTICE QUESTIONS
Mr. Harsh provides the following details relating to his holding in 10% debentures (face
value of ` 100 each) of Exe Ltd. held as current assets:
1.4.2018 opening balance - 12,500 debentures, cost ` 12,25,000
1.6.2018 purchased 9,000 debentures@ ` 98 each ex-interest
1.11.2018 purchased 12,000 debentures @ ` 115 each cum interest
31.1.2019 sold 13,500 debentures@ ` 110 each cum-interest
31.3.2019 Market value of debentures @ ` 115 each
Due dates of interest are 30th June and 31st December.
Brokerage at 1% is to be paid for each transaction. Mr. Harsh closes his books on 31.3.2019.
Show investment account as it would appear in his books assuming FIFO method is followed.
SOLUTION
Investment Account of Mr. Harsh for the year ending on 31-3-2019
(Scrip: 10% Debentures of Exe Limited)
(Interest Payable on 30th June and 31st December)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
` ` ` `
` `
1.4.18 To Balance 12,50,000 31,250 12,25,000 30.6.18 By Bank - 1,07,500 -
b/d 21,500 x
100 X 10%
x 1/2
1.6.18 To Bank 9,00,000 37,500 8,90,820 31.12.19 By Bank 1,67,500
(ex- 33,500 x
Interest)
100x10% x
(W.N.1)
1/2
1.11.18 To Bank 12,00,000 40,000 13,53,800 31.1.19 By Bank 13,50,000 11,250 14,58,900
(cum- (W.N.3)
Interest)
(W.N.2)
31.1.19 To Profit 1,34,920 31.3.19 By 20,00,000 50,000 21,45,640
& Loss A/c Balance
-
(W.N.3) c/d
(W.N.4)
31.3.19 To Profit 2,27,500
& Loss A/c
(Bal. fig.)
33,50,000 3,36,250 36,04,540 33,50,000 3,36,250 36,04,540

444 ACCOUNTING
Working Notes:
1. Purchase of debentures on 1.6.18
Interest element = 9,000 x 100 x 10% x 5/12 = ` 37,500
Investment element = (9,000 x 98) + [1%(9,000 x 98)] = ` 8,90,820
2. Purchase of debentures on 1.11.2018
Interest element = 12,000 x 100 x 10% x 4/12 = ` 40,000
Investment element = 12,000 X 115 X 101% less 40,000 = ` 13,53,800
3. Profit on sale of debentures as on 31.1.19
Sales price of debentures (13,500 x ` 110) 14,85,000
Less: Brokerage @ 1% (14,850)
14,70,150
Less: Interest (1,35,000/ 12) (11,250)
14,58,900
Less: Cost of Debentures (13,23,980)

[(12,25,000 + (890820 X 1,00,000/9,00,000)]
Profit on sale 1,34,920
4. Valuation of closing balance as on 31.3.2019:

Market value of 20,000 Debentures at ` 115 = ` 23,00,000
Cost of
8,000 Debentures = 8,90,820 / 9,000 X 8,000 = 7,91,840
12,000 Debentures = 13,53,800
Total 21,45,640
Value at the end is ` 21,45,640, i.e., which is less than market value of ` 23,00,000.
A Limited invested in the shares of XYZ Ltd. on 1st December, 2019 at a cost of `50,000.
Out of these shares, ` 25,000 shares were purchased with an intention to hold for 6 months
and ` 25,000 shares were purchased with an intention to hold as long-term Investment.
A Limited also earlier purchased Gold of ` 1,00,000 and Silver of ` 30,00,000 on 1st April,
2019. Market value as on 31st March, 2020 of above investments are as follows:
Shares
` 47,500 (Decline in the value of shares is temporary.)
Gold ` 1,80,000
Silver ` 30,55,000
How above investments will be shown in the books of accounts of M/s A Limited for the
year ended 31st March, 2020 as per the provisions of AS 13 (Revised)?
SOLUTION:
As per AS 13 (Revised) ‘Accounting for Investments, for investment in shares - if the
investment is purchased with an intention to hold for short-term period (less than one
year), then it will be classified as current investment and to be carried at lower of cost and
fair value.
In the given case ` 25,000 shares held as current investment will be carried in the books
at ` 23,750 (` 47,500/2).
If equity shares are acquired with an intention to hold for long term period (more than one
year), then should be considered as long-term investment to be shown at cost in the Balance
Sheet of the company. However, provision for diminution should be made to recognize a
decline, if other than temporary, in the value of the investments. Hence, ` 25,000 shares
held as long-term investment will be carried in the books at ` 25,000.
Gold and silver are generally purchased with an intention to hold them for long term period
(more than one year) until and unless given otherwise.
Hence, the investment in Gold and Silver (purchased on 1st March, 2019) should continue
to be shown at cost (since there is no ‘other than temporary’ diminution) as on 31st March,
2020. Thus Gold at ` 1,00,000 and Silver at ` 30,00,000 respectively will be shown in the
books.
On 1st April, 2019 Mr. H had 30,000 equity shares of ABC Ltd. at book value of ` 18 per
share (Nominal value 10 per share). On 10th June, 2019, H purchased another 10,000 equity
shares of the ABC ltd. at ` 16 per share through a broker who charged 1.5% brokerage.
The directors of ABC Ltd. announced a bonus and a right issue. The terms of the issues
were as follows:
(i) Bonus shares were declared at the rate of one equity share for every four shares
held on 15th July, 2019.
446 ACCOUNTING
(ii) Right shares were to be issued to the existing equity shareholders on 31st August,
2019. The company decides to issue one right share for every five equity share s
held at 20% premium and the due date for payment will be 30th September, 2019.
Shareholders were entitled to transfer their rights in full or in part.
(iii) No dividend was payable on these issues.
Mr. H subscribed 60% of the rights entitlements and sold the remaining rights for
consideration of ` 5 per share.
Dividends for the year ending 31st March, 2019 was declared by ABC Ltd. at the rate of
20% and received by Mr. H on 31st October, 2019.
On 15th January, 2020 Mr. H sold half of his shareholdings at ` 17.50 per share and
brokerage was charged @1 %.
You are required to prepare Investment account in the books of Mr. H for the year ending
31st March, 2020, assuming the shares are valued at average cost.
SOLUTION
In the books of Mr. H
Investment in equity shares of ABC Ltd. for the year ended 31st March, 2020
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2019 To Balance 30,000 - 5,40,000 2019 By Bank A/c - 60,000 20,000

b/d
April 1 Oct. (W.N. 5)
June To Bank A/c 10,000 - 1,62,400 20X2 By Bank A/c 28,000 - 4,85,100
Jan. (W.N.4)
July To Bonus 10,000 - - March By Balance 28,000 - 3,77,200

Issue 31 c/d (W.N. 6)
(W.N. 1)
Sept. To Bank A/c 6,000 - 72,000

(W.N. 2)
2020 To P&L A/c - - 1,07,900

Jan. (W.N. 4)
March To P&L A/c - 60,000 -

31
56,000 60,000 8,82,300 56,000 60,000 8,82,300
Working Notes:
Bonus Shares = (30,000 + 10,000) divided by 4= 10,000 shares
2. Calculation of right shares subscribed

Right Shares = = 10,000 shares
5
Shares subscribed 10,000 x 60% = 6,000 shares
Value of right shares subscribed = 6,000 shares @ ` 12 per share = ` 72,000
Amount received from sale of rights will be 4,000 shares x ` 5 per share
= ` 20,000 and it will be credited to statement of profit and loss.
4. Calculation of profit/loss on sale of shares-
10,000 shares bonus
56,000
50% of the holdings were sold i.e. 28,000 shares (56,000 x1/2) were sold.
Cost of total holdings of 56,000 shares
= ` 5,40,000 + ` 1,62,400 + ` 72,000– ` 20,000 = ` 7,54,400
Average cost of shares sold would be:
7,54,400
= = ×28,000 = ` 3,77,200
56,000
Sale proceeds of 28,000 shares (28,000 x `17.50) 4,90,000
4,85,100
Less: Cost of 28,000 shares sold (3,77,200)
Profit on sale 1,07,900
5. Dividend received on investment held as on 1st April, 2019
= 30,000 shares x ` 10 x 20%
= ` 60,000 will be transferred to Profit and Loss A/c and
Dividend received on shares purchased on 10th June, 2019
= 10,000 shares x ` 10 x 20% = `20,000 will be adjusted to Investment A/c
6. Calculation of closing value of shares (on average basis) as on 31st March, 2020
7,54,400
= = ×28,000 = ` 3,77,200
56,000
448 ACCOUNTING
Kunal Securities Ltd. wants to reclassify its investments in accordance with AS -13 (Revised).
State the values, at which the investments have to be reclassified in the following cases:
(i) Long term investment in Company A, costing ` 10.5 lakhs is to be re-classified as
current investment. The company had reduced the value of these investments to
` 9 lakhs to recognize a permanent decline in value. The fair value on the date of
reclassification is ` 9.3 lakhs.
(ii) Long term investment in Company B, costing ` 14 lakhs is to be re-classified as current
investment The fair value on the date of reclassification is ` 16 lakhs and book value
is ` 14 lakhs.
(iii) Current investment in Company C, costing `12 lakhs is to be re-classified as long term
investment as the company wants to retain them. The market value on the date of
reclassification is ` 13.5 lakhs.
(iv) Current investment in Company D, costing ` 18 lakhs is to be re-classified as long
term investment. The market value on the date of reclassification is ` 16.5 lakhs.
SOLUTION
As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and carrying
amount at the date of transfer. And where investments are reclassified from current to
long term, transfers are made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the
cost; hence this re-classified current investment should be carried at ` 9 lakhs in the
books.
(ii) The carrying / book value of the long-term investment is same as cost i.e., ` 14 lakhs.
Hence this long-term investment will be reclassified as current investment at book
value of ` 14 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will
be made at ` 12 lakhs as cost are less than its market value of ` 13.5 lakhs.
(iv) Market value of the investment is ` 16.5 lakhs, which is lower than its cost i.e., ` 18
lakhs. Therefore, the transfer to long term investments should be done in the books
at the market value i.e., ` 16.5 lakhs.
QUESTION 37(CA INTER JAN 21)(10 MARKS)
P Ltd. had 8,000 equity shares of K Ltd., at a book value of ` 15 per share (face value of `
10 each) on 1st April,2019. On 1st September, 2019, P Ltd. acquired another 2,000 equity
shares of K Ltd. at a premium of ` 4 per share. K Ltd. announced a bonus and right issue for
existing shareholders.
The term of bonus and right issue were:
(i) Bonus was declared at the rate for two equity shares for every five shares held on
30th September, 2019.
(ii) Right shares are to be issued to the existing shareholders on 1st December, 219. The
Company had issued two right shares for every seven shares held at 25% premium on
face value. No dividend was payable on these shares. The whole sum being payable by
31st December, 2019.
(iii) Existing shareholders were entitled to transfer their right to outsiders either wholly
or in part.
(iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold the
remaining rights for `8 per share.
(v) Dividend for the year ended 31st March,2019 at the rate of 20% was declared by K
Ltd. and received by P Ltd. on 20th January, 2020.
(vi) On 1st February, 2020, P Ltd. sold half of its shareholdings at a premium of ` 4 per
share.
(vii) The market price of share on 31st March,2020 was `13 per share.
You are required to prepare the Investment account of P Ltd. for the year ended 31st
March,2020 and determine the value of shares held on that date, assuming the investment
as current investment. Consider average cost basis for ascertainment fo r cost for equity
shares sold.
450 ACCOUNTING
SOLUTION
Investment Account-Equity Shares in K Ltd.
Date No. of Dividend Amount Date No. of Dividend Amount

shares ` ` shares ` `
1.4.19 To 8,000 - 1,20,000 20.1.20 By bank 16,000 4,000

Bal.b/d (dividend)
[8,000 x 10
X 20%] and
[2,000 x 10
x 20%]
1.9.19 To Bank 2,000 - 28,000 1.2.20 BY BANK 8,000 1,12,000
30.9.19 To Bonus 4,000 —

Issue
31.12.19 To Bank 2,000 - 25,000 31.3.20 By Balance 8,000 84,500

(Right) C/D (W.N.
(W.N.1) 3)
20.1.20 To Profit 16,000

& Loss
A/c
(Dividend
income)
1.2.20 To P& 27,500

L A/c
(profit on
sale)
16,000 16,000 2,00,500 16,000 16,000 2,00,500
Working Notes:
1. Right shares
No. of right shares issued = (8,000 + 2,000 + 4,000)/ 7 X 2= 4,000
No. of right shares subscribed = 4,000 x 50% = 2,000 shares
Value of right shares issued = 2,000 x `12.50 = ` 25,000
No. of right shares sold = 2,000 shares
Sale of right shares = 2,000 x ` 8 = ` 16,000 to be credited to statement of profit
and loss
2. Cost of shares sold — Amount paid for 16,000 shares
`
(`1,20,000 + ` 28,000 + ` 25,000) 1,73,000
Less: Dividend on shares purchased on Sept.1 (since the dividend (4,000)
pertains to the year ended 31st March, 2019, i.e., the pre-acquisition
period)
Cost of 16,000 shares 1,69,000

Cost of 8,000 shares (Average cost basis) 84,500
Sale proceeds (8,000 X `14) 1,12,000
3. Value of investment at the end of the year

Assuming investment as current investment, closing balance will be valued based on
lower of cost or net realizable value.
Here, Net realizable value is `13 per share i.e., 8,000 shares x ` 13 = ` 1,04,000
and cost = 84,500. Therefore, value of investment at the end of the year will be `
84,500.
QUESTION 38 (CA INTER JULY 21 EXAM)(20 MARKS)
Mr. Z has made following transactions during the financial year 2020-21:
Investment 1: 8% Corporate Bonds having face value ` 100.
Date Particulars
01-06-2020 Purchased 36,000 Bonds at ` 86 cum-interest. Interest is payable on
30th September and 31st March every year
15-02-2021 Sold 24,000 Bonds at ` 92 ex-interest
Interest on the bonds is received on 30th September and 31st March.

Investment 2 : Equity Shares of G Ltd having face value ` 10
Date Particulars
01-04-2020 Opening balance 8,000 equity shares at a book value of ` 190 per share
01-05-2020 Purchased 7,000 equity shares@ ` 230 on cum right basis; Brokerage of
1% was paid in addition.
15-06-2020 The company announced a bonus issue of 2 shares for every 5 shares
held
01-08-2020 The company made a rights issue of 1 share for every 7 shares held at
` 230 per share. The entire money was payable by 31.08.2020
25-08-2020 Rights to the extent of 30% of his entitlements was sold @ ` 75 per
share. The remaining rights were subscribed.
452 ACCOUNTING
16-09-2020 Dividend @ ` 6 per share for the year ended 31.03.2020 was received
on 16.09.2020. No dividend payable on Right issue and Bonus issue.
01-12-2020 Sold 7,000 shares @ 260 per share. Brokerage of 1% was incurred extra.
25-01-2021 Received interim dividend @ ` 3 per share for the year 2020-21.
31-03-2021 The shares were quoted in the stock exchange @ ` 260.
Both investments have been classified as Current investment in the books of Mr. Z. On 15th
May 2021, Mr. Z decides to reclassify investment in equity shares of Z* Ltd. as Long term
Investment. On 15th May 2021, the shares were quoted in the stock exchange @ ` 180.
(i) Prepare Investment Accounts in the books of Mr. Z for the year 2020-21, assuming
that the average cost method is followed.
(ii) Profit and loss Account for the year 2020-21, based on the above information.
(iii) Suggest values at which investment in equity shares should be reclassified in
accordance with AS 13.
SOLUTION:
(i) In the books of Mr. Z
Investment in 8% Corporate Bonds Account
For the period 01 April 2020 to 31 March 2021
Date Particulars Nos Interest Amount Date Particulars Nos Interest Amount
(`) (`) (`) (`)
1/6/20 To Bank 36,000 48,000 30,48,000 30/9/20 By Bank A/c 1,44,000
A/c (WN1) (Interest
36,000 x 100 x
8% x 6/12)
15/2/21 To Profit 1,76,000 15/2/21 By Bank A/c 24,000 72,000 22,08,000

& Loss A/c (WN2)
(WN 3)
31/3/21 To Profit & 2,16,000 31/3/21 By Bank A/c 48,000

Loss A/c (Interest
12,000 x 100 x
8% x 6/12)
By Balance c/d 12,000 10,16,000

(WN 4)
Total 36,000 2,64,000 32,24,000 Total 36,000 2,64,000 32,24,000
Note: For computing the interest on the bonds sold on 15 Feb 2021, if number of days (138
days) is taken instead of months, the interest received on 15.02.2021 should be `72,592
and the total interest transferred to Profit & Loss Account should be ` 2,16,592.
Investment in Equity Shares of G Ltd

For the period 1st April 2020 to 31 March 2021
Date Particulars Nos Dividend Amount Date Particulars Nos Dividend Amount
(`) (`) (`) (`)
01/4/20 To Balance 8,000 15,20,000 16/9/20 By Bank A/c 48,000 42,000

b/d (WN 7)
1/12/20
01/5/20 To Bank 7,000 16,26,100 By Bank A/c 7000 18,01,800
A/c (WN 5) 25/1/21 (WN 8)
15/6/20 To Bonus 6,000 31/3/21 By Bank A/c 48,300

Shares (WN 10)
25/8/20 To Bank 2,100 4,83,000 By Balance 16,100 25,00,100

A/c (Right c/d (WN 11)
Shares)
(WN 6)
01/12/20 To Profit & 7,14,800

Loss A/c
(Sale of
shares)
(WN 9)
31/3/21 To Profit & 96,300

Loss A/c
Total 23,100 96,300 43,43,900 Total 23,100 96,300 43,43,900
Working Notes
1. Computation of the Interest element in the bonds purchased on 01 June 2020
No of Bonds purchased 36,000

Face value per bond ` 100
Face value of the bonds purchased ` 36,00,000
Interest Rate 8%
Interest Amount 36,00,000 x 8% x 2/12
` 48,000
454 ACCOUNTING
Cum-interest per bond ` 86

Value of bond excluding interest 36,000 x ` 86 – `48,000
` 30,48,000
2. Computation of the Interest element in the bonds sold on 15 Feb 2021
No of Bonds sold 24,000

Face value of the bonds sold ` 24,00,000
Interest Rate 8%
Interest Amount ` 24,00,000 x 8% x 4.5/12
= ` 722,000
3. Computation of Profit on Sale of Bonds on 15 Feb 2021
No of Bonds sold 24,000

Ex- interest Rate per bond ` 92
Sales proceeds ` 22,08,000
Average Cost of Bonds (30,48,000/36,000) x 24,000
` 20,32,000
Profit on sale of bonds Sale Proceeds – Average Cost
` 22,08,000 – ` 20,32,000
` 1,76,000
4. Valuation of Bonds as on 31 March 2021
No of Bonds held as on 31 Mar 2021 12,000

Average Cost of Bonds (` 30,48,000/36,000) x 12,000
` 10,16,000
5. Computation of the cost of the equity shares purchased on 01 May 2020
No of shares purchased 7,000

Cum right price per share ` 230
Cost of purchase ` 16,10,000
Brokerage @1% ` 16,100
Cost including brokerage ` 16,26,100
6. Right Shares
No of Right Shares Issued (8,000+7,000+6,000)/7 = 3,000 shares

No of right shares sold 3,000 shares x 30% = 900 shares
Proceeds from sale of right shares to be 900 shares x ` 75 = ` 67,500
credited to statement of profit & loss
No of right shares subscribed 3,000-900 = 2,100 shares
Amount of right shares subscribed 2,100 x 230 = ` 4,83,000
7. Computation of Dividend Received on 16 Sept 2020
No of shares held during the period of dividend 8,000 shares

Dividend per share `6
Dividend Amount 8,000 x 6 = ` 48,000
No of shares received after the period of dividend 7,000 shares
(excluding bonus & right shares)
Dividend per share `6
Dividend Amount 7,000 x ` 6 = ` 42,000
The amount of dividend for the period for which the shares were not held by the
investor has been treated as capital receipt. Thus ` 42,000 shall be treated as capital
receipt
8. Sale Proceeds for the shares sold on 1st Dec. 2020
No of shares sold 7,000 Shares

Sale price per share ` 260
Proceeds from sale of share 7,000 x 260 = ` 18,20,000
Less: Brokerage @ 1% ` 18,200
Net Sale Proceeds ` 18,01,800
456 ACCOUNTING
9. Profit on sale of shares on 1st Dec. 2020
Sales Proceeds ` 18,01,800
Average Cost (15,20,000+16,26,100+4,83,000-

42,000)/23,100x7,000
= ` 10,87,000
Profit on sale of shares Sales Proceeds – Average Cost
= ` 18,01,800 - ` 10,87,000
= ` 7,14,800
10. Computation of Amount of Interim Dividend
No of shares held 8,000+7,000+6,000+2,100-7,000

= 16,100
Dividend per share ` 3 per share
Dividend Received 16,100 shares x ` 3 per share
= ` 48,300
11. Valuation of Shares as on 31 March 2021
Cost of Shares (15,20,000 + 16,26,100 + 4,83,000 – 42,000) /

23,100 x 16,100
= 25,00,100
Market Value of Shares ` 260 x 16,100 = ` 41,86,000
Closing stock of equity shares has been value at ` 25,00,100 i.e. cost being
lower than its market value.
(ii) Profit & Loss Account (Extract)

For the period 01 April 2020 to 31 March 2021
To Balance c/d 12,70,600 By Investment in 8% Corporate 1,76,000

Bonds Account (Profit on sale
of bonds)
By Investment in 8% Corporate 2,16,000

Bonds Account (Interest on
bonds)
By Sale of Right Shares 67,500
By Investment in Equity 7,14,800

Shares of G Ltd (Profit on sale
of shares)
By Investment in Equity Shares 96,300
of G Ltd (Dividend Income)
(iii) As per AS 13, when investments are classified from Current Investments to Long
term Investments, transfer is made at Cost and Fair value, whichever is less (as on
the date of transfer). So, in the given case valuation shall be done as follows:
Date of reclassification/transfer – 15 May 2021
Per Unit Cost of 16,100 shares held – ` 25,00,100/16,100 shares – ` 155.29
Market Price/Fair Value per share – ` 180
As the cost per unit is lower than its fair value, the shares are to be transferred at
its cost i.e., at ` 155.29 per share on 15 May 2021
Note:
1. In the eight last line of the question, investment in equity shares of G Ltd. was w
rongly printed as Z Ltd. in the question paper. In the above solution, it has been
considered as investment in G Ltd. If considered as Investment in equity shares in
Z Ltd. (some other investment and not investment in G Ltd.), then the cost of the
investment for shares in Z Ltd. will not be available.
2. The entire amount of sale proceeds from rights has been credited to Profit and Loss
account in the above solution. However, the sale proceeds of rights in respect of 7,000
shares (purchased cum right on 1.5.20) can be applied to reduce the carrying amount
of such investments (without crediting it to profit and loss account) considering that
the value of these shares has reduced after becoming their ex -right. In that case,
` 22,500 (67,500X 7/21) will be applied to reduce the carrying amount of investment
and ` 45,000 will be credited to profit and loss account.
458 ACCOUNTING
QUESTION 39
Mr. X acquires 200 shares of a company on cum-right basis for ` 70,000. He subsequently
receives an offer of right to acquire fresh shares in the company in the proportion of 1:1
at ` 107 each. He does not subscribe but sells all the rights for ` 12,000. The market value
of the shares after their becoming ex-rights has also gone down to ` 60,000. What should
be the accounting treatment in this case?
SOLUTION:
As per AS 13, where the investments are acquired on cum-right basis and the market value
of investments immediately after their becoming ex-right is lower than the cost for which
they were acquired, it may be appropriate to apply the sale proceeds of rights to reduce
the carrying amount of such investments to the market value. In this case, the amount of
the ex-right market value of 200 shares bought by X immediately after the declaration
of rights falls to `60,000. In this case, out of sale proceeds of ` 12,000, ` 10,000 may be
applied to reduce the carrying amount to bring it to the market value and ` 2,000 would be
credited to the profit and loss account.
QUESTION 40
On 1st April, 20X1, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of ` 15 per
share (nominal value ` 10 per share). On 1st June, 20X1, XY Ltd. acquired 5,000
equity shares of ABC Ltd. for ` 1,00,000. ABC Ltd. announced a bonus and right issue.
Bonus was declared, at the rate of one equity share for every five shares held, on 1st
(1)
July 20X1.
Right shares are to be issued to the existing shareholders on 1st September 20X1.
(2)
The company will issue one right share for every 6 shares at 20% premium. No
dividend was payable on these shares.
Dividend for the year ended 31.3.20X1 were declared by ABC Ltd. @ 20%, which was
(3)
received by XY Ltd. on 31st October 20X1.
XY Ltd.
(i) Took up half the right issue.
(ii) Sold the remaining rights for ` 8 per share.
Sold half of its shareholdings on 1st January 20X2 at ` 16.50 per share. Brokerage
(iii)
being 1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31st March
20X2 assuming the shares are being valued at average cost.
SOLUTION:
In the books of XY Ltd.
Investment in equity shares of ABC Ltd. for the year ended 31st March, 20X2
` ` ` `
20X1 To Balance 15,000 - 2,25,000 20X1 By Bank A/c - 30,000 10,000
April 1 b/d Oct. 31 (W.N. 5)
June 1 To Bank 5,000 -- 1,00,000 20X2 By Bank A/c 13,000 - 2,12,355

A/c Jan. 1 (W.N.4)
July 1 To Bonus 4,000 - - M a r c h By Balance 13,000 - 1,69,500

Issue 31 c/d (W.N. 6)
(W.N. 1)
Sept.1 To Bank 2,000 - 24,000
A/c (W.N.
2)
20X2 To P & L - - 42,855
Jan 1 A/c (W.N.
4)
“20X2 To P & L - 30,000 -
March A/c
31
26,000 30,000 3,91,855 26,000 30,000 3,91,855
Working Notes:

15,000 shares + 5,000 shares
Bonus Shares = x 1 = 4,000 shares
5
2. Calculation of right shares subscribed
Right Shares = = 4,000 shares
6
4,000
Shares subscribed by XY Ltd. = = 2,000 shares
2
Value of right shares subscribed = 2,000 shares @ ` 12 per share = ` 24,000
2,000 shares x ` 8 per share = ` 16,000
Amount received from sale of rights will be credited to statement of profit and loss.
460 ACCOUNTING
4. Calculation of profit on sale of shares

4,000 shares bonus
26,000 shares
50% of the holdings were sold
i.e. 13,000 shares (26,000 x1/2) were sold.
Cost of total holdings of 26,000 shares (on average basis)
=` 2,25,000 + ` 1,00,000 + 24,000- ` 10,000 = ` 3,39,000
Average cost of 13,000 shares would be
3,39,000
x 13,000 = Rs.1,69,500
26,000
`
Sale proceeds of 13,000 shares (13,000 x `16.50) 2,14,500
2,12,355
Less: Cost of 13,000 shares (1,69,500)
5. Dividend received on investment held as on 1st April, 20X1

= 15,000 shares x ` 10 x 20%
= ` 30,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1st June, 20X1
= 5,000 shares x ` 10 x 20% = ` 10,000 will be adjusted to Investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares are
declared on 1st July, 20X1 and dividend pertains to the year ended 31.3.20X1.
6. Calculation of closing value of shares (on average basis) as on 31st March, 20X2
3,39,000
13,000 × = ` 1,69,500
26,000
QUESTION 41
The following information is presented by Mr. Z (a stock broker), relating to his holding in
9% Central Government Bonds.
Opening balance (nominal value) ` 1,20,000, Cost ` 1,18,000 (Nominal value of each unit is
` 100).
1.3.20X1 Purchased 200 units, ex-interest at ` 98.
1.7.20X1 Sold 500 units, ex-interest out of original holding at ` 100.
1.10.20X1 Purchased 150 units at ` 98, cum interest.
1.11.20X1 Sold 300 units, ex-interest at ` 99 out of original holdings.
Interest dates are 30th September and 31st March. Mr. Z closes his books every 31st
December. Show the investment account as it would appear in his books. Mr. Z follows FIFO
method.
SOLUTION:
In the Books of Mr. Z
9% Central Government Bonds (Investment) Account
Particulars Nominal Interest Principal Particulars Nominal Interest Principal

Value Value
20X1 ` ` ` 20X1 ` ` `
Jan.1 To Balance 1,20,000 2,700 1,18,000 Mar. By Bank - 6,300 -

b/d (W.N.1) 31 A/c
(W.N.3)
March To Bank A/c 20,000 750 19,600 July By Bank 50,000 1,125 50,000
1 (W.N.2) 1 A/c
(W.N.4)
July 1 To P&L A/c - - 833 Sept. By Bank - 4,050 -

(W.N.5) 30 A/c
(W.N.6)
Oct. 1 To Bank 15,000 - 14,700 Nov. By Bank 30,000 225 29,700

A/c (150 x 1 A/c
98) (W.N.7)
Nov. 1 To P&L A/c - - 200 Dec. By Balance 75,000 1,688 73,633

(W.N.8) 31 c/d
(W.N. 9 &
W.N.10)
Dec. To P&L 9,938

31 A/c (b.f.)
(Transfer)
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333

462 ACCOUNTING
Working Note:
1. Interest element in opening balance of bonds = 1,20,000 x 9% x 3/12 = ` 2,700

2. Purchase of bonds on 1. 3.20X1
Interest element in purchase of bonds = 200 x 100 x 9% x 5/12 = ` 750
Investment element in purchase of bonds = 200 x 98 = ` 19,600
3. Interest for half-year ended 31 March = 1,400 x 100 x 9% x 6/12 = ` 6,300
4. Sale of bonds on 1.7.20X1
Interest element = 500 x 100 x 9% x 3/12 = ` 1,125
Investment element = 500 x 100 = ` 50,000
5. Profit on sale of bonds on 1.7.20X1
Cost of bonds = (1,18,000/ 1,200) x 500 = ` 49,167 Sale proceeds = ` 50,000
Profit element = ` 833
6. Interest for half-year ended 30 September
= 900 x 100 x 9% x 6/12 = ` 4,050
7. Sale of bonds on 1.11.20X1
Interest element = 300 x 100 x 9% x 1/12 = ` 225
Investment element = 300 x 99 = ` 29,700
8. Profit on sale of bonds on 1.11.20X1
Cost of bonds = (1,18,000/ 1,200) x 300 = ` 29,500 Sale proceeds = ` 29,700
Profit element = ` 200
9. Closing value of investment
Calculation of closing balance: Nominal `

value
Bonds in hand remained in hand at
31st December 20X1
1,18,000
From original holding (1,20,000 – 40,000 x 40,000 39,333
1,20,000
50,000 – 30,000) =
Purchased on 1st March 20,000 19,600
Purchased on 1st October 15,000 14,700
75,000 73,633
10. Interest element in closing balance of bonds = 750 x 100 x 9% x 3/12 = ` 1,688
QUESTION 42
On 1st April, 20X1, Mr. Vijay had 30,000 Equity shares in X Ltd. at a book value of ` 4,50,000
(Face Value ` 10 per share). On 22nd June, 20X1, he purchased another 5000 shares of the
same company for ` 80,000.
The Directors of X Ltd. announced a bonus of equity shares in the ratio of one share for
seven shares held on 10th August, 20X1.
On 31st August, 20X1 the Company made a right issue in the ratio of three shares for
every eight shares held, on payment of ` 15 per share. Due date for the payment was 30th
September, 20X1, Mr. Vijay subscribed to 2/3rd of the right shares and sold the remaining
of his entitlement to Viru for a consideration of ` 2 per share.
On 31st October, 20X1, Vijay received dividends from X Ltd. @ 20% for the year ended
31st March, 20X1. Dividend for the shares acquired by him on 22nd June, 20X1 to be
adjusted against the cost of purchase.
On 15th November, 20X1 Vijay sold 20,000 Equity shares at a premium of ` 5 per share.
You are required to prepare Investment Account in the books of Mr. Vijay for the year
ended 31st March, 20X2 assuming the shares are being valued at average cost.
SOLUTION:
Investment Account in Books of Vijay
(Scrip: Equity Shares in X Ltd.)
No. Amount No. Amount

` `
1.4.20X1 To Bal b/d 30,000 4,50,000 31.10.20X1 By Bank — 10,000

(dividend
on shares
22.6.20X1 To Bank 5,000 80,000 acquired on
22.6.20X1)
10.8.20X1 To Bonus 5,000 _
30.9.20X1 To Bank 10,000 1,50,000
(Rights
Shares)
15.11.20X1 To P&L 32,000 15.11.20X1 By Bank (Sale 20,000 3,00,000
A/c (Profit of shares)
on sale of
shares)
31.3.20X2 By Bal. c/d 30,000 4,02,000
50,000 7,12,000 50,000 7,12,000

464 ACCOUNTING
Working Notes:
(1) Bonus Shares = (30,000 + 5,000) / 7 = 5,000 shares

(30, 000 + 5, 000 + 5, 000)
(2) Right Shares = x 3 = 15,000 shares
8
(3) Rights shares sold = 15,000 × 1/3 = 5,000 shares
(4) Dividend received = 30,000 × 10 × 20% = ` 60,000 will be taken to P&L statement
(5) Dividend on shares purchased on 22.6.20X1 = 5,000 × 10 × 20%
= ` 10,000 is adjusted to Investment A/c
(6) Profit on sale of 20,000 shares
= Sales proceeds – Average cost Sales proceeds = ` 3,00,000
(4,50,000 + 80,000 + 1,50, 000 - 10, 000)
Average cost = × 20, 000 = ` 2,68,000
50, 000
Profit = ` 3,00,000– ` 2,68,000= ` 32,000.
(7) Cost of shares on 31.3.20X2
(4,50,000 + 80,000 + 1,50, 000 - 10, 000)
× 30, 000 = ` 4,02,000
50, 000
(8) Sale of rights amounting ` 10,000 (` 2 x 5,000 shares) will not be shown in investment
A/c but will directly be taken to P & L statement.
AS-16: ACCOUNTING FOR BORROWING COSTS 465
ACCOUNTING STANDARD-16
ACCOUNTING FOR BORROWING COSTS
QUESTION NO 1 (PROGRESS PAYMENT)
Given below are some relevant data as regards a construction contract.
Rs. In lacs
Expenditure incurred till 31.3.2000 450
Interest cost capitalized for the year 1999-2000 @ 12% p.a. 24
Amount specifically borrowed till 31.3.2000 200
Assets transferred to construction during 2000-01 100
Cash payments during 2000-01 78
Progress payment received 300
New borrowings during 2000-01 @ 12% 200
The company intends to capitalize total borrowing cost of Rs.48 lacs. Is it possible to do
that as per AS16?
QUESTION NO 2 (CESSATION IN PARTS)
Given below are expenses incurred in three phases of a project relating to construction of
a captive power plant:
(Rs.)
Phase 1 Phase 2 Phase 3 Total

Cash payments 500000 700000 500000
Transfer of assets 500000 200000 300000
Total 1000000 900000 800000 2700000
Money borrowed at the rate of 12% per annum is Rs.2200000.

The phase 1 is complete. How should the company capitalize borrowing costs?
466 ACCOUNTS
QUESTION NO 3 (DEFINITION OF Q.ASSETS)
Parveen jindal Limited obtained term loan during the year ended 31st March, 2002 itd uses
extent of Rs.650lacs for modernization and development of its factory. Building worth
Rs.120lacs were completed and plant and machinery worth ts.350lacs were installed by
31st March, 2002. A sum of Rs.70 lacs has been advanced for Assets the installation of
which is expected in the following year. Rs.110lacs have been utilized for working capital
requirements. Interest paid on the loan of Rs.650lacs during the year 2001-2002 amounted
to Rs.58.50lacs. How should the interest amount be treated in the Accounts of the company.
QUESTION NO 4 (DEFINITION OF Q.ASSETS)
R Ltd. has borrowed Rs.25 crores from financial institution during the financial year 2001-
02. These borrowings are used to invest in shares of A Ltd , a subsidiary company, which
is implementing a new project estimated to cost 50 crores. As on 31st march,2002 since
the said project was not yet complete, the directors of R ltd, resolved to capitalize the
interest on the borrowings amounting to Rs.3 crores and add it to the cost of investments.
As a statutory auditor, please comment.
QUESTION NO 5 (MONTHWISE CAPITALISATION)
XYZ Ltd. Has undertaken a profit for expansion of company of capacity as per the following
details;
Plan (RS.) Actual (RS.)

April 2002 2,00,000 2,00,000
May 2002 2,00,000 3,00,000
June 2002 10,00,000 ---
July 2002 1,00,000 ---
August 2002 2,00,000 1,00,000
September 2002 5,00,000 7,00,000
The company pays to its bankers at the rate of 12% p.a., interest being debited on a monthly
basis. During the half year company had Rs.10 lakhs overdraft upto 31st July, surplus cash in
August and again overdraft of over Rs.10 lakhs from 01-09-2002. The company had a strike
during June and hence could not continue the work during June. Work was again commenced
on 1st July and all the works were completed on 30th September. Assume that expenditure
were incurred on 1st Day of each month. Calculate:
1. Interest to be capitalized
2. Give reasons wherever necessary.
QUESTION NO 6 (CAPITALISATION RATE)
The British Company Limited made the following borrowings:
Amount borrowed Date on which Amount Objective for Related

borrowing is (Rs. In lacs) amount borrowed expenses
made (in lacs)
15%Debentures 1.1.2001 400 General 1.00
10%Term loan 1.4.2001 200 Specific to 2.00
acquisition of plant
and machinery
12%Term loan 1.11.2001 300 General 2.50
15% Debentures and 12% Term loans were raised for the entire project and 10% Term loan
were raised for financing plant and machinery. Qualifying Assets for General Borrowings
are:
(Rs. In Lacs)
Factory shed 100
Plant and Machinery 900
Other fixed assets 100
1100
Show how the allocation of Borrowing costs for specific loan as well as general loans to the
qualifying assets.
468 ACCOUNTS
QUESTION NO 7
G company has incurred an amount of Rs.80 lakhs as borrowing cost during the year ended
31.12.2002 calculated as under:
Amount borrowed Date on which Amount Interest

borrowing is made (Rs. In lacs)
14%Debentures 1.12.2001 200 28
12%Term loan 1.12.2001 300 36
16%Term loan 1.10.2002 400 16
The 16% secured loan has been specifically raised for construction of factory building.
The estimated cost being Rs.6 crores. The plant is likely to be completed in two years. The
other qualifying assets in which these funds have been utilized are:
Plant 1 200Lacs 18months
Internal roads 100Lacs 14 months
Plant 11 100Lacs 20 months
Compute the amount of borrowing costs to be capitalized for the year ended 31.3.2002.
QUESTION NO 8
ICS & company is a sugar company. Due to the regulations by Central Government, the
company cannot decide the quantity to be sold in the market. It is regulated on the basis
of release orders issued by the Central government on a monthly basis. Because of the
seasonal nature of production, the company has to carry large inventories throughout the
year. The average holding period of the sugar stock is generally 12-15 months. In the
years when there is surplus stock of sugar, the government creates a buffer stock and
reimburses the carrying charges to the sugar factories, for the inventory to be carried by
the sugar mill, which includes interest. Sweet & company incurs high interest costs since
borrowings are required to meet the large demand for the working capital and payment
to sugarcane producers. Interest costs are the second largest item in the Profit and Loss
account of the company next to raw material consumed. Can interest be capitalized under
AS 16 as a part of inventory.
QUESTION NO 9
The main object of a company is to undertake plantation activities, raising of teak and other
forestry operations. It takes about 10 to 15 years for the teak trees to grow. The company
has issued Debentures for the fund to meet all the expenses. The company included all cost
of planetary and interest paid in the valuation of stock of teak. Give comment.
QUESTION NO 10
In may, 2004 speed Ltd. took a bank loan to be used specifically for the construction of a
new factory building. The construction was completed in January 2005 and the building was
put to its use immediately thereafter. Interest on the actual amount used for construction
of the building till its completion was Rs.18 lakhs, whereas the total interest payable to the
bank on the loan for the period till 31st March,2005 amounted to Rs.25 lakhs. Can Rs.25
lakhs be treated as a part of the cost of factory building and thus be capitalized on the plea
that the loan was specifically taken for the construction of factory building.
QUESTION NO 11 (EXPECTED COST OF COMPLETION)
A fixed asset is in the construction period. Actual costs incurred till date and expected
costs to complete along with borrowings and planned borrowings are given below:
(Rs. in lacs)
Year Actual Estimated Money Planned

specifically borrowings
borrowed
1 100 60
2 100 60
3 80 40
4 60 40
5 50 30
Borrowed funds costs @ of 12% per annum. Determine the estimated cost of the asset at
the end of 5th year.
470 ACCOUNTS
QUESTION NO 12
Advise X Ltd. on the weighted average cost of borrowing and the interest cost to be
capitalized based on the following:
Total borrowings and interest of X Ltd. for year ending 31.3.2003 are as follows:
Borrowings Date of borrowing Amount (‘000) Interest (‘000)
18% Bank loan 1.5.2001 1,000 180

14% debentures 1.10.2002 2,000 140
16% term loan 1.7.2002 3,000 360
Total 6,000 680
Qualifying assets in which these borrowed funds are utilized are:
Assets Rs.(‘000) Period

Factory shed 2,500 12 months
Plant 1 1,500 9 months
Plant 2 1,000 7 months
QUESTION NO 13
Determine the dates from which capitalization should cease
Building A Stage of completion
Completed in full in march
Building B Completed in full in April but not accessible until Building C is completed.
Building C Completed in December
Building D Completed in June but got electricity connection and was ready for intended
use in July.
QUESTION NO 14
What do you understand by the term Borrowing costs? Briefly indicate the items
Which are included in the expression “Borrowing cost” as explained in AS-16.
ANSWER:
Borrowing costs are interest and other costs incurred by an enterprise In connection with
the borrowing of funds. Borrowing costs may include:
(a) Interest and commitment charges on bank borrowing and short term and long term
borrowings.
(b) Amortization of discounts or premiums relating to borrowings.
(c) Amortization of ancillary costs incurred in connection with the arrangement of
borrowings.
(d) Finance charges in respective of assets acquired under finance leases or under other
similar arrangements
(e) Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs.
QUESTION NO 15
The notes to accounts of Sharma Ltd. for the year ended 31st March includes the following
“interest on bridge loan from bank and financial institutions and on debentures specifically
obtained for the company’s fertilizer project amounting to Rs.1,80,80,000 has been
capitalized during the year, which includes approximately Rs.1,70,33,465 capitalized in
respect of the utilization of loan and debentures money for the said purpose”. Is the
treatment correct? Briefly comment
ANSWER:
For specific borrowing, amount to be capitalized = actual borrowing cost on that borrowing
during the period less income on the temporary investment of those borrowings, if any.
Hence the amount of capitalized borrowing cost can not exceed actual interest cost.
For general borrowing and use of Capitalization rate, AS-16 provides the amount of borrowing
costs Capitalized during a period should not exceed the amount of Borrowing cost incurred
during that period.
The given case is one of specific Borrowings for fertilizer project and hence the Capitalized
Borrowing cost is restricted to the actual amount of interest expenditure that is
Rs.1,70,33,465. Capitalization of Rs.1,80,80,000 has resulted in over statement of profit
and assets by Rs.10,46,535.
Hence the company’s policy is not in accordance with AS-16.
472 ACCOUNTS
QUESTION NO 16
Jindal Ltd. borrowed Rs.12Crores for its capital expansion which lasted for 18 months. The
relevant borrowing rate was 12.5%. During this period the company invested the temporary
surplus funds at 4.5% on short term basis and earned an interest of 25lakhs Which was
offered as miscellaneous income in the profit and loss account. The company has Capitalized
the entire interest cost and added to its plant and machinery. Is this correct?
ANSWER:
For specific borrowing, amount to be capitalized = actual borrowing cost on that borrowing
during the period less income on the temporary investment of those borrowings, if any.
In the above case, the correct accounting treatment will be:
Actual borrowing cost (12crores*12.5%*18months) = 2.25Crores
Less: interest on temporary investment = 0.25Crores
Borrowing cost to be Capitalized under As-16 = 2.00Crores
The company’s treatment in crediting the amount of 0.25crores as miscellaneous income is
not proper. This amount should be used to reduce the amount of Borrowing cost eligible for
Capitalization.
QUESTION NO 17
Harihara Limited obtained a Loan for Rs. 70Lakhs on 15th April 20X1 from a Nationalised
Bank to be utilized as under:
Particulars Rs.
Construction of Factory Shed 25,00,000
Purchase of Machinery 20,00,000
Working Capital 15,00,000
Advance for Purchase of Truck 10,00,000
In March 20X2, Construction of the Factory Shed was completed and Machinery which was
ready for its intended use installed. Delivery of Truck was received in the next Financial
year. Total Interest RS. 9,10,000 charged by the Bank for the Financial year ending
31.03.20X1. Show the treatment of Interest under AS-16.
QUESTION NO 18
Guha Limited borrowed an amount of Rs. 150 Crores on 1st April, for construction of Boiler
Plant at 11% p.a. The Plant is expected to be completed in 4 years. The Weighted Average
Cost of Capital is 13% p.a. The Accountant of Guha Ltd. capitalized interest of Rs. 19.50
Crores for the accounting period ending on 31st March. Due to Surplus Funds out of Rs. 150
Crores, an income Rs. 3.50Crores was earned and credited to P&L A/c. comment.
SOLUTION
1. Capitalization based on the Weighted Average Cost of Capital 13% is not proper in the
above case, since the above is a case of Specific Borrowings.
2. Income received on Temporary Investments should be reduced from the Borrowing
Cost and should not be credited to Profit & Loss A/c. The correct treatment is as
under:-
Actual Interest Cost = Rs. 150 Crores x 11% Rs. 16.50 Crores
Less: Income from Temporary Investments Rs. 3.50 Crores
Borrowing Costs to be Capitalised under AS-16 Rs. 13.00 Crores
QUESTION NO 19
Madhav Limited began construction of a New Plant on 1st April 2013 and obtained a special
Loan of Rs. 8 Lakhs at 10% p.a. to finance the construction of the Plant. The expenditure
that was made on the project of Plant construction was as -
On 01.04.2014 Rs. 10,00,000 On 01.08.2014 : Rs. 24,00,000 On 01.01.2014 Rs.4,00,000
The Company’s other outstanding Non-Specific Loan was Rs. 46,00,000 at an interest of
12% p.a. The construction of Plant was completed on 31.03.2014. Compute the amount of
interest to be capitalized.
474 ACCOUNTS
SOLUTION
Computation of Interest Amount to be capitalized
Date Amount Spent (Rs.) Computation Interest

Amount (Rs)
01.04.2013 10,00,000 Rs. 8,00,000 from Specific Loan = 80,000
Rs. 8,00,000 x 10%
Rs. 2,00,000 from Non Specific 24,000

Loan = Rs.2,00,000 x 12%
01.08.2013 24,00,000 From Non Specific Loan Rs. 1,92,000
2400,000 x 12% x 8/12
01.01.2014 4,00,000 From Non Specific Loan 12,000
Rs.4,00,000 x 12% x 3/12
Total 38,00,000 3,08,000
Total Amount Capitalized = Cost Incurred Rs. 38,00,000 + Interest capitalized under
AS – 16 Rs. 308,000 = Rs. 41,08,000.
QUESTION NO 20
Assume NDA Limited begins construction on a new building on 1st January, 2004. In addition,
NDA Limited obtained a Rs. 1 Lakh loan to finance the construction of the building on 1st
January, 2004 at an annual interest rate of 10%. The company’s other outstanding debt
during 2004 consists of two loans of Rs. 6 Lakhs and Rs. 8 Lakhs with interest rates of
11% and 13% respectively. Expenditures that were made on the building project were as
follows:
January 2004 200000
April 2004 300000
July 2004 400000
December 2004 120000
Compute the cost to be capitalized including borrowing cost
QUESTION NO 21
On 1st April, Aruna Construction Ltd. obtained a loan of rs. 32 Crores to be utilized as
under:-
Particulars Rs. in Particulars Rs. in

Crores Crores
Construction of Sea link across 2 25.00 Working Capital 2.00
cities (work was held up totally for Purchase of Vehicles 0.50
a month during the year due Advance for Tools/Cranes,etc. 0.50
to high water levels) Purchase of Technical know- 1.00
How
Purchase of Equipment’s and 3.00
Machineries
Total Interest charged by the Bank for the relevant financial year in Rs. 80 Lakhs. Show
the treatment of Interest by Aruna Construction Ltd. under AS-16.
SOLUTION
80.00 Lakhs
Effective Interest Rate = = 2.5%.
3,200.00 Lakhs
The treatment for the Total Interest of Rs. 80 Lakhs is as under:-
Note: Interest Amount = Loan Amount = 2.5% Both Amounts in Rs. Lakhs
Purpose/Utilisation Loan Amt. Interest Accounting Treatment

Amount
1. Construction of Sea- 2,500 62.50 Added to Cost of Asset (It is
Link across two cities assumed that during temporary
suspension, some Administrative
Activities were carried on)
2. Purchase of Equipments 300 7.50 Added to Cost of Equipments

& M/c. and Machineries
3. Working Capital 200 5.00 Written off to P&L A/c. as

Expense. as per AS-16
476 ACCOUNTS
4. Purchase of Vehicles 50 1.25 Debited to P&L A/c. (Assumed

immediate delivery taken and it
is ready for use and hence not
a Qualifying Asset)
5. Advance for Tools / 50 1.25 Write off in Profit & Loss

Cranes etc. Account assuming advances
Are not made for Q.A.
6. Purchase of Technical 100 2.50 Added to the cost of Intangibles.
Know-how (know how takes time)
Total Borrowing Cost 3,200.00 80.00

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DEPARTMENTAL ACCOUNTS

QUESTION NO 2 (SIMPLE CASE OF CONTENT RATIO)

Particulars Department P Department Q

Wages 1,00,000 1,60,000

QUESTION NO 3 (MANAGER COMMISSION)

75% of stock is Timber i.e, portion of timber included in furniture= 50,000*75/100=37,500

G.P.ratio of timber Department:= 4,00,000/25,00,000*100=16%

QUESTION NO 5 (PARTNERSHIP MIXED WITH DEPARTMENTAL)

Tailoring Jobs 44,400 2,65,700 Ready-made

QUESTION NO 6 (MARK UP ACCOUNTS)

QUESTION NO 7 (UNIFORM GP RATIO)

QUESTION NO 8 (CHAIN TRANSFERS)

Stock of each department is valued at cost to the department concerned, stocks of A

QUESTION NO 9 (UNIFORM GP RATIO)

QUESTION NO 10 (APPLICATION OF GP RATIO ON NORMAL SELLING PRICE)

Sales at actual price 3,750 1,200 300

(Ans:- closing stock: X=15,000, Y= 20,000, Z= 5,000)

QUESTION NO 11(CHAIN TRANSFER) (same question 8)

12,000 12,000 6,000 12,000 12,000 6,000

GENERAL P & L ACCOUNT

(STOCK RESERVE CAN ALSO BE COMPUTED ALTERNATIVELY 1000 & 2000)

AS WE DISCUSSED IN CLASS IN QUESTION 8.

QUESTION NO 12 (PREVIOUS YEAR GP RATIO)

QUESTION NO 14 (SAME TO SAME AS QUESTION NO.5)

QUESTION NO15 (MARK UP ACCOUNTS)

QUESTION NO 16 (PRODUCTION DEPARTMENTS WITH SERVICE DEPTT.)

Wages and other expenses 1,25,000 25,000

QUESTION NO 17 (CHAIN TRANSFERS)

QUESTION NO 18 (PROBLEM WITHOUT STOCK RESERVE)

Sundry Debtors - 606

1,691 1,550 1,691 1,550

QUESTION NO 19 (PROBLEM WITHOUT STOCK RESERVE)

Calculation of stock reserve:

75% of stock is Timber i.e, portion of timber included in furniture= 50,000*75/100=37,500

G.P.ratio of timber Department:= 4,00,000/25,00,000*100=16%

QUESTION NO 21 (CA IPCC NOV 2009)

QUESTION NO 22 (CA IPCC MAY 2010) (CROSS TRANSFERS)

GROSS PROFIT: X 1,70,000 Y 1,68,000

QUESTION NO 23 (CA NOV 2010 IPCC) (COMMISSION)

Department X Rs. 54,000

Department Y Rs. 40,500

Department Z Rs. 27,000

Rs. Rs. Rs.

Transfer from Department X 22,500 16,500

Transfer from Department Y 21,000 18,000

Transfer from Department Z 9,000 7,500

unrealized profit in the concerned department . as a result, department profit and

manager`s commission after unrealized profit was calculated incorrectly.

QUESTION NO 24 (CA MAY 2011)

on 31st march, 2009.

Purchases (Units 5,000 10,000 15,000

Purchases (Amounts) 8,40,000

Sales (Units) 5,200 9,800 15,300

Selling price (per unit) Rs 40 Rs 45 Rs 50

Closing stock (units) 400 600 700

of Profit on sale is the uniform in each case.

QUESTION 25 (C A IPCC NOV.11)(8MARKS)

Cloth Readymade Clothes

Department Department Rs.

Opening Stock on 1st April, 2010 31,50,000 5,32,000