Corporate Accounting SP Jain

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Corporate Accounting
[For S. Com. IVih Semester Students of Various Universities in Telangana
and also useful for allied courses of other universities]
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S.P. JAIN K.L. NARANG
M.Com., ACM A Formerly Head
Ex-Associate Professor in Commerce Department of Commerce
Shaheed Bhagat Singh College Government College, Chandigarh and
(University of Delhi) Principal, Government College
Sheikh Sarai, Phase II, New Delhi Kapurthata (Punjab)
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N 247444 5 10+314=324, 28x40/16, 20 Form
© 2018, Jain, S .P . ■ Narang, K.L.
Typesetting a t : Times Printographic
ISBN : 978-93-272-8473-7
P R IN TED IN INDIA
At Process World India, C-90, Sec-63, NOIDA
Accounting information is very necessary these days both outside and inside
users specially to perform the functions of management properly and efficiently.
Taking into consideration this aspect, Corporate Accounting has been included in the
course of instructions of B.Com. IVth Semester of various universities in Telangana.
The main objective of including this paper in the syllabus is to make the students
aware of some of the important technical issues of Corporate Accounting.
Although the Principles of Corporate Accounting are same everywhere, yet there
are differences of opinion as to the best methods of applying these principles.
Keeping this in view, an attempt has been made in the book to present the methods
of preparation of accounts in a lucid manner to cater to the best need of the readers.
A large number of graded illustrations, specially prepared and selected from various
examinations have been given with explanatory notes to suit the requirements of
B.Com. IVth Semester examination. Problems of each chapter have been suitably
graded and edited to include questions of topical interest. Objective type, Short
Answer Type and Long Answer type questions have been added to make the
subject-matter more clear to the readers.
We are thankful to the publishers for his hard labour in bringing out the book in
time. At last we would like to add that in a book on a technical subject, such as the
present one, it is futile to expect that printer's devil has not crept in. We shall be
grateful if the mistakes and deficiencies are pointed out to us by the readers.
2018 S.P. JAIN

K.L. NARANG
B.Com. (General) (CBCS) Faculty of Commerce, O.U.
Paper : (BC 404) : CORPORATE ACCOUNTING

Paper: BC 404 Max. Marks : 100
PPW : 5 Hrs. Exam Duration : 3 Hrs.
Objective : To acquire knowledge of AS-14 and Preparation of Accounts of Banking

and Insurance Companies.
UNIT-I : COMPANY LIQUIDATION
Meaning—Modes—Contributory Preferential Payments—Statements of Affairs—
Liquidators' Remuneration—Preparation of Liquidator's Final Statement of
Account (Including Problems)
UNIT-II : AMALGAMATION (AS-14)
Amalgamation: In the Nature of Merger and Purchase—Calculation of Purchase
Consideration Accounting Treatment in the Books of Transferor and Transferee
Companies. (Including Problems).
UNIT-III : INTERNAL RECONSTRUCTION AND ACQUISITION OF BUSINESS
Internal Reconstruction : Accounting Treatment—Preparation of Final Statement
after Reconstruction—Acquisition of Business when New Set of Books are
Opened—Debtors and Creditors Taken Over on Behalf of Vendors—When same
Set of Books are Continued (Including Problems)
UNIT-IV : ACCOUNTS OF BANKING COMPANIES
Books and Registers Maintained—Slip System of Posting—Rebate on Bills
Discounted— Non-performing Assets— Legal Provisions Relating to Final
Accounts—Final Accounts. (Including Problems).
UNIT-V : ACCOUNTS OF INSURANCE COMPANIES AND INSURANCE
CLAIMS
Introduction—Formats— Revenue Account— Net Revenue Account— Balance
Sheet—Valuation of Balance Sheet— Net Surplus—General In su ran ce-
reparation of Final Accounts with Special Reference to Fire and Marine
>surance— Insurance Claims—Meaning—Loss of Stock and Assets—Average
: a .se—Treatment of Abnormal Loss—Loss of Profit. (Including Problems).
CONTENTS
UNIT I
1. Com pany Liquidation I / l - l — 1-40
UNIT II
1. Am algam ation (AS-14) 11/M — 1-68
UNIT III
1. Interna! Reconstruction III/'1-1-1-25
2. Acquisition o f Business III/2-1 -2 -2 3
UNIT IV
1 . Accounts of Banking Com panies IV/1-1— 1-61
U N IT V
1. Accounts o f Insurance Com panies V / M — 1-60
2. Insurance Claims V/2-1 - 2 - 3 4

CONTENTS
|-----:------------- —
UNIT I
1. Com pany Liquidation I / M — 1-40
UNIT II
1. Am algam ation (A S-14) 11/1 -1— 1-68
UNIT III
i '
1. Internal Reconstruction III/1-1— 1-25
2. Acquisition o f Business III/2 1 — 2-23
UNIT IV
| 1. Accounts of Banking Com panies I V / M — 1*61
U N IT V
1. Accounts o f Insurance Com panies V / M — 1-60
| 2. Insurance Claim s V/2-1 -2 - 3 4

O Meaning of Liquidation
Liquidation or winding up is a legal term and refers to the procedure through which the
affairs of a company are wound up by law. Winding up of a company has been defined in the
Companies Act, 2013 as “the process whereby its life is ended and its property is
administered for the benefit of its creditors and members. An Administrator, called a
Liquidator, is appointed and he takes control of the Company, collects its assets, pays its
debts and finally distributes any surplus among the members in accordance with their rights.”
A company being a creation of law, cannot die a natural death. It comes to an end by law
through the process of liquidation or winding up.
The process of winding up of a company is that a liquidator is appointed who is entrusted
with the following duties :
(a) Selling of the assets of the company.
(b) Paying off its liabilities.
(c) If there is any deficiency to pay to the creditors, the shareholders (now called
contributories) are called upon to pay unpaid amount on their shares.
(d) If there is any surplus after clearing off the liabilities, it may be distributed to the
contributories according to their rights under the articles.
(e) After going through the above process, the Registrar of Companies removes the
name of the company from the Register of Companies maintained by his office.
Liquidation of a company can take place under both the cases, namely, when the
company is insolvent and when the company is not insolvent.
O Difference Between insolvency and Liquidation

(/) The term ‘insolvency’ is applicable to individuals, partnership firms and Hindu
undivided families whereas, the term ‘liquidation’ is applicable to a joint stock company. But it
may be mentioned that the insolvency of a company is not a necessary condition for its
liquidation whereas an individual or a partnership firm or Hindu undivided family is said to be
insolvent when liabilities exceed assets or has committed an act of insolvency. A solvent
company can also be liquidated as we will see in the course of discussion.
1/ 1-2 COMPANY LIQUIDATION
(//) Insolvency is governed by the Insolvency Act but liquidation is governed by the
Companies Act.
O M o d e s o f W in d in g u p 01 L iq u id a tio n
As per Section 270 of the Companies Act, 2013, the winding up of a company may be
either—
(a) by the Tribunal; or
(b) Voluntary.
Notwithstanding anything contained in any other Act, the provisions of this Act with
respect to winding up shall apply to the winding up of a company in any of the modes
specified under this Section.
Q C ir c u m s ta n c e s in W h ic h C o m p a n y m a y b e W o u n d U p b y t h e T rib u n a l
Section 271 of the Companies Act, 2013 provides as follows :
(1) A company may, on a petition under Section 272, be wound up by the Tribunal-
la) if the company is unable to pay its debts;
(b) if the company has, by special resolution, resolved that the company be wound
up by the Tribunal;
(c) if the company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign states, public order,
decency or morality;
(cf) if the Tribunal has ordered the winding up of the company under Chapter XIX (of
the Companies Act, 2013 dealing with revival and rehabilitation of sick
companies);
(e) if on an application made by the Registrar or any other person authorised by the
Central Government by notification under this Act, the Tribunal is of the opinion
that the affairs of the company have been conducted in a fraudulent manner or
the company was formed for fraudulent and unlawful purpose or the persons
concerned in the formation or management of its affairs have been guilty of fraud,
misfeasance or mis-conduct in connection therewith and that it is proper that the
company be wound up;
(/) if the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial
years; or
(g) if the Tribunal is of the opinion that it is just and equitable that the company
should be wound up.
Q C ir c u m s t a n c e s in w h ic h C o m p a n y m a y b e W o u n d u p V o iu n t a r ily
As per Section 304 of the Companies Act, 2013, a company may be wound up
voluntarily—
(a) if the company in general meeting passes a resolution requiring the company to be
wound up voluntarily as a result of the expiry of the period for its duration or on the
occurrence of any event in respect of which the articles of association provide that the
company should be dissolved; or
- if the company passes a special resolution that the company be wound up voluntarily.
COMPANY LIQUID A TION 1/1-3
Q D e c la r a t io n o f S o lv e n c y in c a s e o f P r o p o s a l t o W in d u p V o lu n t a r ily
As per Section 305 of the Companies Act, 2013, where it is proposed to wind up a
company voluntarily, its director or directors, or in case the company has more than two
directors, the majority of its directors, shall at a meeting of the Board, make a declaration
verified by an affidavit that the company has no debt or it will be able to pay its debts in full
from the proceeds of assets sold in voluntary winding up. In other words, only a solvent
company can be wound up voluntarily.
0 C o n s e q u e n c e s o f W in d in g U p
Following are the consequences of winding up :
1. An officer, called a liquidator is appointed and he takes over the administration of the
company. In case of compulsory winding up, the official liquidator attached to the High Court,
functions as liquidator of the company. In case of voluntary winding up by members, such an
official is appointed by the members and in case the voluntary winding up is by creditors, both
the members and creditors may appoint such an official. In case members and creditors
appoint different persons as liquidators, the creditors’ nominee shall act.
2. The powers of the Board of Directors will cease and will now vest the liquidator.
3. Winding up order or resolution of voluntary winding up shall operate as a notice of
discharge to all members of the company. The members of the company will be known as
contributies.
4. Liquidator of the company will prepare a list of the contributories who may be made
liable to contribute to the assets of the company in case assets are not sufficient to meet the
claims of various claimants. In case there is a surplus in the assets, the liquidator of the
company will prepare a list of those members, who are entitled to share this surplus.
5. Liquidator of the company will collect and realise its assets and distribute the proceeds
among right claimants as per the procedure of the law.
6. Winding up ultimately leads to dissolution of a company. The company’s life will come
to an end and it will be no more an artificial person in the eyes of the law.
0 C o n t r ib u t o r y
A contributory is “every person liable to contribute to the assets of a company in the event
of its being wound up, and includes a holder of fully paid-up shares, and also any person
alleged to be contributory”. A contributory can be either a present member or a past member.
A present member is that member whose name is included in the register of members when
the company is wound up. He is liable to contribute the amount remaining unpaid on the
shares held by him if the amount is needed to make the payment to the legal claimants. In the
case of a company limited by guarantee, he is liable for the amount undertaken to be
contributed by him in the event of the company being wound up. The holders of fully paid up
shares are also treated as contributories even though they are not to contribute to the assets
of the company because it is necessary to complete a list of all the members of the company
so that the court may be able to know, not only those who will contribute but also who will
share the surplus assets, if any. The present members are included in “A” List of
contributories. It may be remembered that a contributory’s liability is legal and not contractual
as he cannot set off his debts against his liability for unpaid amount on shares held by him
even if there is an express agreement to do so.
On the other hand, past members are those members who ceased to be shareholders
(except by death) within one year of the winding up of the company and can be called upon to
1/ 1-4 COMPANY LIQUIDA TION
pay if the present contributories are not able to pay the liabilities of the company. As regards
past members, Section 285 of the Companies Act, 2013 provides as follows:
(a) A past member is not liable to contribute in respect of any liability of the company
contracted after he ceased to be a member of the company.
(b ) A past member is not liable to contribute if he ceased to be a member of the company
for one year or upward before the commencement of the winding up.
(c) A past member is liable to contribute only if it appears to the tribunal that present
members are unable to make the contributions required to be made by them in
pursuance of the Companies Act.
(d ) In the case of a company limited by shares, no contribution is required from any
member excluding the amount (if any) unpaid on the shares in respect of which he is
liable as such member.
(e) In the case of a company limited by guarantee, no contribution is required from any
member excluding the amount undertaken to be contributed by him in the event of the
company being wound up.
Past members are included in “B” List of contributories.
Fraudulent Preference. Fraudulent preference takes place when one creditor is
preferred to another creditor in the matter of payment of his dues. The object of the
Companies Act is p a r i p a s s u distribution amongst creditors ; so it has been provided in
Section 328 that every transfer of property or money mado within fi months before the
commencement of the winding up, which amounts to fraudulent preference, is invalid.
V o lu n ta ry T ra n s fe r. All voluntary transfers, made by the company within a period of one
year before the presentation of a petition for winding up or the passing of a resolution for
voluntary winding up, are void as against the liquidator.
E m p lo y e e s , W o rk m e n a n d O ffic e rs . As per Section 277 of the Companies Act, a winding
up order operates as a notice of discharge to the employees and officers of the company,
except when the business of the company is being continued. A voluntary winding up also
operates as a notice of discharge.
In te r e s t o n L ia b ilitie s . Interest on liabilities is payable upto the date of actual payment if
the company is solvent. But if the company is insolvent, interest on liabilities is payable up to
the date of commencement of insolvency proceedings.
Liquidator. For the purposes of winding up of a company by the Tribunal, the Tribunal at
the time of passing of the order of winding-up, shall appoint an official liquidator or a liquidator
from the panel maintained by the Central Government consisting of the names of the
chartered accountants, advocates, company secretaries, cost accountants and such other
professionals as may be notified by the Central Government having at least ten years’
experience in company matters. The company must submit a Statement of Affairs to such
liquidator within 21 days of the passing of the winding up order. This statement shows assets
at realisable values and liabilities at values expected to rank and shows surplus or deficiency
as per list H. The Official Liquidator must convene a meeting of the creditors within 2 months
of the winding up order to ascertain whether they like to appoint a “Committee of Inspection.”
He should also convene a contributories’ meeting within 14 days of the above meeting to
ascertain their views on the “Committee of Inspection”. The committee so appointed should
not have more than 12 members, made up of equal number representing creditors and
contributories. In case of voluntary winding up, the voluntary liquidator is appointed by a
^solution in general meeting of the company and/or of the creditors. The general duties of
c-idator are to take into his custody or under his control all the property of the company
=rc *.s effects and actionable claims and pay the right claimants.
COMPANY LIQUID A TION 1/ 1-5
O Order of Payment
Amounts realised from the assets not specifically pledged and the amounts
contributed by the contributories must be distributed by the liquidator in the following
order:
(1) Expenses of winding up including the liquidator’s remuneration.
(2) Creditors, (i . e debentures etc.) secured by a floating charge on the assets of the
company.
(3) Preferential creditors.
(4) Unsecured creditors.
(5) The surplus, if any, amongst the contributories, (i.e. preference shareholders and
equity shareholders) according to their respective rights and interests.
(a) Preference Shareholders. Preference shareholders get the priority over the equity
shareholders as regards the payment of their capital and the dividend payable upto the date
of the winding up. The holders of cumulative preference shares are entitled to arrears of
dividend if there is a surplus after the return of the amount of the equity share capital or if the
Articles state that arrears of preference dividend are to be paid before anything is paid to
equity shareholders. In the latter case, the arrears of dividend must be paid even by
contributions from equity shareholders if equity shares are partly paid.
(b) Equity Shareholders. Any surplus left after making the payment of the preference
shareholders is distributed among equity shareholders pari passu if all shares are equally
paid up. But if the shares are called in unequal proportions, the liquidator should see that the
capital contribution by the shareholders should be the same. For example, a company has
issued equity shares of ? 10 each, but if the shares of some shareholders have been called
up f 7 per share and those of other shareholders f 5 per share. Further, if the amount
realised from the sale of the assets is not sufficient to pay the liabilities and the cost of the
winding up, the liquidator will make a call of f 2 per share on those shareholders who have
paid f 5 per share to bring their capital contribution equal to other shareholders. A further call,
if necessary, would be made equally on all equity shareholders. In case of surplus of assets,
the shareholders who have paid ? 7 per share will get preference of payment of f 2 per share
and if still there is a surplus, all equity shareholders will be entitled to pari passu distribution.
It may be remembered that calls-in-advance will have priority in repayment over the
paid up share capital of that class.
O Preferential Creditors
Preferential creditors are paid out of the proceeds of the assets not specifically pledged,
surplus from the assets specifically pledged and amount contributed by the contributories
after retaining the amount necessary for the payment of legal expenses, cost of winding up
and liquidator’s remuneration but before making any payment to other claimants. It must be
remembered that preferential creditors are in the nature of unsecured creditors who have
priority of claims over other unsecured creditors not because of any security held by them but
because of Section 327 of the Companies Act, 2013. Following are the preferential creditors :
(a) All revenues, taxes, cesses and rates, whether payable to the Government or local
authority, due and payable by the company within 12 months before the date of
commencement of winding up.
(b) All wages or salaries (including commission earned) of any employee in respect of
services rendered to the company and due for a period not exceeding four months within the
said twelve months before the relevant date such sum may be specified by the Government in
the Official Gazette in respect of each claimant. Such sum has been specified as ? 20,000
w.e.f. from March, 1997, Maximum preferential amount for each such claimant is f 20,000.
Salaries due to an officer like director, manager, secretary, assistant secretary, branch
manager etc. are not preferential.
(c) All accrued holiday remuneration becoming payable to an employee on account of the
termination of his employment before or on account of winding up.
Note. Persons who advance money for the purpose of making preference payments
under (b) and (c) above will be treated as preferential creditors.
(d) Unless the company is being wound up voluntarily for the purpose of reconstruction or
amalgamation, all contributions payable during the 12 months previous to the winding up, by
the company as the employer of any person, under Employees’ State Insurance Act, 1948 or
any other law for the time being in force.
(e) All sums due as compensation under Workmen’s Compensation Act, 1923 unless the
winding up is for reconstruction or amalgamation.
(/) All sums due to an employee from a provident fund, pension fund, gratuity fund, or any
other fund maintained for the welfare of the employees.
(g) The expenses of any investigation held under section 213 or 216 in so far as they are
payable by the company.
The foregoing preferential creditors rank equally among themselves and must be paid in
full unless the assets are not sufficient to meet their claims, in which case they shail abate
proportionately.
Due to Workers. In order to protect the Interest of workers, Section 325 of the
Companies Act, 2013 the legitimate dues of the workers will rank pari passu with secured
creditors in the event of the liquidation of the company. The security of every secured creditor
shall be deemed to be subject to a pari passu charge in favour of workmen to the extent of
workmen’s portion therein. Workmen in relation to a company means the employees of the
company, being workmen within the meaning of clause(s) of Section 2 of the Industrial
Disputes Act, 1947.
Following persons are specifically excluded from the definition of workman.
“(1) A person who is subject to the Army Act, 1950, or the Air Force Act, 1950 or the Navy
(Discipline) Act, 1934.
(2) A person who is employed in the police service or as an officer or other employee of a
prison.
(3) A person who is employed mainly in a managerial or administrative capacity.
(4) A person who is employed in a supervisory capacity and draws wages exceeding
? 1,600 per month or exercises functions mainly of a managerial nature.”
Section 326 of the Companies Act, 2013 makes provision for overriding preferential
payment. This section gives priority in payment to workmen’s dues and debts due to secured
creditors to the extent they could not be paid because of the former, ranking pari passu with
the latter as provided in section 325. The unpaid amount of dues to workmen and secured
creditors after making payment as per section 325 shall be paid in full, unless the assets are
insufficient to meet them, in which case they shall abate in equal proportions.
Q Statement of Affairs
Where the court has made a winding up order or appointed the official liquidator as
provisional liquidator unless the court in its otherwise order, a statement as to the affairs of
the company (in the prescribed form verified by an affidavit) shall be made out and submitted
to the official liquidator. This is known as a Statement of Affairs. This statement is to be
submitted to the liquidator within 21 days from the date of winding up order (or within such
extended time not exceeding three months as the liquidator or the court permits). This
statement must contain the following particulars :
COMPANY LIQUIDATION 1/ 1-7
(/) The assets of the company, stating separately cash in hand, cash at bank and
negotiable securities.
(//) The names and addresses of its creditors stating separately the amount of secured
and unsecured debts.
(Hi) In case of secured debts particularly of the securities held by creditors, their value
and dates on which they were given.
(/V) The debts due to the company and names and addresses of the persons from whom
they are due and amount likely to be realised.
(v) Such further information as may be required by the official liquidator.
Statement of Affairs is always open to inspection by any person stating in writing, to the
creditor or contributory of the company, on payment of the prescribed fee.
FORM O F STATEM ENT O F AFFAIRS
Statement as to the affairs of.... Ltd., on the....day of.... 20....being the date of the winding up
order appointing Provisional Liquidator or the date directed by the Official Liquidator as the
case may be showing assets of estimated realisable values and liabilities expected to rank.
A sse ts n o t s p e c ia lly p le d g e d (as p e r lis t ‘A ’) E stim a te d
re a lisa b le
value
r
Balance at Bank
Cash in Hand
Marketable Securities
Bills Receivable
Trade Debtors
Loans & Advances
Unpaid Calls
Stock-in-T rade
Work-in-Progress
Freehold Property, Land & Buildings

Leasehold Property
Plant & Machinery
Furniture Fittings, Utensils etc.
Investments other than marketable securities
Livestock
Other Property, viz.,
*Assets specially (a) (b) (c) (d)

pledged Estimated Due to Deficiency Surplus
(as per List ‘B’) realisable Secured ranking as carried to
values Creditors unsecured last column
Freehold Property
Estimated surplus from assets specially pledged

Estimated total assets available for preferential creditors,
debentureholderssecured by a floating charge, and unsecured
creditors (carried forward).
1/1 8 COMPANY LIQUID A TION
SUMMARY OF GROSS ASSETS
Gross realisable value of assets specially pledged

Other Assets
Gross Assets
G ross L ia b ilitie s
L ia b ilitie s (to be deducted from surplus or added to deficiency as the
? case may be)
Secured creditors (as per list ‘B’) to the extent to which
claims are estimated to be covered by assets specially
pledged item (a) or (£>) whichever is less
[(Insert in ‘Gross Liabilities’ column only)
Preferential Creditors (as per list ‘C ’)]
Estimated balance of assets available for debentureholders
secured by a floating charge and unsecured creditors) **
Debentureholders secured by a floating charge (as per list ‘D’)
Estimated Surplus/ Deficiency as regards Debentureholders
Unsecured Creditors (as per list ‘E’)
Estimated unsecured balance of claims of creditors partly
secured on specific assets, brought from preceding page
Trade Accounts
Bills Payable
Outstanding Expenses
Contingent liabilities (state nature)
Estimated Surplus/Deficiency as regards
Creditors (being difference between
Gross Assets and Gross Liabilities
Issued and Called-up Capital :

Preference Shares o f......... each
Called-up (as per list ‘F’)
Equity Shares of....each
.... Called-up (as per list ‘G’)
Estimated Surplus/Deficiency as regards Members (as per list ‘H’)

'Notes. 1. All assets specially mortgaged, pledged, or otherwise given as security should be
included under this head. In the case of goods given as security, those in possession of the company
and those not in possession, should be separately set out.
2. The figures must be read subject to the following :
(a) There is no unpaid capital liable to be called up or the nominal amount of unpaid capital liable to
be called up is ?.... estimated to produce f ..... which is not charged in favour of Debentureholders.
(£>) The estimates are subject to cost of the winding up and to any surplus or deficiency on trading
pending realisation of assets.
O Procedure of Preparation of Statement of Affairs

For the preparation of Statement of Affairs, the following points are worth-noting :
(1) First of all, take all assets which are not specifically pledged. These assets are taken
at their realisable values and not at book values because creditors for their payment are
COMPANY LIQUIDATION 1/ 1-9
concerned with the realisable values of the assets. It may be noted that calls in arrears are
also treated as an asset not specifically pledged to the extent of estimated realisable amount,
but uncalled capital is not shown as an asset.
(2) Add to the realisable value of the assets not specifically pledged, any surplus from
assets specifically pledged.
(3) From the total as obtained by adding (1) and (2) first deduct the amount of preferential
creditors, then the amount of creditors having a floating charge (e.g., debentures) and the
result will be surplus or deficiency as regards debentureholders.
(4) Deduct the amount of unsecured creditors from the figure as obtained in (3) above ;
the resultant figure will be either surplus or deficiency as regards unsecured creditors.
(5) Add the amount of paid up share capital to the figure as obtained in (4) above ; the
result will be either surplus or deficiency as regards members or contributories.
(6) Any likely expenditure on liquidation should be ignored. A note may simply be given
that deficiency or surplus as shown by the Statement of affairs is subject to the cost of
liquidation.
(7) Any unrecorded asset or liability should be shown both in the Statement of Affairs and
the Deficiency or Surplus Account to make double entry complete.
(8) Personal guarantee given by any party including the guarantees given by the directors
for loans raised by the company should be ignored while preparing the Statement of Affairs.
O Lists to be Attached to the Statement of Affairs

Following lists are attached to the Statement of Affairs :
List A gives a complete list of assets not specifically pledged in favour of secured
creditors. Creditors having a floating charge on the assets are considered as having assets
not specifically pledged with them ; so such assets art, included in this list.
List B gives the list of assets which are specifically pledged in favour of fully secured and
partly secured creditors.
List C gives the list of preferential creditors.
List D gives the list of debentureholders and other creditors having a floating charge on
the assets.
List E gives the names, addresses and occupations of unsecured creditors and the
amount due.
List F gives the names and number and value of shares held by various preference
shareholders.
List G gives the names and holdings of equity shareholders.
List H shows how Deficiency or Surplus in the Statement of Affairs has been arrived at,
i.e., it explains the reasons responsible for the surplus or deficiency. According to the law, the
period covered by Deficiency or Surplus must commence on a date not less than 3 years
before the winding up order, or if the company has not been incorporated for the whole of that
period, the date of incorporation of the company, unless the official Liquidator otherwise
agrees.
IL L U S T R A T IO N 1. Following information was extracted from the books of a
limited company on 31st December, 2017 on which date a winding up order was made :
?
Cash in hand 5.000
Stock-in-trade (estimated to produce ? 15,000) 20,000
Fixture and Fittings (estimated to produce ? 2,100) 3.000
1/ 1-10 COMPANY LIQUID A TION
Plant and Machinery (estimated to produce f 15,600) 15,000

Freehold Land and Buildings (estimated to produce ? 45,000) 30,000
Book Debts (Estimated to produce ? 5,200) 8,200
Unsecured Creditors 70,000
Preferential Creditors 2,000
Creditors fully secured (value of securities ? 11,000) 9,000
Creditors partly secured (value of securities ? 6,000) 10,000
Bank Overdraft, secured by a second charge on all the assets
of the company 8,000
10% Debentures secured by floating charge on all the assets of the
company (interest paid to date) 50,000
Equity Share Capital—8,000 shares of ? 10 each 60,000
11% Preference Share Capital—6,500 shares of ? 10 each 65,000
Calls in Arrear on equity shares (Estimated to produce ? 1,000) 2,500
Make out Statement of Affairs as regards Creditors and Contributories.
S O L U T IO N
STATEMENT OF AFFAIRS OF
a s a t 3 1 s t D e ce m b e r, 2 0 1 7
E stim a te d
R e a lisa b le
Value
f
Assets not specifically pledged (as per List A ) :
Cash in hand 5.000
Sundry Debtors 5,200
Calls in Arrear 1.000
Stock-in-Trade 15.000
Freehold Land and Buildings 45.000
Plant and Machinery 15,600
Fixtures and Fittings 2,100
88,900
Assets specifically pledged (as per List B) :
E stim a te d D ue to D e ficie n cy S u rp lu s
re a lisa b le se cu re d ra n kin g as c a rrie d to
value cre d ito rs u n se cu re d la s t colum n
r 7 f
11,000 9,000 — 2,000
6,000 10,000 4,000 --
17,000 19,000 4,000 2,000
Estimated surplus from assets specifically pledged 2,000

Estimated total assets available for preferential creditors, debenture-
holders and bank overdraft secured by a floating charge and unsecured creditors. 90,900
Summary of Gross Assets
r
Gross realisable value of assets specifically pledged 17,000
Other Assets 88,900
1,05,900
COMPANY LIQUIDA TION 1/1-11
G ross
Liab ilitie s L ia b ilitie s
r Secured Creditors (as per list B) to the extent to which claims are
15,000 estimated to be covered by assets specifically pledged
2,000 Preferential creditors (as per list C) 2,000
Estimated balance of assets available for debentureholders and bank
overdraft secured by a floating charge, and unsecured creditors 88,900
50,000 Debentureholders (as per list D) 50,000
38,900
8,000 Bank Overdraft (as per list D) 8,000
Estimated Surplus as regards debentureholders and bank overdraft 30,900
Unsecured Creditors (as per list E)
Estimated unsecured balance of claims of creditors
74,000 partly secured on specific assets 4,000
74,000
Estimated deficiency as regards creditors (being the difference
1,49,000 between gross liabilities and gross assets) 43,100
Issued and called up capital :
6,500 Preference Shares of ? 10 each, fully paid
(as per list F) 65,000
6,000 Equity Shares of ? 10 each, fully called up ?
(as per list G) 60,000
Less : Irrecoverable unpaid calls 1,500
58,500
Estimated Deficiency as regards members or contributories
(as per list H) 1,66,600
O Deficiency Account
The official liquidator will specify a date for period (minimum three years) beginning with
the date on which information is supplied for preparation to an account to explain the
deficiency or surplus. On that date either assets could exceed capital plus liabilities i.e. there
could be reserve or there could be a deficit or negative balance in Surplus Account.
Deficiency account is divided into two parts :
1. The first part starts with the deficit (on the given date) and contains every item that
increases deficiency or reduces surplus such as losses, dividend etc.
2. The second part starts with the surplus on the given date and indicate all profits.
If the total of the first exceeds that of the second three could be a deficiency to the extent
of the difference and if the total of the second part exceeds that of the first, there could be a
surplus, the form of deficiency or surplus account is given below :
_________FORM OF DEFICIENCY OR SURPLUS ACCOUNT (LIST H ) __________
Items contributing to Deficiency or Reducing Surplus : ?
1. Excess (if any) of Capital and Liabilities over Assets on the........ 20............ as
shown by Balance Sheet (copy annexed)
2. Net dividend and bonus declared during the period from............20............ to
the date of statement.
3. Net trading losses (after charging items shown in note below) for the same
period.
1/1-12 COMPANY LIQUID A TION
4. Losses other than trading losses written off or for which provision has been
made in the jpooks during the same period (give particulars or annex schedule)
5. Estimated losses not written off or for whrh provision has been made for
purposes of preparing the statement (give particulars or annex schedule)
6 . Other items contributing to Deficiency or reducing Surplus :
Items reducing Deficiency (or Contributing) to Surplus :

7. Excess (if any) of assets over capital and liabilities on the......... 20..........as
shown in the Balance Sheet (copy annexed)
8 . Net trading profit (after charging items shown in note below) for the period
from the........ 19.........to the date of Statement.
9. nrofits and income other than trading profits during the same period
(give particulars or annex schedule)
10. Other items reducing Deficiency or contributing to Surplus :
Deficiency/Surplus as shown by the Statement of Affairs
Note, as to Net Trading Profits and Losses :

Particulars are to be inserted here (so far as applicable) of the items mentioned below,
which are to be taken into account in arriving at the amount of net trading profits
or losses shown in this account.
Provisions for depreciation, renewals or diminution in value of fixed assets
Charges for Income-tax and other Indian taxation on profits
Interest on debentures and other fixed loans
Payments to directors made by the company required by law to be disclosed in the
accounts
Exceptional or non-recurring expenditure : -------------------
Less : Exceptional or non-recurring receipts : ------------------
Balance, being other trading profits or losses
Net trading profits or losses as shown in Deficiency or Surplus Account above

Signature Date.............20........
Note. In case the company in liquidation has not maintained proper books of accounts after a
certain date, a trial balance should be prepared with available information by taking items at their book
values. Any difference found in the trial balance is the profit or loss made by the company during the
period the company did not maintain books of accounts.
IL L U S T R A T IO N 2. Following information is extracted from the books of Lucky
Ltd. on 31st July, 2017 on which date a winding up order was made.
Unsecured Creditors 3,50,000

Salaries due for five months 20,000
Managing Director’s Remuneration due 30,000
Bills Payable 1,06,000
Debtors—Good 4,30,000
—Doubtful (estimated to produce ? 62,000) 1,30,000
-B a d 88,000
Bills Receivable (Good ? 10,000) 16,000
Bank Overdraft 40,000
Land (estimated to produce ? 5,00,000) 3,60,000
Stock (estimated to produce ? 5,80,000) 8,20,000
Furniture and Fixtures 80,000
Cash in hand 4,000
Estimated liabilities for bills discounted 60,000

Secured creditors holding first mortgage on land 4,00,000
Partly secured creditors holding second mortgage on land 2,00,000
Weekly wages unpaid 6,000
Liabilities under Workmen’s Compensation Act, 1925 2 900
Income-tax due 8,000
5,000 9% Mortgage Debentures of ? 100 each interest payable
to 30th June and 31st December, paid to 30th June, 2017 5,00,000
Share Capital :
20.000 10% Preference Shares of ? 10 each 2,00,000
50.000 Equity Shares of ? 10 each 5,00,000
General Reserve since 31st December, 2013 1,00,000
In 2013, the company earned profit of ? 4,50,000 but thereafter it suffered trading
losses totalling ? 5,84,000. The company also suffered a speculation loss of ? 50,000
during the year 2014. Excise authorities imposed a penalty of ? 3,50,000 in 2015 for
evasion of tax which was paid in 2016.
From the foregoing information, prepare Statement of Affairs and Deficiency
Account.
S O L U T IO N
?
Unsecured Creditors as per List E :
One month’s Salaries (4 months’ salaries are preferential) 4,000
Managing Director’s Remuneration 30,000
Bills Payable 1,06,000
Liability on Bills Discounted 60,000
Amount uncovered in respect of partly secured creditors
(? 2 ,00,000 - ? 1 ,00,000 value of security of second mortgage on land) 1 ,00,000
6,90,000
Preferential Creditors as per List C : ?
Salaries for 4 months 16,000
Weekly Wages 6,000
Liabilities under Workmen Compensation Act, 1925 2,000
Income Tax due 8,000
32,000
Lucky Ltd. (in Liquidation)
STATEMENT OF AFFAIRS
as on 3 1 s t July, 2 0 1 7
A sse ts E stim a te d
R e alisable
Value
?
Assets not specifically pledged (as per List A) :
Cash in hand 4,000
Bills Receivable 10,000
Trade Debtors 4,92,000
Stock 5,80,000
Furnitures and Fixtures 80,000
Assets specifically pledged (as per List B)

Estimated Due to Deficiency Surplus
realisable secured ranking as carried to
value creditors unsecured last column
? ? ? ?
Land 5,00,000 6,00,000 1,00,000
Estimated surplus from assets specifically pledged Nil
Estimated total assets available for preferential creditors, debentureholders
secured by a floating charge and unsecured creditors 11,66,000
Summary of Gross Assets :

Specifically pledged 5,00,000
Others 11,66,000
16,66,000
G ross
L ia b ilitie s L ia b ilitie s
(to be deducted from surplus or added to deficiency as the case may be)
Secured Creditors (as per list B) to the extent to which claims are
5,00,000 estimated to be covered by assets specifically pledged
32,000 Preferential Creditors (as per list C) 32,000
11,34,000
Estimated balance of assets available for debentureholders
secured by a floating charge and unsecured creditors
Debentureholders secured by a floating charge (as per list D)
5,00,000
5,03,750 Interest due for 1 month (July, 2017) @ 9% p.a. 3,750
5,03,750
Estimated surplus as regards debentureholders 6,30,250
6,90,000 Unsecured creditors (as per list E) 6,90,000
Estimated deficiency as regards creditors, being the difference /
17,25,750 between gross liabilities and gross assets 59,750
Issued and Called-up Capital:
20.000 10% Preference Shares of ? 10 each fully paid (as per list F) 2 ,00,000
50.000 Equity Shares of ? 10 each fully paid (as per list G) 5,00,000
Estimated Deficiency as regards Contributories (as per list H) 7,59,750
DEFICIENCY ACCOUNT (LIST H)
A. Items contributing to Deficiency : r
1. Excess of capital and liabilities over assets on 31st December, 2013 as
shown by the Balance Sheet Nil
2. Net dividend and bonus declared during the period from 1st January, 2014
to 31st July, 2017 Nil
3. Net trading losses after charging depreciation, taxation, interest on
debentures etc. (loss after 2013 ? 5,84,000 + T 3,750 interest on
debentures for 1 month) 5,87,750
4. Losses other than trading losses written off or for which provision has been
made in the books during the same period :
Speculation Loss 50,000
Penalty imposed by excise authorities 3,50,000
4,00,000
5. Estimated losses now written off or for which provision has been
made for the purpose of preparing the statement
f
Debtors 1.56.000
Stock 2.40.000
Contingent liability of bills discounted 60,000
4,62,000
6 . Other items contributing to deficiency Nil
Total (A) 14,49,750
B. Items reducing Deficiency :
7. Excess of assets over capital and liabilities on 31st December, 2013
as shown in the Balance Sheet (General Reserve) 1, 00,000
8 . Net trading profits (after charging depreciation, taxation, interest on
debentures etc.) 4.50.000
9. Profits and income other than trading profits Nil
10. Other items reducing deficiency— profit expected on realisation of land 1.40.000
Total (B) 6.90.000
Deficiency as shown by the Statement of Affairs (A) — (B) 7,59,750
Note. Managing Director’s remuneration due has not been treated as preferential creditor because
he is an officer and does not come under the category of an employee.
O Liquidator's Final Statement of Account

As we know, the main job of the liquidator is to collect the assets of the company and
realise them and distribute the money realised among right claimants. For this purpose he
maintains a Cash Book for recording the receipts and payments and is required to submit an
abstract of the Cash Book to the court in case of compulsory winding up and to the company
in case of voluntary winding up. The liquidator is also required to prepare an account of
winding up known as Liquidator’s Final Statement of Account after the affairs of the company
are fully wound up. This account takes the form of Cash Account and the following receipts
are shown on the debit side of this account:
(1) Amount realised on sale of assets.
(2) In case of assets specifically pledged in favour of creditors, only the surplus from it, it
any is entered as surplus from securities.
(3) Amount received from delinquent directors and other officers of the company.
(4) In case of partly paid up shares, the holders of equity shares would be called upon to
pay necessary amount not exceeding the amount of uncalled capital if creditors’ claims/claims
of preference shareholders cannot be satisfied with the available amount. In case the amount
is still insufficient (after calling the amount from the holders of partly paid equity shares) for
paying off the creditors, preference shareholders would be called upon to pay necessary
amount (not exceeding the uncalled amount on such shares).
(5) Contributions made by the contributories.
On the credit side of the account, he records the payments made in the following order:
(1) Payment of secured creditors and dues to workmen up to their claim or up to the
amount of securities held by secured creditors as per Section 529. The balance of secured
:'editors left unsatisfied (i.e., when the claims of the secured creditors are more than the
i~ cun t realised by sale of securities) wili be added to unsecured creditors.
1/116 COMPANY LIQUIDATION
(2) Legal charges

(3) Liquidator’s remuneration.
(4) Liquidation expenses
(5) Payment of creditors (e.g., debentures) having a floating charge on the assets of the
company. Interest on debentures should be paid upto the date of actual payment to the
debentureholders and not only upto the date of liquidation provided the company is solvent.
But if the company is insolvent, interest is payable upto the date of commencement of
insolvency proceedings.
(6) Workmen’s dues and claims of secured creditors as mentioned in section 529A.
(7) Payment of preferential creditors.
(8) Payment of unsecured creditors. This may also include liability in respect of dividend
declared but not paid but the payment of dividend due will be paid only after the amount due
to outsiders is paid.
(9) Amount paid to preference shareholders.
(10) Amount paid to equity shareholders.
The various claims will be satisfied by the liquidator in the order mentioned above. So, if
the money available with the liquidator is exhausted after paying, say, debentureholders partly
or fully, payments will not be possible to unsecured creditors, preference shareholders and
equity shareholders.
The form of the Liquidator’s Final Statement of Account prescribed by the Supreme Court
is given below :
LIQUIDATOR’S STATEMENT OF ACCOUNT OF THE WINDING-UP
1. Name of the company :--------------Ltd.
2. Nature of proceeding :
3. Date of commencement of the winding-up :
4. Name and address of the Liquidator:
Statement showing how the winding-up has been conducted and the property of the company has
been disposed of from...........20 ........... (commencement of winding-up) t o ............ 20 ............ (close of
winding-up).
E sti Value P a y
R eceipts m a te d re a lise d P aym e n ts m ents
t P. ? P. f P. ? P.
Assets : Legal charges
Cash at Bank Liquidator’s remuner
Cash in hand ation :
Marketable Securities When applicable—
Bills Receivable % on ?.... realised
Traae Debtors % on f ... distributed
Loans and Advances
Stock in Trade Total
Work in Progress
Freehold Property
Leasehold Property (By whom fixed...... )
Plant and Machinery Auctioneers’ and
Furniture, Fittings, valuers’ charges
Utensils, etc. Costs of possession
Patents, Trade Marks etc. and maintenance
Investments other than of estate
6
COMPANY LIQUIDA TION 1/ 1-17
Marketable Securities Costs of notice in

Surplus from Securities Gazette and News
Unpaid Calls at comm papers
encement of winding-up Incidental outlay (esta
Amounts receivable blishment charges
from calls on contri and other expenses
butories made in the of liquidation)
winding-up Total costs and charges
Receipts per Trading
Account (/) Debentureholders :
Other Property, viz., Payment of per
? ...... debenture
Payment of ?... per
f ..... debenture
Total Payment of ?..per
Less ^....debenture
Payments to redeem
securities (/'/) Creditors :
Costs of execution ....... ‘ Preferential
Payments per Trading ....... ‘ Unsecured :
Account Dividend (s)...... P. in
the rupee on
(The estimate of the
amount expected
to rank for dividend
was ?....... )
(Hi) Returns to
Contributories :
...... P. per rupee...
“ share.......
....... P. per rupee....
“ share.......
...... P. per rupee....
“ share.......
A d d : balance
‘State the number ; Preferential creditors need not be separately shown if all creditors have been
paid in full.
“ State nominal value and class of shares.
(1) Following assets estimated to be of the value of ?......... have proved to be unrealisable:
(Give details of the assets which have proved to be unrealisable).
(2) Amount paid into the Companys’ Liquidation Account in respect o f:
(a) Unclaimed dividends payable to creditors in the winding-up. ?................
(b) Other unclaimed distributions in the winding-up. ?................
(c) Moneys held by the company in trust in respect of dividends or other sum due before the
commencement of the winding-up to any person as a member of the company.
r ...........
(3) Add here any remarks the Liquidator thinks desirable (Sd.)
Dated this.............day o f...........20......... L iq u id a to r
I declare that the above statement is true and contains a full and accurate account of the winding-
up from the commencement to the close of the winding-up. (Sd )
Dated this..............day o f...........20......... L iq u id a to r
Liquidator’s Statement of Account is prepared for the period starting from the
commencement of winding up to the close of winding up. If winding up is not concluded within
one year after its commencement, Liquidator’s Statement of Account is to be filed by a
liquidator within a period of two months of the conclusion of one year and thereafter on
interval of six months.
O Liquidator's Remuneration
The liquidator normally gets the remuneration in the form of commission which is usually
based as a percentage on the value of assets realised and amount paid to unsecured
creditors. In calculating the liquidator’s remuneration, the following points may be noted :
(1) Commission on assets given as securities to secured creditors. The liquidator gets
commission on the surplus from such assets left after making the payment of secured
creditors because he makes an effort of realising the surplus of such assets from secured
creditors. However, if he sells the assets himself, he gets commission on the total proceeds of
such assets.
(2) Cash and Bank Balance. If the liquidator is to get a commission on assets realised, he
also gets a commission on cash and bank balance unless otherwise stated.
(3) Unsecured Creditors. If the liquidator is to get a commission on amount paid to
unsecured creditors, unsecured creditors will also include preferential creditors for the
purpose of calculation of remuneration unless otherwise stated. If the amount available is
sufficient to make the full payment of unsecured creditors, the commission is calculated as
follows :
Liquidator’s remuneration
Amount due to unsecured creditors x % of commission on creditors
Too
If the amount available is not sufficient to make the full payment of unsecured creditors,
the commission is calculated as below :
Amount available for unsecured creditors x % of commission
100 + % of commission
For example, if the amount due to unsecured creditors is ? 5,00,000 and the amount
available for unsecured creditors before charging commission on amount paid to unsecured
creditors is ? 2,06,000. Suppose 3% commission is to be paid on the amount paid to
unsecured creditors, the commission in this case will be calculated as below :
? 2,06,000 x 3 r 2,06,000 x 3 „ ____
100 + 3 = 103 = ? 6’000-
IL L U S T R A T IO N 3. Following particulars relate to a limited company which has
gone into voluntary liquidation. You are required to prepare the Liquidator’s Final
Statement of Account allowing for his remuneration @ 2% on the amount realised on
assets and 2% on the amount distributed to unsecured creditors other than preferential
creditors :
? ?
Unsecured Creditors 2,24,000 The assets realised the following sums :
Preferential Creditors 70,000 Cash ift hand 20,000
Debentures 75,000 Land and Buildings 1,30,000
Plant and Machinery 1,10,500
Fixtures and Fittings 7,500
The liquidation expenses amount to ? 2,000. A call of ? 2 per share on the partly
paid 10,000 equity shares was made and duly paid except in case of one shareholder
owning 500 shares.
S O L U T IO N
In the Books of..... Ltd. (in Liquidation)
LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT
r r r
To Assets realised : By Liquidation Expenses : 2,000
Cash in hand 20,000 ” Liquidator’s Remuneration
Land and Buildings 1,30,000 2% on f 2,68,000 5,360
Plant and 2% on f 1,32,000 (2) 2,640
Machinery 1,10,500 8,000
Fixtures and Fittings 7,500 By Debentureholders 75,000
2 ,68,000 ” Preferential Creditors 70,000
" Calls (9,500 shares ” Unsecured Creditors 1,32,000
@ ? 2 each) 19,000 (58.93% Of f 2,24,000)
2,87,000 2,87,000
Notes. (1) Shareholders will not get anything as the amount is not sufficient even to make the
payment of the unsecured creditors.
(2) Since the amount is not sufficient to make the full payment of the unsecured creditors, the
commission payable to the liquidator on the payment made to the unsecured creditors is to be
Amount available for Unsecured Creditors & Liquidator’s Remuneration 1,34,640

Therefore, liquidator’s commission on payment to unsecured creditors is
i.e., Q2 x ? 1,34,640
IL L U S T R A T IO N 4. Following were the balances taken from the books of X
Limited as on 31-3-2017 :
Cr. Balances ? Dr. Balances t
Share Capital Fixed Assets
14%, 4,000 Preference Shares Land 40,000
of ? 100 each fully paid up 4,00,000 Buildings 1,60,000
8,000 Equity Shares of f 100 Plant and Machinery 5,40,000
each, ? 60 per share Patents 40,000
paid up 4,80,000 Investments Nil
Reserves and Surplus Nil Current Assets, Loans and
Secured Loans Advances
1. 14% Debentures 2,30,000 Current Assets
(Having a floating charge Stock at cost 1,00,000
on ail assets) Sundry Debtors 2,30,000
Interest accrued on above Cash at Bank 60,000
debentures 32,200 Surplus A/c (Negative Balance) 2,40,000
(Also having a floating
charge as above)
2. Loan on Mortgage of Land

and Building 1,50,000
Unsecured Loan Nil
Current Liabilities and
Provisions
Current Liabilities
Sundry creditors 1,17,800
14,10,000 —14,10,000
On 31-3-2017 the company went into voluntary liquidation. The dividend on 14%
preference shares was in arrears for one year. Sundry creditors include preferential
creditors amounting to ? 30,000.
The assets realised the following sums :
Land f 80,000, Buildings ? 2,00,000; Plant and Machinery ? 5,00,000; Plant ? 50,000;
Stock ? 1,60,000; Sundry Debtors ? 2,00,000.
The expenses of liquidation amounted to t 29,434. The liquidator is entitled to a
commission of 2% on all assets realised (except cash at bank) and 2% on amounts
distributed among unsecured creditors other than preferential creditors. All payments
were made on 30th June, 2017. Interest on mortgage loan shall be ignored at the time
of payment.
Prepare the Liquidator’s Final Statement of Account.
S O L U T IO N
X Ltd.
f ?
To Assets Realised By Loan on Mortgage 1,50,000
Cash at Bank 60,000 By Liquidation Expenses 29,434
Sundry Debtors 2 ,00,000 By Liquidator’s Remuneration
Stock 1,60,000 2% of f 11,90,000 Assets
Land 80,000 Realised 23,800
Buildings 2 ,00,000 2% of f 87,800 Unsecured
Plant and Machinery 5,00,000 Creditors 1,756
Patent 50,000 25,556
By Debentureholders :
14% Debentures 2,30,000
Interest Accrued
(? 32,200 + r 8,050
Interest for 3 months from
1-4-2017 to 30-6-2017 @ 14%
p.a. on ? 2,30,000) 40,250
2,70,250
By Preferential Creditors 30,000
By Unsecured Creditors 87,800
By Preference Shareholders
Preference Capital 4,00,000
Arrears of Dividend 56,000
4,56,000
By Equity shareholders (@ f 25.12
per share on 8,000 shares) 2,00,960
12,50,000 12,50,000
IL L U S T R A T IO N 5. The position of Valueless Ltd. on its liquidation is as under:

Issued and paid up Capital :
3.000 11% preference shares of ? 100 each fully paid.
3.000 Equity shares of ? 100 each, fully paid.
1.000 Equity shares of ? 50 each, ? 30 per share paid.
Calls in Arrears are ? 10,000 and Calls received in Advance ? 5,000. Preference
Dividends are in arrears for one year. Amount left with the liquidator after discharging
all liabilities is ? 4,13,000. Articles of Association of the company provide for payment
of preference dividend arrears in priority to return of equity capital. You are required to
prepare the Liquidator’s Final Statement of Account.
S O L U T IO N
? ?
To Cash (Left after discharging By Payment of Preference
all liabilities) 4,13,000 Dividend @ 11% on
To Realisation from Calls in Arrears 10,000 f 3,00,000 Pref. Capital 33,000
To Final Calls @ ? 5 per By Payment of Preference Share Capital 3,00,000
Equity Shares of ? 50 each By Calls in Advance 5,000
on 1,000 shares (1) 5,000 By Payment to Holders of 3,000
Equity Shares fully paid
@ ? 30 (1) per Equity Share 90,000
4,28,000 4,28,000
Working Notes (1): ?

Balance left with the liquidator after payment of all liabilities 4,13,000
A d d : Calls in arrears received 10,000
4,23,000
?
Less : Payment for preference dividend 33,000
Payment for preference capital 3,00,000
Payment of calls in advance 5,000
3,38,000
85,000
A d d : Amount which can be received from holders of 1,000
equity shares of ? 50 each, ? 30 paid @ ? 20 per equity share 20,000
Total amount disposable 1,05,000
No. of Equivalent Equity Shares of ? 50 each :
3.000 equity shares of ? 100 each = 6,000 equity shares of ? 50 each
1.000 equity shares of ? 50 each = 1,000 equity shares of ? 50 each
7,000 equity shares of ? 50 each
r-. . .. , T -\ ,05,000
Final payment for equity share of ? 50 each = 7 qqq shares = ^ 15
? 15
Therefore, final payment for each equity share of ? 100 = x ? 100 = f 30
Equity shareholders of ? 50 each, ? 30 paid up have to pay? 20 per share and receive ? 15 as final
payment. As a result, they are required to pay net ? 5 (i.e. ?20 - ? 15) per share.
IL L U S T R A T IO N 6. Z Ltd. went into voluntary liquidation on 31st December, 2016.

Balance Sheet of the company as on that date stood as follows :
I. Equity and Liabilities
(/) Share Capital
20,000,10% Cumulative Preference Shares of
? 100 each, fully paid up 20,00,000
10,000 Equity Shares of ? 100 each, ? 75 paid up 7,50,000
30,000 Equity Shares of ? 100 each, ? 60 paid-up 18,00,000
45,50,000
(ii) Reserves and Surplus
Surplus Account (Negative Balance) (11,25,000)
(iii) Non-current Liabilities
15% Debentures secured by a Floating Charge 10,00,000
(iv) Current Liabilities
Trade Payables 12,75,000
Outstanding Interest on Debentures 1,50,000
14,25,000
Total 58,50,000
II. Assets
(/) Non-current Assets
Land and Building 10,00,000
Plant and Machinery 25,00,000
Furniture and Fixtures 4,00,000
ft 39,00,000
(ii) Current Assets
Stock 5,50,000
Trade Receivables 11,00,000
Cash and Bank Balance 3,00,000
19,50,000
Total 58,50,000
Other Information :
(i) Preference share dividend are in arrears for the last two years.
(ii) Trade payables include preferential creditors of ? 1,52,000.
(Hi) The assets were sold and realised as follows :
Land and building ? 12,00,000; Plant and machinery ? 20,00,000; Furniture and
fixtures f 3,00,000; Stock ? 6,00,000; Trade receivables ? 8,00,000.
(iv) Expenses of liquidation were ? 1,09,000.
( v ) Liquidator is entitled to receive commission of 3% on assets realised except
cash.
(vi) Preference shareholders have right to dividend at the time of liquidation.
(viii) The final payment including those on debentures is made on 30th June, 2017.
You are required to prepare Liquidator’s Final Statement of Account.
S O L U T IO N
R eceipts Am ount P a ym e n ts Am ount
? ?
To Assets Realised : By Liquidation Expenses 1,09,000
Cash at Bank 3,00,000 By Liquidators’ Remuneration
Land and Building 12,00,000 (3% of ? 49,00,000) 1,47,000
Plant and Machinery 20 ,00,000 By Preferential Creditors 1,52,000
Furniture and Fixtures 3,00,000 By Debentureholders (1) 12,25,000
Stock 6 ,00,000 By Unsecured Creditors
Trade Receivables 8 ,00,000 (? 12,75,000-1,52,000) 11,23,000
Call on Equity Shares (2) By Preference Shareholders
(? 2.65 x 30,000) 79,500 (? 20,00,000 + 4,00,000) 24,00,000
By Equity Shareholders (2)
(? 12.35 x 10,000) 1,23,500
52,79,500 52,79,500
Working Notes
1. Payment to Debentureholders ?
15% Debentures secured by Floating Charge 10,00,000
A d d : Outstanding Debenture Interest 1,50,000
A d d : Interest from 1-1-2017 to 30-6-2017 (since the company is solvent) 75,000
12,25,000
2. Total Paid-up Value of Equity Shares (? 7,50,000 + 18,00,000) 25,50,000
L e ss : Net Assets available for Equity Shareholders(? 52,00,000 - 51,56,000) 44,000
Total Loss to be borne by the Equity Shareholders 25,06,000
I II
( 10,000 shares (30,000 shares
of ? 75 each) of ? 60 each)
Paid-up Value of Shares 75 60
Less : Net Loss per share (? 25,06,000/10,000 + 30,000) 62.65 62.65
12.35 2.65
(To be paid per (To be taken per
share) share)
IL L U S T R A T IO N 7. Bekar Limited went into voluntary liquidation. The details
regarding liquidation are as follows :
Share capital:
1. 2,000 8% preference shares of ? 100 each (fully paid-up)
2. Class A—2,000 equity shares of ? 100 each (? 75 paid-up)
3. Class B—1,600 equity shares of ? 100 each (? 60 paid-up)
4. Class C—1,400 equity shares of f 100 each (? 50 paid-up)
Assets including machinery realised ? 4,20,000. Liquidation expenses amount to
? 15,000.
Bekar Limited has borrowed a loan of ? 50,000 from Patel Brothers against the
mortgage of machinery (which realised ? 80,500). In the books of the company salaries
of four clerks for four months at a rate of ? 250 per month and salaries of four peons
for three months at a rate of f 150 per month, are outstanding. In addition to this, the
company’s books show the creditors worth ? 88,200. Prepare Liquidator’s Statement of
Receipts and Payments.
S O L U T IO N
LIQUIDATOR’S STATEMENT OF RECEIPTS AND PAYMENTS
?
To Assets Realised 4,20,000 By Payment of Secured Creditors
” Proceeds of call @ f 1 per (Loan of Patel Bros.) 50,000
share on 1,400 shares of class (2) (3) 1,400 ” Liquidation Expenses 15,000
’’ Preferential Creditors (1) 5,800
” Unsecured Creditors 88,200
” Preference Shareholders 2,00,000
” Equity Shareholders :
Return of ? 24 per share
on 2,000 class A shares (2) 48,000
Return of t 9 per share on
1,600 class B shares (2) 14,400
4,21,400 4,21,400
Working Notes :
(1) Calculation of Preferential Creditors ?
Salary of 4 clerks @ ? 1,000 4,000
Salary of 4 peons @ f 450 each 1,800
5,800
(2) Calculation of Amount Returnable to Equity Shareholders or Receivable from Equity
Shareholders
Assets realised 4,20,000

L e s s : Payments :
Secured Creditors 50,000
Liquidation Expenses 15,000
1.59.000
Balance available for shareholders 2.61.000
Le ss : Capital to be returned to preference shareholders 2,00,000
Amount available for equity shareholders 61,000
Less : Equity share capital paid up : ?
Class A— 2,000 equity shares @ ? 75 = 1,50,000
Class B —1,600 equity shares @ ? 60 = 96,000
Class C — 1,400 equity shares @ f 50 = 70,000
3.16.000
Loss to be borne by equity shareholders 2.55.000
Totai Loss ? 2,55,000 = _
Therefore, loss per equity share = Total No. of Equity Shares " 5,000 = ^ 51
C lass A S hares C lass B S hares C lass C S hares
r r ?
Paid up amount per share 75 60 50
Le ss : Loss per share 51 51 51
Net amount receivable or returnable per share 24 9 _^1
COMPANY LIQUIDA VON 1/ 1-25
O Receiver for Debentureholders

The terms of issue of debentures may give express power to the debentureholders to
appoint a receiver on failure of the company to pay them their interest or the instalment on the
due date or on liquidation of the company. In case of liquidation, debentureholders may
appoint an independent person as receiver to take over the assets specifically or generally
charged in their favour. The receiver will realise such assets and after meeting his expenses,
remuneration and making payment to claimants entitled to get payment in priority to the
debentureholders, he will make payment to the debentureholders. The receiver will hand over
the surplus, if any, to the liquidator of the company so that the latter may make the payment
to the claimants who are to get the payment after the debentureholders. Thus, if a receiver is
appointed by the debentureholders to protect their interest, two statements of accounts
namely Receiver’s Statement of Account and Liquidator’s Final Statement of Account will
have to be prepared.
IL L U S T R A T IO N 8. Following are the balances taken from the books of
Confidence Builders Ltd, as at 30th September, 2017 :____________________________
Cr. Balances Dr. Balances ?
Share Capital : Land and Buildings 1,20,000
Issued : 11% Pref. Shares Sundry Current Assets 3,95,000
of ? 10 each 1,00,000 Profit and Loss Account 38,500
10,000 Equity Shares of ? 10 Debenture Issue Expenses not
each, fully paid up 1,00,000 written off 2,000
5,000 Equity Shares of ? 10
each, ? 7.50 per share paid up 37,500
Mortgage Loan 80,000
Creditors for Trade 32,000
Income-tax Arrears :
(assessments concluded
in July 2017) f
Assessment year 2015-16 21,000
Assessment year 2016-17 5,000
26,000
5,55,500 5,55,500
Mortgage loan was secured against land and buildings. Debentures were secured
by a floating charge on all the other assets. The company was unable to meet the
payments and therefore the debentureholders appointed a Receiver and this was
followed by a resolution for members’ voluntary winding up. The Receiver for the
Debentureholders brought the land and buildings to auction and realised ? 1,50,000. He
also took charge of sundry assets of the value of ? 2,40,000 and realised ? 2,00,000.
The Liquidator realised ? 1,00,000 on the sale of the balance of sundry current assets.
The Bank Overdraft was secured by a personal guarantee of two of the Directors of the
company and on the Bank raising a demand, the Directors paid off the dues from their
personal resources. Costs incurred by the Receiver were ? 2,000 and by the liquidator
f 2,800. The Receiver was not entitled to any remuneration but the liquidator was to
receive 3% fee on the value of assets realised by him. Preference shareholders had not
been paid dividend for period after 30th September, 2011 and interest for the last half-
year was due to the debentureholders.
Prepare the accounts to be submitted by the Receiver and the Liquidator.
S O L U T IO N
RECEIVER’S STATEMENT OF ACCOUNT
r
Sundry Assets Realised 2,00,000 Cost of the Receiver 2,000
Surplus Realised from Mortgage : Payment of Preferential Creditors
Sale proceeds of Land f Income Tax raised within
and Buildings 1,50,000 12 months 26,000
L e s s : Applied to Payment of Debentureholders : T
discharge of Principal 1,50,000
mortgage loan 80,000 Interest for ^ year @ 13% p.a. 9,750
70,000 1,59,750
Surplus handed over to the liquidator 82,250
2,70,000 2,70,000

? ?
Surplus received from Cost of Liquidation 2,800
the Receiver 82,250 Liquidator’s Remuneration (3%
Sundry Assets realised by the of ? 1,00,000 amount
Liquidator 1,00,000 of assets realised) 3,000
Amount realised from Payment of Unsecured Creditors : ?
Contributories : Creditors for Trade 32,000
From holders of 5,000 partly Payment of amount due to
paid shares @ ? 2.17 per share (1) 10,850 directors for Bank Overdraft 30,000
62,000
Payment of Preference
Shareholders ?
Principal 1,00,000
Arrears of Dividends
for 2 years @ 11% p.a. 22,000
1,22,000
Equity Shareholders to get:
Return of money to holders of
10,000 shares fully paid up
@ 33 paise per share (1) 3,300
1,93,100 1,93,100
Working Note :
( 1) Calculation o f Amount Payable by Partly Paid Shareholders f
Amount available before call from partly paid
shareholders 1,82,250
Less: Amount payable to various claimants :
Cost of liquidator 2,800
Liquidator’s remuneration 3,000
Unsecured creditors 62,000
Preference shareholders 1,22,000
1,89,800
Deficiency (-) 7,550
: Total amount receivable from partly paid

shareholders on the basis of notional call
of ? 2.50 per share on 5,000 shares 12,500
Net surplus after notional call 4,950
Number of shares deemed fully paid (10,000 + 5,000) 15,000

Refund on each fully paid share (T 4,950 + 15,000) = 33 paise
Call on partly paid share = ? 2.50 - f 0.33 = ? 2.17.
O B' List of Contributories

As already stated when a company is liquidated, shareholders who transferred partly paid
;-ares (otherwise by operation of law or by death) within a year prior to the date of winding up
r ' the company are placed in the ‘B’ list of contributories whereas all persons who are
snareholders at the time of winding-up are placed in the ‘A’ list of contributories. ‘B’ list of
contributories are required to pay the unpaid amount of shares held by them within a year of
■- e date of the winding-up of the company, if the amount due to various creditors remains
^"oaid at the time of winding-up. But they are required to pay only those debts which existed
at the time they ceased to be members. In other words, such members are not liable to
contribute for debts incurred after they ceased to be members. They are also not liable to pay
; all the creditors can be paid out of the amount realised from sale of assets or from ‘A’ list of
contributories. Further, they are also not required to pay if the present shareholders have paid
ce unpaid amount of shares transferred by them. If the number of such contributories is more
:nan one, they will all share the liability proportionately, subject to the maximum due on the
;~ares. All this has been made clear in the illustration given below :
IL L U S T R A T IO N 9. Bad Luck Limited went into voluntary liquidation and the
proceedings commenced on 2nd July, 2017. Certain creditors could not receive
payment out of the realisation of assets and out of the contributions from the
contributories of the ‘A’ list. Following details of share transfers are made available to
you :
Name of the No. of shares Date of the Creditors remaining
transferor transferred transferor unpaid and outstand
shareholder ceasing to ing at the time of the
be a member transferor ceasing to
be a member
(0 A 1,000 1st March, 2016 6,000

(11) B 1,250 15th August, 2016 8,000
(Hi) C 500 1st October, 2016 10,750
(/V) D 2,000 1st December, 2016 13,000
(v)E 250 1st April, 2017 15,000
All the shares were of W10 each, on which ? 5 per share had been paid up. Ignoring
other details like liquidator’s expenses etc., you are required to work out the liability of
the individual contributories listed above.
S O L U T IO N
STATEMENT OF LIABILITY OF INDIVIDUAL
_____________________________ (B LIST) CONTRIBUTORIES_______
D ate C re d ito rs In cre m e n ta l N am e o f C o n trib u to ry
O u tsta n d in g Am ount of
C re d ito rs B C D E
N u m b e r o f sh a re s tra n sfe rre d

1,250 500 2,000 250
r ? ? ? r ?
15-8-2016 8,000 8,000 2,500 1,000 4,000 500
(Divided among B, C D & E in proportion
to shares i.e. 5 : 2 : 8 :1)
1-10-2016 10,750 2,750 — 500 2,000 250
(10,750-8,000) (Divided among C, D, & E in
proportion to shares i.e. 2 :8 :1 )
1-12-2016 13,000 2,250 — — 2,000 250
(13,000-10,750) (Divided between D & E in
proportion to shares i.e. 8 :1)
1-4-2017 15,000 2,000 — — — 2,000
(15,000-13,000) (The total incremental amount transferred to E
because liability was created before E transferred
his shares)
Maximum amount payable to
creditors 2,500 1,500 8,000 3,000
Amount unpaid on shares @
? 5 per share 6,250 2,500 10,000 1,250
(1,250 x 5) (500 x 5) (2,000 x 5) (250 x 5)
Actual liability of contributories
being lower of amount paya-
ble to creditors or amount un-
paid on shares 2,500 1,500 8,000 1,250
Notes. (1) Liability of ‘A’ shareholder is nil because he ceased to be a shareholder of the company
more than a year before the date of winding-up of the company. He does not fall under the category of
‘B’ list of contributories who are required to pay the unpaid amount of creditors if the company is unable
to pay.
(2) Shareholders have contributed to only those debts which existed at the time they ceased to be
members.
OBJECTIVE TYPE
1. State whether the following statements are true or false :
(a) Insolvency is a necessary condition for the liquidation of a joint stock company.
(b ) A contributory can only be a present member of the liquidated company.
(c) Interest on liabilities is payable upto the date of actual payment if the company is solvent
and upto the commencement of the insolvency proceedings in case the company is
insolvent.
(c/) All voluntary transfers made by the company within a period of one year before the
presentation for winding up are void as against the liquidator.
Ans. [False : (a) and (b ); True : (c) and (d)].
: ZVÂNY LIQUID A TiON 1/ 1-29
2. Fill in the blanks :

(a) A company can be liquidated in any of three ways.............
(b ) Fraudulent preference takes place when one creditor i s ......... to another creditor in the
matter of payment of his dues.
(c) List H shows................Account.
(d) When a company is wound-up, all persons who ceased to be the shareholders within a
year before the winding-up are placed in the......
Ans. [(a) (/) compulsory winding-up by the Court, (//) voluntary winding-up by the members or
creditors, and (Hi) winding-up under the supervision of the court ; ( b ) preferred ; (c)
Deficiency or Surplus ; ( d) ‘B’ list of contributories].
3. Select the most appropriate answer:
(a) Liquidator's Final Statement of Account is prepared :
(/) Only in case of members’ voluntary winding up;
(//) Only in case of compulsory winding up;
(///) In all modes of winding up;
(/V) In none of the above.
(£>) Debentureholders having a floating charge on assets have priority in payment over:
(/) Secured Creditors ; (/'/) Unsecured Creditors;
(/'/'/) Preferential Creditors; (iv) None of the above.
(c) In case a company being liquidated is solvent, the interest on debentures is paid upto the
date of:
(/) Commencement of winding up; (//) Balance Sheet preparation’s date;
(iii) Payment o debentures; (iv) None of the above.
(d) Amount due to the Government for purchases of goods is an example of
(/) Preferential Creditor; (//) Unsecured Creditor;
(iii) Secured Creditor; (iv) None of the above.
Ans. [(a ) (iii); (b ) (//); (c) (iii); (d ) (//)]
SHORT/LONG ANSWER TYPE

1. What do you mean by liquidation of a company ? Describe the different modes of winding-up.
2. Bring out clearly the distinction between a winding-up by the court and a members’ voluntary
winding-up.
3. Give a proforma of the Statement of Affairs and the Deficiency/Surplus Account with imaginary
figures which complies with the requirements of the Indian Companies Act, 1956.
4. What do you mean by the term “Contributory” ? Describe the various types of contributories.
5. Explain the preferential creditors as given under the Indian Companies Act.
6 . What do you understand by the Liquidator’s Final Statement of Account ? Give a proforma of
such an account with imaginary figures.
7. Explain the circumstances under which a liquidator would have to make a call on partly paid
shares.
8 . Explain the various lists to be attached to the Statement of Affairs.
9. What is the position of preference shareholders in regard to surplus left in the hands of the
liquidator after all the shareholders have been paid back their capitals ?
10. What is B list of contributory ?
11. Give the provisions of Section 325 of the Companies Act, 2013 relating to dues to workers.
illllllllilllll Practical Problems 111111

STATEMENT OF AFFAIRS
1. ‘A’ Ltd. is to be liquidated. Their summarised Balance Sheet as at 30th September, 2017
appears as under:____________________________________ _____ __________ ________
L ia b ilitie s : r
5,00,000 Equity Shares of T 100 each 50.00. 000
Secured Debentures (on Land and Buildings) 20 .00 . 000
Unsecured Loans 40.00. 000
Trade Creditors 70.00. 000
1,80,00,000
A sse ts :
Other Fixed Assets 40.00. 000
Current Assets 90.00. 000
Profit and Loss Account 40.00. 000
1,80,00,000
Contingent Liabilities are :
For Bills Discounted 2 ,00,000
For Excise Duty Demands 3,00,000
On investigation, it is found that the contingent liabilities are certain to devolve and that the
assets are likely to be realised as follows :
r
Land and Building 22 ,00,000
Other Fixed Assets 36,00,000
Current Assets 70,00,000
Taking the above into account, prepare the Statement of Affairs.
Ans. [Deficiency : (a) as regards Creditors ? 7,00,000 and (b ) as regards Members
? 57,00,000].
2. Following information is extracted from the books of a limited company on June 30, 2017 on
which date a winding-up order was made :
Cash in hand 4,050

Book Debts : ?
Good 75,000
Doubtful (estimated to produce 40%) 15,000
Bad 9.000
99.000
Stock in Trade (estimated to produce ? 1,19,350) 1.44.000
Freehold Land and Buildings (estimated to produce ? 3,91,000) 3.30.000
Plant and Machinery (estimated to produce ? 1,06,000) 1.50.000
Fixtures and Fittings (estimated to produce f 15,000) 25.000
Equity Share Capital, 40,000 shares of ? 10 each 4.00. 000
10% Preference Share Capital, 6,000 shares of ? 100 each 6 .00 . 000
Calls in arrears on equity shares (estimated to produce f 4,000) 8,000
9% First Mortgage Debentures, secured by a floating charge on
the whole of the assets of the company 4,00,000
Creditors fully secured (vaiue of shares in A Ltd. ? 80,000) 70.000
COMPANY LIQUIDATION 1/1-31
Creditors partly secured (value of shares in B Ltd. ? 40,000) 80,000

Bank Overdraft, secured by a second charge on the whole of
the assets of the company 40,000
Estimated liability on bills discounted 20,000
Prepare a Statement of Affairs : (a) as regards Creditors ; and (b) as regards
Contributories.
Ans. [(a) Deficiency as regards Creditors ? 3,04,600 ; (b) Deficiency as regards Contributories
? 13,00,600].
3. Shri A B Govindan is appointed liquidator of a company in voluntary liquidation on 1st July,
2017, and the following balances are extracted from the books on that date :
Cr. B ala n ce s ? Dr. B a la n ce s ?
Capital : Machinery 65,000
16,000 shares of f 5 each 80,000 Leasehold Properties 40,000
Provision for Bad Debts 10,000 Stock in Trade 1,000
Debentures 50,000 Book Debts 60,000
Bank Overdraft 18,000 Investments 6,000
Liabilities for Purchases 20,000 Calls in Arrear 5,000
Cash in hand 1,000
1,78,000 1,78,000
Machinery is valued at ? 60,000 ; Leasehold Properties at ? 73,000 ; Investments at

? 4,000 ; Stock in Trade at f 2,000 ; bad debts are ? 2,000 ; doubtful debts are ? 4,000
estimated to realise ? 2,000. Bank Overdraft is secured by deposit of title deeds of Leasehold
Properties. Preferential creditors for taxes and wages ? 1,000. Telephone rent owing is ? 80.
You are required to make out (1) Statement of Affairs as regards Creditors and Contributories
and (2) Deficiency or Surplus Account.
Ans. [Estimated Surplus as regards Creditors ? 1,11,920 ; Estimated Surplus as regards
Contributories T 31,920].
4. M Co. Ltd. went into voluntary liquidation on 1st March, 2017. Following balances are extracted
from its books on that date :
Cr. B a la n ce s ? Dr. B ala n ce s f
Capital : Buildings 1,50,000

50,000 equity shares of Plant and Machinery 3,50,000
? 10 each 5,00,000 Stock-in-Trade 95,000
Debentures (secured by Book Debts 75,000
a floating charge) 2 ,00,000 L e s s : Provision 10,000
Bank Overdraft 30,000 65,000
Creditors 40,000 Calls in Arrears 1,00,000
Cash in hand 10,000
7,70,000 7,70,000
Plant and Machinery and Building are valued at ? 1,50,000 and ? 1,20,000 respectively. On
realisation, losses of ? 15,000 are expected on stock. Book debts will realise ? 70,000. Calls in
arrears are expected to realise 90%. Bank Overdraft is secured against Buildings. Creditors
include preferential creditors for taxes and wages f 6,000 and miscellaneous expenses
outstanding ? 2 ,000 .
Prepare a Statement of Affairs to be submitted to the meeting of creditors.
Ans. [Surplus as regards Creditors ? 2,50,000].
1/1-32 COMPANY LIQUIDATION
STATEMENT OF AFFAIRS AND DEFICIENCY ACCOUNT

5. Following particulars were extracted from the books of X Ltd. on 1st January, 2017 on which
date a winding up order was made.
20,000 Equity Shares of ? 10 each fully paid up 2,00,000
6% 2,000 Preference Shares of f 10 each fully paid up 2,00,000
6 % First Mortgage Debentures secured by a floating charge
upon the whole of the assets 1 ,00,000
Fully secured creditors 30,000
Partly secured creditors 20,000
Preferential creditors for rates and taxes 6,000
Bills payable 10,000
Unsecured creditors 70,000
Bank overdraft 10,000
Bills receivable 15,000
Bills discounted (one bill for ? 10,000 is likely to be bad) 40,000
Book debts— good 10,000
doubtful (estimated to produce 50%) 7,000
bad 6,000
Shares in A Ltd. (estimated to produce ? 35,000) 45,000
Shares in B Ltd. (estimated to produce ? 10,000) 15,000
(given to partly secured creditors as security)
Land and building (estimated to produce ? 40,000) 1,50,000
Stock in trade (estimated to produce T 40,000) 50,000
Machinery and tools etc., (estimated to produce ? 20,000) 50,000
Cash in hand 10,000
You are required to prepare :
(a) Statement of Affairs
(b) Deficiency Account.
Ans. [Deficiency as regards Creditors ? 42,500, Deficiency as regards Contributories
f4,42,500 ; Total of Deficiency Account ? 4,42,500 ; Excess of Capital and Liabilities
over Assets T 2,58,000],
Hints : (1) Value of securities held by fully secured creditors is not given in the question.
Value of securities held by fully secured creditors has been assumed to be ? 30,000
equal to the amount of fully secured creditors.
(2) Excess of capital and liabilities over assets ? 2,58,000 has been ascertained by
preparing Trial Balance of X Ltd. as on 1.1.2017.
LIQUIDATORS FINAL STATEMENT OF ACCOUNT
6. LT Ltd. went into liquidation with the following liabilities :
Secured creditors ? 40,000 (securities realised ? 50,000) ; Preferential creditors ? 1,200;
Unsecured creditors T 61,000 ; Liquidation expenses ? 500.
The liquidator is entitled to a remuneration of 3% on the amount realised (including
securities in the hands of secured creditors) and 1^% on the amount distributed to unsecured
creditors. The various assets (excluding the securities in the hands of the secured
creditors) realised ? 52,000.
Prepare Liquidator’s Statement of Account showing the payment made to the unsecured
creditors.
Ans. [Liquidator’s Remuneration ? 3,924 ; Amount paid to Unsecured Creditors f 56,376].
7. Following particulars relate to a Limited Company. You are required to prepare Liquidator’s
Final Statement of Account allowing for his remuneration @ 2% on amount realised and 2% on
the amounts distributed among the unsecured creditors other than preferential creditors. The
assets realised the following sum :
f
Buildings 20,000 Liabilities :
Plant 18,650 Preferential Creditors 10,000
Furniture 1,000 Unsecured Creditors 32,000
Liquidation expenses amounted to ? 1,000 Debentures 10,000
Equity Share Capital 50,000
Ans. [Liquidator’s Remuneration * 1,143; Amount paid to Unsecured Creditors ? 17,507]
8 . Following particulars relate to a limited company which has gone into voluntary liquidation. You
are required to prepare the Liquidator’s Final Account allowing for his remuneration @ 3% on
the amount realised and 2 % on the amount paid to the unsecured creditors.
Share Capital issued :
1.000 preference shares of f 100 each (fully paid)
20.000 equity shares of ? 10 each (fully paid)
4.000 equity shares of 1 10 each (80% paid)
Assets realised ? 3,08,000 excluding amount realised by sale of
securities held by the secured creditors. T
Secured Creditors (security realised ? 54,000) 46,000
Debentures having a floating charge on the assets 1,00,000
Expenses of liquidation amounted to ? 3,000.
A call of ? 2 per share on the partly paid equity shares was duly paid except in case of one
shareholder owning 400 shares.
Ans. [Liquidator’s Remuneration f 13,612 ; Amount paid to Unsecured Creditors f 1,98,588].
9. From the data relating to a company (in voluntary liquidation), you are asked to prepare
Liquidator’s Statement of Account.
(a) Cash with liquidator (after all assets are realised and secured creditors and
debentureholders are paid) is ? 6,73,800.
(b ) Preferential creditors to be paid ? 30,000.
(c) Other unsecured creditors ? 2,15,000.
(d) 4,000 6% preference shares of ? 100 each, fully paid.
(e) 2,000 equity shares of ? 100 each, T 75 per share paid up.
(/) 6,000 equity shares of ? 100 each, ? 60 per share paid up.
(g) Liquidator’s remuneration 2% on preferential and other unsecured creditors.
(h) Preference dividends were in arrears for 2 years.
Ans. [Liquidator’s Remuneration ? 4,900 ; Amount called from holders of 6,000 equity shares
@ T 6.76 per share ; Amount paid to holders of 2,000 equity shares @ ? 8-24 per share].
10. V. Ltd., went into voluntary liquidation on 31st March, 2017. The details regarding liquidation
are as follows :
(a) 3,000 9% Preference Shares of ? 100 each fully paid up.
(b) 3,000 ‘A’ Equity Shares of ? 100 each, ?75 paid up. 2,400 ‘B’ Equity Shares of ? 100
each, ?60 paid up. 2,100 ‘C’ Equity Shares of f 100 each, ?50 paid up.
V Ltd. has borrowed a loan of f 75,000 from B ltd. against the mortgage of Machinery which
realised T 1,20,750. Books of the company show outstanding salaries of four clerks for four
months @ ? 450 p.m. per clerk and of four workers for three months @ ? 225 p.m. per worker.
In addition to this the company’s books show the creditors worth ? 1,31,100. Other assets
realised ? 4,86,750. Prepare Liquidator’s Final Statement of Account.
Ans. [Amount paid on 3,000 Equity Shares @ f 24 per share; Amount paid on 2,400 Equity
Shares @ ? 9 per share; Amount received on 2,100 Equity Shares @ ? 1 per share]
Hint. [Loss per Equity Share = ? 51]
11. T Ltd. was placed in voluntary liquidation on 31st December, 2016, when its Balance Sheet
was as follows :
r
1. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(a) Share Capital : t
50,000 Equity Shares of ? 10 each 5,00,000
Less : Calls in arrear 25,000
4,75,000
6,000 5% Cumulative Preference Shares
of 1 100 each fully paid 6 ,00,000
(b) Reserves and Surplus :
Securities Premium Reserve 50,000
(2) N o n -c u rre n t Liab ilitie s
5% Debentures Account 1,00,000
(3) C u rre n t Lia b ilitie s
Creditors 1,15,000
Interest on Debentures Due 2,500
Total 14,00,500
II. Assets
(1) N o n -cu rre n t A ss e ts
Freehold Factory 7,94,000
Plant & Machinery 2,89,000
Motor Vehicles 57,500
(2) C u rre n t A sse ts
Stocks 1,86,000
Debtors 74,000
Total 14,00,500
Preference dividends are in arrears from 2013 onwards.
The Company’s articles provide that on liquidation, out of the surplus assets remaining after
payment of liquidation costs and outside liabilities, there shall be paid firstly all arrears of
preference dividend ; secondly the amount paid up on the Preference Shares together with a
premium thereon of ? 10 per share, and thirdly any balance then remaining shall be paid to the
equity shareholders.
Bank Overdraft was guaranteed by the directors who were called upon by the Bank to
discharge their liability under the guarantee. The directors paid the amount to the Bank.
The liquidator realised the assets as follows :
Freehold Factory ? 7,00,000 ; Plant and Machinery ? 2,40,000 ; Motor Vehicles ? 59,000;
Stock ? 1,50,000 ; Debtors f 60,000 ; Calls in Arrears ? 25,000.
Creditors were paid less discount of 5 per cent. The debentures and accrued interest were
repaid on 31st March, 2017.
Liquidation costs were ? 3,820 and the liquidator’s remuneration was 2 per cent on the
amounts realised.
Prepare Liquidator’s Statement of Account.
Ans. [Liquidator’s Remuneration ? 24,680 ;
Amount paid to Equity Shareholders ? 1,54,500],
12. The Suny Valley Mining Co. Ltd. went into voluntary liquidation on 1st January, 2017.
Liquidator’s remuneration is 5% on assets realized and 3% on distribution among
shareholders. Position as on 1st January, 2017 was as follows :
Cash on realisation of assets ? 5,00,000 ; Liquidation expenses ? 9,000 ; Unsecured
creditors ? 62,000 ; Creditors for salaries and wages (December 2016) T 6,000 ; 5,000 6%
preference shares @ ? 30 each (dividend paid up to 2014) ? 1,50,000 ; 10,000 equity shares of
? 10 each, ? 9 per share called and paid up T 90,000
Under the Articles the preference shareholders have the right to receive 25% of the surplus
remaining after repaying the equity share capital.
Prepare the Liquidator’s Final Statement of Account. (B.Com. Panjab Modified )
Ans. [Total Amount paid to Preference Shareholders T 2,00,102 ; Total Amount paid to Equity
Shareholders f 1,86,306].
13. The position of Valueless Ltd. on its liquidation is as under:
Issued and Paid-up Capital :
3.000 11% preference shares of ? 100 each fully paid.
3.000 Equity shares of T 100 each, fully paid.
1.000 Equity shares of ? 50 each, ? 30 per share paid.
Calls in Arrears are ? 10,000 and Calls received in Advance ? 5,000. Preference Dividends are
in arrears for one year. Amount left with the liquidator after discharging all liabilities is
? 4,13,000. Articles of Association of the company provide for payment of preference dividend
arrears in priority to return of equity capital. You are required to prepare the Liquidator’s Final
Statement of Account.
Ans. [Final call received from holders of 1,000 equity shares of ? 50 each, ? 30 paid @ ? 5 per
share = ? 5,000 ; Amount paid to holders of 3,000 equity shares of ? 100 each @ ? 30 =
? 90,000].
14. The Breakfast Foods Ltd., went into voluntary liquidation on 31st December, 2017. The
balances in its books on that date were :
C re d it B a la n ce s D e b it B ala n ce s ?
S hare C a p ita l: Land and Buildings 2,50,000
Authorised and Subscribed : Machinery and Plant 9,25,000
5,000 6% Cumulative Patents 1,00,000
Preference Shares of Stock 1,37,500
f 100 each fully paid 5,00,000 Sundry Debtors 2,75,000
2,500 Equity Shares of f 100 Cash at Bank 75,000
each, ? 75 paid. 1.87,500
7,500 Equity Shares of ? 100
each, ? 60 paid 4,50,000
5% Mortgage Debentures 2,50,000
Interest Outstanding 12,500
Creditors 3,62,500
17,62,500 17,62,500
The liquidator is entitled to commission of 3% on all assets realised except cash and 2% on
amounts distributed among unsecured creditors other than preferential creditors.
Creditors include Preferential Creditors ? 37,500 and a loan for f 1,25,000 secured by a
mortgage on land and buildings. The preference dividends were in arrears for two years. The
assets realised as follows :
Land and Buildings ? 3,00,000 ; Machinery and Plant ? 5,00,000 ; Patents ? 75,000 ; Stock
? 1,50,000 ; Sundry Debtors f 2,00,000.
The expenses of liquidation amounted to ? 27,250.
Prepare Liquidator’s Final Statement of Account.
Ans. [Liquidator’s Remuneration t 40,750 ; Amount paid to Equity Shareholders : on 2,500
shares @ f 15.95 and on 7,500 shares @ 95 paise per share].
15. BALANCE SHEET
as on 3 1 s t D ecem ber, 2 0 1 6 ___________________________

Share Capital :
(/) 2,000 Equity Shares of ? 100 each fully paid 2 , 00,000
1/ 1-36 COMPANY LIQUIDA TION Ci
(/'/) 3,000 Equity Shares of X 100 each, X 50 per share paid 1,50,000
(iii) 1,000 6% Preference Shares of X 100 each 1 ,00,000
(2) N o n -c u rre n t Lia b ilitie s
(/) 6% Debentures (Floating charge on all assets) 1 ,00,000
(//) Loan on Mortgage of Land & Building 1 ,00,000
(/) Sundry Creditors 90,000
(//) Income Tax Payable 10,000
Total 7,50,000
II. Assets
(1) N o n -c u rre n t A sse ts
(a) Land & Building 2 ,00,000
(b) Plant & Machinery 3,20,000
(a) Stock 1,00,000
(b) Debtors 1,00,000
(c) Cash at Bank 30,000
Total 7,50,000
The company went into liquidation on 1st January, 2017.
The preference dividends were in arrear for three years. The arrears are payable on
liquidation.
The assets were realised as follows : Land and Building X 2,40,000 ; Plant and Machinery
X 1,80,000 ; Stock X 70,000 ; Debtors X 60,000.
The expenses of liquidation amounted to X 8,000.
The liquidator is entitled to a commission at 2% on all assets realised except cash at bank
and 3% on amounts distributed to unsecured creditors.
All payments were made on 30th June, 2017.
Prepare Liquidator’s Statement of Account.
Ans. [Equity shareholders g e t: On 2,000 shares @ X 57.40 and on 3,000 shares @ X 7.40].
16. Credit and debit balances of Bubble Ltd. as on 31-12-2017 were as follows :
Cr. B ala n ce s X Dr. B ala n ce s X
S hare C a p ita l : Land and Building 25,000
8,000 Preference Shares of Other Fixed Assets 2 ,00,000
X 10 each 80,000 Stock 5,25,000
12,000 Equity Shares of X 10 each 1,20,000 Debtors 1,00,000
Bank Loan 4,00,000 Surplus A/c (Negative Balance) 58,000
8 % Debentures 1,00,000
Interest Outstanding on
Debentures 8,000
Creditors 2 ,00,000
9,08,000 9,08,000
The company went into liquidation on that date. Prepare Liquidator’s Statement of Account
after taking into account the following :
(1) Liquidation expenses and liquidator’s remuneration amounted to X 3,000 and X 10,000
respectively.
(2) Bank loan was secured by pledge of stock.
(3) Debentures & interest thereon are secured by a floating charge on all assets.
(4) Fixed assets were realised at book values and current assets at 80% of book values.
Ans. [Amount paid to Preference Shareholders : X 4,000 @ 50 Paise per share on 8,000
shares].
6
17. Balance Sheet of Byrtes Ltd, as on 30th September, 2017 was as follows :
1. Equity and Liabilities ?
(a) Share Capital :
(/) 10,000 ‘A’ Equity Shares of ? 20 each 2 ,00,000
(/'/) 5,000 ‘B’ Equity Shares of ? 20 each,
? 19 per share called up and paid up 95,000
(///) 500 5% Cumulative Preference Shares of ? 200 each 1 ,00,000
(b) Surplus Account (-) 1,95,000
(2) N o n -c u rre n t Lia b ilitie s
5% Debentures (Secured on Freehold Property) 80,000
(3) C u rre n t L ia b ilitie s
Creditors 1,78,000
Total 4,58,000
II. Assets
( 1) N o n -c u rre n t A sse ts
Freehold Property 80,000
Furniture & Equipment 20,000
Stock 1,60,000
Debtors 60,000
Bank 18,000
Total 4,58,000
The company passed a resolution to wind up voluntarily and you are appointed as a
liquidator. The preference shareholders have not received dividend for the past two years. The
articles of the company include the following clauses : (a) The preference shares will rank both
as regards dividend whether declared or not and capital in priority to all other shares both
present and future, (b) That all equity shares will be treated alike.
The debenture interest is payable on 31st March and on 30th September every year and
the interest due on 30th September, 2017 was paid. Creditors include ? 5,000 on account of
Income-tax due.
The liquidator sold the Plant and Furniture for T 95,000, stock realised ? 1,22,000 and
debtors realised ? 50,000. The debentureholders requested the liquidator to sell also the
Freehold Property and the property was sold for f 1,20,000. Liquidation expenses amounted to
? 12,000. Liquidator’s remuneration was fixed at 2£ % on all the amount realised except Bank
plus a fixed bonus of f 4,325. The debentureholders and others were paid off on 31st
December, 2017. Draw up the Liquidator’s Final Statement of Account.
Ans. [Liquidator’s Remuneration ? 14,000 ; Amount paid to Equity Shareholders ? 10,000].
18. A Limited Company went into voluntary liquidation with liabilities amounting to
? 30,000 and assets which eventually realised ? 1,78,000. The capital of the company
consisted of 10,000 preference shares of ? 10 each of which ? 7 per share was called and paid
up. The holders of 8,000 shares had, however, paid up the full ? 10 in advance of calls. There
were also 10,000 ordinary shares of f 10 each on which f 9 per share had been called.
Holders of 2,000 shares had, however, paid up ? 8 per share, while holders of 4,000 shares,
had paid up the full f 10 in advance of calls.
Assuming that preference shares have no prior rights as to capital, show in the form of a
Liquidator’s Receipts and Payments Account, how you would divide the available balance
among the shareholders, assuming that the costs of winding up amount to f 2,000 and that the
calls in arrears are duly collected.
Ans. [Return of Capital : ? 50,000 to Preference Shareholders and ? 70,000 to Equity
Shareholders].
19. Following is the Balance Sheet as on 31-12-2016 of X Ltd. which goes into voluntary liquidation
as on that date :
(a) Share Capital :
(/) 10,000 Equity Shares of ? 50 each 5,00,000
(/'/) 1,000 Preference Shares of f 100 each 1 ,00,000
General Reserve 1,00,000
(2) N o n -c u rre n t L ia b ilitie s
Secured Loans :
(;) Loan from State Financial Corporation 2 ,00,000
(/'/) Loan from Bank 38,00,000
Creditors 9,00,000
Total 56,00,000
II. Assets ?
(1) N o n -cu rre n t A sse ts
Fixed Assets 9,00,000
(a) Stocks 24,00,000
(b) Debtors 18,00,000
(c) Cash at Bank 1 ,00,000
(d) Loans and Advances 4,00,000
Total 56,00,000
Following information is given :

(a) The loan from State Financial Corporation is secured by first charge on fixed assets.
(b) The Bank is secured by pledge of goods, hypothecation of all current assets and a
second charge on fixed assets.
(c) Creditors include preferential creditors of ? 2,00,000. On 15-1-2017, stocks are sold.
Stocks in the pledge/godown realised ? 14,00,000 and other stocks were sold for f 4,00,000.
On 31-1-2017 expenses of liquidation amounting to ? 3,000 are met and fixed assets are sold
for ? 13,00,000. On 15-2-2017 all other current assets realised T 19,10,000 and liquidator’s
remuneration amounting to f 7,000 is paid.
Prepare Liquidator’s Cash Account and Liquidator’s Final Statement of Account presuming
that all payments are made in order of preference on earliest availability of cash.
Ans. [Equity Shareholders get T 1,00,000].
20. You are asked by a liquidator of a company to prepare a Statement of Account to be laid
before a meeting of the shareholders from the following data :
a s on da te o f L iq u id a tio n 1-1-2017
? f
S h a re C a p ita l : Fixed Assets 4,00,000
4,000 Equity Shares of Book Debts 3,00,000
T 100 each, called ? 80 3,20,000 Loss-to-date 1 ,00,000
1,000 Preference Shares of
f 100 each, called f 70 70,000
Secured Loan from Banks on
Building and Machinery 1.50.000
Trade Creditors 2.60.000
8 ,00,000 8 ,00,000
COMPANY LIQUIDA TION 1/1-39
The assets realised as follows : 1-4-2017— Book Debts ? 1,00,000 and expenses paid
f 4,000. 1-6-2017-Fixed Assets (final ? 3,00,000 and Book Debts f 1,00,000. 1-8-2017-
Book Debts paid payment ? 50,000. The Liquidator is entitled to 5% on collections from book
debts and 2% on the amount paid to equity shareholders. Prepare Liquidator’s Statement of
Account on the assumption that disbursements are made in accordance with law, as and when
cash is available. (B .C o m . P a n ja b )
Ans. [Amount distributed on 1-4-2017 : Liquidator’s Remuneration ? 5,000 and Expenses
T 4,000. Amount distributed on 1-6-2017 : Liquidator’s Remuneration ? 5,118; Trade
Creditors ?2,60,000; Preference Shareholders f 70,000 and Equity Shareholders f 5,882.
Amount distributed on 1-8-2017 : Liquidator’s Remune-ration ? 3,431 and Equity
Shareholders ? 46,569].
Hint : The balance in hand on 1st April, 2017 after paying the liquidator’s remuneration
and expenses has been carried forward till the further realisation on 1.6.2017 because
the position as regard loan from bank has not yet crystallised.
21. Following is a list of credit and debit balances of Olympus Ltd. as at 31st August, 2017 :
Cr. B ala n ce s f Dr. B ala n ce s r
Issu e d C a p ita l : Sundry Assets 4,79.000
1 ,000 7% Preference Shares Buildings 1,00,000
of ? 100 each fully paid 1,00,000 Preliminary Expenses 10,000
1,500 Equity Shares of ? 100 Surplus Account 33,500
each, ? 95 paid 1,42,500
5% Debentures 2 ,00,000
Loan on Mortgage 80,000
Bank Account 25.000
Creditors including f 55,000
for the assessed tax 75.000
6,22,500 6,22,500
The mortgage was secured on the Buildings and the Debentures were secured by floating
charge on the ‘Sundry Assets’. The debentureholders appointed a Receiver who took charge of
the ‘Sundry Assets’ amounting to T 3,15,000. A Liquidator was also appointed as the company
went into voluntary liquidation. The Receiver realised the assets for f 2,95,000 and his costs
and remuneration were f 1,500 and ? 2,000 respectively; ? 90,000 were realised from Building
and ? 1,45,000 from the sale of the remaining ‘Sundry Assets’. The Bank had the Guarantees
of the Directors amounting to ? 22,000 which was duly honoured by them. The costs of
liquidation were ? 3,000 and the Liquidator’s remuneration amounted to ? 1,250. Prepare the
Accounts of the Receiver and the Liquidator.
Ans. [Amount paid to Equity Shareholders ? 42,250],
22. The liabilities and assets of Vasant Ltd. as on 31st March, 2017 being the date of voluntary
winding up is as under:_________________________________________________________
L ia b ilitie s Am ount A sse ts Am ount
? ?
Share Capital : Land & Building 1.30.000
Issued : 10% Pref. Shares of Sundry Current Assets 4.36.000
f 10 each 1.50.000 Surplus Account 35,000
10.000 Equity Shares of f 10 each, Debenture Issue Expenses
fully paid up 1 ,00,000 Not Written off 2,000
5.000 Equity Shares of ? 10 each,
? 8 per share paid up 40.000
13% Debentures 1.50.000
Mortgage Loan 70.000
Bank Overdraft 30.000
Trade Creditors 38.000
Income Tax Arrears (assessment
concluded in February, 2017) 25.000
6,03,000 6,03,000
Mortgage loan was secured against Land & Building. Debentures were secured by a floating
charge on all assets. The company was unable to meet the payments and therefore the
debentureholders appointed a Receiver for the debentureholders. He brought the Land and
B u ild in g s to action a n d re a lise d ? 1,60,000. He also took charge of Sundry Assets of value of
? 2,36,000 and realised ? 2,00,000. The Bank overdraft was secured by personal guarantee of
the directors of the company and on the Bank raising a demand, the Directors paid off the due
from their personal resources. Costs incurred by the Receiver were ? 1,950 and by the
Liquidator f 3,000. The receiver was not entitled to any remuneration but the Liquidator was to
receive 2% fee on the value of assets realised by him. Preference Shareholders have not been
paid dividend for period after 31st March, 2015 and interest for the last half year was due to the
Debentureholders. Rest of the assets were realised at ? 1,50,000.
Prepare the accounts to be submitted by the receiver and Liquidator.
Ans. [Amount paid to Equity Shareholders t 6,200]
23. In a winding up which commenced on 15th September, 2017, certain creditors could not
receive payments out of the realisation of assets and out of contribution from ‘A’ list of
contributories. Following are the details of certain share transfers that took place prior to
liquidation and the amount of creditors remaining unpaid.
C re d ito rs rem aining
u n p a id a n d o u tsta n d in g
No. o f sh a re s D ate w hen ce a se d on the d a te o f ce a sin g
S h a re h o ld e rs tra n sfe rre d to be m e m b e r to be a m e m b e r
?
L 2,000 31-8-2016 8,000
M 1,800 20-9-2016 12,000
N 1,200 15-11-2016 17,400
O 1,000 22-4-2017 18,600
P 500 10-7-2017 22,000
All the shares were of T 10 each, on which ? 5 per share had been called and paid up.
Ignoring expenses of liquidation, remuneration to liquidator etc., work out the amount to be
realised from the above contributories.
Ans. [Amount to be realised from : M ? 4,800 ; N ? 5,600 : O ? 5,000 and P ? 2,500 ; L Nil],
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O Introduction
Sometimes companies carrying on similar business combine with each other to obtain the
economies of large scale production or to avoid the disastrous results of cut throat
::mpetition. It is being done by Amalgamation and Absorption. The term amalgamation is
sed when two or more companies carrying on similar business go into liquidation and a new
:ompany is formed to take over their business. Accounting Standard 14 (AS-14)—
Accounting for Amalgamation”, issued by the Institute of Chartered Accountants of
ndia is applicable in respect of accounting periods commencing on or after 1st April,
' 595 and is mandatory in nature. This standard specifies the procedure of accounting
‘or amalgamations and the treatment of any resultant goodwill or reserve. AS-14 has
seen replaced by Ind AS-103. But in this Chapter AS-14 has been followed keeping in
. ew the requirement of the Syllabus.
O Definitions
Following terms with specified meaning have been used in this standard:
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies
2013 or any other statue which may be applicable to companies.
(b) Transferor Company means the company which is amalgamated into another
company.
(c) Transferee Company means the company into which a transferor company is
i-algamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise
■•nether capital or revenue) appropriated by the management for a general or a specific
: .-pose other than a provision for depreciation or dimuation in the value of assets or for a
• ■■own liability.
O Features of Amalgamation
1. For amalgamation two or more companies are required to amalgamate (or merge)
themselves.
2. All the existing companies which are merged are to be liquidated.
3. A new company is formed to take over the business of the companies which are to be
merged.
11/ 1-2 AMALGAMATION (AS-14)
4. The value of the new company formed is expected to be greater than the total of the
independent values of the amalgamating companies because of economies of large
scale production, saving in cost by elimination of duplicate activities and facilities and
by avoiding the disastrous results of cut throat competition.
O Types of Amalgamation
From accounting point of view there are two types of amalgamation :
(I) Amalgamation in the nature of merger, and (II) Amalgamation in the nature of purchase.
(I) Amalgamation in the Nature of Merger or Pooling Interests Method of

Amalgamation
An amalgamation should be considered to be an amalgamation in the nature of
merger when all the following conditions are satisfied :
(/) All the assets and liabilities of the transferor company become, after amalgamation,
the assets and liabilities of the transferee company.
(/'/) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee company by virtue of the amalgamation.
(Hi) The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee company
is discharged by the transferee company wholly by the issue of equity shares in the
transferee company, except that cash may be paid in respect of any fractional shares.
(/V) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.
Thus there is pooling of assets and liabilities of the combining entities under this type of
amalgamation. Equity shareholders of the combining entities continue to have a proportionate
share in the combining entity. It must be ensured that resultant figures of assets, liabilities,
capital and reserve of the combining entity more or less represent the sum of the relevant
figures of the amalgamating companies.
(II) Amalgamation in the Nature of Purchase
An amalgamation should be considered to be an amalgamation in the nature of purchase,
when any one or more of the conditions specified for amalgamation in the nature of merger is
not satisfied. In fact under this type of amalgamation generally one company acquires
another company and equity shareholders of the combining entities do not continue to have
proportionate share in the equity of the combined entity or the business of the acquired
company is not intended to be combined after the amalgamation.
Q Distinction Between Amalgamation in the Nature of M erger and

Amalgamation in the Nature of Purchase
The two types of amalgamation differ in the following respects :
1. In an amalgamation in the nature of merger, there is a genuine pooling not merely of
assets and liabilities of the amalgamating companies but also of the shareholders’ interest
and of the businesses of the two companies. All the assets and liabilities including reserves
and surplus of the transferor company, after amalgamation, become the assets and liabilities
:--V A T IO N (AS-14) 11/ 1-3
nr r t •a.'sferee company. The business of the transferor company is intended to be carried

y l~t amalgamation by the transferee company. Equity shareholders of the combining
n t ; ::ntinue to have a proportionate share in the combining entity. On the other hand an
mr ^ :i- a ;io n in the nature of purchase is a mode by which one company acquires another
H3T*c«."y and equity shareholders of the combining entities do not continue to have
a c n a t e share in the entity of the combined entity. The business of the acquired
sr~ C c 'i may not intended to be continued.
1 i the pooling of interest method of amalgamation, assets, liabilities, reserves and
s~— .5 of the transferor company are all incorporated in the books of the transferee
« d—cany. Hence, pooling of interest method is a case of total incorporation of financial
f c . H in the case of amalgamation in the nature of purchase, only net assets taken over by
H e Eansferee company are incorporated in the books of the transferee company ignoring
■serves and surplus ot the transferor company. Hence, amalgamation in the nature of
:. :-aseTsFonly partTaTTncorporation of financial figures.
3 In case of amalgamation in the nature of merger, difference between the purchase
: - ; ;eration and net assets taken over is adjusted in general reserve or other reserves and
: treated as goodwill or capital reserve as is the case in case of amalgamation in the
- £-_-e of purchase.
- In case of amalgamation in the nature of purchase, for carry forward of any statutory
h t ' . s by the transferee company, Amalgamation Adjustment A/c is debited and credit is
p’.en to the concerned statutory reserve by the transferee company. On the other hand, in
of amalgamation in the nature of merger, Amalgamation Adjustment A/c is not to be
;ce_ed for the take over of the statutory reserves.
Reconstruction. It means reconstruction of a company’s financial structure. It may take
: a:e either with or without the liquidation of the company. If the company going into
e-:: nstruction is liquidated then the reconstruction is called as ‘External Reconstruction’,
~9"wise it is called ‘Internal Reconstruction’. The two types of reconstructions thus are :
/) External Reconstruction. When a new company is formed with the same name in
: ;er to take over the business of an existing company, it is called external reconstruction.
s is generally resorted to in case of a company having accumulated past losses, the book
.a ue of assets are not shown at their true value. For example, National Company Ltd. was
a*en over by the New National Co. Ltd. Then the former company will be a transferor
company being wound up and the latter company will be a transferee company.
(//) Internal Reconstruction. This is generally resorted to by a company which is being
-ec-rganised internally. A scheme of re-organisation is prepared in which ail parties sacrifice.
The sacrifice are made in this order—equity shareholders, preference shareholders,
.-secured creditors and partially secured creditors. Linder this scheme the existing company
continues in its legal entity form and can take advantage of carry forward and set off of the
:ast losses. This will be discussed in detail in next chapter.
With the sanction of a special resolution of the company, the liquidator is permitted to
accept shares and securities etc. of the transferee company for distribution among the
members of the transferor company. Thus a company that goes into liquidation can be
purchased by some other company and the purchase price may be paid, fully or partly, by
issuing shares or securities in the purchasing company. The members of the transferor
company who do not like to purchase the shares of the transferee company have the right of
requiring the liquidator to purchase their shares at a price to be determined by agreement or
in default by arbitration.
From the above discussion it is clear that there are two types of companies i.e. transferee
company and the transferor company/companies in case of amalgamation, and external
reconstruction; so accounting entries which are to be passed in the books of transferee
company and transferor company/companies will be the same in case of amalgamation and
external reconstruction.
11/1-4 AMALGAMATION (AS-14)
O Purchase Consideration
Purchase consideration is the amount which is paid by the transferee company for the
purchase of the business of the transferor company. In other words consideration for
amalgamation means the aggregate of the shares and other securities issued and payment in
cash or other assets by the transferee company to the shareholders of the transferor
company. It should not include the amount of liabilities taken over by the transferee company,
which will be paid directly by this company. Payments made to debentureholders should
not be considered as part of purchase consideration. While determining the amount of.
purchase consideration special care should be given to the valuation of assets and liabilities
of the transferor company. The calculation of purchase consideration is very important and
may be calculated in the following ways :
(I) Lump Sum Method. When the transferee company agrees to pay a fixed sum to the
transferor company, it is called a lump sum payment of purchase consideration. For example,
if X Ltd. purchases the business of Y Ltd. and agrees to pay f 25,00,000 in all, it is an
example of lump sum payment.
(II) Net Worth (or Net Assets) Method. According to this method, the purchase
consideration is calculated by calculating the net worth of the assets taken over by the
Transferee company. The net worth is arrived at by adding the agreed value of assets taken
over by the transferee company minus agreed value of liabilities to be assumed by the
transferee company. While calculating purchase consideration under this method the
following points merit attention :
(a) The term ‘Assets’ will always include cash in hand and cash at bank unless
otherwise specified but shall not include fictitious assets such as preliminary
expenses, discount on the issue of shares or debentures, underwriting commission,
debit balance of Profit & Loss Account etc.
(b) If a particular asset is not taken over by the transferee company, it should not be
included in the purchase consideration.
(c) The term ‘Liabilities’ will mean all liabilities to third parties (i.e. excluding company
and shareholders).
(d) The term ‘ trade liabilities’ will include trade creditors and bills payable. It will
exclude other liabilities to third party such as bank overdraft, debentures,
outstanding expenses, tax liability etc.
(e) If a fund or portion of a fund denotes liability to third parties, the same must be
included in the liability as staff provident fund, workmens’ savings bank account,
workmens’ profit sharing fund, workmens’ compensation fund (upto the amount of
claim, if any).
(/) The ‘term liabilities’ will not include past accumulated profits or reserves such as
general reserve, dividend equalisation fund, reserve fund, sinking fund, capital
reserve, Securities Premium account, capital redemption reserve account, profit and
loss account etc. as these are payable to shareholders and not to third parties.
(g) The term ‘business’ will always mean both the assets and the liabilities.
(h) If any liability is not taken over by the transferee company, the same should not be
included in the purchase consideration.
(/) Goodwill (being an intangible asset) value agreed to be paid by the transferee
company is added in the purchase consideration.
(y) The consideration for the amalgamation should include any non-cash element at fair
value. In case of issue of securities, the value fixed by the statutory authorities may
be taken to be the fair value. In case of other assets, the fair value may be
determined by reference to the market value of the assets given up. Where the
market value of the assets given up cannot be reliably assessed, such assets may
be valued at their respective net book values.
AMALGAMATION (AS-14) li /1-5
(k) Where the scheme of the amalgamation provides for an adjustment to the
consideration contingent on one or more future events, the amount of the additional
payment should be included in the consideration if payment is probable and a
reasonable estimate of the amount can be made. In all other cases, the adjustment
should be recognised as soon as the amount is determinable [see Accounting
Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet
Date]
(/) Treatment o f Reserves Specified in a Scheme o f Amalgamation. Where the
scheme of amalgamation sanctioned under a statue prescribes the treatment to be
given to the reserves of the transferor company after amalgamation, the same
should be followed. Calculation of the purchase consideration by the net worth
method may be made clear by the following example :
BALANCE SHEET OF A CO. LTD.
as a t ..............

(a) Share Capital :
6,000 Equity Shares of ? 10 each 60,000
(to) Reserves and Surplus
General Reserve 4,000
Surplus Account 20,000
8 % Debentures 10,000
(3) C u rre n t Liab ilitie s
Sundry Creditors 6,000
Total Equity and Liabilities 1,00,000
H. Assets
(a) Fixed Assets
(/) Land & Buildings 16,000
(//) Plant & Machinery 28,000
(to) Intangible Asset: Goodwill 30,000
Stock 16,000
Debtors 8,000
Cash 2,000
Total Assets 1 ,00,000
Suppose (/) Company B takes over the business of company A; (/'/) The value agreed for
. arious assets is : Goodwill ? 22,000, Land and Buildings ? 25,000, Plant and Machinery
= 24,000, Stock ? 13,000 and Debtors ? 8,000; (Hi) B Company does not take over cash but
agrees to assume the liability of Sundry Creditors at ? 5,000.
The calculation of purchase consideration will be as follows :
Value of assets taken over by B company : ?
Goodwill 22,000
Land and Buildings 25,000
Plant and Machinery 24,000
Stock 13,000
Debtors 8,000
92,000
Less : Sundry Creditors taken over by B company 5,000
Purchase Consideration 87,000
(ill) Net Payment Method. Under this method purchase consideration is calculated by
adding the various payments in the form of shares, securities, cash etc. made by the
transferee company. No amount of liabilities is deducted even if these are assumed by
the purchasing company. Thus purchase consideration is the total of all the payments
whether in shares, securities or cash. Suppose in the example given above B Co. Ltd. agrees
to give for every 10 shares in A Ltd. 15 shares of ? 10 each, ? 8 paid up and balance of the
purchase consideration is paid in cash.
Purchase consideration will be calculated as under:
Shareholders of A Co. Ltd. will get :
6,000 x = 9,000 shares of ? 10 each, ? 8 paid up 72,000
Balance paid in cash 15,000
Purchase consideration 87,000
Following points should be taken into account while calculating purchase

consideration under this method :
(a) The assets and liabilities taken over by the transferee company are not to be
considered.
(b) The payments made by the transferee company for shareholders, whether in cash or
shares must be taken into account.
(c) If creditors and debentures are taken over by the transferee company and subse
quently discharged, then such amount should not be added to the purchase
consideration.
(d) When liabilities are not taken over by the transferee company, they are neither added
or deducted to the amount of purchase consideration.
(e) Any payment made by the transferee company to some other party on behalf of the
transferor company is to be ignored.
(f) If the liquidation expenses of the transferor company are to be borne by the
transferee company, these should not be added to the purchase consideration.
IL L U S T R A T IO N 1. Balance Sheet of Dreamers Ltd. as on 31st March, 2017
stood as under:
I. Equity and Liabilities ? in lakhs
(1) Shareholders ’ Funds
(a) Share Capital :
10% Preference Shares of ? 100 each 30
Equity Shares of ? 10 each 60
General Reserve 36
(2) Non-current Liabilities
12% Debentures 28
(3) Current Liabilities 20
Total Equity and Liabilities 174
AMALGAMATION (AS-14)
11/1-9
II. Assets
(1) Non-current Assets
(a) Fixed Assets
(b) Investments 24
(2) Current Assets
Total Assets 20
Total Assets 174
Performers Ltd. signified their agreement to takeover the assets and liabilities of
Dreamers Ltd. as per the following terms and conditions :
(i) Fixed assets at 90% of the book value. (/'/) Investments at 10% above the par
value. (Hi) Current assets and liabilities at book value except that stock-in-trade at cost
amounting to f 10 lakh was agreed to be taken over at a discount of 20%. (;V) 12%
Debentures are to be discharged at a premium of 15% by issuing 12% debentures of
Performers Ltd. (v) Preference shareholders are to be discharged at a premium of 15%
by issuing 10% preference shares of ? 100 each, (vi) The equity shareholders in
Dreamers Ltd. are to be issued 5 equity shares of ? 10 each in Performers Ltd. for
every 3 shares held by them.
Work out the purchase consideration for the takeover under : Net assets method;
and net payment method.
S O L U T IO N
Computation of Purchase Consideration
(!) According to Net Assets Method f in L akhs
I 90
Fixed Assets taken at 90% i.e. ™ x T 130 lakhs 117.00
investments (taken a. 10% above. i.e., ? 24 lakhs I 26.40
Current Assets :
Stock-in-trade |taken at 80%, i.e., x ? 10 lakhs ) 8.00
Other Current Assets (taken at par value) 10.00
T6L40
Less : Liabilities taken over f in Lakhs
115
12% Debentures at 15% premium x ? 28 lakhs 32.20
Current Liabilities at par 20.00
52.20
Purchase Consideration 109.20"
Note : Debentures are assumed to be taken over by Performers Ltd.
(//) According to Net Payment Method A m ount M ode o f
? in Lakhs P a ym e n t
Payment for Preference Shareholders 34.50 10% Preference
(30 + 15% Premium) Shares in
Performers Ltd.
Payment for Equity Shareholders
5 Equity Shares for every 3 shares held
Equity Shares in
16 lakhs x | x ? 10 J 100.00 Performers Ltd.
Purchase Consideration 134.50
AMALGAMATION (AS-14)
falue Method. Under this method purchase consideration is required to be

jasis of intrinsic value of shares. The intrinsic value of a share is calculated
it assets available for equity shareholders by the number of equity shares,
mines the ratio of exchange of the shares between the transferee and
inies. In some cases the agreed values of the shares of both the companies
are given, in t case the purchase consideration is calculated with reference to the value of
shares of two companies involved. Suppose X Ltd. and Y Ltd. are two companies carrying on
business in the same line of activity. Their capital is ? 6,00,000 and ? 2,00,000 (value of each
share, ? 10). The two companies decided to amalgamate in XY Ltd. If each share of X Ltd.
and Y Ltd. is valued ?t f 15 and f 25 respectively for the purpose of amalgamation, then
purchase consideration will be as under:
X L td . Y L td .
w r
60.000 shares @ f 15 each 9,00,000 —
20.000 shares @ ? 25 each — 5,00,000
Note : While issuing shares to individual shareholders of the selling company, these may be
in fractions. A company cannot issue shares in fractions but it can issue fractional certificates
or coupons or pay cash for the fractions.
A M A L G A M A T IO N A N D EXTERNAL RECONSTRUCTION
O Accounting Entries in the Books of the Transferor Company
The books of the transferor company being wound up will be closed in the same
way as the books of a partnership firm being dissolved. Following entries are made :
(1) F o r tr a n s fe rr in g a s s e ts ta k e n o v e r b y th e tr a n s fe re e c o m p a n y .
Realisation A/c Dr.
To Various Assets (individually) (at book value)
Note. Assets which are not taken over by the purchasing company as cash, bank balance will not
be transferred to Realisation Account. Fictitious assets like preliminary expenses, discount or
commission or expenses on issue of shares or debentures, debit balance of profit and loss account are
not to be transferred to realisation account. Assets on which some provision has been made are to be
transferred to realisation account at their gross figures and provisions made should be transferred along
with liabilities.
(2) F o r tr a n s fe rr in g lia b ilitie s ta k e n o v e r b y th e tr a n s fe re e c o m p a n y
Various Liabilities (Individually) Dr. (at Book value)
To Realisation A/c
Note. Only those liabilities are to be transferred which have been assumed by the transferee
company. Accumulated profits like credit balance of profit and loss account, general reserve, dividend
equalisation reserve, sinking fund, capital reserve are not transferred to realisation account. If there is
any fund which partially represents liability and partially undistributed profit, then that portion which
represents liability should be transferred to realisation account.
(3) F o r p u r c h a s e c o n s id e r a tio n
Transferee Company’s A/c Dr.
To Realisation A/c
(4) F o r r e c e iv in g p u r c h a s e c o n s id e r a tio n fro m th e tr a n s fe re e c o m p a n y
Bank A/c Dr.
Shares in Transferee Company A/c Dr.
To Transferee Company’s A/c
- VALGAMATION (AS-14) 11/ 1-9
!5) For assets sold by the transferor company not taken over by the transferee company
Bank A/c Dr.

Realisation A/c (If loss on sale of assets) Dr.
To Assets A/c
To Realisation A/c (If profit on sale of assets)
6) For liquidation expenses
(a) If the expenses are to be met by the transferor company
Realisation A/c Dr.
To Bank A/c
(b) If the expenses are to be met by the transferee company, there are two
alternatives :
- rst Alternative—no entry.
Second Alternative—Following two entries will be passed :
(/) Transferee Co.’s A/c Dr.
To Bank A/c
(//) Bank A/c Dr.
To Transferee Co.’s A/c
For liabilities not taken over by the transferee company and paid by the transferor
company
Various Liabilities A/c Dr.
Realisation A/c (If excess payment is made) Dr.
To Bank Account
or Shares in Transferee Co. A/c
To Realisation Account (if less payment is made)
3 i For Closing Realisation Account
(a) If Profit
Realisation A/c Dr.
To Equity Shareholders A/c
(b) If Loss
Equity Shareholders A/c Dr.
To Realisation A/c
For transferring Preference Share Capital
Preference Share Capital A/c Dr.
To Preference Shareholders A/c
Hote. If arrears of dividend are tao be paid to preference shareholders, then such excess amount
* d - : oe debited to Realisation Account and credited to Preference Shareholders Account. If the
•ce shareholders have agreed to get less than the amount of capital, then reverse entry is to be
' 0 For transferring equity share capital and accumulated profit and reserves :
Equity Share Capital A/c Dr.
General Reserve A/c Dr.
Debenture Redemption Fund Dr.
Dividend Equalisation Reserve Dr.
Securities Premium A/c Dr.
Surplus A/c Dr.
Accident Compensation Fund Dr
(to the extent it does not denote liability)
Shares Forfeited A/c Dr.

Profit Prior to Incorporation
Any Other Reserve or Fund A/c Dr.
To Equity Shareholders A/c
(11) For transferring accumulated losses and expenses not written-off
To Surplus A/c (Debit Balance)
To Discount or Expenses on Issues of Shares or Debentures A/c
To Preliminary Expenses A/c
To Underwriting Commission A/c
(12) For paying shareholders
Preference Shareholders A/c Dr.
To Bank or Shares in Transferee Company
Q Accounting in the Books of the Transferee Company
Accounting in the books of the transferee company is to be done with reference to
Accounting Standard (AS)-14. The accounting procedure will differ depending upon the type
of amalgamation. There are two main methods of accounting for amalgamation in the books
of the transferee company :
(a) The Pooling of Interests Method, and (b) The Purchasing Method.
(a) The Pooling of Interests Method
This method is applicable in case of amalgamation in the nature of merger. In this case,
the amalgamation is accounted for as if separate businesses of amalgamated companies
were intended to be carried on by the transferee company. That is why only minimum
changes are made in aggregating the individual financial statements of the transferor
companies. Following factors are taken into consideration while making entries in this
method:
(/) In preparing the transferee company’s financial statements, the assets, liabilities, and
reserves (whether capital or revenue or arising on revaluation) of the transferor company
should be recorded at their existing carrying amounts and in the same form as at the date of
the amalgamation unless any adjustment is required due to different accounting policies. The
balance of the Surplus Account of the transferor company should be aggregated with the
corresponding balance of the transferee company or transferred to the General Reserve, if
any.
(//) The difference between the amount recorded as share capital issued plus any
additional consideration in the form of cash or other assets and the amount of share
capital of the transferor company should be adjusted in reserves. In case there is no
balance in the Reserve Account in the Balance Sheet of the transferee company to
offset the debit balance in the Reserve Account arising as a result of the difference
between the purchase consideration and the amount of share capital of the transferor
company should be debited to Surplus Account instead of debiting Reserve Account.
It is so because Reserve Account is never shown as a debit balance.
(Hi) If, at the time of amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies should be adopted
following the amalgamation. The effects on the financial statements of any changes in
accounting policies should be reported in accordance with Accounting Standard (AS)-5, ‘Prior
Period and Extraordinary Items and Changes in Accounting Policies.
Following Journal Entries are to be passed in the books of the transferee company
'or incorporating the financial statements of the transferor company.
1) On amalgamation of business
Business Purchase A/c Dr. (with the amount of
To Liquidators of the Transferor Co. purchase consideration)
2) For recording assets and liabilities taken over
Sundry Assets (Individually) With book value
To Sundry Liabilities (Individually) (With book value)
To Reserve A/c
To Business Purchase A/c
The difference between debits and credits is adjusted in the reserves of the transferee
company.
Instead of passing two entries one combined entry can be passed :
Sundry Assets Dr.
To Sundry Liabilities
To Different Reserves of the Transferor Co.
To Liquidators of the Transferor Co. A/c
The difference between the above mentioned debits and credits is adjusted against the
=serve in the books of transferee company.
Note. As per para 33 of AS-14, the balance of the Surplus A/c of the transferor Company is
- =-isferred to General Reserve, if any.
(3) For making payment to the liquidator of the transferor company.
Liquidators of the Transferor Co A/c
To Bank/Share Capital/Securities Premium (if any)
(4) If liquidation expenses are paid by the transieree company
General Reserve or Surplus A/c Dr.
(if there is no General Reserve)
To Bank A/c
(5) For the formation expenses of the transferee company
Preliminary Expenses A/c Dr.
To Bank A/c
IL L U S T R A T IO N 2. A Ltd. and B Ltd. were amalgamated on and from 1st April,
2017. A new company AB Ltd. was formed to take over the business of existing
companies. Liabilities and assets of A Ltd. and B Ltd. as on 31st March, 2017 are given
oelow :
(figures in thousands)
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
r f
Share Capital: Fixed Assets 4,800 3,200
Equity Shares of Less : Depn. 800 600
? 10 each 2,400 1,600 4,000 2,600
12°o Preference Shares Investments 1,600 600
of f 100 each 1,200 800 Current Assets :
Reserves and Surplus : Stock 1,200 600
Capital Reserve 800 600 Debtors 1,600 800
General Reserve 1,200 600 Cash & Bank Balance 1,200 600
Surplus A/c 400 200
Secured Loans 1,600 800
Current Liabilities:
Trade Creditors 1,200 400
Tax Provision 800 200
9,600 5,200 9,600 5,200
Other Informations:
(/) Preference shareholders of the two companies are issued equivalent number of
15% preference shares of AB Ltd. at an issue price of ? 125 per share.
(/f) AB Ltd. will issue one equity share of ? 10 each for every share of A Ltd. and B
Ltd. The shares are issued at a premium of ? 5 per share. Prepare Balance
Sheet of AB Ltd. on the assumption that the amalgamation is in the nature of
merger.
S O L U T IO N
(1) CALCULATION OF PURCHASE CONSIDERATION
A Ltd. B L td .
r ’ooo ? ’000
(a) Preference Shareholders to get
12.000 shares at T 125 each 1500
8.000 shares at ? 125 each 1000
(£>) Equity Shareholders to get
2.40.000 shares of ? 15 each 3600
1.60.000 shares of f 15 each 2400
Total Purchase Consideration 5100 3400
(2)___________ AMOUNT TO BE ADJUSTED AGAINST THE RESERVES

A Ltd. B L td .
Share Capital of Transferor Companies rooo rooo
Equity Share Capital 2,400 1,600
Preference Share Capital 1,200 800
3,600 2,400
Purchase Consideration [as per working (/)] 5,100 3,400
Difference to be adjusted against reserves 1,500 1,000
The total difference of f 25,00,000 should be adjusted in the Balance Sheet of AB Ltd. against
reserves as shown below : (? in ’000 )
A Ltd. B Ltd. Total A d ju s tm e n t B alance
Capital Reserve 800 600 1,400 1,400 Nil
Genera! Reserve 1,200 600 1,800 1,100 700
2,000 1,200 3,200 2,500 700
BALANCE SHEET OF AB LTD.
as on 1 -4-2017
1. Equity and Liabilities f ’0 0 0 f ’000

(1) S h a re h o ld e rs ' F unds
(a) Share Capital :
20,000 Pref. Shares of ? 100 each 2,000
4,00,000 Equity Shares of f 10 each 4,000
6,000
- VfALGAMATION (AS-14) 11/ 1-13

Securities Premium Account 2,500
General Reserve 700
Surplus Account 600
3.800
Total 9.800
Long-term Borrowings : Secured Loans 2,400
Trade Payables : Trade Creditors 1,600
Short-term Provisions : Tax Provision 1,000
Total 2,600
Total Equity and Liabilities (1) + (2) + (3) 14,800
II. Assets r
(1) N o n -C u rre n t A ss e ts ?
Fixed Assets 8,000
L e ss : Depreciation 1,400
6,600
Investments (assumed to be long-term) 2,200
Total 8,800
(2) C u rre n t A s s e ts : Stock 1,800
Debtors 2,400
Cash and Bank Balance 1,800
6,000
Total Assets (1) + (2) 14,800
r Purchase Method
This method of accounting is applicable for amalgamation in the nature of purchase,
towing factors should be considered while making accounting entries under this method :
(/) In preparing the transferee company’s financial statements, the assets and liabilities of
"e transferor company should be incorporated at their existing carrying amounts or,
i ternatively, the consideration should be allocated to individual identifiable assets and
ar ties on the basis of their fair values at the date of amalgamation.
i/7) The reserves (whether capital or revenue or arising on revaluation) of the transferor
:: -pany, other than the statutory reserves, should not be included in the financial statements
:' me transferee company.
!///) An excess of the amount of the consideration over the net assets of the transferor
::mpany acquired by the transferee company should be recognised in the transferee
:: -pany’s financial statements as goodwill arising on amalgamation. If the amount of the
: : -sideration is lower than the value of the net assets acquired, the difference should be
Tiled as Capital Reserve.
/V) The goodwill arising on amalgamation should be amortised to income on a systematic
rasis over its useful life. The amortisation period should not exceed five years unless a
t : mewhat longer period can be justified.
v) Where the requirements of the relevant statute for recording the statutory reserves
- as Development Allowance Reserve, Investment Allowance Reserve etc. in the books of
ne transferee company are complied with, then statutory reserves of the transferor
::~pany should be recorded in the financial statements of the transferee company by
:a: ting ‘Amalgamation Adjustment Account’.
(vi) Amalgamation Adjustment Account may be disclosed as deduction from the

statutory reserve in the Balance Sheet. When the identity of the statutory reserves is no
longer required to be maintained, both the reserves and aforesaid account should be
reversed.
Following Journal Entries are passed in the books of the transferee company for
incorporation of the financial statement of the transferor company :
(1) For purchase of business from the Transferor Company:
Business Purchase A/c Dr. (For Purchase consideration)
To Liquidator of the Transferor Company
(2) For recording assets and liabilities taken over
Various Assets A/c Dr.
(at revised values if any, otherwise at book values)
To Various Liabilities (with the figures at which they are taken over)
If (1) and (2) are combined, then the following one entry can also be passed :
Various Assets A/c Dr.
(at revised values if any, otherwise at book values)
To Various Liabilities A/c (with the figures at which they are taken over)
Note. (/) If credit is more than debit, the difference is debited to Goodwill Account.
(/'/) If debit is more than credit, the difference is credited to Capital Reserve Account.
(3) For making payment to the liquidator of the vendor company:
Liquidator of the Transferor Company Dr.
To Bank A/c
To Share Capital A/c
To Securities Premium A/c (if any)
(4) When statutory reserve is maintained
Amalgamation Adjustment A/c Dr.
To Statutory Reserve A/c
(5) If liquidation expenses are paid by the transferee company :
Goodwill A/c Dr.
To Bank
(6) For formation expenses of the transferee company, if any
Preliminary Expenses A/c Dr.
To Bank
(7) When goodwill is written off against capital reserve
Capital Reserve A/c Dr.
To Goodwill A/c
(8) If any liability is discharged by the transferee company
Respective Liability A/c Dr. (with amount payable)
To Share Capital/Debentures/Bank A/c Dr.
(as the case may be)
(9) If fresh issue of shares or debentures is made to raise further capital, then pass usual
entries as discussed in a previous chapter.
AMALGAMATION (AS-14) 11/ 1-15
O Disclosure in Financial Statements

1. For all amalgamations, the following disclosures should be made in the first financial
statements following the amalgamation :
(a) Names and general nature of business of the amalgamating companies;
(b) Effective date of amalgamation for accounting purposes;
(c) The method of accounting used to reflect the amalgamation; and
(d) Particulars of the scheme sanctioned under a statute.
2. For amalgamations accounted for under the pooling of interests method, the following
additional disclosures should be made in the first financial statements following the
amalgamation :
(a) Description and number of shares issued, together with the percentage of each
company’s equity shares exchanged to effect the amalgamation;
(b) The amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof.
3. For amalgamations accounted for under the purchase method, the following additional
: sclosures should be made in the first financial statements following the amalgamation :
(a) Consideration for the amalgamation and a description of the consideration paid or
contingently payable ; and
{b) The amount of any difference between the consideration and the value of net
identiable assets acquired, and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
4. Amalgamation after the Balance Sheet Date. When an amalgamation is effected
;Ter the Balance Sheet date but before the issuance of the financial statements of either
party to the amalgamation, disclosure should be made in accordance with AS-4,
Contingencies and Events Occurring After the Balance Sheet Date’, but the amalgamation
siould not be incorporated in the financial statements. In certain circumstances, the
amalgamation may also provide additional information affecting the financial statements
memselves, for instance, by allowing the going concern assumption to be maintained.
IL L U S T R A T IO N 3. A Ltd. acquired the undertaking of B Ltd. on 31-3-2017 for a
purchase consideration of ? 2,50,00,000 to be paid by fully paid equity shares of ? 10
each. Balance Sheets of the two companies on the date of acquisition were as follows:
A Ltd. BLtd.
f f
(a) Share Capital :
Equity Shares of f 10 each fuiiy
paid up 2,50,00,000 1,50,00,000
General Reserve 1,20,00,000 18,00,000
Development Rebate Reserve 10,00,000 37,00,000
Workers’ Compensation Fund 15,00,000 24,00,000
Surplus Account 10,00,000 53,00,000
Shareholders’ Funds 4,05 00,000 2,82,00,000
(2) Current Liabilities 45,00,000 95,00,000
Total Equity and Liabilities 4,50,00,000 3,77,00,000
II. Assets
Land & Buildings 1,20,00,000 80,00,000
Plant and Machinery 2,00,00,000 1,80,00,000
Furniture and Fixtures 10,00,000 20,00,000
(2) Current Assets
Stock 55,00,000 40,00,000
Debtors 45,00,000 40,00,000
Bank Balance 20,00,000 17,00,000
Total Assets 4,50,00,000 3,77,00,000
Pass the necessary Journal Entries in the books of A Ltd. when amalgamation is in
the nature of (/) merger and (ii) by way of purchase. Also prepare the Balance Sheet of
A Ltd. after amalgamation assuming that Development Rebate Reserve and Workers’
Compensation Fund of B Ltd. are required to be continued in the books of A Ltd.
S O L U T IO N
(/) When Amalgamation is in the Nature of Merger
Books of A Ltd.
JOURNAL ENTRIES
2017
March 31 Business Purchase A/c Dr. 2,50,00,000
To Liquidators of B Ltd. 2,50,00,000
(Being purchase of business of B Ltd.)
Land & Buildings A/c Dr. 80,00,000
Plant & Machinery A/c Dr. 1,80,00,000
Furniture & Fixtures A/c Dr. 20 ,00,000
Stock A/c Dr. 40,00,000
Debtors A/c Dr. 40,00,000
Bank A/c Dr. 17,00,000
General Reserve A/c (Balancing figure) Dr. 29,00,000
To Current Liabilities 95,00,000
To Development Rebate Reserve A/c 37,00,000
To Workers’ Compensation Fund A/c 24,00,000
To Business Purchase A/c 2,50,00,000
(Being merger of assets, liabilities and reserves of B Ltd.
with A Ltd. and difference transferred to General Reserve
A/c)
Liquidators of B Ltd. Dr. 2,50,00,000
To Equity Share Capital A/c 2,50,00,000
(Being payment of purchase price by issue of 25,00,000
equity shares of ? 10 each)
BBALANCE SHEET OF A LTD. (AFTER AMALGAMATION)

___________________________ as on 3 1 -3 -2 0 1 7 __________________________________
?
(a) S hare C apital
50,00,000 Equity Shares of ? 10 each fully paid 5,00,00,000
(Of the above 25,00,000 shares of ? 10 each issued for
purchase of business of B Ltd.)
AMALGAMATION (AS-14) 11/1-17
(b ) R e se rve a n d S u rp lu s : f
General Reserve 91.00. 000
Development Rebate Reserve 47.00. 000
Workers’ Compensation Fund 39.00. 000
Surplus A/c 10 .00 . 000
1.87.00. 000
Total 6.87.00. 000
(2) Non-current Liabilities Nil
(3) Current Liabilities 1.40.00. 000
Total Equity and Liabilities (1) + (2) + (3) 8.27.00. 000
II. Assets
(1) F ixe d A s s e ts : Land & Buildings 2 , 00 , 00,000
Plant and Machinery 3.80.00. 000
Furniture & Fixtures 30.00. 000
Total 6 .10 .0 0 . 000
(2) C u rre n t A ss e ts : Stock 95.00. 000
Debtors 85.00. 000
Bank Balance 37.00. 000
Total 2.17.00. 000
Total Assets (1) + (2 ) 8.27.00. 000
(//) When Amalgamation is by Way of Purchase

JOURNAL ENTRIES
Business Purchase A/c Dr. 2,50,00,000

To Liquidators of B Ltd. 2,50,00,000
(Being purchase of business of B Ltd.)
Land & Buildings A/c Dr. 80,00,000
Plant & Machinery A/c Dr. 1,80,00,000
Furniture & Fixtures A/c Dr. 20 ,00,000
Stock A/c Dr. 40,00,000
Bank A/c Dr. 17,00,000
To Business Purchase 2,50,00,000
To Capital Reserve A/c (Balancing figure) 32,00,000
(Being assets and liabilities taken over)
B Ltd. Dr. 2,50,00,000
To Equity Share Capital A/c 2,50,00,000
(Being payment of purchase price by issue of
25,00,000 shares of ? 10 each)
Amalgamation Adjustment A/c Dr. 61,00,000
To Development Rebate Reserve A/c 37,00,000
To Workers’ Compensation Fund A/c 24,00,000
(Being carrying forward of reserves of B Ltd.)
BALANCE SHEET OF B LTD. (After Amalgamation)

as on 3 1 -3 -2 0 1 7
r
(a) S hare C apital
50,00,000 Equity Shares of ? 10 each fully paid 5,00,00,000
(Of the above 25,00,000 shares of ? 10 each issued for
purchase of business)
(b) R e se rve s a n d S urplus
Capital Reserve 32,00,000
General Reserve 1,20 ,00,000
Development Rebate Reserve 47,00,000
Less : Amalgamation Adjustment A/c 37,00,000
10,00,000
Workers’ Compensation Fund 39,00,000
Less : Amalgamation Adjustment A/c 24,00,000
15,00,000
Surplus Account 10,00,000
1,87,00,000
Total 6,87,00,000
(2) Non-current Liabilities Nil
(3) Current Liabilities 1,40,00,000
Total Equity and Liabilities (1) + (2) + (3) 8,27,00,000
II. Assets r
(1) : Land & Buildings
F ixe d A s s e ts 2 ,00 ,00,000
Plant and Machinery 3,80,00,000
Furniture & Fixtures 30,00,000
Total 6 ,10 ,00,000
(2) C u rre n t A sse ts : Stock 95,00,000
Debtors 85,00,000
Bank Balance 37,00,000
Total 2,17,00,000
Total Assets (1) + (2) 8,27,00,000
IL L U S T R A T IO N 4. Following are the ledger balances of X Co. Ltd. as on 31st

March, 2017 : _______________________________________________________
Cr. Balances Dr. Balances
12,000 shares of ? 10 each Land and Buildings 90.000
fully paid up 1,20,000 Machinery 50.000
Sundry Creditors 30,000 Stock 17,000
Bank Overdraft 28,000 Sundry Debtors 20,000
Commission on Shares 1,000
1,78,000 1,78,000
The company went into voluntary liquidation and the assets were sold to Y Co. Ltd.
for ? 1,50,000 payable as to ? 60,000 in cash (which sufficed to discharge creditors and
Bank Overdraft and pay the winding expenses of ? 2,000) and as to ? 90,000 by the
allotment of f 12,000 shares of ? 10 each of Y Co. Ltd, f 7.50 per share paid up, to the
shareholders of X Co. Ltd.
AMALGAMATION (AS-14) >1/1-19
Draw up the Journal Entries and the necessary Ledger Accounts to close the
books of X Co. Ltd. and the Journal Entries for recording these transactions in the
books of Y Co. Ltd. on the basis of amalgamation in the nature of purchase.
S O L U T IO N
JOURNAL ENTRIES IN THE BOOKS OF X CO. LTD.
r ?
Realisation Account Dr. 1,77,000
To Land and Buildings Account 90,000
To Machinery Account 50,000
To Stock Account 17,000
To Sundry Debtors Account 20,000
(Being assets taken over by Y Co. Ltd. transferred to
Realisation Account)
Y Co. Ltd. Dr. 1,50,000
To Realisation Account 1,50,000
(Being purchase consideration payable by Y Co. Ltd.)
Cash Account Dr. 60,000
Shares in Y Co. Ltd. Dr. 90,000
To Y Co. Ltd. 1,50,000
(Being receipt of the purchase price)
Sundry Creditors Account Dr. 30,000
Bank Overdraft Account Dr. 28,000
To Cash Account 58,000
(Being payment of sundry creditors and Bank Overdraft)
Realisation Account Dr. 2,000
(Being payment of liquidation expenses)
Shareholders Account Dr. 30,000
To Commission on Shares Account 1,000
To Realisation Account 29,000
(Being discount on shares Account and loss on realisation
transferred)
Share Capital Account Dr. 1 ,20,000
To Shareholders Account 1,20,000
(Being transfer of share capital)
To Shares in Y Co. Ltd. 90,000
(Being shares received from Y Co. Ltd. distributed among
shareholders in settlement of their account)
_____ __ , , ..................... .................. ...................
Ledger Account
REALISATION ACCOUNT
” : :_and and Buildings Account 90,000 By Y Co. Ltd. 1,50,000

Machinery Account 50,000 ” Loss on Realisation
Stock Account 17,000 transferred to Shareholders
Sundry Debtors Account 20,000 Account 29,000
Cash Account (Expenses) 2,000
1,79,000 1,79,000
SUNDRY CREDITORS ACCOUNT
To Cash Account 30,000 By Balance b/d 30,000
BANK OVERDRAFT ACCOUNT

f f
To Cash Account 28,000 By Balance b/d 28,000
COMMISSION ON SHARES ACCOUNT

?
To Balance b/d 1,000 By Shareholders Account— Transfer 1,000
SHARE CAPITAL ACCOUNT

?
To Shareholders Account— Transfer 1 ,20,000 By Balance b/d 1 ,20,000
Y CO. LTD.
To Realisation Account 1,50,000 By Cash Account 60,000

” Shares in Y Co. Ltd. 90,000
1,50,000 1,50,000
CASH ACCOUNT
To Y Co Ltd 60,000 By Sundry Credito.s Account 30,000

” Bank Overdraft Account 28,000
” Realisation Account (Winding Exp.) 2,000
60,000 60,000
SHARES IN Y CO, LTD.

f ?
To Y Co. Ltd. 90,000 By Shareholders Account 90,000
SHAREHOLDERS ACCOUNT
To Realisation Account (Loss) 29,000 By Share Capital Account 1,20,000

” Commission on Shares Account 1,000
” Shares in Y Co. Ltd. 90,000
1,20,000 1.20,000
JOURNAL ENTRIES IN THE BOOKS OF Y CO. LTD.

?
Business Purchase Account Dr. 1,50,000
To Liquidators of X Co. Ltd. 1,50,000
(Being purchase consideration agreed to be paid to the
liquidators or X Co Ltd.)
- VALGAMATION (A S -14) 11/1-21
Land and Buildings Account Dr, 90,000

Machinery Account Dr. 50,000
Stock Account Dr. 17,000
Sundry Debtors Dr. 20,000
To Business Purchase Account 1,50,000
To Capital Reserve Account 27.000
(Being various assets taken over at book value and the excess
of value of assets over purchase price credited to Capital
Reserve Account being capital profit)
Liquidators of X Co. Ltd. Dr. 1,50,000
To Share Capital Account 90.000
(Being issue of 12,000 shares of ? 10 each, ? 7.50 paid up and
? 60,000 cash paid to the liquidators of X Ltd. in settlement of
the purchase price)
IL L U S T R A T IO N 5. Balance Sheet of Agency Limited as on 31st March, 2017

e as under:

(a) Share Capital :
20.000 Equity Shares of 1 10 each 2, 00,000
10.000 (8%) Preference Shares of ? 10 each 1, 00,000
Reserve 10,000
10% Debentures 1, 20,000
(3) Current Liabilities
Total 5,00,000
Assets
Tangible Assets : Fixed Assets 3.00. 000
intangible Assets :
Goodwill 30.000
Discount on Debentures 5 000
(2) Current Assets
Stock 80.000
Debtors 70,000
Bank Balance 15 000
Tota 5.00. 000
- new company, Principal Limited, was formed to acquire the business of Agency
- ~ ~ed, which was to be wound up, Principal Limited acquired the assets of Agency
_ - ed with the exception of book debts and cash, but took over no liabilities except:
Indentures, agreeing, however, to collect the debts and pay the creditors as art
I of Agency Limited.
Purchase consideration was to be satisfied as follows :

Preference shareholders of Agency Limited were to be allotted 6 preference shares
of ? 10 each in Principal Limited for every five shares held, and the Equity
shareholders of Agency Limited were to be allotted five equity shares of ? 10 each
credited as ? 9 paid for every four shares held.
Expenses of liquidation were ? 5,000.
Of the debtors, ? 2,000 proved bad and a discount of 2 per cent had to be allowed
on settlement.
Creditors were paid off subject to a 4 per cent discount on ? 25,000.
Show the Ledger Accounts necessary to close the books of Agency Limited.
S O L U T IO N
In the Books of Agency Ltd.
REALISATION ACCOUNT
? ?
To Sundry Assets : ? By 6% Debentures A/c 1,20,000
Goodwill 30,000 By Principal Ltd.
Fixed Assets 3,00,000 (Purchase consideration) (1) 3,45,000
Stock 80,000 By Sundry Creditors A/c
4,10,000 (Discount) 1,000
To Bank (liquidation expenses) 5,000
To Sundry Debtors A/c
(Bad Debts & Discount)
(? 2,000 + ? 1,360) 3,360
To Preference Shareholders A/c 20,000
To Equity Shareholders A/c (Profit) 27,640
4,66,000 4,66,000
SUNDRY DEBTORS ACCOUNT

? ?
To Balance b/d 70,000 By Realisation A/c
(Bad Debts & Discount) 3,360
By Principal Ltd. (Amount Collected) 66,640
70,000 70,000
SUNC>RY CRED TORS ACCOUNT

? ?
To Realisation A/c (Discount) 1,000 By Balance b/d 50,000
To Principal Ltd. 49,000
50,000 50,000
EQUITV SHAREH 0LDERS ACCOUNT

? ?
To Discount on Debentures 5,000 By Equity Share Capital A/c 2 ,00,000
To Equity Shares in Principal Ltd. 2,25,000 By Reserve A/c 10,000
To Bank 27,640 By Surplus A/c 20,000
By Realisation A/c (Profit) 27,640
2,57,640 2,57,640
AMALGAMATION (AS-14) ______________________ _____ 11/1-23
PREFERENCE SHAREHOLDERS ACCOUNT
: Reference Shares in By Preference Share Capital A/c 1,00,000

= ncipal Ltd. 1 ,20,000 By Realisation A/c (Premium Payable) 20,000
1,20,000 1,20,000
PRINCIPAL LTD.
7
‘ : -ealisation A/c By Sundry Creditors (amount paid) 49,000
purchase Consideration) 3,45,000 By Preference Shares in Principal Ltd. 1,20,000
" : Sundry Debtors A/c By Equity shares in Principal Ltd. 2,25,000
amount realised) 66,640 By Bank 17,640
4,11,640 4,11,640
EQUITY SHARE CAPITAL ACCOUNT

? f
Equity Shareholders A/c 2 ,00,000 By Balance b/d 2 ,00,000
6% PREFERENCE SHARE CAPITAL ACCOUNT

?
: Preference Shareholders A/c 1,00,000 By Balance b/d 1 ,00,000
6% DEBENTURES ACCOUNT
?
Realisation A/c 1,20,000 By Balance b/d 1,20,000
PREFERENCE SHARES IN PRINCIPAL LTD.
Principal Ltd. 1,20,000 By Preference Shareholders A/c 1 ,20,000
EQUITY SHARES IN PRINCIPAL LTD.

t
Principal Ltd. 2,25,000 By Equity Shareholders A/c 2,25,000
BANKACCOUNT
? ?
Ba'ance b/d 15,000 By Realisation A/c (Exp.) 5,000
Principal Ltd. 17,640 By Equity Shareholders A/c 27,640
32,640 32,640
%ata. (1) Calculation of Purchase Consideration : ?

Preference Shareholders : 6 shares of ? 10 each for every
5 shares held in Agency Ltd. 110,000 x | x f 10 | 1,20,000
Equity Shareholders : 5 equity shares of ? 10 each
(Credited as f 9 paid) for every 4 shares held in Agency Ltd. 20,000 x ^ x f 9i 2,25,000
3,45,000
DISSENTING SHAREHOLDERS
Those shareholders who have not given their assent to the scheme of amalgamation or
absorption or external reconstruction entered into by the prescribed majority of shareholders
are called dissenting shareholders. Such shareholders refuse to transfer their shares
according to the scheme framed by the company. As per provision of Section 395 of the
Companies Act, the shares of such dissenting shareholders may be acquired by the vendor
company: ‘
(/) on the same terms on which willing shareholders passed on their shares ; or
(/'/) on other terms agreed between the vendor company and dissenting shareholders.
(Hi) on terms ordered by the court on an application made either by the vendor company
or the dissenting shareholders.
Under such a case, the paid up capital held by the dissenting shareholders must be
transferred to a separate shareholders account. Any excess amount paid to them or discount
received from such shareholders is transferred to realisation account as is done in case of
preference shareholders and debentureholders. The remaining profit or loss on realisation is
transferred to willing shareholders’ account. All items of Balance Sheet pertaining to
shareholders will be transferred to willing shareholders account only.
IL L U S T R A T IO N 6. X Co. Ltd. agrees to acquire, as a going concern, the
business of Y Co. Ltd. on the basis of vendor’s Balance Sheet at 31st March, 2017
which is as follows :
i. Equity and Liabilities
(a) Share Capital:
Authorised Capital :
25,000 shares of ? 50 each 12.50,000
issued Capital :
20,000 shares of \ 50 each 10,00,000
Called-up Capital :
20,000 shares of f 50 each,
? 30 per share called up 6,00,000
Reserve Fund 1,25,000
Creditors 75,000
Total 8,60,000
II. Assets
Freehold Property 2,50,000
Plant and Machinery 50.000
6% Govt. Papers 10.000
(2) Current Assets
Stock ? 3,00,000
Debtors 2,30,000
Less : Provision 10,000
2,20,000
Cash at Bank 30,000
Total 8,60,000
6
X Co. Ltd. took over all the assets and liabilities of the vendor company, subject to
•he retention of ? 15,000 cash to provide for cost of liquidation, income-tax etc. and to
satisfy any dissenting shareholders.
The consideration for the sale is the allotment of the shares to the shareholders in
•ie vendor company of one share f 100 (? 50 paid up) in the X Co. Ltd. for every two
snares in the Y Co. Ltd.
The market value of the X Co’s shares, which are ? 50 paid up at the date of sale is
= 70 each. The liquidator of the vendor company has paid out of ? 15,000 retained ;
:ost of liquidation amounting to ? 2,500, income-tax ? 7,500 and dissenting
shareholders of 100 shares at ? 32,50 per share, i.e., W3,250.
The sale and purchase were carried through on terms of the agreement.
Prepare necessary Ledger Accounts in the books of Y Co. Ltd. and Journal Entries
-i the books of X Co. Ltd.
S O L U T IO N
Books of Y Co. Ltd.
REALISATION ACCOUNT
f ? f
: Sundry Assets By Creditors A/c 75,000
Freehold Property 2,50,000 By Provision for Doubtful Debts 10,000
Plant and Machinery 50,000 /1q non \
Stock 3,00,000 By X Co. Ltd. - - f 00 x ? 50 4,97.500
6% Government Papers 10,000 \ 1 1
Debtors 2,30,000 By Shareholders A/c 2,82,750
Cash at Bank 15,000 (Transfer of Loss on Realisation)
8,55,000
~o Bank :
Expenses 2,500
Income-tax 7,500
10,000
- c Dissenting Shareholders A/c 250
8,65,250 8,65,250
X CO. LTD. ACCOUNT

?
Realisation A/c 4,97,500 By Shares in X Co. Ltd. 4,97,500
DISSENTING SHARE HOLDERS ACCOUNT
?
~: Bank A/c 3,250 By Share Capital A/c 3,000
By Realisation A/c 250
3,250 3,250
f ?
~: Realisation A/c 2,82,750 By Share Capital A/c 5,97,000
Shares in X Co. Ltd. A/c 4,97,500 By Reserve Fund 1,25,000
3ank A/c 1,750 By Surplus A/c 60,000
7,82,000 7,82,000
II/ 1-26 AMALGAMATION (AS-14)
BANK ACCOUNT
f
To Balance b/d 30,000 By Realisation A/c : ?
Transfer 15,000
Expenses & Income-tax 10,000
25,000
By Dissenting Shareholders A/c 3,250
By Shareholders A/c 1,750*
30,000 30,000
SHARE S IN X Cl3. LTD. ACCOUNT

f
To X Co. Ltd. 4,97,500 By Shareholders A/c 4,97,500
JOURNAL (OF X CO. LTD.)

2017 ?
March 31 Business Purchase A/c Dr. 4,97,500
To Liquidator of Y Co. Ltd. 4,97,500
(Being purchase consideration agreed to be paid)
Freehold Property A/c Dr. 2,50,000
Plant and Machinery A/c Dr. 50,000
Stock A/c Dr. 3,00,000
6 % Govt. Papers A/c Dr. 10,000
Cash at Bank A/c Dr. 15,000
To Creditors A/c 75,000
To Provision for Doubtful Debts A/c 10,000
To Bushiness Purchase A/c 4,97,500
To Capital Reserve (Bal. Fig.) 2,72,500
(Being various assets and liabilities taken over and
balance treated as capital reserve)
Liquidator of Y Co. Ltd. A/c Dr. 4,97,500
To Share Capital A/c 4,97,500
(Being the payment of purchase consideration)
IN TER-CO M PA N Y OW INGS
if any amount is owed by the Transferor Company to the Transferee Company or vice
versa at the time of amaigamation or absorption of companies, this is to be eliminated.
Suppose A Ltd. acquires the business of B Ltd. and the latter company owes a book debt of
? 5,000 to the former company, then after the absorption both the sundry debtors and sundry
creditors should be shown in the Balance Sheet of the Transferee Company at the net figures
after deduction of ? 5,000. This will not affect the entires to be passed in the books of the
Transferor Company (B Ltd.) but the Transferee Company (A Ltd.) is required to pass one
more entry i.e.,
Sundry Creditors A/c Dr. 5,000
To Sundry Debtors A/c 5,000
The same entry will be passed in the books of the Transferee Company even if ? 5,000 is
owed by A Ltd. to B Ltd.
- * - - CAMATION (AS-14) II / 1-27
5 milariy, before acquisition if some goods are sold by the Transferor Company to the
” i i eree Company and goods remain unsold on the date of acquisition when the business
s inquired, the unsold stock at invoice price will also be acquired by the Transferee
I : ~ oany for which it must have taken some profit. Thus it becomes essential to reduce the
- r s c c stock to its cost price and the profit element will automatically be adjusted either in the
fc_ '9 of goodwill or capital reserve.
On the other side, if goods are purchased by the Transferor Company from the
_-£-5‘eree Company and some goods remain unsold with the Transferor Company, the way
_ e 'ninate the unrealised profit charged by the Transferee Company is to debit goodwill or
zzc-ra\ reserve and credit the stock account with the amount of unrealised profit. Suppose X
- : 'ad bought goods of the invoice value of ? 15,000 from Y Ltd. which company invoices
:cs at cost plus 20%. Later X Ltd. acquired the business of Y Ltd. when out of goods
: j~nased, ? 6,000 were still in stock. The unrealised profit is :
20
? 6 ,0 0 0 x 12Q = ? 1 ,0 0 0
1 _td. must pass the following additional entry in addition to the usual entries :
Goodwill or Capital Reserve A/c Dr. ? 1,000
To Stock ? 1,000
IL L U S T R A T IQ N 7. Ajanta Limited agreed to acquire the business of Elora Ltd.
as on 31st March, 2017.
Balance Sheet of Eiora Limited as on that date was as under :
?
(a) Share Capital :
20.000 Equity Shares of T 10 each 2, 00,000
10.000 6% Preference Shares of 1 10 each 1, 00,000
Reserve 20,000
Sundry Creditors 1,50,000
Total 6,00,000
U. Assets
Machineries 1,00,000
Debenture Discount 15.000
(2) Current Assets
Stock 2,00,000
Debtors 50.000
The consideration payable by Ajanta Limited was agreed as under:

(1) The Preference Shareholders of Elora Limited were to be allotted 8%
Preference Shares of ? 1,10,000.
(2) Equity Shareholders to be allotted six Equity Shares of f 10 each issued at a
premium of 10% and ? 3 cash against every five shares held.
(3) 7% Debentureholders of Elora Limited to be taken over by the transferee
company.
While arriving at the agreed consideration the directors of Ajanta Limited valued
Land and Building at ? 2,50,000 ; Stock at f 2,20,000 and debtors at their book value
subject to an allowance of 4% to cover doubtful debts. The machineries were valued at
book value. Debtors of Elora Limited included f 10,000 due from Ajanta Limited.
It was agreed that before acquisition Elora Limited will pay dividend at 10% on
Equity Shares and will also retain f 5,000 for liquidation expenses.
Draft Journal entries necessary to close the books of Elora Limited and to record
acquisition in the books of Ajanta Limited.
S O L U T IO N
JOURNAL OF ELORA LTD.
r
Surplus Account Dr. 20,000
To Bank 20,000
(Being the payment of 10% dividend on equity shares prior to
absorption of Ajanta Ltd.)
Realisation A/c Dr. 5,60,000
To Land and Building A/c 2 ,00,000
To Machineries A/c 1,00,000
To Stock A/c 2 ,00,000
To Debtors A/c 50,000
To Cash & Bank Balance 10,000
(? 35,000 - ? 5,000 - ? 20,000)
(Being the sundry assets acquired by Ajanta Ltd. transferred
to Realisation Account)
Sundry Creditors A/c Dr. 1,50,000
7% Debentures A/c Dr. 1,00,000
To Realisation A/c 2,50,000
(Being sundry creditors and debentures assumed by Ajanta
Ltd. transferred to Realisation A/c)
Ajanta Ltd. Dr. (1)3,86,000
(Being purchase consideration to be paid by Ajanta Ltd.)
Realisation A/c Dr. 5,000
To Bank 5,000
(Being payment of liquidation expenses)
6% Preference Share Capital Account Dr. 1 ,00,000
To Preference Shareholders A/c 1,10,000
(Being the amount payable to preference shareholders at a
premium of 10% credited to them)
- UALGAMATION (AS-14) 11/ 1-29
8 % Preference Shares in Ajanta Ltd. Dr. 1, 10,000

Equity Shares in Ajanta Ltd. Dr. 2,64,000
Bank Account Dr. 12,000
To Ajanta Ltd. 3,86,000
(Being the receipt of purchase consideration)
Preference Shareholders A/c Dr. 1,10,000
To 8% Preference Shares in Ajanta Ltd. 1 ,10.000
(Being the distribution of 8 % preference shares in Ajanta Ltd.
among the preference shareholders)
Equity Share Capital A/c Dr. 2 ,00,000
Reserve A/c Dr. 20,000
Surplus A/c Dr. 10,000
Realisation A/c Dr. 61,000
To Sundry Equity Shareholders A/c 2,91,000
(Being the amount due to sundry equity shareholders on
liquidation of the company after transfer of ? 61,000 profit on
realisation)
Sundry Equity Shareholders A/c Dr. 15,000
To Discount on Debentures A/c 15.000
(Being the transfer of fictitious assets to Sundry Equity
Shareholders Account)
Sundry Equity Shareholders A/c Dr. 2,76,000
To Equity Shares in Ajanta Ltd. 2 64,000
To Bank 12,000
(Being equity shares and cash received from Ajanta Ltd.
distributed among equity shareholders)
JOURNAL OF AJANTA LTD.
2017 ? f
Uar 31 Business Purchase A/c Dr. 3,86,000
To Liquidators of Elora Ltd. 3,86,000
(Being the amount of purchase consideration)
Goodwill A/c (Balancing Figure) Dr. 8,000
Land & Building A/c Dr. 2,50,000
Machineries A/c Dr. 1 ,00,000
Stock A/c Dr. 2 .20,000
Sundry Debtors A/c Dr. 50,000
To 7% Debentures A/c 1,00,000
To Sundry Creditors A/c 1,50,000
To Provision for Bad Debts A/c 2,000
To Business Purchase A/c 3,86,000
(Being sundry assets and liabilities taken over as per
agreement)
Liquidators of Elora Ltd. Dr. 3,86,000
To 8 % Preference Share Capital A/c 1,10,000
To Equity Share Capital A/c 2,40,000
To Securities Premium A/c 24,000
To Bank A/c 12,000
(Being the settlement of purchase consideration)
Sundry Creditors A/c Dr. 10,000
To Sundry Debtors A/c 10,000
(Being cancellation of inter-company debts on
taking over Elora Ltd.)
il/1‘30 AMALGAMATION (AS-14)
Notes :
(/) Calculation of Purchase Consideration T
8 % Preference Shares f 1,10,000
Equity Shares, 20,000 x - of ? 10 each 2,40,000
Securities Premium 10% 24,000
---------------- 2,64,000
Cash @ ? 3 per lot of 5 shares for 4,000 lots j ~ shares^” ) 12,000 *
3,86,000
(//) Prepare Realisation Account for calculating the profit on realisation in the books of Elora Ltd.
(Hi) Prepare Sundry Equity Shareholders Account for calculating the shares and cash paid to
shareholders finally.
External Reconstruction. When a new company is formed with the same name or
different name in order to take over the business of an existing company, it is called external
reconstruction. This is generally resorted to in case of a company having accumulated past
losses, the book value of assets are not shown at their true value. For example, National
Company Ltd. was taken over by the New National Co. Ltd. Then the former company will be
a transferor company being wound up and the latter company will be a transferee company.
IL L U S T R A T IO N 8. (External Reconstruction) : Ashish Products Ltd. was just
recovering out of great financial stress and consequently went into voluntary
liquidation. Its Balance Sheet as on 31st March, 2017 were as follows :
Equity and Liabilities ?
(a) Share Capital :
Equity Shares 7,80,000
Preference Shares 5,20,000
Capital Reserve 15,730
Surplus A/c (Negative Balance) -5,36,510
(2) & (3) Non-current and Current Liabilities 1,36,110
Total 9,15,330
(4) Contingent Liabilities ?
In respect of a pending suit 18,840
Assets
Sky-scrappers 4,13,400
Other Fixed Assets 2,22,560
(2) Current Assets
Floating Assets 2,79,370
Total 9,15,330
Ashish Prosperous Ltd. agreed to take over some of the assets of the Ashish
Products Ltd. at an agreed valuation as under.
Sky-scrappers ? 2,60,000 ; Plant & Machinery ? 1,56,000 ; Motor & Lorries ? 5,200 ;
Stock-in Trade f 98,800.
Total purchase consideration was satisfied by the allotment of Preference and
Equity Shares in the new company in the ratio of 3 : 2. The Preference Shares carried
- ■'■iLGAMATION (AS-14) 11/ 1-31
• 2% Dividend whereas the Equity Shares of ? 30 each were issued as partly-paid to the
erent of f 20 per share. The new company also agreed to take over the Contingent
. =Dility which ultimately materialised. The claimant was allotted Equity Shares as fully
said.
Book-debts of the old company realised ?1,65,425 and the Trade Creditors were
i ertled for ? 1,14,842. The Liabilities were discharged. The cost of voluntary winding
jq came to ? 13, 923. The Preference Shareholders in the old company agreed to
=::ept in fully satisfaction of their claims, the preference shares in the new company
and the available cash.
You are required to give Journal Entries to close the books of Ashish Products Ltd.
=nd open the books of Ashish Prosperous Ltd.
S O L U T IO N In the Books of Ashish Products Ltd.
JOURNAL ENTRIES
r
To Sky-scrappers Account 4,13,400
To Other Fixed Assets Account 2,22,560
To Floating Assets Account 2,79,370
(Being transfer of assets to Realisation Account on sale of
business)
Ashish Prosperous Ltd. Dr. 5,20,000
(Being purchase consideration receivable as per agreement)
Bank Account Dr. 1,65,425
(Being amount realised from Sundry Debtors)
Liabilities Account Dr. 1,36,110
To Bank Account 1,14,842
(Being payment made to creditors in full settlement, balance
being gain transferred to Realisation Account)
6 % Preference Shares in Ashish Prosperous Ltd. Dr. 3,12,000
Equity Shares in Ashish Prosperous Ltd. Dr. 2,08,000
To Ashish Prosperous Ltd. 5,20,000
(Being preference and equity shares received from Ashish
Prosperous Ltd. in discharge of the purchase consideration)
To Bank Account 13,923
(Being expenses of liquidation paid)
Preference Share Capital Account Dr. 5,20,000
To 6 % Preference Shares in Ashish Prosperous Ltd. 3,12,000
To Bank Account 36,660
(Being distribution of available cash and 6 % preference
shares in Ashish Prosperous Ltd. among the preference
shareholders and the balance credited to Realisation Account
being gain on payment to preference shareholders)
Equity Shareholders Account Dr. 5,87,730
To Surplus Account 5,36,510
(Being loss on realisation and debit balance in Surplus
Account transferred to equity shareholders)
Equity Share Capital Account Dr. 7,80.000

Capital Reserve Account Dr. 15,730
To Equity Shareholders Account 7,95,730
(Being equity share capital and profit prior to incorporation
transferred to equity shareholders)
Equity Shareholders Account Dr. 2,08,000
To Equity Shares in Ashish Prosperous Ltd. 2,08,000
(Being equity shares in Ashish Prosperous Ltd. distributed
among equity shareholders)
JOURNAL ENTRIES IN THE BOOKS OF ASHISH PROSPEROUS LTD.

?
Business Purchase Account Dr. 5,20,000
To Liquidators of Ashish Products Ltd. 5,20,000
(Being purchase price agreed to be paid on the purchase
of the business of Ashish Products Ltd.)
Sky-scrappers Account Dr. 2,60,000
Plant & Machinery Account Dr. 1,56,000
Motor & Lorries Account Dr. 5,200
Stock-in-trade Dr. 98,800
(Being assets taken over)
Liquidators of Products Ltd. Dr. 5,20,000
To 6 % Preference Share Capital Account 3.12,000
To Equity Share Capital Account 2,08,000
(Being payment of the purchase consideration)
Goodwill Account Dr. 18,840
To Equity Share Capital Account 18,840
(Being payment of contingent liability taken over)
O Inter-Company Holdings
There may be three situations with reference to inter-company holdings :
(/) Shares held by the transferee (i.e. purchasing) company in the transferor (i.e.
absorbed or vendor) company.
(/'/) Shares held by the transferor company in the transferee company.
(Hi) Shares held by both companies in one another.
(/) Shares held by the transferee company in the transferor company
The transferee company being a shareholder of the transferor company has a right to
proportionate net assets of the transferor company. In such a case the transferee company
buys only the net assets belonging to outsiders. The transferee company usually issues its
own shares for discharge of purchase consideration. Such a company cannot receive its own
shares for the amount due to itself. The accounting treatment will be as under in the books of
transferor (vendor) company and transferee (purchasing) company.
O Books of Transferor or Vendor Company

Purchase consideration is calculated for the entire business either by the net assets or
net payment method as applicable in a particular case. The Transferee Company Account is
debited with the full price but credited with only what is received in respect of outsiders. The
NATION (AS-14) 11/ 1-33
: a ance in this account represents the amount still receivable from the transferee
ar. towards purchase price. Similarly only outside shareholders are paid and debited to
• : cers Account. Shareholders Account will show a credit balance representing the
:ue to the transferee company as a shareholder of the transferor company. This
s neither paid by the transferee company as the buyer of the business nor received
# as a shareholder. Rather the two accounts are closed by passing the following set-off
: * a-enolders’ Account Dr.

~o Transferee Co’s A/c
c f T r a n s fe r e e C o m p a n y
_o_ dator of Transferor Company A/c Dr. (with full purchase price)
To Share Capital/Bank A/c (Amount payable to outsiders)
~o Shares in the Transferor Company
Amount due to transferee company)
ne difference, if any, in Shares in the Transferor Company Account will be transferred to
Soccwill or Capital Reserve Account as the case may be.
L L U S T R A T IO N 9. Following are the balances derived from the books of A Ltd.
iwc 3 Ltd, as on 31-3-2017 :___________________________________[Figures in lakh ?]
3-fart Balances A Ltd. B. Ltd. Debit Balances A Ltd. S. Ltd.
3*are Capital Goc ’will E_ 0.50
* : 300 Equity Shares Fixed Assets 30 3.50
of ? 100 each 40 Investments 5 —
: : 300 Equity Shares Current Assets 65 14.00
of ? 50 each 10
- ~ -=ral Reserve 30 5
3 .r-ent Liabilities 30 1
: • sion for Tax 1
lo o s e d Dividend 1
100 18 100 18
E Ltd. is to be amalgamated in the nature of purchase by A Ltd. on the following
B Ltd. declares a dividend of 10% before absorption for the payment of which it
is to retain sufficient amount of cash.
The net worth of B Ltd. is valued at ? 14.50 lacs.
3) The purchase consideration is satisfied by the issue of fully paid-up shares of
* 100 each in A Ltd.
r: owing further information is also to be taken into consideration :
A Ltd. holds 5,000 shares of B Ltd. at a cost of ? 3 lacs,
r* The stock of B Ltd. includes items valued at ? 1.00,000 purchased from A Ltd.
scost to A Ltd. ? 75,000).
: The creditors of B Ltd, include f 50,000 due to A Ltd.
: A Ltd. takes fixed assets of R Ltd. in its books at T 4,50,000.
11/ 1-34 AMALGAM A TIONJAS-14)
Show Ledger Accounts in the books of B Ltd. to give effect to the above and make
Journal Entries in the books of A Ltd. and also prepare Balance Sheet of A Ltd. after
completion of the absorption.
SOLUTION
In the Books of B Ltd.
REALISATION ACCOUNT
y y y y
To Sundry Assets : By Sundry Liabilities :
Goodwill 50,000 Current Liabilities 1,00,000
Fixed Assets 3,50,000 Provision for Tax 1,00,000
Current Assets 13,00,000 2,00,000
17,00,000 By A Ltd. (Purchase Consideration) 14,50,000
By Shareholders A/c (Loss) 50,000
17,00,000 17,00,000
A LTD.
? y
To Realisation A/c 14,50,000 By Shares in A Ltd. 10,87,500
By Shareholders A/c (set off) 3,62,500
(1/4 of y 14,50,000 as 1/4th shares
of B Ltd, are held by A Ltd.)
14,50,000 14,50,000
f f
To Realisation A/c (Loss) 50,000 By Share Capital A/c 10,00,000
To Shares in A Ltd. 10,87,500 By General Reserve 5,00,000
To A Ltd. (set off) 3,62,500
15,00,000 15,00,000
PROPOSED DIVIDEND ACCOUNT

y f
To Current Assets A/c (Cash) 1 ,00,000 By Balance b/d 1,00,000
SHARES IN A LTD.
y f
To A Ltd. 10,87,500 By Shareholders A/c 1 0 ,8 7 ,5 0 0
CURRENT ASS»ETS ACCOUNT

? f
To Balance b/d 14,00,000 By Proposed Dividend A/c 1 ,0 0 ,0 0 0
By Realisation A/c 1 3 ,0 0 ,0 0 0
14,00,000 1 4 ,0 0 ,0 0 0
In the Books of A Ltd.

JOURNAL ENTRIES
2017 y y
Mar. 31 Business Purchase A/c Dr. 14,50,000
To Liquidators of B Ltd. 14,50,000
(Being the purchase consideration)
Fixed Assets M e Dr. 4,50,000

Current Assets A/c Dr. 13,00,000
To Provision for Tax 1,00,000
To Capital Reserve A/c 1,00,000
(Being assets & liabilities taken over and difference
transferred to Capital Reserve A/c)
Liquidators of B Ltd. A/c Dr. 14,50,000
To Shares (i.e. Investment) in B Ltd. 3,62,500
(Being discharge of purchase consideration)
Shares (i.e. Investment) in B Ltd. A/c Dr. 62,500
To Capital Reserve A/c 62,500
(Being profit on shares on B Ltd. transferred to capital reserve)
Bank A/c (i.e. Current Assets)
(25% of ? 1,00,000 Dividend) Dr. 25,000
To Surplus A/c 25,000
(Being the receipt of dividend from B Ltd.)
Capital Reserve A/c Dr. 25,000
To Stock (i.e. Current Assets) A/c 25,000
(Being stock reserve maintained on stock sold by us)
Creditors (i.e. Current Liabilities) A/c Dr. 50,000
To Debtors (i.e. Current Assets) A/c 50,000
(Being cancellation of inter-company owings)
BALANCE SHEET OF A LTD. (AFTER AMALGAMATION)

as o n 3 1 s t M arch, 2 0 1 7
Equity and Liabilities

(1) S h a re h o ld e rs ’ F u n d s
(a) S h a re C a p ita l
50,875 Equity shares of ? 100 each fully paid 50,87,500
(Of the above 10,875 shares have been issued to vendor
for purchase of business)
Capital Reserve 1,37,500
31,62,500
Total 82,50,000
(2) N o n -c u rre n t L ia b ilitie s Nil
(3) C u rre n t L ia b ilitie s :
30.00. 000
Acquired from B Ltd. 1 , 00,000
31.00. 000
Le ss : Mutual Adjustment 50,000
30,50,000
Provision for Taxation ,
1 00,000
31,50,000
Total Equity and Liabilities (1) + (2) + (3) 1,14,00,000
II. Assets r
11) N o n -cu rre n t A sse ts
F ixe d A s s e ts : r
Tangible Assets 30,00,000
A d d : Acquired from B Ltd. during the year 4,50,000
34,50,000
Investments 2 ,00,000
36,50,000
(2) Current Assets (? 65,00,000 + ? 13,00,000 + ? 25,000
- ? 25,000 - ? 50,000) 77,50,000
Total Assets (1) + (2) 1,14.00,000
Alternative Method
Purchase consideration, under this alternative method, is not calculated for the entire
business. In the case of net payment method, purchase consideration is calculated on the
basis of what is due to the outside shareholders plus creditors. Under net assets method,
purchase consideration is calculated for the whole business and then reduced proportionately
on the basis of shares held bythe transferee company in the transferor company. Suppose A
Ltd. acquires the business of B Ltd. on a valuation of t 5,00,000 and if A Ltd. is holding 30%
equity shares in B Ltd. purchase consideration should be treated as only ? 3,50,000 i.e., 70%
of f 5,00,000, as f 1,50,000 already belongs to A Ltd.
No purchase consideration is to be paid by the transferee company to the transferor
company for that part of share capital which is held by the transferee company. The
transferor company will close the share capital to that extent by transferring to Realisation
Account. The entry for this is :
Share Capital A/c Dr.
To Realisation A/c
The transferee company’s investment in shares and debentures of the transferor
company also becomes useless after the liquidation of the transferor company. So
investment in shares and debentures (of the transferor company) is closed by passing the
following entry :
Goodwill or Capital Reserve A/c Dr.
To Investments in Shares/Debentures A/c
This will be more clear from the following Illustration :
IL L U S T R A T IO N 10. Following are the balances taken from the books of A Ltd.
as on 31st March, 2017 : _________________________________________________
Cr. Balances Dr. Balances
Share Capital in ? 10 each Fixed Assets 17,00,000
share fully paid 16,00,000 Current Assets 10 ,20,000
10% Debentures 10 ,00,000 Surplus A/c 5,00,000
Interest Outstanding 50,000
32,20,000 32,20,000
The above company is amalgamated by B Ltd. who holds 4 of the share capital
(purchased by them at ? 3,70,000) and all the debentures of A Ltd.
The purchase consideration being the taking over of the assets and trade liabilities
~f A Ltd. at book value subject to revaluation of fixed assets which were reduced by
* 3.00,000, payment to outside shareholders in f 10 shares issued at par on the basis
=f such shares being worth f 15 each and the shares of A Ltd. being worth f 5 each.
You are required to make necessary Journal Entries in the books of both the
companies.
SO LU TIO N
Working Notes :
M Calculation of purchase consideration
Assets taken over at market value (? 27,20,000 - ? 3,00,000) 24,20,000
Le ss : Liabilities taken over 5,70,000
18.50.000
Less : Debentures (including interest) 10.50.000
8 ,00,000
Le ss: Money belonging to B Ltd. because of | of the shares
of A Ltd. held by B Ltd. 2 ,00,000
Purchase consideration 6 ,00,000
if) Payment of purchase consideration by issue of shares as under :
For ? 15 company issues 1 share.
For ? 6,00,000 company issues 40,000 shares.
As each share is to be recorded at par, so the purchase consideration for book purposes is 40,000
• = '0 = ? 4,00,000 (though actual purchase consideration is f 6,00,000).
JOURNAL OF A LTD.
2017 ?
Mar. 31 Realisation A/c Dr. 27,20,000
To Fixed Assets 17.00,000
To Current Assets 10.20,000
Being assets transferred to Realisation A/c)
Debentures A/c Dr. 10,00,000
Interest Outstanding A/c Dr. 50,000
Creditors A/c Dr. 5,70,000
(Being transfer of outside liabilities to Realisation Account)
B Ltd. Dr. 4,00,000
Share Capital A/c Dr. 4,00,000
(1/4 of share capital already with B Ltd. transferred to
Realisation A/c)
Shares in B Ltd. A/c Dr. 4,00,000
To B Ltd. 4,00,000
Being the receipt of purchase consideration)
Shareholders A/c Dr. 3,00,000
Being loss on realisation transferred to Shareholders A/c)
Shareholders A/c Dr, 5,00,000
To Surplus A/c 5,00,000
Being transfer of balance of Surplus Account to
Shareholders A/c)
Share Capital A/c Dr. 12 ,00,000

To Shareholders A/c 12 ,00,000
(Outsiders capital transferred to Shareholders A/c)
To Shares in B Ltd. A/c 4,00,000
(Being the payment to shareholders)
JOURNAL OF B LTD.
2017
Mar. 31 Business Purchase A/c Dr. 4,00,000
To Liquidators of A Ltd. 4,00,000
Fixed Assets A/c (at revised values) Dr. 14,00,000
To Creditors A/c 5,70,000
To Debentures in A Ltd. A/c 10,00,000
To Accrued Interest A/c 50,000
To Business Purchase A/c 4.00. 000
To Capital Reserve A/c (Bal. Figure) 4.00. 000
(Being assets and liabilities taken over)
Liquidators of A Ltd. A/c Dr. 4,00,000
(Being payment of purchase consideration)
Capital Reserve A/c Dr. 3,70,000
To Investment in Shares in A Ltd. (at cost price) 3,70,000
(Being cancellation of investment in shares of A Ltd.)
(//) Shares held by the transferor company in the transferee company

In this case when the assets of the transferor company are acquired by the transferee
company, the latter company cannot purchase its own shares.
Under the net payment methodise purchase consideration is calculated by deducting the
number of shares already held by the transferor company from the shares agreed to be
issued. The shares already held by the transferor company before absorption are treated as a
part of the purchase consideration. As shares in the transferor company are not taken over by
the transferee company, so investment in the shares (of the transferee company) should not
be transferred to Realisation Account. Transferor company is required to revalue the shares
in the transferee company in view of the price of the shares now received. If there is any gain
or loss, that should be transferred to Realisation Account.
If the purchase consideration is calculated under the net asset method, the assets in the
form of the investment in shares of the transferee company, are not taken into consideration.
IL L U S T R A T IO N 11. Liabilities and assets of Z Ltd. and A Ltd. are given below
as at 31st March, 2017 :______________________________________________________
Liabilities Z Ltd. A Ltd. Assets Z Ltd. A Ltd.
? r ?
Share Capital (? 10) 2 ,00,000 4,00,000 Sundry Assets 3,10,000 6 ,00,000
Reserves and Surplus 40,000 1 ,00,000 (no Goodwill)
7% Debentures (? 100) 1 ,00,000 Loan to A Ltd. 30,000
Loan from Z Ltd. 30.000 Investments : 5,000
Current Liabilities 50,000 70.000 shares in A Ltd. 50,000 ,_
3,90,000 6 ,00,000 3,90,000 6 ,00,000
- '■’ -L GAMA TION (AS-14) 11/1-39
A Ltd. merges Z Ltd. in the nature of purchase on the following terms :

(a) A Ltd. will issue sufficient number of shares at ? 11 each and pay 50 paise
each per share held by members of Z Ltd.
(b) 7% debentures of Z Ltd. are taken over by A Ltd. along with other liabilities of
Z Ltd.
Show Journal Entries and significant Ledger Accounts in the books of both the
: c-mparties. Also draft Balance Sheet of A Ltd. after absorption.
S O L U T IO N
Calculation of Purchase Consideration
Total number of shares of Z Ltd. is 20,000. For each share one share of
A Ltd. is to be issued, therefore, shares of A Ltd. to be issued 20,000
-e s s : Shares of A Ltd. already held by Z Ltd. 5,000
New shares of A Ltd. to be issued 15,000
Total value of new shares : 15,000 @ ? 11 per share 1,65,000
Cash payment @ 50 paise per share on 20,000 shares 10,000
1,75,000
JOURNAL OF Z LTD.
?
To Sundry Assets 3,10,000
To Loan to A Ltd. 30,000
(Being transfer of assets to the Realisation A/c on sale of
business to A Ltd.)
Current Liabilities Dr. 50,000
(Being transfer of liabilities taken over by A Ltd. to the
Realisation Account)
A Ltd. Dr. 1,75,000
(Being purchase consideration agreed to be paid by A Ltd.
for the purchase of the business)
Shares in A Ltd Account Dr. 1,65,000
Cash Account Dr. 10,000
To A Ltd. 1,75,000
(Being receipt of the purchase consideration)
Shares in A Ltd. Account Dr. 5,000
To Realisation A/c 5,000
(Being gain on 5,000 shares held by us in the transferee
company)
(Being loss on realisation transferred to Shareholders A/c)
Share Capital Account Dr. 2 ,00,000
Reserves and Surplus Account Dr. 40,000
To Shareholders Account 2,40,000
(Being share capital and reserves and surplus transferred
to Shareholders Account)
Shareholders Account Dr. 2.30,000

To Shares in A Ltd. Account 2 ,20,000
(Being payment of claim of shareholders by giving shares
of A Ltd. and shares already held and cash) 0
In Z Ltd.’s Books
LEDGER ACCOUNTS
REALISATION ACCOUNT
r ?
To Sundry Assets 3,10,000 By Current Liabilities 50,000
To Loan to A Ltd. 30,000 By 7% Debentures 1 ,00,000
By A Ltd. (Purchase consideration) 1,75,000
By Shares in A Ltd. 5,000
By Loss on Realisation trans-
ferred to Shareholders A/c 10,000
3,40,000 3,40,000
A LTD.
To Realisation Account 1,75,000 By Shares in A Ltd. 1,65,000

By Cash 10,000
1,75,000 1,75,000
SHARES IN A LTD. ACCOUNT

N um ber Am ount Num ber Am ount
? ?
To Balance b/d 5,000 50,000 By Shareholders A/c 20,000 2 ,20,000
To Realisation A/c 5,000
To A Ltd. 15,000 1,65,000
20,000 2 ,20,000 20,000 2 ,20,000
To Realisation A/c 10,000 By Share Capital Account 2 .00,000

To Shares in A Ltd, Account 2 ,20,000 By Reserves & Surplus A/c 40,000
2,40,000 2,40,000
JOURNAL OF A LTD.
2017 f
Mar. 31 Business Purchase Account Dr. 1,75,000
To Liquidators of Z Ltd. 1,75,000
(Being amount agreed to be paid to the liquidators of Z Ltd. for
purchase of business)
Sundry Assets Dr. 3,10,000
Loan of A Ltd. Dr. 30,000
To Current Liabilities 50,000
To 7% Debentures 1 ,00,000
To Capital Reserve Account 15,000
(Being various assets and liabilities acquired from Z Ltd.— the
excess of net assets over purchase consideration credited to
Capital Reserve Account)
Liquidators of Z Ltd. Dr. 1,75,000
To Share Capital Account 1,50,000
To Securities Premium Account 15,000
(Being settlement of purchase consideration)
Loan from Z Ltd. Dr. 30,000
To Loan to A Ltd. 30,000
(Being elimination of Loan from Z Ltd. by eliminating loan to A
Ltd.— an inter company owing)
Significant Ledger Accounts in the Books of A Ltd.
BUSINESS PURCHASE ACCOUNT
r
To Liquidators of Z Ltd. 1,75,000 By Sundries 1,75,000
LIQUIDATORS OF Z LTD. ACCOUNT

r
Share Capital Account 1,50,000 By Business Purchase A/c 1,75,000
lo Securities Premium Account 15.000
To Cash Account 10.000
1,75,000 1,75,000
BALANCE SHEET OF A LTD.

as on 3 1 s t M arch, 2 0 1 7
?=
(a) S h a re C apital
55,000 Equity Shares of ? 10 each fully paid up 5,50,000
(Of the above 15,000 shares issued for consideraticn other than cash)
Reserves (as given) 1 ,00,000
Securities Premium Account 15,000
1,30,000
Total 6,80,000
(2 ) N o n -cu rre n t Lia b ilitie s
Long-term Borrowings
Secured Loan : 7% Debentures (? 10 each) 1 ,00,000
(3) C u rre n t L ia b ilitie s : 1 ,20,000
Total Equity and Liabilities (1) + (2) + (3) 9,00,000

II. Assets * ?
Sundry Assets 6 ,00,000
Add : Assets acquired on take over of Z Ltd. 3.10.000
9.10.000
Less : Cash paid to the liquidator 10,000
9,00,000
(iii) Shares held by both companies in each other

As the shares are held by both companies in each other is a case of cross holdings. The
calculation of purchase consideration is dependent on the method given in the problem for
this purpose. The procedure is explained as under:
O Net Payment Method

In case of net payment method, the purchase price is calculated as under :
(a) Calculate the number of shares to be given to the outside shareholders in the
transferor company.
(b) Calculate the number of shares due to the transferee company as a shareholder in
the absorbed company.
(c) To get the total number of shares add the number of shares in (a) and (b).
(d) Deduct the number of shares already held by the transferor company from the total
under (c).
(e) To calculate the purchase consideration multiply the number of shares arrived as
under (d) with the issue price.
IL L U S T R A T IO N 12. X Ltd. is to absorb Y Ltd. by issuing 5 shares of ?10 each at
a premium of 10% for every 4 shares held in Y Ltd. On the date of absorption, Balance
Sheets were as under:
X Ltd. Y Ltd.
? T
(a) Share Capital :
Shares of ? 10 each 10 ,00,000 6 ,00,000
General Reserve 1 ,00,000 80,000
Creditors 2 ,00,000 1 ,20,000
Total Equity and Liabilities 13,00,000 8 ,00,000
II. Assets
Fixed Assets 8 ,00,000 4,00,000
Investments :
12,000 Shares in Y Ltd. 1,60,000 —
10,000 Shares in X Ltd. — 1 ,20,000
(2) Current Assets 3,40,000 2,80,000
Total Assets 13,00,000 8 ,00,000
- VfALGAMATION (AS-14) 11/ 1-43
You are required to show (a) important Ledger Accounts in the books of Y Ltd., and
j) the acquisition entries in the books of X Ltd. assuming current assets of Y Ltd. are
2 <en at f 1,80,000.
S O L U T IO N
C a lc u la tio n o f P u rc h a s e C o n s id e ra tio n
(a) Shares held by outsiders = 48,000 No. o f sh a re s
5
Shares due to outsiders 48,000 x ^ = 60,000
12,000 x 5
(b) Shares due to X Ltd. (which however will not be issued) ------- ^------- = 15,000
(c) Total of (a) and (b) 75,000

(d) Less : Already held by Y Ltd. 10,000
(e) Net number of shares constituting purchase consideration 65,000
( f) Therefore, purchase consideration will be 65,000 x f 11 = ? 7,15,000
Ledger of Y Ltd.
REALISATION ACCOUNT
?
” : -ixed Assets 4,00,000 By Sundry Creditors 1,20,000
*: Current Assets 2,80,000 By X Ltd.— Purchase
Shares in X Ltd. 10,000 Consideration 7,15,000
Loss on 10,000 shares @ ? 1)
‘ ; Shareholders A/c (Profit) 1,45,000
8,35,000 8,35,000
X LTD. \CCOUiMT
Realisation A/c 7,15,000 By Shares in X Ltd. (50,000 x ? 11) 5,50,000

By Shareholders A/c (15,000 x ? 1 1) 1,65,000
(set off; not to be issued)
7,15,000 7,15,000
SHARES IN X LTD. ACCOUNT
r
*: Sajance b/d 1 ,20,000 By Realisation A/c (10,000 x?1) 10,000
" : 1 Ltd. (shares received now) 5,50.000 (Loss on revaluation)
By Shareholders A/c (distribution) 6,60,000
6,70,000 6,70,000
r
! _td. — setoff 1,65,000 By Share Capital A/c 6,00,000
5-ares in X Ltd. 6,60,000 By General Reserve A/c 80,000
a-stribution) ” Realisation A/c (Profit) 1.45,000
8,25,000 8,25,000
11/ 1-44 AMALGAMATION.(AS-U)
JOURNAL OF X LTD.
*
f
Business Purchase A/c Dr. 7,15000
To Liquidator of Y Ltd. 7,15,000
(Being the purchase consideration)
Fixed Assets A/c Dr. 4,00,000
Goodwill A/c (Balancing figure) Dr. 2,55,000
To Sundry Creditors A/c 1,20,000
(Being the value of assets and liabilities taken over and the
amount of goodwill)
Liquidator of Y Ltd. A/c Dr. 7,15,000
To Securities Premium A/c 50,000
To Shares in Y Ltd. 1,65,000
(Being the payment of purchase consideration)
Shares in Y Ltd. A/c Dr. 5,000
To Goodwill A/c 5,000
(Being the profit on revaluation of shares in Y Ltd. credited
to goodwill account)
O Net Assets Method

As the value of shares of one company is dependent on the value of the shares of the
other company, the net assets cf each company, under this method, can be ascertained only
by solving simultaneous equations.
Following are the main steps :
(/) Calculate the total value of assets of each company by algebraic equation.
(/'/) Deduct the proportionate value of assets (because of claim of transferee company in
the transferor company) from the total assets of the transferor company as
calculated in (/) above.
(Hi) Deduct shares of the transferee company held by the transferor company from the
balance as calculated in (/'/) above, as the transferee company cannot purchase its
own shares.
ILLUSTRATION 13. B Ltd. is absorbed by A Ltd. on 31st March, 2017 on the
basis of the following Balance Sheets :
A Ltd. B Ltd.
?
(a) Share Capital :
2,00,000 Equity Shares of ? 5 each 10 ,00,000 —
5,000 Equity Shares of ? 100 each — 5,00,000
General Reserve 2,50,000 —
Surplus A/c (Negative Balance) — (-) 1 ,20,000
Shareholders’ Funds 12,50,000 3,80,000
- UALGAMATION (AS-14) li/1-45
(2) Non-current Liabilities:

Sundry Creditors 2,50,000 3,00,000
Total Equity and Liabilities 15,00,000 9,80,000
II. Assets
Fixed Assets :
Factory Shed 5,00,000
Machinery 3,00,000 —
Furniture 50,000 —
Investments :
500 Shares in B Ltd. 50,000
40,000 Shares of A Ltd. 2,00,000
Others 70,000 —
Debentures in B Ltd. 50,000 —-
(2) Current Assets
Stock 2,20,000 5,00,000
Debtors 2,00,000 2,50,000
Bank Balance 60,000 30,000
Total Assets 15,00,000 9,80,000
Following is the scheme of absorption :

(/) Prior to absorption A Ltd. was to declare a dividend of 25%.
(if) For every share in B Ltd. 14 fully paid up equity shares in A Ltd. were to be
ssued.
(/'/'/) For each debenture in B Ltd., l \ % Preference Shares of ? 100 each of A Ltd.
»>sre to be issued as fully paid.
Directors of A Ltd. decided to revalue the shares in B Ltd. according to their
- 'insic value just before absorption.
Draw up the Balance Sheet of A Ltd. after absorption is completed. Merger is to be
- the nature of purchase as per AS-14.
Show necessary workings.
S O LU TIO N
BALANCE SHEET OF A LTD. (AFTER ABSORPTION)
as on 3 1 s t M arch, 2 0 1 7
?
(a) S h a re C a p ita l :
Issued, Subscribed and Paid-up Capita!
2,500 Preference Shares of f 100 each fully paid up 2,50,000
2,23,000 Equity Shares of 7 5 each fully paid up 11,15,000
13,65,000
(Of the above 23,000 Equity Shares of 7 5 each have
been issued for consideration other than cash)
Capita! Reserve [See Note (///)] 65,000
Total 14,30,000
(2) N o n -c u rre n t Liab ilitie s Nil

(3) C u rre n t L ia b ilitie s :
Trade Payables : Sundry Creditors 5.50.000
Other Liabilities : Dividend Payable 2 , 00,000
Total 7.50.000
II. Assets
(1) N o n -c u rre n t A sse ts ?
Tangible Assets : Machinery 3.00. 000
Furniture 50,000
Factory Shed 5.00. 000
8,50,000
Total 9,20,000
(2) Current Assets : Stock in Trade 7.20.000
Debtors 4.50.000
Bank Balance 90,000
12,60,000
Total Assets (1) + (2) 21,80,000
Working Notes :
(#) Calculation o f Intrinsic Value :
A Ltd. holds ' shares of B Ltd. and B Ltd. holds ^ shares of A Ltd. Suppose intrinsic value of A
Ltd. is a and that of B Ltd. is b.
a = ? 9,50,000 [i.e ., f 15,00,000 of total assets - ? 50,000 Investment in
shares of B Ltd, — ? 2,50,000 dividend - ? 2,50,000 sundry creditors] +
to”
b = ?2,30,000 (Hi) +g a
= ? 2,30,000 + ? 9,50,000 + Yq b
? 2,30,000 + ? 1,90,000 + 5U
cn b
49
50 b = ? 4,20,000
50
b = ? 4,20,000 x = ? 4,28,571
49
a = ? 9,50,000 + — of ? 4,28,571
= ? 9,50,000 + ? 42,857 = ? 9,92,857
?
Intrinsic value of 500 shares in B Ltd. of ? 4,28,571 42,857
Amount paid 50,000
Loss to be written off 7,143
1UALGAMATION (AS-14) 11/1-47
(if)Calculation of Purchase Consideration :

Shares in B Ltd. held by outsiders (5,000 - 500) 4,500
Totai no. of shares to be issued by A Ltd. (4,500 x 14) 63,000
Less : Shares already held 40,000
Additional shares to be issued 23,000
Value of shares 23,000 @ ? 5 per share ? 1,15,000
(Hi) Calculation of Capital Reserve :
Value of net assets taken over by A Ltd. ?
Sundry assets ? [5,00,000 + 2,50,000 + 30,000 + 50,000 for Dividend received] 8,30,000
Less : Debentures ? 3,00,000 plus Creditors f 3,00,000 6,00,000
2,30,000
Purchase Consideration ( f 1,15,000 + ? 42,857) 1,57,857
Capital Profit 72,143
Less : Loss on revaluation of shares in B Ltd. (? 50,000 - ? 42,857) 7,143
9 A CC O U N TIN G STANDARD (AS) 14— Accounting for Amalgamations

AS 14 deals with accounting for amalgamation. This standard does not deal with cases of
Jsitions which arise when there is a purchase of the whole or part of the shares or the
: e or part of the assets of another company by one company. The special characteristic of
i : r-isition is that the acquired company is not liquidated and its separate entity continues to
ex.s: Some of the definitions as given in AS 14 may be reproduced as follows :
a) Amalgamation means an amalgamation pursuant to the provisions of the companies
Act, 1956, or any other statute which may be applicable to companies,
i b) Transferor company means the company which is amalgamated into another
company.
(c) Transferee company means the company into which a transferor company is
amalgamated.
(d) Reserves means the portion of earnings, receipts or other surplus of an enterprise
(whether capital or revenue) appropriated by the management for a general or a
specific purpose other than a provision for depreciation or diminution in the value of
assets or for a known liability.
23. The scheme of amalgamation sanctioned under the provisions of the Companies Act,
r 56 or any other statute may prescribe the treatment to be given to the reserves of the
i-sferor company after its amalgamation. Where the treatment is so prescribed, the same is
: : wed. In some cases, the scheme of amalgamation sanctioned under a statute may
prescribe a different treatment to be given to the reserves of the transferor company after
i - i'gamation as compared to the requirements of this Statement that would have been
: : wed had no treatment been prescribed by the scheme. In such cases, the following
: •>: osures are made in the first financial statements following the amalgamation :
a) A description of the accounting treatment given to the reserves and the reasons for
following the treatment different from that prescribed in this Statement.
b) Deviations in the accounting treatment given to the reserves as prescribed by the
scheme of amalgamation sanctioned under the statute as compared to the
requirements of this Statement that would have been followed had no treatment been
prescribed by the scheme.
c) The financial effect, if any, arising due to such deviation.
3aragraphs 28 to 46 of AS 14 giving a summarised version of accounting for
=—= gamations are reproduced below :
28 An amalgamation may be either:
a) an amalgamation in the nature of merger, or
li/1 -4 8 AMALGAMATION (AS-14)
(b) an amalgamation in the nature of purchase.

29. An amalgamation should be considered to be an amalgamation in the nature of
merger when all the following conditions are satisfied :
(/) All the assets and liabilities of the transferor company become, after amalgamation,
the assets and liabilities of the transferee company.
(//) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries or their *
nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.
(Hi) The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of equity
shares in the transferee company, except that cash may be paid in respect of any
fractional shares.
(/V) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statements of
the transferee company except to ensure uniformity of accounting policies.
30. An amalgamation should be considered to be an amalgamation in the nature of
purchase, when any one or more of the conditions specified in paragraph 29 is not satisfied.
31. When an amalgamation is considered to be an amalgamation in the nature of
merger, it should be accounted for under the pooling of interest method described in
paragraphs 33-35.
32. When an amalgamation is considered to be amalgamation in the nature of purchase,
it should be accounted for under the purchase method described in paragraphs 36-39.
Q The Pooling of Interests Method

33. In preparing the transferee company’s financial statements, the assets, liabilities, and
reserves (whether capital or revenue or arising on revaluation) of the transferor company
should be recorded at their existing carrying amounts and in the same form as at the date of
the amalgamation. The balance of the Profit and Loss Account of the transferor company is
transferred to the General Reserve, if any.
34. If, at the time of amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies should be adopted
following the amalgamation. The effects on the financial statements of any changes in
accounting policies should be reported in accordance with Accounting Standard (AS) 5, ‘Prior
Period and Extraordinary Items and Changes in Accounting Policies’.
35. The difference between the amount recorded as share capital issued (plus any
additional consideration in the form of cash or other assets) and the amount of share capital
of the transferor company should be adjusted in reserves.
O The Purchase Method
36. In preparing the transferee company’s financial statements, the assets and liabilities
of the transferor company should be incorporated at their existing carrying amounts or,
alternatively, the consideration should be allocated to individual identifiable assets and
liabilities on the basis of their fair values at the date of amalgamation. The reserves (whether
capital or revenue or arising on revaluation) of the transferor company, other than the
statutory reserves, should not be included in the financial statements of the transferee
company except as stated in paragraph 39.
AMALGAMATION (m S-14) 11/1-49
37. An excess of the amount of the consideration over the net assets of the transferor
::~ p a n y acquired by the transferee company should be recognised in the transferee
c ;-p a n y ’s financial statements as goodwill arising on amalgamation. If the amount of the
r:-sideration is lower than the value of the net assets acquired, the difference should be
re d as Capital Reserve.
38. The goodwill arising on amalgamation should be amortised to income on a
F* s:ematic basis over its useful life. The amortisation period should not exceed five years
a somewhat longer period can be justified.
39. Where the requirements of the relevant statute for recording the statutory reserves in
oooks of the transferee company are complied with, statutory reserves of the transferor
pany should be recorded in the financial statements of the transferee company. The
esponding debit should be given to a suitable account head (e g., ‘Amalgamation
-stment Account’) which should be disclosed as a part of “miscellaneous expenditure” or
r similar category in the balance sheet. When the identity of the statutory reserves is no
er required to be maintained, both the reserves and aforesaid account should be
e'sed.
Common Procedures
40. The consideration for the amalgamation should include any non-cash element at fair
?. In case of issue of securities, the value fixed by the statutory authorities may be taken
be the fair value. In case of other assets, the fair value may be determined by reference to
-arket value of the assets given up. Where the market value of the assets given up
at be reliably assessed, such assets may be valued at their respective net book value.
-* Where the scheme of the amalgamation provides for an adjustment to the
aderation contingent on one or more future events, the amount of the additional payment
be included in the consideration if payment is probable and a reasonable estimate of
amount can be made. In all other cases, the adjustment should be recognised as soon as
amount is determinable [see Accounting Standard (AS) 4, Contingencies and Events
mg After the Balance Sheet Date].
T r e a tm e n t of Reserves Specified in a Scheme o f A m a lg a m a t io n
- I Where the scheme of amalgamation sanctioned under a statute prescribes the
■~ent to be given to the reserves of the transferor company after amalgamation, the
snould be followed. Where the scheme of amalgamation sanctioned under the statute
rbes a different treatment to be given to the reserves of the transferor company after
: carnation as compared to the requirements of this Statement that would have been
i ed had no treatment been prescribed by the scheme, the following disclosures should
~ aze in the first financial statements following the amalgamation :
a A description of the accounting treatment given to the reserves and the reasons for
following the treatment different from that prescribed in this Statement.
: Deviations in the accounting treatment given to the reserves as prescribed by the
scheme of amalgamation sanctioned under the statute as compared to the
requirements of this Statement that would have been followed had no treatment been
prescribed by the scheme.
; The financial effect, if any, arising due to such deviation.
Disclosure
cor all amalgamations, the following disclosures should be made in the first financial
rents following the amalgamation :
i names and general nature of business of the amalgamating companies ;
elective date of amalgamation for accounting purposes ;
11/1-50 AMALGAM A TION (A S -U
(c) the method of accounting used to reflect the amalgamation ; and

(d) particulars of the scheme sanctioned under a statute.
44. For amalgamations accounted for under the pooling of interests method, the
following additional disclosures should be made in the first financial statements following the
amalgamation :
(a) description and number of shares issued, together with the percentage of eac~
company’s equity shares exchanged to effect the amalgamation ;
(b) the amount of any difference between the consideration and the value of nee
identifiable assets acquired, and the treatment thereof.
45. For amalgamations accounted for under the purchase method, the followir;
additional disclosures should be made in the first financial statements following the
amalgamation :
(a) consideration for the amalgamation and a description of the consideration paid or
contingently payable ; and
(b) the amount of any difference between the consideration and the value of rea
identifiable assets acquired, and the treatment thereof including the period off
amortisation of any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date.
46. When an amalgamation is effected after the balance sheet date but before the
issuance of the financial statements of either party to the amalgamation, disclosure should be
made in accordance with AS 4, ‘Contingencies and Events Occurring After the Balance Shee
Date’, but the amalgamation should not be incorporated in the financial statements. In certa -
circumstances, the amalgamation may also provide additional information affecting the
financial statements themselves, for instance, by allowing the going concern assumption to
be maintained.
O W ith effect front April 1, 2016, AS 14 has been replaced by Ind AS 103
Major Changes in Ind AS 103 vis-a-vis Notified AS 14
1. Ind AS 103 defines a business combination which has a wider scope as compared E
the existing AS 14 which deals only with amalgamation. As per Ind AS 103 ‘Business
Combinations’, a business combination is a transaction or event in which an ent*.
known as acquirer obtains control of one or more businesses (acquiree (acquirees), j
2. Under the existing AS 14 there are two methods of accounting namely the pooling :
interest method and the purchase method for amalgamation whereas Ind AS 103
prescribes only the acquisition method for every business combination. This is the
most important change from accounting point of view because acquisitio'
entries will be recorded by the acquisition method only.
3. Under the existing AS 14, assets and liabilities acquired are recognised at ther
existing book values or at fair values under the purchase method.
In Ind AS 103, acquired identifiable assets, liabilities, and non-controlling interest as
recognised at their fair values under the acquisition method.
From the above differences, it is clear that entries are not to be recorded according to the
pooling of interest method and purchase method but entries for acquired assets and liabilities
will be recorded at their fair values according to the acquisition method.
Applying the acquisition method requires :
(a) Identifying the acquirer
(b) Determining the acquisition date
(c) Recognising and measuring the identifiable assets acquired, the liabilities assume:
and any non-controlling interest in the acquiree.
(d) Recognising and measuring goodwill or a gain from a bargain purchase.
- v - -GAMATION (AS-14) 11/ 1-51
-o r each business combination, one of the combining entities will be identified as the
rerand other combining entity or entities whose assets and liabilities are acquired or
■^;_~ed will be identified as a c q u ir e e o r a c q u ire e s .
Entries in the books of the acquiree company will be in the same way as the books of a
: ;-'e rs h ip being dissolved. These have already been explained. Entries in the books of the
i : rer company will be same as the entries for purchase of business are recorded.
Questions
1. State whether the following statements are True or False :

(a) When two or more companies go into liquidation and a new company is formed to take
over their business, it is called absorption.
(£>) The net worth is arrived at by adding the agreed value of assets taken over by the
purchasing company minus agreed value of the liabilities assumed by the purchasing
company.
(c) External reconstruction means reduction of capital of a company which is to be
reconstructed.
(d) Under net payment method, purchase consideration is calculated by adding the various
payments made by the purchasing company.
(e) Accident Compensation Fund is a liability and should be closed by transferring it to
Realisation Account.
Jots. [True : (b), ( d) ; False : (a), (c) and (e)].
(a) When an existing company takes over the business of one or more existing companies, it
is called
(b) .........is the amount which is paid by the purchasing company for the purchase of the
business of the vendor company.
(c) Cost of liquidation of the vendor company agreed to be paid by the purchasing company
is debited to.......... in the books of the latter company.
(d) Accumulated losses in the vendor company should be transferred to.....
i.*s [(a) absorption ; (b ) purchase consideration ; (c) Goodwill or Capital Reserve Account ;
(d) Equity Shareholders Account],
1. What do you mean by amalgamation in the nature of merger ?

Z Distinguish between (/) Internal Reconstruction and External Reconstruction (/'/) Amalgamation,
Absorption & Reconstruction.
3 Give the names of various methods of calculating purchase consideration.
- What is the journal entry to be passed by the purchasing company for making payment of
liquidation expenses of the vendor company ?
5. What do you mean by inter company owings ?
6- When the purchase price exceeds the net value of the business taken over how is difference
dealt with ?
Write a short note on different bases of determination of ‘Consideration in Amalgamation’.
£. How are accumulated losses in the vendor company treated ?
5 if a company is purchased for a price which is less than net value, how will you deal with the
difference?
'3 How are reserves of the transferor company treated in the books of the transferee company in
case of amalgamation in the nature of merger.
LONG ANSWER TYPE

1. Define Amalgamation. What entries are passed by a company to close its books when it is
amalgamated by another company ?
2. What entries should be passed in the books of a company that goes into liquidation for the
purpose of amalgamation ?
3. What do you mean by the value of business ? If a concern is purchased for a price which is
less than net value how will you deal with the difference ?
4. If the purchasing company issues fully paid shares to the liquidating company at a premium,
how will they be dealt with ? Explain and give the necessary journal entries.
5. Explain pooling interests method of amalgamation.
6 . Give clearly the difference between amalgamation in the nature of merger and amalgamation
in the nature of purchase.
7. What entries should be passed in the books of a transferee company in the case of an
amalgamation in the nature of purchase.
8 . Define purchase consideration. Explain methods to calculate it by taking suitable examples.
IB Prob/ems|||||III!III||||I|||!ll||||IIIIIIlll|j||llllllllll||||
AMALGAMATION
1. Following are the Balance Sheets of A Ltd. and B Ltd. as at 31st March, 2017:-
A Ltd. B Ltd.
I. Equity and Liabilities f ’000 ? ’000

(a) Share Capital :
Equity Share Capital ( T 10 each) 24,000 9,000
12% Preference Shares Capital
(? 10 each) — 3,000
General Reserve 13,830 2,940
Statutory Reserve 1,170 375
Surplus Account 1,689 1,065
(2) N o n -cu rre n t Lia b ilitie s
13% Debentures — 750
(3) C u rre n t L iab ilitie s 4,311 2,970
Total 45,000 20,100
II. Assets
Fixed Assets 33,000 14,190
(2) C u rre n t A sse ts 12,000 5,910
Total 45,000 20,100
On 1st April, 2017 A takes over B Ltd. on the following terms :

(/) A Ltd. will issue 10,50,000 equity shares of X 10 each at par to the equity shareholders
of B Ltd.
(//) A Ltd. will issue 33,000 12% preference shares of ? 100 each at par to the preference
shareholders of B Ltd.
(Hi) Debentures of B Ltd will be converted into equal number of 14% debentures of the
same denomination.
11/1-55
AMALGAMATION (A S -14)
You are informed that the statutory reserves of B Ltd are to be

years. You are required to show the Balance Sheet of A Ltd. immediately after
mentioned scheme of amalgamation has been implemented assuming that:
(a) the amalgamation is in the nature of merger and
(b) the amalgamation is in the nature of purchase.
Ans. [(a) B/S Total (T ’000) 65,100 ; (b) B/S Total (T ’000) 65,100]
2. X Ltd. and Y Ltd. decided to amalgamate in the nature of purchase and new company viz. XY
Ltd. is formed to take over both the companies as on 31-3-2017. Following are the Balance
Sheets of the Companies as on that date :
X Ltd. Y Ltd.
(Tin (Tin
lakhs) lakhs)
(1) S h a re h o ld e rs ’ Funds
(a) Share Capital :
Shares of T 10 each fully paid 50 30.00
Reserve Fund 20 15.00
Dividend Equalisation Fund — 10.00
Workmen’s Compensation Fund 2 —
Surplus Account 3 5.00

Bank Overdraft — 5.00
Sundry Creditors 10 12.00
Bills Payable 5 3.00
Total 90 80.00
II. Assets
(a) Tangible Assets :
Land & Building 25 19.00
Plant & Machinery 20 25.50
(£>) Intangible Assets :
Goodwill 10 8.00
Patents & Trade Mark — 5.25
Stock 20 15.00
Sundry Debtors 10 5.00
Bills Receivable — 2.00
Cash at Bank 5 0.25
Total 90 80.00
Show how the amount payable to each company is arrived at and prepare the
amalgamated Balance Sheet of XY Ltd. assuming amalgamation is done in the nature of
purchase.
ins. [Purchase Consideration : X Ltd. T 75 lakhs, Y Ltd. T 60 lakhs; B/S Total of XY Ltd. T 170
lakhs].
3 Following are the balances taken from the books of G Ltd, and H Ltd, as on 31 -3-2017.
G Ltd. H Ltd.
T T
(a) Share Capital :
Equity Shares of T 10 each 50,00,000 20 ,00,000
Preference Shares of T 100 each 20 ,00,000 10 ,00,000
js and Surplus :
General Reserve 8 , 00,000 2 , 00,000
Investment Allowance Reserve 7.00. 000 3.00. 000
Surplus Account 10, 00,000 5.00. 000
c u rre n t Lia b ilitie s
12% Debentures (f 100 each) 5.00. 000 . .
2 00 000
C u rre n t Liab ilitie s
Trade Creditors 5.00. 000 3.00. 000
Other Current Liabilities 4.00. 000 2 .0 0 . 000
Total 1,09,00,000 47,00,000
II. Assets
Land & Building 29.00. 000 12, 00,000
Plant & Machinery 45.00. 000 18,00,000
F urniture 5.00. 000 2 , 00,000
Stock 15.00. 000 5.00. 000
Debtors 10 .0 0 . 000 7.00. 000
Cash at Bank 5.00. 000 3.00. 000
Total 1,09,00,000 47,00,000
G Ltd. takes over H Ltd. as on April 1, 2017. G Ltd. discharges the purchase consideration
as follows :
(/) Issued 2,00,000 equity shares of f 10 each at f 12.50 to the equity shareholders of H
Ltd.
(//) Issued 15% preference shares of ? 100 each to discharge the preference shares of H
Ltd. at par.
Debentures of H Ltd. will be converted into equivalent number of Debentures of G Ltd.
Investment Allowance Reserve of H Ltd. is to be maintained for two more years. The fair
value of Plant & Machinery of H Ltd. is ? 15,00,000. Make Journal Entries in the books of G
Ltd. assuming that:
(/) the amalgamation is in the nature of merger.
(//) the amalgamation is in the nature of purchase.
Ans. [Purchase Consideration ? 35,00,000]
4. Deva Ltd., and Asura Ltd., carrying on similar business agreed to amalgamate by transferring
their undertakings to a new company, Devasura Ltd.
Balance Sheets of the two companies as on the date of transfer were as follows :
D eva Ltd. A su ra Ltd.
7
i. Equity and Liabilities
(a) Share Capital :
Equity Shares of ? 100 each 5,00,000 3,00,000
6% Preference Shares of ? 100 each 5,00,000 2,50,000
(b ) Reserves and Surplus :
General Reserve 2 ,00,000 70,000
Surplus Account 1,15,000 55,000
(2) N o n -c u rre n t Liabilities

5% Debentures — 40,000
Sundry Creditors 75,000 35,000
Total 13,90,000 7,50,000
!!. Assets
(a) T angible A sse ts :
Land & Buildings 4,65,000 2,55,000
Plant & Machinery 5,60,000 3,58,000
Furniture & Fittings 79,000 34,000
(b) In ta n g ib le A sse ts
Discount on Shares 55,100 —
Stock 81,500 52,000
Debtors 56,000 24,600
Cash & Cash Equivalents :
Cash at Bank 87,000 22,500
Cash in hand 6,400 3,900
Total 13,90,000 7,50,000
The terms of agreement were as follows :

(a) the purchase consideration consisted o f:
(/) the assumption of liabilities of both the companies ; (/'/) the discharge of the debentures
in Asura Ltd., at a premium of 5% by Devasura Ltd. by the issue of 7% debentures in Devasura
Ltd. ; (Hi) the issue of 10 equity shares of ? 10 each at a premium of f 2 per share for each
preference share held in both the companies ; (/V) the issue of 10 equity shares of ? 10 each at
a premium of ? 2 per share and ? 22 in cash for each equity share in Deva Ltd., and 5 equity
shares of ? 10 each at a premium of ? 2 per share and ? 80 in cash for every equity share in
Asura Ltd.
(b) All the assets and liabilities of the two companies were taken over at their book values
except a provision @ 5% to be raised on debtors.
(c) In order to raise working capital and to pay the purchase consideration, Devasura Ltd.
decided to issue 30,000 equity shares of ? 10 each at a premium of 7 2.50 per share.
You are required to :
(/) pass Journal Entries in the books of Deva Ltd., to close its accounts, and
(/'/) show the opening Balance Sheet of Devasura Ltd. assuming amalgamation has been
done in the nature of purchase.
D e va L td . A s u ra L td .
? ?
Ans. [Purchase Consideration : 13,10,000 7,20,000
Value of Goodwill (taken over) 52,900 48,230
Loss on Realisation 49,900
Balance Sheet Total of Devasura Ltd. ? 22,07,000].
5. Following are the liabilities and assets of M/s Desai Bros, as on 31st March, 2017.
L ia b ilitie s r A ss e ts t
Capital 42,500 Freehold Premises 25,000

Bank Loan 20,000 Furniture 3,500
Bills Payable 6,700 Motor Van 12,800
Creditors 10,800 Stock 13,200

Debtors 18,700
Cash 1,400
80,000 80,000
On the above date the entire business was taken over by Ding Dong Bell Ltd. The
purchase consideration was paid as under:
(/) 3,000 fully paid 7 10 shares.
(/'/) The balance in cash.
While recording the assets, the company valued the premises and stock at 10% and 20%
above their book values respectively. Find out purchase consideration and pass necessary
Journal Entries in the books of the Ding Dong Bell Ltd., and show its Balance Sheet after take
over of the business.
Ans. [Purchase Consideration 7 47,640 ; B/S Total 7 83,740].
6 . Following is the Balance Sheet of Beta Company Limited as at 31st March, 2017 :
1. Equity and Liabilities 7
(a) Share Capital :
24,000 Shares of 7 10 each fully paid 2,40,000
(b) Reserves and Surplus Nil
(2) N o n -c u rre n t Liabilities
Bank Loan 52,000
II. Assets
Buildings 2 ,00,000
Plant & Machinery 80,000
Stock of Goods 30,000
Trade Receivables : Sundry Debtors 42,000
Total Assets 3,52,000
The Company went into liquidation and the assets were sold to Alpha Company Ltd. for
7 2,94,000. The consideration was payable as follows :
7 1,14,000 in cash (which sufficed to discharge the liabilities and to pay the costs of
winding up 7 2,000) and the balance 7 1,80,000 by the allotment of 24,000 shares of 7 10
each, 7 7.50 per share paid up to the shareholders of Beta Company Ltd.
Close the books of Beta Company Limited and give necessary entries for recording the
transactions in the books of Alpha Company Limited.
Ans. [Loss on Realisation 7 60,000 ; Capital Reserve 7 58,000].
7. The Board of Directors of Lucky Ltd. decided to amalgamate the Unlucky Ltd. Balance Sheets
of the two companies as on 31st March, 2017 are given below :
L u c k y Ltd. U n lu cky Ltd.
7 7
(a) Share Capital
Equity Shares of 7 1 each 63,000 20,000
5% Preference Shares of 7 1 each 10,000
■i VALGAMATION (AS-14) 11/1-57

Surplus A/c (Negative Bal.) (-) 10,000
Shareholders’ Funds 1,23,000 20,000
(2) N o n -c u rre n t L ia b ilitie s — —
Creditors 2,000 10,000
Overdraft - 10,000
Total Equity and Liabilities 1,25,000 40,000
Assets
Land & Buildings 25,000 15,000
Plant 35,000 —
(b) Intangible Assets :
Goodwill 10,000 10,000
Copy Rights 5,000 —
Closing Stock 10,000 5,000
Debtors 10,000 10,000
Cash in hand 30,000 —
Total Assets 1,25,000 40,000
The terms of sales are as follows :

(/) Lucky Ltd. takes over both assets and liabilities of Unlucky Ltd.
(/'/) Equity shareholders of Unlucky Ltd. are to receive one new share of ? 1 of Lucky Ltd.
for every 10 shares held and the preference shareholders one 5% preference share of ? 1 in
Lucky Ltd. for every 2 shares held.
(///) An amount of ? 5,000 towards cost of liquidation will be met by the Lucky Ltd.
(/V) The Land and Buildings of Lucky Ltd. are valued at ? 40,000 and a provision of
f 1,000 is to be made for doubtful debts in case of Unlucky Ltd.
Show necessary Ledger Accounts to close the books of Unlucky Ltd. and prepare the
Balance Sheet of Lucky Ltd. after amalgamation.
ins. [Purchase Consideration ? 7,000 ; Loss on Realisation ? 8,000 ; B/S Total ? 1,54,000].
8 . Following is the Balance Sheet of ABC Company Ltd, on 31st March, 2017 :______________
(a) Share Capital :
20,000 Shares of ? 10 each 2,00,000
Reserve Fund 25,000
Dividend Equalisation Fund 10,000
Workmen’s Compensation Fund 10,000
Debentures 1,00,000
Creditors 30,000
Total 3,80,100
11/ 1-58 AM A LGA MA TION (A S -U
II. Assets
(1) N o n -cu rre n t A sse ts f
Land & Building 1 ,20,000
Less : Depreciation Provision 20,000
Plant and Machinery

Furniture & Fittings
Stock
Work-in-Progress
Debtors
Cash & Cash Equivalents : Cash at Bank
Cash in Hand
Total 3,80,1C
The company is amalgamated in the nature of purchase by XYZ Company Ltd. on th

above date. The consideration for amalgamating the company is taking over the debenture
the trade liability and a payment of ? 7 in cash and one share of the face value of ? 5 in X>
Company Ltd. (market value ? 8 per share) in exchange for one share in ABC Company Lt:
The cost of liquidation, ? 500 is to be met by the purchasing company.
Pass Journal Entries in the books of both the companies and show how the purchas
consideration is arrived at.
Ans. [Purchase Consideration f 3,00,000 ; Profit on Realisation ? 49,900 ; Goodwill ? 50,40
? 49,900 on Take Over of Business + ? 500 Cost of Liquidation].
i.e.,
9. White Ltd. agreed to acquire the business of Green Ltd. as on 31st March, 2017 on which da
Balance Sheet of Green Ltd. was as follows

(a) Share Capital :
Equity paid shares of ? 10 each 6,00,i
General Reserve
Surplus Account
(2) N o n -cu rre n t Lia b ilitie s
6 % Debentures
(3) C u rre n t L iab ilitie s
Creditors
Total 10 , 00.1
II. Assets
Land & Buildings 3.00. 1
Plant 3.40.00
Goodwill 1.00. 03
Stock .
1 68.00
Debtors 56.00
Cash 36.0a
Total
- ' -LGAMATION 0-.S-14) 11/1-59
The consideration payable by White Ltd. was :

(/) a cash payment of ? 2.50 for every share to Green Ltd.,
(/'/) issue of 90,000 f 10 shares at an agreed value of ? 12.50 per share and
(///) 6 % debentures of Green Ltd. are taken over by White Ltd. and are discharged by the
issue of such an amount of fully paid 5% Debentures in White Ltd. at 96% as is sufficient to
discharge the 6 % Debentures in Green Ltd. at a premium of 20%.
The directors of White Ltd. valued Land and Buildings at ? 4,00,000 and created a
provision of 5% on debtors against doubtful debts.
The expenses of liquidation of ? 6,000 were paid by White Ltd.
Give Journal Entries to close the books of Green Ltd. and to record the acquisition of
business in the books of White Ltd.
ins. [Profit on Realisation ? 3,95,000 ; Purchase Consideration ? 12,75,000; Goodwill
? 4,23,800 (i.e., f 3,97,800 on Take Over of Business + f 6,000 Expenses of Liquidation
+ ? 20,000 Excess Payment to Debentureholders)].
10. Balance Sheet of A Ltd. on 31st March, 2017 was as follows :
(a) Share Capital :
8,000 Equity Shares of f 50 each fully paid 4,00,000
Compensation Fund 30,000
(Outstanding Liability ? 8,000)
1,000. 14% Debentures of ? 50 each 50,000
Staff Provident Fund 40,000
Total 6 ,20,000
il. Assets
( 1) N o n -cu rre n t A sse ts
Land & Buiidings 2,30,000
Furniture 20,000
Discount on Issue of Debentures 3,000
Stock 90,000
Sundry Debtors (? 1,00,000 - f 5,000 Provision) 95,000
Cash 2,000
Total 6 ,20,000
The business of the company is taken over by B Ltd. on that date.

(a) A payment in cash at ? 10 for every share in A Ltd.
(b ) An exchange of 5 shares in B Ltd. of ? 10 each, at the market value of ? 15 per share,
for every 2 shares in A Ltd.
Show Realisation Account, Cash Account and Sundry Shareholders Account in the books
of A Ltd. The expenses of liquidation, ? 5,000, were borne by A Ltd.
- -s [Purchase Consideration ? 3,80,000 ; Loss on Realisation ? 94,000],
11/ 1-60 AMALGAMATION (AS-14
11. X Co. Ltd. is absorbed by Y Co. Ltd. Given below are the Balance Sheets of the two
companies, taken after revaluation of their assets on a uniform law :
X Co. Ltd. Y Co. Ltd.
T
(1) S h a re h o ld e rs ’ Funds
(a) Share Capital :
Authorised Share Capital : •»
9,000 Shares of ? 300 each 27,00,000
40,000 Shares of ? 180 each 72,00,000
Paid-up Capital :
9,000 Shares of ? 300 each,
? 270 paid up 24,30,000
40,000 Shares of ? 180 each,
? 150 paid up 60,00,000
General Reserve 8,07,000 25,70,000
(2) C u rre n t Liabilities
Creditors 1,10,000 1,30,000
Total 33,77,000 87,70,000
II. Assets
(1) N o n -c u rre n t a n d C u rre n t A sse ts
Sundry Assets 33,70,000 87,15,000
Cash in hand 7,000 55,000
Total 33,77,000 87,70,000
The holders of every three shares in X Co. Ltd. were to receive five shares in the Y Co.
Ltd. plus as much cash as is necessary to adjust the rights of shareholders of both the
companies in accordance with the intrinsic values of the shares as per respective balance
sheets. Pass the necessary Journal entries in the books of Y Co. Ltd. assuming it to be an
amalgamation in the nature of merger and prepare the Balance Sheet giving effect to the
above scheme of amalgamation.
Ans. [Purchase Consideration f 22,77,000 ; General Reserve ? 35,60,000 ; Balance Sheet
Total ? 1,21,20,000 ].
Hint. As per AS-14, Surplus A/c of the transferor company is transferred to General Reserve,
if any. Hence Surplus A/c is not recorded separately and gets adjusted in Reserves.
12. Balance Sheets of A Ltd. and B Ltd. are as under:
A Ltd. B Ltd.
f ?
(a) Share Capital
Shares of ? 100 each 5,00,000 15,00,000
Capital Reserve 50,000 —
General Reserve 20,000 2 ,00,000
Development Rebate Reserve 40,000 -
Surplus Account — 1,20,000

Creditors 95,000 2,40,000
Total 10,05,000 20,60,000
II. Assets
( 1) N o n -c u rre n t A ss e ts
(/) Tangible Assets :
Building 6 ,00,000
Plant & Machinery 4,20,000 6,50,000
Furniture 5,000 10,000
(/'/) Tangible Asset: Goodwill 1 ,00,000 —
(Hi) Capital Work-in-Progress 75,000 —
(Expenses on New Project)

Stock 2 ,10,000 3,80,000
Debtors 1,80,000 2,30,000
Cash & Bank Balance 15,000 1,90,000
Total 10,05,000 20,60,000
A Ltd. was absorbed by B Ltd. on 1st April, 2017 on the terms given below :
(a) Fixed assets other than goodwill to be valued at T 5,00,000 including f 6,000 for
furniture.
(b ) Stock to be reduced by ? 20,000 and debtors by 5%.
(c) B Ltd. to assume liabilities and 6% debentures.
(d) The new project to be valued at ? 95,000.
(e) The shareholders of A Ltd. to receive cash payment of T 30 per share plus four
ordinary shares in B Ltd. for every five shares held.
(/) B Ltd. to pay the liquidation expenses of A Ltd. amounting to ? 6,000.
Draft the Journal entries in the books of B Ltd. and A Ltd. taking amalgamation in the
nature of purchase and prepare Balance Sheet of B Ltd. after absorption, Development Rebate
Reserve of A Ltd. is to be continued in the books of B Ltd.
[Purchase Consideration ? 5,50,000; Loss on Realisation ? 60,000 ; Balance Sheet
? 2,87,500].
•2. Following is the Balance Sheet of Ankur Ltd. as on 31st March, 2017 :
(a) Share Capital:
Equity Shares of ? 100 each 30,00,000
13% Preference Shares of ? 100 each 10 ,00,000
Sundry Creditors 8 ,00,000
Total 69,00,000
II. Assets
( 1) N o n -c u rre n t A sse ts
Investments 2 ,00,000
(2 ) C u rre n t A sse ts 27,00,000
Total 69,00,000
11/ 1 -6 2 AMALGAMATION (AS-14
Other inform ation:

(a) Vishal Ltd. takes over Ankur Ltd. on 1st April, 2017. Debentureholders of Ankur Ltd.
are discharged by Vishal Ltd. by issuing 10% Debentures of ? 100 each at a premium of ? 25
each.
(b) 13% Preference Shareholders of Ankur Ltd. are to be discharged at a premium of 20°:
by issuing necessary number of 12% Preference shares of Vishal Ltd.
(c) Intrinsic value per share of Ankur Ltd. is ? 150 and that of Vishal Ltd. is ? 300. Visha!
Ltd. will issue necessary shares to satisfy the equity shareholders of Ankur Ltd. on the basis o<
intrinsic value. However, shares are to be recorded at par value only in the books of Vishal Ltd.
You are required to give Journal Entries in the books of Y Ltd. taking amalgamation in the
nature of merger.
Ans. [Purchase Consideration ? 27,00,000; General Reserve Account ? 18,00,000].
14. Bharat Ltd. having a Shareholders’ Fund of \ 10,00,000 divided into 10,000 shares of ? 100
each (? 75 paid up) and a Reserve Fund of ? 2,50,000 was amalgamated in the nature o!
purchase by Haryana Ltd. having a Shareholders’ Fund of ? 30,00,000 divided into 40,000
shares of T 100 each (7 60 paid up) and a Reserve Fund of ? 6,00,000 on the terms that for
every four shares in the absorbed company, the absorbing company was to give five shares
partly paid as its original ones.
Prepare Ledger Accounts in the books of the transferor company. Also give Journa
Entries in the books of the transferee company.
Ans. [Loss on Realisation ? 2,50,000 ; Purchase Consideration f 7,50,000].
15. The X Bank has on 30th September, 2016 issued capital of 50,000 shares of ? 100 each, ? 60
paid. Its reserves amount to ? 40,00,000. The X Bank is amalgamated in the nature of
purchase by the Z Bank on 30th September, 2016 on the basis of allotment of one share in the
Z Bank for every three shares in the X Bank. The share capital of the Z Bank consists of
2,00,000 shares of f 100 each, ? 70 paid up. The shares are quoted at ? 450 in the market but
the issue is to be recorded at par. The reserves of the Z Bank were ? 1,00,00,000.
On 31st March, 2017 the shareholders of the Z Bank were paid dividend for the whole of
the year 2016-17 at the rate of f 40 per share. Journalise the entries in the books of the Z
Bank Ltd.
Ans. [Purchase Consideration 1 11,66,920 ; Capital Reserve ? 54,99,760].
Hint. Dividend for 6 months from April 1, 2016 to September 30, 2016 in respect of 16,666
shares @ f 20 debited to Capital Reserve Account because of dividend for that period
relates to the purchase of business.
16. Following are the Balance Sheets of B Ltd, and Beesons Ltd, as on 31st March, 2017 :______
B Ltd. B e e so n s Ltd.
? in lakhs T in lakhs

(a) Share Capital
Shares of f 100 each 50 —
Shares of ? 10 each — 80
Capital Reserve 10 —
General Reserve 36 100
Secured Loans — 40
Unsecured Loans 22 —I
Sundry Creditors 42 46
Provisions :
Provision for Tax 11 52
Provision for Dividend — 10
Total 171 328
AMALGAMATION (AS-14) 11/ 1-63
II. Assets
(/) Tangible Assets : Fixed Assets 83 160
(/'/) Intangible Asset: Goodwill 2
(Hi) Investments 17
(2) C u rre n t A ss e ts 69 168
Total 171 328
B. Ltd is amalgamated with Beesons Ltd. as on 31st March, 2017.

For the purposes of the amalgamation the goodwill of B Ltd. is considered valueless. There
are also arrears of depreciation in B Ltd. amounting to ? 4,00,000. The shareholders in B Ltd.
are allotted, in full satisfaction of their claims, shares in Beesons Limited in the same
proportion as the respective intrinsic values of the shares of the two companies bear to one
another.
Pass Journal Entries in the books of both the companies to give effect to the above.
Ans. [Purchase Consideration ? 90,00,000, i.e., 4,00,000 shares of ? 10 each issued @ f 22.50
per share ; Loss on Realisation ? 6,00,000].
Hints : Calculation of Purchase Consideration
B. Ltd. Beesons Ltd.
T
Share Capital 50.00. 000 80,00,000
Capital Reserve 10 .00 . 000
General Reserve 36.00. 000 1, 00, 00,000
96.00. 000 T80,00,000
Less : Goodwill 2 , 00,000
Arrears of Dep. 4,00,000
6 , 00,000
90,00,000 1,80,00,000
No. of Shares 50,000 8 , 00,000
Value per Share ? 180 ? 22.50
On the basis of the above holder of each share in B. Ltd. is allotted 8 shares in
Beesons Ltd. A total of 4,00,000, (i.e., 8 x 50,000) shares has to be issued of the total
face value of 4,00,000 x ? 10 = ? 40,00,000; the real value is ? 90,00,000 i.e., @ ? 22.50
each. In other words Securities Premium is ? 50,00,000.
17. Following is the Balance Sheet of X Co. Ltd. as on 31st March, 2017 :
I. Equity and Liabilities r
(a) Share Capital :
2,000 Shares of T 100 each 2 ,00,000
Reserve Fund 20,000
(2) N o n -cu rre n t L ia b ilitie s
Loan from A (a director) 40,000
Total 4,40,000
11/ 1 -6 4 AMALGAMATION (AS-14)
II. Assets
Land & Buildings 85,000
Goodwill 35,000
Discount on Debentures 6,000
Stock 55,000
Cash at Bank 34,000
Total 4,40,000
The business of the company is taken over by Y Co. Ltd., as on that date on the following
terms :
(a) Y Co. to take over all assets except cash, to value the assets at book values less 10%
except goodwill which is to be valued at 4 year’s purchase of the excess of average (5
years) profit over 8 % of the combined amount of share capital and reserves.
(b) Y Co. to take over trade liabilities which were subject to a discount of 5%.
(c) The purchase consideration was to be discharged in cash to the extent of ? 1,50,000
and the balance in fully paid equity shares of ? 10 each valued at ? 12.50 per share. The
average of the ‘five years’ profit was ? 30,100. The expenses of absorption, ? 4,000, were paid
by X Co. Ltd. but afterwards reimbursed by Y Co. Ltd.
X Ltd, had sold, prior to 31-3-2017 goods costing f 40,000 to Y Ltd. for ? 50,000. On the
date of absorption f 15,000 worth of goods were still in stock of Y Ltd. Debtors of X Ltd.
include f 25,000 still due from Y Ltd.
Show the necessary Journal Entries in the books of X Co. Ltd. and Y Co. Ltd.
Ans. [Purchase Consideration ? 3,02,500 ; Loss on Realisation ? 17,500],
18. Shakti Limited acquired the undertaking of Takti Limited on 31st March, 2017. Takti Limited
went into liquidation.
The consideration for the acquisition was :
(1) Shakti Limited to assume all the liabilities of Takti Limited ;
(2) Shakti Limited to allot fully paid ? 10 Equity shares to Takti Ltd. at an agreed value of
? 10.25 per share, in the ratio of nine shares of Shakti Limited for five of Takti Limited ;
fractions amounted to 400 shares of Takti Limited and were settled in cash provided by Shakti
Limited at the agreed value.
The liquidator of Takti Limited was permitted to retain ? 7,500 from the assets to meet the
costs of liquidation (which amounted to that sum exactly).
Balance Sheet of Takti Limited at 31st March, 2017 were as follows :
1. Equity and Liabilities r
(a) Share Capital:
2,00,000, ? 10 Shares, ? 7.50 paid 15,00,000
Leasehold Redemption Fund 80,000
Plant Replacement Reserve 1,00,000
(2) N o n -c u rre n t L iab ilitie s
Total 35,20,000
6
¥ATION (AS—14) 11/ 1-65
II. Assets
Freehold Premises 91,500
Leasehold Premises 2,60,000
Plant ? 9,51,900
Less : Depreciation Provision T 4,63,800
4,88,100
Leasehold Redemption Fund Investment 80,000
Debentures of Tabti Ltd. (Face Value ? 1,00,000) 85.000
Stock 8.73.000
Debtors 9.90.000
Cash at Bank 5,62,400
Trade Investments 90.000
Total 35,20,000
Give the Journal entries to close the books of Takti Ltd.

purchase Consideration f 36,90,000 ; Profit on Realisation T 9,45,000].
Balance Sheets of Rama Ltd. and Krishna Ltd., as at 31st March, 2017 were as follows :
R am a Ltd. K rishna Ltd.
? r
( 1) S h a re h o ld e rs ’ F unds
(a) Share Capital :
Divided into Equity Shares of
? 10 each 6 ,00,000 4,00,000
Reserve 1,50,000 1,00,000
(2) N o n -c u rre n t Liab ilitie s — —

Sundry Creditors 37,500 30,000
Total 8,62,500 5,85,000
II. Assets
Fixed Assets 5,00,000 3,50,000
(Other than Goodwill)
Stock-in-Trade 95,000 75,000
Debtors 1,40,000 1 ,00,000
Cash at Bank 1,27,500 60,000
Total 8,62,500 5,85,000
Rama Ltd. took over and amalgamated Krishna Ltd., as on 1st October, 2017, No
Eaance Sheet of Krishna Ltd. was prepared on the date of takeover. But the following
••:rmation is made available to you :
(/) In the six months ended 30th Sept. 2017, Krishna Ltd. made net profits of ? 60,000
after providing for depreciation at 10% per annum of fixed assets.
(//) Rama Ltd. during that period had made net profits of ? 1,45,000 after providing for
depreciation at 10% per annum on the fixed assets.
(Hi) Both the companies had distributed dividends of 10% on 1st July, 2017.
11/1-66 AMALGAMATION (AS-14i
(/V) Goodwill of Krishna Ltd. on the date of takeover was estimated at ? 25,000 and it was
agreed that the stocks of Krishna Ltd. would be appreciated by ? 15,000 on the date o'
takeover.
(v) Rama Ltd. to issue shares to shareholders of Krishna Ltd., on the basis of the intrinsic
value of the shares on the date of takeover.
Draft Balance Sheet of Rama Ltd. after amalgamation in the nature of purchase.
Ans. [Balance Sheet Total f 15,92,500 ; Intrinsic Value of a Share of Rama Ltd. ? 15; Purchase
Consideration ? 6,15,000 discharged by issue of 41,000 shares of ? 10 oach at a
premium of ? 5 per share].
H in t: Cash at Bank is ? 3,25,000 calculated as follows :
R a m a L td . K r is h n a Ltd
f f
Opening Cash on 1-4-2017 1,27,500 60,000
A d d : Net Profit during 6 months 1,45,000 60,000
(assumed to be realised in Cash)
A d d : Depreciation being non-cash item will increase cash
inflow from operations @ 10% on fixed assets for half year 25,000 17,50C
2.97.500 1,37,500
L e s s : 10% dividend on capital 60,000 40,000
2.37.500 97,500
Total cash at bank after absorption : ? 2,37,500 + ? 97,500 = ? 3,35,000.

20. Balance Sheets of Jay Ltd. & Ray Ltd, as on 31-3-2017 are as follows :______
J a y Ltd. R a y Ltd.

(.1) S h a re h o ld e rs ’ F unds
(a) Share Capital :
Equity Share Capital ( f 10) 5.00. 000 4 .00 . 00 :
Preference Share Capital (? 100) 5.00. 000 1.00 . 00 :
Reserves 1,40,000 1,00 : : :
7% Debentures (? 100) i, o o . : : :
Loan from J. Ltd. 30 .
Other Liabilities 2,50,000 70.::
Total 13,90,000 8,oo: :
II. Assets
Fixed Assets 8 , 00,000 6,oo ::
Investments : 5,000 Shares of Ray Ltd. 60,000
Current Assets 5,00,000 2 , 00 .
Loan to Ray Ltd. 30,000
Total 13,90,000 8,00.Of
Jay Ltd. decides to amalgamate in the nature of purchase Ray Ltd. on the following terms
(a) Jay Ltd. will issue 7 equity shares of f 10 each at a premium of 20% and ? 5 cash
every 5 equity shares of Ray Ltd. surrendered.
- VALGAMATION (AS-14) 11/ 1 -6 7
(b ) Preference shareholders of Ray Ltd. are to be given one 6% preference share in Jay
Ltd. for every share held. These shares are to be issued at a premium of 5%.
(c) Liquidation expenses are to be paid by Jay Ltd. amounting to ? 10,000.
(d) Jay Ltd. revalues the fixed assets of Ray Ltd. at ? 8,00,000 on takeover.
Close the books of Ray Ltd. and pass Journal Entries in the books of Jay Ltd.
Ans. [Profit on Realisation ? 1,73,000 ; Purchase Consideration f 7,28,000 ; B/S Total
? 22,55,000].
NTER-COMPANY HOLDINGS
21. Sad Limited presents the following ledger balances as on 31st March, 2017 :
Cr. B ala n ce s r Dr. B alances
Share Capital Fixed Assets 12,75,000
(Shares of ? 10 each) 12,00,000 Current Assets 7,65,000
Surplus A/c (Dr. Balance) (-)3,75,000
Accrued Interest 37,500
Creditors 4,27,500
20,40,000 20,40,000
The Company is amalgamated by Poor Limited who holds 25% of share capital
(purchased by them for f 2,77,500) and all Debentures issued (at par) by Sad Limited.
The purchase consideration being taking over all assets and liabilities at book value,
subject to Fixed Assets revalued at ? 10,50,000.
The payments to other Shareholders to be made on the basis of such shares being worth
? 15 per share and shares in Sad Ltd. being worth ? 5 per share.
Show entries in books of Sad Limited after determining purchase consideration.
A/ts. [Purchase Consideration ? 4,50,000 ; Loss on Realisation ? 75,000].
22. Following is the Balance Sheet of P Ltd. as at 31-3-2017.
I. Equity and Liabilities r
(a) Share Capital :
Authorised and Issued Capital :
80,000 Shares of ? 10 each fully paid 8,00,000
(to) R e se rve s a n d S urplus :
Surplus A/c (Dr. Balance) (-) 2,50,000
Shareholders’ Funds 5,50,000
5% Debentures (secured by a floating charge) 5,00,000
Accrued Interest 25,000
II. Assets
(1) N o n -c u rre n t A ss e ts
Fixed Assets :
Land & Buildings 2,50,000
Stock & Work-in-Progress 2,35,000
Sundry Debtors 2,49,000
Cash Balance 26,000
11/ 1 -6 8 AMALGAMATION (AS-14)
The debentures are held by G Ltd. who also hold 20,000 shares acquired during the past
two years at a total cost of ? 1,45,000.
Negotiation between the two companies resulted in an agreement for the amalgamation of
P Ltd. by G Ltd. upon the following terms :
(a) That G Ltd. takes over the assets and liabilities of P Ltd. as at 31st March at their
book figures, subject to the revaluation of the Plant and Machinery at ? 4,50,000.
(b) That the amount due in respect of debentures be set off against the purchase
consideration and that they be cancelled on the completion of the transaction.
(c) That the outside shareholders in P Ltd. be given ? 10 shares issued at par by G. Ltd.
on the basis of such shares being worth ? 15 each and the shares in P Ltd. being
worth ? 5 each.
(Your are to assume that no fractional holding resulted).
The arrangement was approved by the necessary resolution of the shareholders in P Ltd.
Show Journal Entries required to close the books of P Ltd. and to record the transactions
in the books of G Ltd. including the transfers required to close the accounts therein relating to
the shares and debentures in P Ltd.
Ans. [Purchase Consideration f 2,00,000 : Loss on Realisation ? 1,50,000 ; Capital Reserve
T 55,000].
23. Given below are the ledger balances of the two companies, taken after revaluation of their
assets on a uniform basis :
X COMPANY LIMITED
Cr. B alances ? Dr. B ala n ce s
Paid-up-Capital : Sundry Assets 18,50,000
10,000 shares of ? 100 Discount on Shares
each fully paid 10,00,000 (not written off) 20,000
Reserve Fund 2,00,000
Creditors 2,50,000
18,70,000 18,70,000
Y COMPANY LIMITED
Cr. B alances Dr. B ala n ce s
Paid up Capital: Sundry Assets 9,00,000
5,000 shares of f 100 each 1,000 shares in X
fully paid 5,00,000 Company Ltd. 1,10,000
Reserves 2,90,000 Discount on Shares 30,000
Creditors 1,50,000
10,40,000 10,40,000
X Company Ltd, amalgamates in the nature of purchase Y Company Ltd. on the basis of
the intrinsic value of the shares. Give Journal Entries in the books of the two companies.
Ans. [Intrinsic Value of Share of X Ltd. (? 130) and Y Ltd. (? 156); Purchase Consideration
? 6,50,000; Profit on Realisation ? 20,000].
• 5 desirable to learn alteration of share capital, before discussing internal reconstruction.
G Alteration of Share Capital
According to Section 61 of the Companies Act, 2013 a limited company can, if authorised
» _ 1 tides of Association, alter the capital clause of its Memorandum of Association in any
" owing ways :
£ in c r e a s e its share capital by such amount as it thinks expedient by issue of new
Iv a r- 'r Accounting entries are the same as are done for the issue of new shares.
r< C o n s o lid a te all or part of its existing shares of smaller amounts into shares of larger
For example, X Ltd., having a share capital of f 5,00,000 divided into 5,000 shares
:o each, resolves to consolidate the shares into 50,000 shares of ? 10 each. Journal
ir- the consolidation is as follows :
? f
E*areCapital (say ? 10) Account Dr. 5,00,000
To Share Capital(say ? 100) Account 5,00,000
=~ ng consolidation of 50,000 equity shares of ? 10
each into 5,000 shares of f 100 each fully paid as per
rest jtion number....dated..... )
:• S u b -d iv id e its shares of higher denomination into shares of smaller denomination
•per tothe condition that in case of partly paid up shares, the proportion between the paid
:t s r : tne unpaid amount on the shares continues to be the same after sub-division as
IT " '< Ltd. resolves to subdivide 5,000 shares of ? 100 each into 50,000 shares of ? 10
■fir. . : -mal entry for sub-division is as under:
? ?
■Eauty Share Capital (say ? 100) Account Dr. 5,00,000
To EquityShare Capital (say ?10) Account 5,00,000
: e r g sub-division of 5,000 shares of ? 100 each into 50,000
3~a*es of T 10 each as per resolution number...... dated...... )
.1C a n c e l those shares which have not been taken up, i.e ., decrease its unissued capital
■esulting in the reduction of paid up capital. It does not require any journal entry
>e : does not affect paid up issued capital in any way.
*=■■•=: on of capital can be affected in any of the above five ways by passing an ordinary
or n the general meeting. Confirmation of the court is not required.
.raes 1. The powers under Section 61 can be exercised only if authorised by the articles. In case
do not contain any such authorisation, the articles must first be amended, before the power
~*e share capital is exercised.
111/ 1-2 INTERNAL RECONSTRUC
2. It would be perfectly valid if in a single meeting both a special resolution amending the art;
and a resolution for exercise of any of the powers under this section are passed.
3. The power should be exercised bona fide in the interest of the company and not to benefit
group.
Under Section 64 of the Companies Act, 2013 the company shall give notice of tf
alteration of capital to the Registrar within thirty days of doing so who makes necess
alteration in Company’s Memorandum or Articles of Association. If a default is made
complying with this provision, the company and every officer of the company who is in defa
is punishable with a fine which may extend to fifty rupees for every day the default continues
Q Internal Reconstruction or Capital Reduction

Internal reconstruction means the reduction of capital to cancel any paid up share cap
which is lost or unrepresented by available assets. This is generally resorted to write off
past accumulated losses of the company. Thus, internal reconstruction and reduction
capita! mean the same.
Reduction of capital is unlawful except when sanctioned by the court because
conservation of capita! is one of the main principles of the company law. The issuec
share capital of a company represents the security on which the creditors rely
Companies usually do not call the full value of shares at one time. The uncalled capital acts
as a future security for the company’s creditors. Therefore, any reduction of capital reduces
the security of the creditors. Keeping this in view,all safeguards havebeenprovided for in the
Companies Act to conserve the capital of a company.However, ingenuinecases,a company
is permitted to reduce its share capital by Section 66 in any of the following ways:
(i) By extinguishing or reducing the liability on any of its shares in respect of share capital
not paid up, i.e., reducing or extinguishing the uncalled liability of members of the company.
For example, the capital of a company consists of 2,00,000 equity shares of ? 10 each on
which ? 8 has been paid, now being reduced to a fully paid share of T 8. Journal entry for this
is as follows :
? f
Equity Share Capital Account (? 10) Dr. 16,00,000
To Equity Share Capital Account (? 8) 16,00,000
(Being 2,00,000 equity shares of ? 10 each, f 8 per share paid
up converted into 2,00,000 equity shares of ? 8 each fully paid
up as per special resolution number....... dated........vide court
sanction number......dated............... )
(/'/) By paying off any paid up capital which is in excess of the needs of the company. For
example, a company has a paid up share capital of T 6,40,000 divided into equity shares of
? 10 each, f 8 per share paid up. Surplus Account shows a credit balance of ? 2,80,000. The
company decides to reduce paid up share capital to T 6 per share paid up by paying off the
necessary amount out of accumulated surplus. The appropriate journal entries are as follows
Share Capital A/c Dr. 1,60,000

To Shareholders A/c
(Being the amount to be repaid to shareholders on reduction of
paid up capital)
To Bank A/c 1,60,000
(Being the amount paid off)
S-ERNAL. RECONSTRUCTION III/1-3
Surplus A/c Dr. 1,60,000

To General Reserve A/c 1,60,000
Being transfer on repayment of share capital)
Hi) Where any paid up share capital is being reduced without reducing the liability on the
; ■i'es. For example, a share of ? 10 on which ? 8 has been paid up is being reduced to a
i'a 'e of ? 10, f 6 paid-up. The journal entry is as follows :
Share Capital A/c ?2
To Capital Reduction A/c ?2
/V) Where any paid up share capital is being reduced reducing the liability on the shares.
r ; - example a share of ? 10 on which ? 8 has been paid up is being reduced to fully paid
sr --'e of ? 6. Journal entry is as follows :
? f
Share Capital A/c (? 10) 8
To Share Capital A/c (? 6) 6
To Capital Reduction A/c 2
v) By any other method approved by the court.
The court ordinarily gives sanction for the third type of capital reduction without consulting
~e creditors because creditors’ interest is in no way affected by such reduction. Such capital
ecuction neither amounts to reducing or extinguishing the uncalled liability of the members
*c ' returning of any paid up capital.
The court consults creditors for giving approval of the first and second type of capital
eiuction because security available to creditors is affected by these types of capital
-ecuction. If some creditors are unwilling to give their consent to such types of capital
-ecuction, the company will have to settle their claims before getting sanction from the court.
O Procedure for Reducing Share Capital

Following procedure is to be followed for reducing share capital :
f i) A company cannot reduce its share capital unless it is authorised by its articles.
-:.'.ever, if the articles do not permit capital reduction, they may be altered by special
*=solution to enable the company to reduce its share capital.
i ii) The company must pass a special resolution for reduction of capital.
(///) The company must apply to the court for an order confirming the capital reduction.
~-e court must look after the interests of creditors and shareholders before giving an order
:: "Arming the capital reduction.
The court may make an order confirming the capital reduction on such terms and
:: -ditions as it thinks proper, if it is satisfied that every creditor of the company entitled to
:c ect capital reduction has consented to the reduction or that his debt has been discharged
zr secured by the company. The court may also order the company to add the words “and
s-r jcea” to the name of the company for such period as it deems fit. The court may also
: :er the company to publish reasons for reduction and all other information in regard thereto
~r oublic information.
<rV) The order of the court confirming the reduction must be produced before the Registrar
i~d a certified copy of the order and of the minutes of reduction should be filed with the
strar for registration.
Note. In the following cases, procedure of reduction of capital is not called for:
a) Where redeemable preference shares are redeemed in accordance with the provisions of
Section 55.
b) Where any shares are forfeited for non-payment of calls.
c) Where there is surrender of shares or a gift is made to a company of its own shares.
id) Where the nominal share capital of a company is reduced by cancelling any shares which have
not been taken or agreed to be taken by any person.
111/ 1-4 INTERNAL RECONSTRUCTION
© Accounting Entries on internal Reconstruction

(1) When the face value of the shares is changed or the rate of dividend on preference
shares is changed, it is treated as change in the category of the share capital. The journal
entry in such a case on reduction of capital is :
(Old) Share Capital Account Dr. (with the paid up value of the old shares)
To (New) Share Capital Account (with the paid up value of the new shares)
To Capital Reduction (with the difference, i.e., amount of
(or Reconstruction) Account capital reduced)
On the other hand, when the face value of the shares or rate of dividend on preference
shares is not changer on reduction of share capital, it does not result in the change of the
category of the share capital. Category of share capital remaining the same, the journal entry
then is :
Share Capital Account Dr. (with the amount of reduction of capital)
To Capital Reduction
(or Reconstruction) Account
(2) If any sacrifice has been made by creditors and debentureholders :
Creditors A/c Dr. (with the amount of sacrifice)
DebentureholdersA/c Dr.
(or Reconstruction) A/c
(3) When any contingent liability (say sales tax) arises and is to be paid immediately, the
following journal entries will be passed :
(a) Capital Reduction Dr.
To Liability (Sales Tax) Payable A/c
(b) Liability (Sales Tax)Payable A/c Dr.
To Bank A/c
(4) If the value of any asset is appreciated :
Respective Asset A/c Dr. (with the amount of appreciation)
(5) When amount of capital reduction is utilised for writing off fictitious assets, past losses
and excess value of other assets :
Capital Reduction (or Reconstruction) A/cDr.
To Surplus A/c
” Goodwill A/c
” Discount on Shares or Debentures A/c
” Patents or Trade Marks A/c
” Plant and Machinery A/c
” Other Assets A/c
” Capital Reserve A/c (if some balance is still left)
The amount to be written off cannot exceed the amount credited to Capital Reduction
Account. But if any reserve appears on the liabilities side of the Balance Sheet, the same
may be utilised in writing off the accumulated losses and assets. The amount written off or
appreciated in respect of fixed assets under a scheme of reconstruction must be shown for
five years in the Balance Sheet along with respective fixed assets as a deduction or addition
as required in the Schedule III. The words “And Reduced” should be added to the name of
the company for such period as the court deems fit. The words “And Reduced” may not be
added to the name of the company if no such direction has been given by the court.
#» — = HAL RECONSTRUCTION III / 1-5
IL L U S T R A T IO N 1. The paid-up capital of Toy Ltd. amounted to ? 2,50,000

: - sisting of 25,000 equity shares of ? 10 each.
Due to losses incurred by the company continuously, the directors of the company
: reared a scheme for reconstruction which was duly approved by the court. The
k — s of reconstruction were as follows :
f) In lieu of their present holdings, the shareholders are to receive :
(a) Fully paid equity shares equal to 2/5th of their holding.
(b) 5% preference shares fully paid-up to the extent of 20% of the above new
equity shares.
(c) 3,000 6 % second debentures of ? 10 each.
A An issue of 2,500 5% first debentures of ? 10 each was made and fully
subscribed in cash.
A The assets were reduced as follows :
(a) Goodwill from W1,50,000 to ? 75,000.
(b) Machinery from ? 50,000 to ? 37,500.
(c) Leasehold premises from ? 75,000 to ? 62,500.
Snow the Journal Entries to give effect to the above scheme of reconstruction.
SO LUTIO N
In the Books of Toy Ltd.
JOURNAL ENTRIES
r T
Share Capital A/c (Old) Dr. 2,50,000
To 5% Pref. Share Capital A/c 20,000
To 6% Secured Debentures A/c 30,000
To Capital Reduction A/c 1,00,000
(Being conversion of 25,000 equity shares and balance being
transferred to Capital Reduction A/c in accordance with the
scheme of internal reconstruction as per special Resolution
......dated as confirmed by court order dated.......)
Bank A/c Dr 25,000
To 5% First Debentures A/c 25,000
(Being issue of f 25,000 5% 1st Debentures for cash as per
scheme of internal reconstruction)
Capital Reduction A/c Dr. 1,00,000
To Goodwill A/c 75,000
To Plant & Machinery A/c 12,500
To Leasehold Premises A/c 12,500
(Being sundry assets written down as per scheme of internal
reconstruction) -
ILLUSTRA TIO N 2. Following is the Balance Sheet of C Ltd, as on 31-3-2017 :

Equity and Liabilities r
1) Shareholders ’ Funds
(a) Share Capital :
50.000 Equity Shares of f 10 each 5.00. 000
50.000 Preference Shares of ? 10 each 5.00. 000
10, 00,000
111/1-6 INTERNAL RECONSTRUCTION
Issued and Paid-up Capital :

25.000 Equity Shares of ? 10 each 2.50.000
25.000 Preference Shares of ? 10 each 2.50.000
Surplus A/c (Negative Balance) (-) 1,23,000
Shareholders’ Fund 3,77,000
(a) Sundry Creditors 40.000
(b) Bank Overdraft 36.000
Total 4,53,000
II. Assets
(//) Intangible Assets :
Goodwill 22,000
Patents 1,73,900
(2) Current Assets
(a) Stock 34.000
(b) Debtors 56.000
(c) Cash 100
Total 4,53,000
The Company proved unsuccessful and resolutions were passed to carry out the
following scheme of reconstruction by reduction of capital :
(/) That the Preference Shares be reduced to an equal number of fully paid shares
of ? 5 each.
(/'/) That the Equity Shares be reduced to an equal number of fully paid shares of
f 2.50 each.
(Hi) That the amount so available be utilised towards wiping out losses anc
reduction of assets as follows :
Goodwill and Surplus Account (Dr. Balance) to be written off entirely, ? 27,000 tc
oe written off Leasehold Premises, ? 14,000 to be written off stock, ? 6,000 to be
provided for doubtful debts, 20% should be written off Plant and Machinery and the
balance be written off Patents.
Make Journal Entries in the books of the company and prepare Balance Shee:
giving effect to the above scheme.
SOLUTION
JOURNAL
f
Preference Share Capital (? 10) A/c Dr. 2,50,000
To Preference Share Capital (? 5) A/c 1.25.000 j
To Capital Reduction A/c 1.25.000
(Being 25,000 Pref. Shares of ? 10 each reduced to Pref.
Shares of ? 5 each)
N ’ ERNAL RECONSTRUCTION III/1-7
Equity Share Capital (? 10) A/c Dr. 2,50,000

To Equity Share Capital (? 2.50) A/c 62,500
To Capital Reduction Account 1,87,500
(Being 25,000 equity shares of f 10 each reduced to equity
shares of ? 2.50 each)
To Goodwill 20,000
To Leasehold Premises 27.000
To Plant & Machinery A/c 12.000
To Stock A/c 14,000
To Patents (Bal. fig.) 1,08,500
(Being various assets written down and losses written off)
BALANCE SHEET OF C LTD. (AND REDUCED)
as on 1st A pril, 2 0 1 7
T) Shareholders’ Funds
S hare C apital
Authorised : 1,00,000 Pref. Shares of T 5 each 5.00. 000
2,00,000 Equity Shares of f 2.50 each 5.00. 000
10,00,000
Issued & Paid-up : 25,000 Pref. Shares of f 5 each 1,25,000
25,000 Equity Shares of f 2.50 each 62,500
(2) Current Liabilities : Sundry Creditors 40.000
Bank Overdra'1 36.000
II. Assets
1) Non-current Assets
(!) Tangible Assets :
Less : Reduced under Reconstruction Scheme Dated......... 27,000
80,000
Less : Reduced under Reconstruction Scheme Dated........ 12,000
48,000
Intangible Assets :
Goodwill 20,000
L e ss : Reduced under Reconstruction Scheme Dated........ 20,000
Nil
Patents 1,73,900
L e ss : Reduced under Reconstruction Scheme Dated........ 1,08,500
65,400
(2) Current Assets : Stock (? 34,000 - ? 14,000) 20,000
Debtors 56,000
Le ss : Provision for Doubtful Debts 6,000
50,000
Cash 100
IL L U S T R A T IO N 3. Following is the Balance Sheet of Downhill Ltd. as at 31st

March, 2017 :
?
(a) Share Capital :
20,000 Equity Shares of ? 100 each 2 0 ,00,000
Surplus A/c (Negative Balance) (-)19,80,000
Shareholders’ Funds 20,000
Creditors 3,00,000
Outstanding Debenture Interest 1 ,20,000
Total 9,40,000
II. Assets
Furniture 80,000
(ii) Intangible Assets :
Goodwill 45,000
(2) Current Assets
Stock 2,70,000
Debtors 60,000
Cash at Bank 35,000
Total 9,40,000
Following scheme of reconstruction is executed :

(/) Equity shares are reduced by ? 95 per share. They are, then, consolidated into
10,000 equity shares of ? 10 each.
(//) Debentureholders agree to forego outstanding debenture interest. As a
compensation 12% Debentures are converted into 14% Debentures, the
amount remaining ? 5,00,000.
(Hi) Creditors are given the option to either accept 50% of their claim in cash in full
settlement or to convert their claims into equity shares of ? 10 each. Creditors
for ? 2 ,00,000 opt for shares in satisfaction of their claims.
(/V) To make payment to creditors opting for cash payment and to augment
working capital, the company issues 50,000 equity shares of f 10 each at par,
the entire amount being payable along with applications. The issue was fully
subscribed.
(v) Land and Buildings are revalued at f 2,00,000 whereas Plant and Machinery is
to be written down to ? 2,10,000. A provision amounting to f 5,000 is to be
made for doubtful debts.
Pass Journal Entries and draft the company's Balance Sheet immediately after the
reconstruction.
» — - UAL RECONSTRUCTION III / 1-9
E l u t io n
JOURNAL ENTRIES
?
To Equity Share Capital (? 5) A/c 1,00,000
(Being the reduction of equity share capital)
Equity Share Capital (?5) A/c Dr. 1,00,000
(Being consolidation of 10,000 shares of f 10 each)
Outstanding Debenture Interest A/c Dr. 1,20,000
(Being conversion of 12% debentures into 14% debentures
and outstanding debenture interest foregone by debenture-
holders)
To Bank A/c 50.000
To Capital Reduction A/c 50.000
(Being creditors opted for payment in cash and equity shares)
Bank A/c Dr. 5,00,000
(Being issue of equity shares)
Land and Building A/c Dr. 50,000
To Capital Reduction A/c 50,000
(Being appreciation in the value of land and building)
To Goodwill 45,000
To Plant & Machinery A/c 90,000
(Being the balance of capital reduction utilised for writing off
intangible asset, previous losses and fixed asset)
BALANCE SHEET OF M/S DOWNHILL LTD. (AFTER RECONSTRUCTION)

as on 3 1 s t M arch, 2 0 1 7

;1) S h a re h o ld e rs ’ F unds
80,000 Equity Shares of ? 10 each fully paid 8,00,000
(b) Reserves and Surplus —
Total 8,00,000
(2) N o n -C u rre n t Lia b ilitie s
Long-term Borrowings :
Secured Loan : 14% Debentures of f 100 each 5,00,000
13) C u rre n t Lia b ilitie s —
II. Assets
(1) N o n -C u rre n t A sse ts
F ixe d A s s e ts :
Tangible Assets :
Land & Building 1,50,000
A d d \ Appreciated under Reconstruction Scheme Dated. 50.000
2 , 00 , 00 !
Less : Reduced under Reconstruction Scheme Dated... 90.000
2.10.C.
Furniture so,oo:
Intangible Asset:
Goodwill 45.000
Less : Reduced under Reconstruction Scheme Dated ... 45.000
Total 4,90,000
(2) C u rre n t A s s e ts :
inventories (Stock) 2,70,
Trade Receivables (Debtors) 60,000
Less : Provision for Doubtful Debts 5,000
55,
Cash & Cash Equivalents (Bank Balance)
(? 35,000 + ? 5,00,000 - ? 50,000) 4,85,
Total 8 , 10 ,
Total Assets (1) + (2) 13,00,:
IL L U S T R A T IO N 4. The ledger balances of X Co. as on 31st March, 2017 are

Fixed Assets ? 7,00,000, Investments ^ 10,000, Stock and Debtors ? 8,50,0
Equity Share Capital 60% paid) f 6,00,000, 10% First Debentures ? 2,00,000, 1
Second Debentures ? 5,00,000, Bank Overdraft 1 50,000, Trade Creditors (including
for ? 8,50,000) ? 11,50,000, Outstanding interest for one year on both types
debentures ? 80,000.
Due to heavy losses, the following scheme of reconstruction is agreed :
(/) To make the existing ? 100 each shares fully paid up and then to reduce th
to ? 20 each,
(/'/) To settle the claims of first debenture-holders by issuing 2,000 13-5
debentures of ? 100 each,
(Hi) To discharge the claims of the second debenture holders by issuing 1
4,000 debentures of ? 100 each,
(iV) To pay f 3,00,000 to Mr. Y in full settlement of his account.
(v) To allot 15,000 fresh equity shares of ? 20 each to discharge the remaini
trade creditors,
(vi) Market value of investments is f 20,000, and
(v/7) To write off the fictitious assets and to reduce the fixed assets.
Assuming all formalities are duly complied with, pass Journal Entries to give eff
to the above scheme and prepare the post reconstruction Balance Sheet.
S O L U T IO N
Working Note : Calculation of Balance of Surplus A/c
TRIAL BALANCE
Cr. B ala n ce s
Equity Share Capital (60%) 6 , 00,000 Fixed Assets

10% 1st Debentures 2 , 00,000 Investments
m— RNAL RECONSTRUCTION IH/1'11
: : nd Debentures 5,00,000 Stock and Debtors 8,50,000

Overdraft 50,000 Surplus A/c (Loss) (Bal. fig.) 10,20,000
* =ce Creditors
including Y for ? 8,50,000) 11,50,000
I .-randing Interest 80,000
25,80,000 25,80,000
JOURNAL ENTRIES
Bank A/c Dr. 4,00,000

(Being 40% called and received)
(Being share of ? 100 reduced to ? 20)
10% 1st Debentures A/c Dr. 2,00,000
Debenture Interest Outstanding A/c 20,000
(Being settlement of claim of 1st Debentures by issue of
13g % Debentures)
12% llnd Debentures A/c Dr. 5,00,000
Debenture Interest Outstanding A/c Dr. 60,000
(Being discharge of claim of llnd debentures by 15%
debentures)
Creditors (Y) A/c Dr. 8,50,000
(Being claim of Y settled by paying ? 3,00,000)
(Remaining trade creditors claim settled by issue of
equity share Capital)
Investments A/c Dr. 10,000
(Being appreciation in the value of investments)
To Fixed Assets A/c 5,20,000
(Being balance of capital reduction utilized in writing off
fictitious and fixed assets)
BALANCE SHEET OF X CO. (AFTER RECONSTRUCTION)
as on 1 -4-2017
L Equity and Liabilities
i1) S h a re h o ld e rs ’ F unds
25,000 Equity Shares of ? 20 each fully paid 5.00. 000
(b) Reserves and Surplus
Total 5.00. 000
Ill/1'12 INTERNAL RECONSTRUCTION
(2) N o n -C u rre n t L ia b ilitie s

Long-term Borrowings (Secured Loans) :
13g % Debentures 2 ,00,001
15% Debentures 4 .00 . 00:
6 .00 . 00 :
(3) C u rre n t Liabilities
Total Equity and Liabilities (1) + (2) + (3) 11,00,00C
II. Assets
(1) N o n -C u rre n t A sse ts r
Less : Reduced under Reconstruction Scheme Dated ... 5,20,000
1,80,000
Total 2 , 00,000
(2) C u rre n t A s s e ts :
Stock and Debtors 8,50,000
Bank Balance 50,000
Total 9,00,000
Total Assets (1) + (2) 11, 00,000
Working Note (1)

CAPITAL REDUCTION ACCOUNT
To Surplus A/c 10,20,000 By Equity Share Capital 8,00,000

To Fixed Assets (Bal. Fig.) 5,20,000 By 10% Debentures 20,000
By 12% Debentures 1,60,000
By Creditors (Y) A/c 5,50,000
By Investments A/c 10,000
15,40,000 15,40,000
IL L U S T R A T IO N 5. Following is the Balance Sheet of Sick Ltd, as on 31-3-2017:

(a) Share Capital :
Equity Shares of T 10 each 7,00,000
13% Cum. Pref. Shares of ? 100 each 1 ,00,000
Current Liabilities 39,00,000
Provision for Taxation 3,00,000
Total 50,00,000
s-ERNAL RECONSTRUCTION 111/1-13
II. Assets
Fixed Assets 15.00. 000
(2) Current Assets 35.00. 000
Total 50,00,000
-ollowing scheme of reorganisation is sanctioned :

1. All existing equity shares are reduced to ? 5 each.
2. Ail Preference shares are reduced to ? 75 each. Preference Shareholders decide
to forego their right to arrears of dividend which are in arrears for three years.
3. The rate of interest on debentures is increased to 11%. The debentureholders
surrender their existing debentures of ? 100 each and exchange the same for
fresh debentures of ? 75 each.
4. One of the creditors of the company, to whom the company owes ? 25,00,000,
decides to forego 50% of his claim. He is allotted 1,00,000 equity shares of ? 5
each in part satisfaction of the balance of his claim.
5. The taxation liability of the company is settled at ? 4,00,000.
5. Fixed assets are to be written down by 33^%.
7 Current assets are to be revalued at ? 27,00,000.
3ass Journal Entries and prepare Balance Sheet of the company after giving effect
b —e above.
SOLUTION
JOURNAL OF SICK LTD.
f
To Equity Share Capital (? 5) A/c 3.50.000
To Capital Reduction A/c 3.50.000
(Being conversion of equity share capital of f 10 into T 5 as
per reconstruction scheme)______________________
13% Cumulative Pref. Share Capital (? 100) A/c Dr. 1, 00,000
To 13% Cumulative Pref. Share Capital (? 75) A/c 75.000
To Capital Reduction A/c 25.000
(Being conversion of 13% cumulative preference share capital
of f 100 into ? 75 as per reconstruction scheme)__________
'Being 11% debentures issued to 8% debentureholders for
75% of their claims, the balance transferred to capital
reduction account as per reconstruction scheme)___________
Being a creditor of t 25,00,000 agreed to surrender his claim
by 50% and allotted 1,00,000 shares of ? 5 in part settlement
of his dues as per reconstruction scheme)
Provision for Taxation A/c Dr. 4,00,000
To Liability for Taxation 4,00,000
'Conversion of the provisions for taxation into liability for
taxation on settlement of the amount due)
6. Capital Reduction A/c Dr. 17,00,000

To Fixed Assets 5,00,000
To Current Assets 8,00,000
To Provision for Taxation 1,00,000
(Being amount of capital reduction utilised in writing off
Surplus A/c (Dr.) balance, fixed assets, current assets and
provision for taxation as per reconstruction scheme)
BALANCE SHEET OF SICK LTD. (AFTER RECONSTRUCTION)
as on 3 1 s t M arch, 2 0 1 7
I. Equity and Liabilities f
(a) S hare C apital
1,70,000 Equity Shares of ? 5 each fully paid 8,50,000
1,000 13% Pref. Shares of ? 75 each fully paid 75,000
9,25,000
(b) Reserves and Surplus : —
Total Shareholders’ Funds 9,25,000
(2) N o n -C u rre n t L ia b ilitie s
Long-term Borrowings :
Secured Loans : 11% Debentures 2,25,000
(3) C u rre n t Liab ilitie s r
Current Liabilities 21,50,000
Liability for Taxation 4,00,000
25,50,000
II. Assets
(1) N o n -C u rre n t A sse ts
Le ss : Reduced under Reconstruction Scheme dated... 5,00,000
10,00,000
(2) C u rre n t A sse ts 27,00,000
Total Assets (1) + (2) 37,00,000
O Reorganisation Through Surrender of Shares

Under this method shares are subdivided into shares of smaller denominations and tc
facilitate capital reorganisation shareholders are made to surrender a part of their holdings
Such surrendered shares are usually utilised to reduce or extinguish debentures and trade
liabilities. The portion of shares surrendered but not reissued are to be cancelled. The claims
foregone by creditors and debentureholders are transferred to capital reduction (or
reorganisation) account which will be utilised to write off losses.
IL L U S T R A T IO N 6 . Balance Sheet of Z Ltd. as on 31 st March, 2017 was :_______

(a) Share Capital :
30.000 Equity Shares of ? 100 each 30,00,000
10.000 11 % Pref. Shares of ? 100 each 10,00,000
TERNAL RECONSTRUCTION 111/1-15

15% Debentures 10, 00,000
Interest due on Debentures 3,00,000
Total 45,90,000
II. Assets
Fixed Assets :
(/) Tangible Assets 30,00,000
(//) Intangible Assets : Goodwill 5,00,000
(2) Current Assets 10.90.000
Total 45.90.000
Following scheme of reconstruction has been passed and approved by the court :
(/) The equity shares are to be sub-divided into shares of ? 10 each, and each
shareholder shall surrender 70 per cent of his holdings.
ii) Out of surrendered shares 50,000 shares shall be issued to preference
shareholders in full settlement of their claims.
Hi) Debenture holder’s total claim shall be reduced to ? 7,00,000 and shall be
satisfied by issue of 70,000 equity shares, out of surrendered shares.
iv) Creditors claims are to be reduced by 50 per cent and in consideration the
creditors shall receive 20,000 equity shares out of the surrendered shares.
v) The remaining surrendered shares shall be cancelled.|
vi) Goodwill and Surplus Account are to be written off completely and Fixed
Assets are to be depreciated by ? 10,00,000.
You are required to give Journal Entries and Balance Sheet in the books of Z Ltd.
SOLUTION
In the Books of Z Ltd.
JOURNAL ENTRIES

(Being sub-division of equity shares of ? 100 each in to
equity shares of f 10 per reconstruction scheme)
Equity Share Capital A/c Dr. 21,00,000
To Shares Surrendered A/c 21,00,000
(Being surrender of 70% of their holdings of equity shares
holdings)
Shares Surrendered A/c Dr. 5,00,000
(Being issue of equity shares out of surrendered shares to
preference shareholders, of their claims as per reconstruction
scheme)
1 '
111/ 1*16 INTERNAL RECONSTRUCTION

(Being issue of equity shares out of the surrendered shares
to debenture holders in full satisfaction of their claims as per
reconstruction scheme)
(Being issue of equity shares out of the surrender shares to
the creditors as per reconstruction scheme)
Shares Surrendered A/c Dr. 7.00. 000
Preference Share Capital A/c Dr. 10,00,000
Interest due on Debentures A/c Dr. 3.00. 000
(Being cancellation of unissued surrendered shares and
transfer of preference shares and liabilities in respect of
debentures and creditors to the Capital Reduction A/c as
these have been fully discharged by the issue of surrendered
shares)
. To Goodwill 5,00,000
To Surplus A/c 15,50,00C
To Fixed Assets A/c 10,00,000
To Capital Reserve A/c 3,70,000
(Being writing off fictitious, intangible and fixed assets from
Capital Reduction as per reconstruction scheme and balance
transferred to Capital Reserve)
BALANCE SHEET OF Z LTD. (AND REDUCED)
as on 1st A pril, 2 0 1 7
I. Equity and Liabilities f

(b) R ese rve s a n d S u rp lu s
Capital Reserve 3,70,00C
Total 26,70,000
Trade Receivables (Sundry Creditors) 4,20,000
II. Assets t
(1) N o n -C u rre n t A s s e ts :
Fixed Assets 30.00. 000
Le ss : Reduced under Reconstruction Scheme Dated ... 10.00. 000
20 ,00 ,00:
(2) Current Assets 10,90 ,00:
Total Assets (1) + (2) 30,90,000
ETERNAL r e c o n s t r u c t io n 111/1-17

(a) After giving sanction of capital reduction the court may order the use of words after
the name of the company for a specified period.
(b) Under Section 64 of the Companies Act, 2013, the company shall give notice of the
alteration of capital to the Registrar within days of doing so.
(c) Internal reconstruction is generally resorted to write off the...........
(d) Reduction of capital is unlawful except when.............
Ans. [(a) and reduced ; (b) thirty ; (c) past accumulated losses ; (d) sanctioned by the court].
1. Why do we resort to internal reconstruction of a company ?

2. What is the journal entry for the following scheme of capital reduction ?
50,000 equity shares of ? 100 reduced to ? 10 each fully paid.
3. Journalise the following scheme of re-organisation :
(1) 10,000 equity shares of ? 100 each fully paid shall be sub-divided into ten fully paid equity
shares of ? 10 each.
(2) After such sub-division, each equity shareholder shall surrender to the company 90% of
his holding, for the purpose of reissue to debentureholders and creditors so far as
required, and otherwise for cancellation.
1. Explain the various provisions of capital reduction as given in the Companies Act, 2013.
2. “Reconstruction may be internal or external”. Comment.
3. Explain the various provisions of alteration of share capital as given in the Companies Act,
2013.
4. Reconstruction is not a term of any legal significance. It expresses reorganisation and this may
take many forms. State at least eight different purposes for which a company may be
reorganised, with short notes on them.
1. The paid up capital of Science Traders Ltd. amounted to ? 5,00,000 consisting of 2,000 5%
Cumulative Preference Shares of ? 100 each and 30,000 Equity shares of ? 10 each. The
Preference dividends were in arrear for ? 30,000.
A succession of losses having been incurred by the company, the Director recommended to
the shareholders the proposal to reduce the capital to provide a sum sufficient for the following
purposes :
(a) To write down the book-value of Patents by ? 70,000 ; Plant and Machinery by ? 17,000 ;
and Tool and Implements by ? 2,000.
(b) To write off debit balance on Surplus Account of ? 1,98,000.
(c) Any balance made available by the reduction of capital to be written off “Experiment and
Research Expenses”.
The scheme duly approved and Authorised, provided as follows :
(/) For every five 5% Preference Shares, three 4% Cumulative Preference Shares, of ? 100
each and twenty Equity Shares, of ? 2 each ;
(//) For every ? 10 of accumulated arrears of Preference Dividend, one Equity Share of ? I
each ; and
(/'/'/) For every five old Equity Shares, one new Equity Share of f 2 each.
You are required to show the necessary Journal Entries and prepare Capital Reductio'
Account to record the above in the books of the company.
H in t: ? 59,000 utilised for writing off Experiment and Research Expenses.
Following is the Balance Sheet of Weak Ltd, as at 31st March, 2017 :________
S h a re h o ld e rs ’ F unds
(a) Share Capital :
20,000 Equity Shares of ? 10 each, fully paid up
10% Non-cumulative Preference
Shares of ? 100 each fully paid up
Surplus A/c (Negative Balance)
Shareholders’ Funds 55.000
N o n -c u rre n t Lia b ilitie s
8% Debentures 1,00,000j
C u rre n t Lia b ilitie s
Trade Creditors 3,30,000 i
Creditors for Expenses 20.000
Total 5,05,00C
N o n -c u rre n t A sse ts
Buildings 2 , 00,000
Machinery 1,30,000
(//) Intangible Assets
Patents 40,oo:
C u rre n t A sse ts
Inventories
Debtors
Total 5,05,0:
With a view to reconstruct the company, it is proposed :

(a) to reduce (/) Equity Shares by ? 9 each, (//) 10% Preference Shares by ? 40 each, (Hi) 8:
Debentures by 10%, (/V) Trade Creditors’ claims by one-third, (v) Machinery to ? 70,00C
and (vi) Inventories by f 10,000 ;
to provide * 15,000 for bad debts ; and
to raise the rate of preference dividend to 13% and the rate of debenture interest
13-5%.
Assuming that the aforesaid proposals are duly approved and sanctioned, pass the Jour
Entries to give effect to the above and show the company’s post reconstructed Balance Sheet
[Balance Sheet Total ? 3,80,000].
Following is the Balance Sheet of Godbole Co. Ltd, as on 31st March, 2017 :

(1) S h a re h o ld e rs ' F unds
(a) Share Capital :
6.000 Equity Shares of ? 100 each
3.000 5% Preference Shares of ? 100 each
e
STERNAL RECONSTRUCTION 111/1-19

Creditors 75,000
Bank Overdraft 1,50,000
Total 9,15,000
II. Assets
Land and Buildings 3,00,000
Machinery 4,50,000
Goodwill 22,500
Stock 65,000
Debtors 70,000
Cash
7,500
Total 9,15,000
On the above date, the company adopted the following scheme of reconstruction :
(/) The preference shares are to be reduced to fully paid shares of f 75 each and equity
shares are to be reduced to shares of ? 40 each fully paid.
(//) The debenture holders took over stock and debtors in full satisfaction of their claims.
(Hi) The fictitious and intangible assets are to be eliminated.
(/V) The Land and Buildings to be appreciated by 30% and machinery to be depreciated by
33g%.
(v) Expenses of reconstruction amounted to f 4,500.
Give Journal Entries incorporating the above scheme of reconstruction and prepare the
reconstructed Balance Sheet,
ins. [Balance Sheet Total ? 6,93,000].
H int: Capital Reserve ? 3,000.
4. Balance Sheet of Nipun Ltd. on 31st March, 2017 were as follows :

(a) Share Capital :
Equity Shares of ? 10 each 2,50,000
8% Pref. Shares of ? 10 each 50,000
Surplus A/c (Negative Bal.) (-) 1,25,000
6% Debentures of ? 100 each 20,000
Creditors 40,000
Total 2,83,500
II. Assets
Land and Buildings 1,40,000
Machinery 37,500
Furniture 15,000
Goodwill 90,000
Discount on Shares 1,000
(2) C u rre n t A sse ts —
Total 2,83,500
The capital reduction scheme, approved by the court is as under:

(/) Holders of 6% debentures of ? 100 each are to be given 8% debentures of ? 50 and
preference shares of ? 10 each of equal amount, for the remaining amount of ? 50.
(//) The value of all preference shares including the preference shares given to debenture
holders as shown above, is to be reduced to ? 6 and dividend rate is to be increased
upto 9%.
(Hi) The value of equity shares is to be reduced to ? 2.
(/V) The existing equity shareholders are to purchase additional equity shares of f 1,00,000
for cash, to pay off the bank overdraft.
(v) All fictitious and intangible assets are to be written off. Machinery and furniture are to be
written off in proportion of book values with the help of General Reserve and Capital
Reduction A/c.
Pass necessary Journal Entries in the books of the company, to record the above
transactions. Prepare the company’s Balance Sheet after such changes.
Ans. [B/S Total ? 2,36,000],
H in t: Machinery written off ? 20,000 ; Furniture written off ? 8,000.
5. Balance Sheet of a Company as at 31st March, 2017, were as follows :________ ___________
(a) Share Capital:
Authorised and Issued Capital :
10,000 6% Cum. Pref. Shares of ? 100 each fully paid 10,00,000
Bank Overdraft 7,00,000
Total 36,00,000
II. Assets
Tangible Assets :
Intangible Assets :
Goodwill 2,00,000
Patents & Trade Marks 2,00,000
Stocks 4,00,000
Total 36,00,000
Note. Pref. dividend was in arrears for 3 years.
ETERNAL RECONSTRUCTION III/1-21
A scheme for the reduction of capital was approved on the following terms :
(/) The preference shareholders agree that their shares be reduced to a fully paid value of
? 50 each and to accept equity shares of ? 5 each fully paid in lieu of the dividends
arrears.
(//) The equity shareholders agree that their shares be reduced to a fully paid value of ? 5
each.
(///) The authorised capital of the company is to remain at ? 30,00,000 divided into 4,00,000
Equity shares of ? 5 each and 20,000, 6% Cumulative Preference shares of ? 50 each.
(/V) All the intangible assets are to be eliminated and bad debts of ? 50,000 and obsolete
stocks of ? 80,000 are to be written off.
Give Journal Entries necessary to record to the reduction of capital and draw up a new
Balance Sheet after the scheme has been carried through.
Ans. [B/S Total ? 30,70,000 ; Capital Reserve ? 1,90,000].
6. Unlucky Ltd presents you the following Balance Sheet as at 31-3-2017 :___________________

(a) Share Capital (Shares of ? 100 each fully paid) :
Equity 4,00,000
7% Preference 3,00,000
Profit prior to Incorporation 10,000
Surplus Account (Negative Balance) (-) 2,95,000
Total 9,15,000
II. Assets
(/'/) Intangible Assets :
Goodwill 60,000
Patents 30,000
Stock 2,20,000
Cash 5,000
Total 9,15,000
Following scheme of reconstruction was duly approved :

(a) 7% Preference shares be converted into 9% preference shares, the amount being
reduced by 30% ; (b ) Equity shares be reduced to fully paid shares of T 50 each ; (d) Land and
Buildings be appreciated by 20% ; (d) Debentures be reduced by 20% ; (e) All intangible
assets and fictitious amounts including patents be written off. Utilise profit prior to
incorporation, if necessary. ( f) Equity shareholders to subscribe equity shares of ? 1,00,000 the
amount to be utilised for acquiring new Plant and Machinery.
Assuming the whole scheme to have been put through, give Journal Entries resulting from it
and prepare the resultant Balance Sheet.
ins. [B/S Total f 9,55,000 ; ? 5000 Utilised from Profit Prior to Incorporation],
IN/1-22 INTERNAL RECONSTRUCTION
7. Following was the Balance Sheet of Bharat Construction Ltd, as on 31st March, 2017 :
?
I. Fquity and Liabilities
(a) Share Capital :
20,000 Equity Shares of ? 10 each 2,00,000
Issued, Subscribed and Paid-up Capital :
12,000 Equity Shares of W 10 each 1,20,000
Less : Calls in Arrear @ ? 3 per share 9,000
1,11,000
Surplus A/c as per last Balance Sheet (-) 22,000
Less : Profit for the year 1,200
(-) 20,800
Provision for Taxation 4,000
Total 1,09,625
II. Assets
0) N o n -cu rre n t A sse ts
Machinery 50,850
(/'/) Intangible Assets :
Goodwill 10,000
Discount on Shares 1,500
Stock 10,275
Book Debts 15,000
Cash at Bank 1,500
Total 1,09,625
The directors have had a valuation made of the machinery and find it over-valued by
? 10,000. It is proposed to write down this asset to its true value and to extinguish the
deficiency in the Surplus Account and to write off goodwill and preliminary expenses, by the
adoption of the following course :
1. Forfeit the shares on which the call is outstanding.
2. Reduce the paid up capital by ? 3 per share.
3. Reissue the forfeited shares at ? 5 per share.
4. Utilise the provision for taxes, if necessary.
The shares on which the calls were in arrear were duly forfeited and reissued on payment of
? 5 per share. You are required to draft the Journal Entries necessary and the Balance Sheet
of the company after carrying out the scheme as set above.
Ans. [B/S Total ? 1,03,125 ; Provision for Taxes Utilised f 300].
REORGANISATION THROUGH SURRENDER OF SHARES

8. A Company’s position on 31st March, 2017 was as follows :
20.000 equity shares of ? 100 each 20 , 00,000

1.000 6% debentures of ? 1,000 each 10 , 00,000
Interest on the above 1 , 20,000
ETERNAL RECONS/’RUCTION III/1-23
The assets on that date amounted to ? 9,60,000 (valued according to their present worth.
The following steps were taken with the approval of all concerned :
(/) The shares were sub-divided into shares of T 5 and 90% of the shares were
surrendered.
(//) The total claims of the debentureholders were reduced to t 4,90,000 and in
consideration of this, they were allotted shares (out of the surrendered shares)
amounting to T 2,50,000.
(Hi) The shares surrendered but not reissued were cancelled.
Draft Journal Entries and give Balance Sheet of the company after reduction.
Ans. [B/S Total ? 9,60,000; Assets written off ? 21,60,000].
9. Balance Sheet of G Ltd. is as follows :
r
(a) Share Capital :
Authorised & Issued :
8,000 Shares of f 100 each fully paid 8,00,000
(2) N o n -cu rre n t Liab ilitie s
Debentures 13,50,000
Trade Payables 4,50,000
Interest Accrued 50,000
Income Tax Payable 10,000
Total 15,90,000
II. Assets
Land, Buildings, Machinery, etc. 14,30,000
Investments 17,000
Stocks in Trade 80,000
Debtors 30,000
Cash
33,000
Total 15,90,000
The fixed assets are heavily overvalued. The debentureholders have a floating charge on
the assets of the company. They are prepared to accept a modification of their claims in
consideration of a substantial interest in share capital. A scheme of reorganisation is
accordingly prepared, approved by the necessary meetings, and in due course confirmed by
the court. The salient points of the scheme are the following :
(1) Each share shall be sub-divided into twenty fully paid equity shares of T 5 each.
(2) After sub-division, each shareholder shall surrender to the company 95% of his
holding, for the purpose of re-issue to debentureholders and creditors, so far as
required, and otherwise for cancellation.
(3) Of those surrendered 46,000 shares of ? 5 each shall be converted into 8%
Preference Shares of ? 5 each fully paid.
(4) The debentureholders’ total claims shall be reduced to ? 2,30,000. This will be satisfied
by allotting them 46,000 Participating Preference Shares of ? 5 each fully paid.
(5) The liability for income tax is to be satisfied in full.
111/ 1 -2 4 INTERNAL RECONSTRUCTION
(6) The claims of unsecured creditors shall be reduced by 4/5ths of the amount and the
balance shall be satisfied by allotting them equity shares of ? 5 each from the shares
surrendered.
(7) Shares surrendered and not re-issued shall be cancelled.
Journalise the various entries to be made, assuming that the liability of income tax has not
been discharged. Show also the Balance Sheet after the Reconstruction Scheme has been
carried out.
Ans. [B/S Total ? 3,70,000 ; Land and Building Machinery etc. written off? 12,20,000].
10. The business of Rundown Ltd. was being carried on continuously at losses. Following is the
Balance Sheet of the Company as on 31st March, 2017.
?
( 1) S h a re h o ld e rs ’ F u n d s
(a) Authorised, Issued and Subscribed Capital:
2,000 8% Cum. Pref. Shares of ? 100 each fully paid 2,00,000
Securities Premium Reserve 90,000
Surplus Account (Negative Balance) (-) 2,05,000
Unsecured Loan (from Director) 50,000
Outstanding Expenses (including Director’s
Remuneration ? 20,000) 70,000
Total 8,05,000
II. Assets
( 1) N o n -c u rre n t A ss e ts
Plant 3,00,000
(/'/) Intangible Asset :
Goodwill 50,000
Stocks 1,50,000
Loose Tools 10,000
Debtors 2,50,000
Cash and Cash Equivalents :
Cash 10,000
Bank 35,000
Total 8,05,000
Note. Dividends on Cum. Pref. Shares are in arrears for 3 years.

Following scheme of reconstruction has been agreed upon and duly approved by the court
(1) Equity shares to be converted into 1,50,000 shares of ? 2 each.
(2) Equity shareholders to surrender to the company 90% of their holding,
(3) Preference shareholders agree to forego their right to arrears of dividends in
consideration of which 8% Preference shares are to be converted into 9% Preference
shares.
(4) Sundry Creditors agree to reduce their claims by one-fifth in consideration of their gettin:
shares of ? 35,000 out of the surrendered equity shares.
. TERNAL RECONSTRUCTION lil/1 -2 5
(5) Directors agree to forego the amounts due on account of unsecured loan and Directors’
remuneration.
(6) Surrendered shares not otherwise utilised to be cancelled.
(7) Assets to be reduced as under:
Goodwill by ? 50.000 ; Plant by ? 40,000 ; Tools by ? 8,000 ; S/Debtors by ? 15,000 ;
Stock by r 20,000.
(8) Any surplus after meeting the losses should be utilised in writing down the value of the
Plant further.
(9) Expenses of reconstruction amounted to ? 10,000.
(10) Further 50,000 Equity shares were issued to existing members for increasing the working
capital. The issue was fully subscribed and paid-up.
(11) Authorised Capital was suitably increased.
A member holding 100 Equity shares opposed the scheme and his shares were taken over
by a Director on payment of ? 1,000 as fixed by the Court.
You are required to pass the Journal entries for giving effect to the above arrangements and
also to draw up the resultant Balance Sheet of the company.
Ans. [B/S Total ? 7,45,000 ; Plant written off ? 57,000].
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_________________________________S _____________________________ ,
The business acquired by a corporate body from a non-corporate body i.e., sole trader or
: ; _nership business is discussed under this heading. As regards the acquisition of business
: a corporate body from a corporate body has been discussed in the section under the
-jading ‘Amalgamation, Absorption and Reconstruction.’ The accounting problems arising
t :~ acquisition will be discussed under the two headings, i.e., (A) When new sets of books
5re opened and (B) when the same sets of books are continued.
<A) When New Sets of Books are Opened
When a company purchases an existing business of a sole trader or a partnership and
books are opened, there are two points which require attention :
!/) Purchase Consideration. Purchase consideration is the amount paid by the
; _-:nasing company to the vendor firm for taking over its assets and liabilities. The company
■ns, take over all assets or liabilities or any of them. The value of such assets taken over and
■aalities assumed may be book value or current value but it depends upon agreement
:e~.veen them. The amount of purchase consideration may be paid in any form such as
scares, debentures of the company and cash. Purchase consideration ascertainment is very
i-cortant as it affects accounting entries in the books.
3 Methods of Calculation of Purchase Consideration

There are different methods of calculating purchase consideration but here only
r e Allowing three methods are discussed.
1. Lumpsum Method. When a fixed amount is or lumpsum is given by the purchasing
: — oany to the vendor firm, it is called lump sum method of purchase consideration. For
i ;~ole, R Ltd. paid T 2,00,000 to M/s AB & Co. for purchase of business, it is a case of
sum method of purchase consideration.
2. Net Payment Method. Under this method, the purchase consideration is the total of all
tte cayments made by company to the vendor firm in the form of shares, debentures and
css* For example, X Co. Ltd. is formed to take over all the assets and liabilities of the firm of
N r; < Y & Z for ? 2,00,000 which is to be paid by the allotment of 12,000 shares of f 10 each
1. said and balance in cash. It is not necessary that the company may take all assets and
*=3.--ie all liabilities. If any asset is not taken over by the company, the same may be sold by
■he *'m in the market or may be taken over by one of the partners at an agreed value.
S - iarly if liabilities are not assumed by the company, then they should be paid by the firm
111/2 2 ACQUISITION OF BUSINESS
IL L U S T R A T IO N 1. Calculate the amount of purchase consideration from

following details :
(a) The purchasing company agreed to issue 15,000 equity shares of ? 10 each
valued at f 12 each, 6,000, 6 % debentures of ? 10 each at a discount of 5% and pay
cash equal to 10% of face value of shares and debentures issued. The company also
agreed to meet dissolution expenses of ? 2,500.
(b) The purchasing company has agreed to issue 8,000 equity shares of ? 10 each
at par, 500 8 % preference shares of ? 100 each at 10% premium, 1,000 debentures of
? 50 each at 10 % discount and pay cash equal to 10 % of total purchase consideration.
(c) The purchasing company has agreed to issue 30,000 equity shares of ? 10 each
at a premium of 10 %, 1,000 8 % preference shares of ? 100 each at par, 1,000 6 %
debentures of ? 100 each at a discount of 10% and pay cash equal to 25% of the total
purchase consideration.
S O L U T IO N
(a) Calculation of Purchase Consideration
15,000 Equity Shares of ? 10 each at ? 12 each (15,000 x f 12) 1,80,000
6% Debentures (6,000 x ? 9.50) 57,000
Cash 10% of (? 1,50,000 + ? 60,000) 21,000
2,58,000
Note : If dissolution expenses are included in purchase consideration, then purchase
consideration will be ? 2,60,500.
(b) Calculation of Purchase Consideration
Equity Shares (8,000 x f 10) 80,000
55,000
45,000
1,80,000
Cash (10% of Total Purchase Consideration or 1/9 of ? 1,80,000) 20,000
Total 2,00,000
(c) Calculation of Purchase Consideration
Equity Shares (30,000 x ? 10 x 1.10) 3,30,000
8% Pref. Shares (1,000 x ? 100) 1 ,00,000
6% Debentures (1,000 x f 100 x 0.90) 90,000
5,20,000
Cash (25% of Total P.C. or 1/3 of ? 5,20,000) 1,73,333
Total 6,93,333
3. Net Assets Method. Under this method the total of all assets taken over by the
company at agreed value is calculated and the agreed value of liabilities assumed is
deducted. The balance is the purchase consideration, i.e.,
Purchase Consideration = Agreed value of assets taken over
- Agreed value of liabilities assumed.
For example, X Co. Ltd. took over the following assets at the v&iue mentioned against
them :
Building 6 ,0 0 ,0 0 0
Stock 3 ,0 0 ,0 0 0
ACQUISITION OF BUSINESS 111/2-3
Debtors 4,00,000
Goodwill 2,00,000
The company agreed topay to the creditors ? 5,00,000. The purchase consideration
will be calculated as under:
Agreed value of assets taken over ?
Building 6,00,000
Stock 3,00,000
Debtors 4,00,000
Goodwill 2,00,000
15.00. 000
Less : Agreed value of creditors assumed 5,00,000
Purchase Consideration 10.00. 000
(/#) Calculation of Goodwill or Reserve. When a company purchases a business, the
'chase price must be compared with the net assets acquired. If the value of net assets is
ess than the purchase price agreed to be paid, the excess amount should be debited to
sodwill account. Value of net assets will be assets taken over at the revised values minus
\,--z ities taken at agreed values. When the value of net assets is more than the purchase
: ce. the company stands to gain and such a gain is credited to Capital Reserve.
3 Accounting Treatment in the Books of the Vendor

The accounting treatment in the books of a firm is the same as in case of sale of
-ms. Following entries are to be passed in the books of vendor :
(/) For assets taken over by Purchasing Company
Realisation A/c Dr.
To Assets A/c
For liabilities taken over by Purchasing Company
Liabilities A/c Dr.
To Realisation A/c
For purchase consideration
Purchasing Company Dr.
To Realisation A/c
For Realisation Expenses paid by Vendor Firm
Realisation A/c Dr.
To Bank A/c
For Receipt of Purchase Consideration
Bank A/c Dr.
Shares in New Company A/c Dr.
Debentures in New Company A/c Dr.
To Purchasing Company
C - ccounting Treatment in the Books of the Purchasing Company

purchasing company will pass the following journal entries in its books :
For purchase of business
Debit Business Purchase A/c
Credit Vendor Firm A/c
111/ 2-4 ACQUISITION OF BUSINESS
(/'/) F o r a s s e ts a n d lia b ilitie s ta k e n o v e r o n p u r c h a s e o f b u s in e s s

Debit Various Assets A/c (at revised value)
Credit Various Liabilities A/c (at agreed value)
Credit Business Purchase A/c
Notes, (a) If the credits exceed the debits, the difference should be debited to Goodwill Account.
(b) If the debits exceed the credits, the difference should be credited to Capital Reserve.
(Hi) F o r d is c h a r g e o f p u r c h a s e c o n s id e r a tio n
Vendor Firm A/c Dr.
To Cash (if cash is paid)
To Share Capital A/c (if shares are issued)
To Debentures A/c (if debentures are given)
IL L U S T R A T IO N 2. Pass incorporation entries in the books of the company from
the following particulars :
Purchase consideration = T 2,50,000; Value of sundry assets taken over =
? 3,00,000; Current liabilities taken over = f 30,000; Settlement of purchase
consideration = 60% in Equity shares of ? 10 each at face value and the balance in 6 %
debentures of ? 100 each at face value.
S O L U T IO N
JOURNAL ENTRIES
?
Business Purchase A/c Dr 2,50,000
To Vendor Firm A/c 2,50,000
(Being purchase consideration due)
Sundry Assets A/c Dr. 3,00,000
To Sundry Liabilities A/c 30.000
To Capital Reserve A/c (Bal. Fig.) 20.000
(Assets and liabilities taken over and balance of purchase
consideration being capital profit credited to Capital Reserve
A/c)
Vendor Firm A/c Dr. 2,50,000
To 6% Debentures A/c 1,oo,oo:
(Being settlement of purchase consideration)
IL L U S T R A T IO N 3. (Purchase of Business) R Ltd. was formed to take over the
assets and liabilities of A and B. The Balance Sheet of A and B on 31-3-2017 was e;
follows : _____
Liabilities Assets ?
Trade Creditors 8,000 Cash in Hand 2,000
Capital : Cash at Bank 12,000
A 80,000 Book Debts 18,000
B 80,000 Stock 78,000
Furniture 10,000
1 ,68,000 1 ,68,000
ACQUISITION OF BUSINESS 111/ 2 -5
The purchase consideration was agreed at ? 2,00,000 and was to be paid as under:
(a) 5,600 equity shares of f 20 each fully paid.
(b) ? 68,000 in 6 % preference shares of ? 100 each issued at par.
(c) ? 20,000 in cash.
All the assets and liabilities were valued as per Balance Sheet except the book
sebts which were subject to a bad debt provision of 5%.
The company raised further capital by issue of 15,000 equity shares of ? 20 each.
The adjoining premises were purchased for ? 1,00,000 and additional stock of
1.40,000 was obtained from open market.
Record the above transactions in the books of R Ltd. through Journal Entries and
--aft its opening Balance Sheet.
S O LU TIO N In the Books of R Ltd.
JOURNAL ENTRIES
r
Business Purchase A/c Dr. 2,00,000
To M/sA&B A/c 2,00,000
(Being purchase consideration)
Cash in Hand A/c Dr. 2,000
Book Debts A/c Dr. 18,000
Stock A/c Dr. 78,000
Furniture A/c Dr. 10,000
Land & Buildings A/c Dr. 48,000
Goodwill A/c (Bal. Fig.) 40,900
To Trade Creditors A/c 8,000
To Provision for Bad Debts A/c (5% of T 18,000) 900
(Being Assets & Liabilities taken over)
Bank A/c Dr. 3,00,000
(Being issue of 15,000 equity shares of ? 20 each)
M/sA&B A/c Dr. 2,00,000
To Equity Share Capital A/c (5,600 x ? 20) 1,12,000
To 6% Preference Share Capital A/c 68,000
To Bank A/c 20,000
(Being consideration settled)
Premises A/c Dr. 1,00,000
Stock A/c Dr. 1,40,000
(Being purchase of additional assets)
BALANCED SHEET OF
a s on 3 1 -3 -2 0 1 7

680, 6% Preference Shares of f 100 each fully paid 68,000
(Of the above 680 Preference Shares and 5,600 Equity Shares issued
for consideration other than cash)
Total Share Capital 4,80,000
111/2-6 ACQUISITION OF BUSINESS
(b) R e se rve s a n d S urplus Nil

Total 4.80.000
(2) N o n -C u rre n t L ia b ilitie s Nil
(3) C u rre n t L ia b ilitie s : Trade Creditors 8,000
Total Equity and Liabilities (1) + (2) + (3) 4.88.000
II. Assets
(1) N o n -C u rre n t A ss e ts :
F ixe d A sse ts
Land & Building (? 48,000 + ? 1,00,000) 1,48,000
Furniture 10,000
(«) Intangible Asset: Goodwill 40,900
Total 1,98,900
( 2 ) C u rre n t A sse ts
Inventories (i.e. Stock (? 78,000 + ? 1,40,000) f 2,18,000
Trade Receivable 18,000
Less : Provision for Doubtful Debts 900
17,100
Cash and Cash Equivalents (In hand ? 2,000 + ? 52,000 at Bank) 54,000
2,89,100
Total Assets (1) + (2) 4,88,000
IL L U S T R A T IO N 4. The Balance Sheet of P, Q and R stood as under when they

sold concern to a newly started Joint Stock Company.____________________________
Liabilities ? Assets
Capitals : Land and Building 56,000
P 90,000 Machinery 28,000
Q 60,000 Stock 52,000
R 30,000 Bills Receivable 24.000
1,80,000 Debtors 36.000
Creditors 16,000
1,96,000 1,96,000
The Joint Stock Company is started with a capital of ? 4,00,000 divided into 4,000
shares of ? 100 each. It also issues Debentures for C 2,00,000 at discount of 5%. The
entire concerns of P, Q and R is taken up by the company by issuing 960 shares fully
paid and payment of ? 96,000 in cash. All the Debentures and remaining shares are
issued to the public which are all taken up and paid for with the exception of 400
shares held by A on which he has not paid the final call of ? 40 per share. The said 400
shares were forfeited and reissued as fully paid at a discount of ? 20 per share. The
company paid ? 2,000 as preliminary expenses. The balance of forfeited amount is
utilised firstly to write off preliminary expenses and discount on issue of debentures
entirely and then towards Goodwill.
Pass the necessary Journal entries in the books of Joint Stock Company and
prepare its Balance Sheet.
ZUISITION OF BUSINESS III/2-7
SO LUTIO N In the Books of Purchasing Co.

JOURNAL ENTRIES
B usin e ss P urchase A cco u n t Dr. 1,92,000

T o M /s P Q & R ’s A cco u n t 1,92,000
(Being purch a se of b u sin ess fo r a co n sid era tio n o f ? 1,92,000)
Land and B uilding Dr. 56.000

M a chinery Dr. 28.000
S tock Dr. 52.000
Bills R eceivable Dr. 24.000
D ebtors Dr. 36.000
G oodw ill (Bal. Fig.) Dr. 12.000
T o C reditors 16,000
T o B usin e ss P urch a se A cco u n t 1,92,000
(V a rio u s a sse ts and lia b ilitie s ta ke n over, G o o d w ill ca lcu la ted
by d e d u c tin g the va lu e o f all a s s e ts fro m th e cre d ito rs and
B usiness P urch a se A ccount)
M/s. P Q & R ’s A cco u n t Dr. 1,92,000

T o S hare C apital A cco u n t 96.000
T o C ash A ccount 96.000
(D ischarge of the a m o u n t d u e to the v e n d o r )
S hare A p p lica tio n and A llo tm e n t A cco u n t Dr. 1,82,400

T o S hare C apital A cco u n t 1.82.400
(B eing th e cre d it to sh a re ca p ita l on a llo tm e n t o f 3 ,040 e q u ity
shares @ ? 60 per share, a llotted as per D ire c to r’s R esolution
N o .........d a te d ..................)
B ank A cco u n t Dr. 1,82,400
T o S hare A pp lica tio n and A llo tm e n t A cco u n t 1.82.400
(A m o u n t re ce ive d a g a inst the s h a re a p p lica tio n and a llo tm e n t
on 3,040 e q u ity sh a re s @ ? 60 per share)
S hare Final C all A cco u n t Dr. 1,21,600
To S hare C apital A cco u n t 1,21,600
(A m o u n t d u e fro m m e m b e rs in re s p e c t o f s h a re fin a l ca lls
3 ,0 4 0 e q u ity s h a re s @ ? 4 0 p e r s h a re as p e r D ire c to r’s
resolution N o ............. d a te d ....................)
Bank A cco u n t Dr. 1,05,600
To S hare Final C all A cco u n t 1,05,600
(A m ount re ce ive d a g a inst th e sh a re final call a cco u n t on 2,640
equity sh a re s @ ? 40 p e r share)
S hare C apital A cco u n t Dr. 40,000

To S hare Final C all A cco u n t 16.000
To S hare F orfeited A ccount 24,000
(The fo rfe itu re o f 400 s h a re s fo r n o n -p a y m e n t o f fin a l call of
? 40 p e r s h a re as p e r D ire c to r's re s o lu tio n N o ..............
d a te d .........)
B ank A cco u n t Dr. 32,000

S hare F orfeited A cco u n t Dr. 8,000
T o S hare C apital A cco u n t 40,000
(The reissue o f 400 sh a re s o f f 100 each @ ? 80 per share as
per D ire c to rs ’ resolution N o .........d a te d .............)
P re lim in a ry E xpenses A cco u n t Dr. 2,000

T o B ank A cco u n t 2,000
(B eing a m o u n t paid fo r p re lim in a ry expenses)
B ank A cco u n t 1,90,000
D iscount on Issue o f D ebe ntu re s A ccount 10,000
T o D ebe ntu re s A ccount 2 , 00,000
(Issue of D ebe ntu re s fo r ? 2,0 0 ,0 0 0 at a d isco u n t 5% )
Forfeited A cco u n t Dr. 16,000

T o P re lim in a ry E xpenses A cco u n t 2,000
T o D isco u n t on Issue o f D ebe ntu re s A ccount 10,000
To G oodw ill A cco u n t 4,000
(The b a la nce o f fo rfe ite d a m o u n t is utilised firs tly to w rite
o ff p re lim in a ry e x p e n s e s a n d d is c o u n t on is s u e of
d e b e n tu re s and b a lance tre a te d as G oodw ill)
BALANCE SHEET OF THE JOINT STOCK COMPANY

a s a t .......

(1) S h a re h o ld e rs’ Fu n d s
(a) S h a re Capital
4 ,000 E quity S ha re s of ? 100 each fu lly paid up 4 ,0 0 .0 ®
(b) R eserves and S urplus N# I
T otal S h a re h o ld e rs’ Funds lo o :® i|
(2) Non-Current Liabilities

Long-term B orro w in g s :
S ecured Loan : D ebentures 2 ,oo_:
(3) Current Liabilities : S un d ry C re d ito rs
T o ta l E quity and Liabilities (1) + (2) + (3) 6,1 e : « I

II. Assets
f
(1) Non-Current A s s e ts :
F ix e d A s s e ts
(i) T a n g ib le A sse ts :
La nd a n d B u ild in g
M a c h in e ry 28. JOB
(if) Intangible A s s e ts : Goodwill
Total 9 2 ,0 0 :!
(2) Current A s s e ts
Inventories (S tock)
52,000
T rade R e ce iva b le s :
D ebtors
3 6 .0 0 0
Bills R eceivable
24.000
C ash a n d C ash E q u iva le n ts : B an k B alance 60,000
4,12,000
Total 5,24,000
Total A s s e ts (1) + (2)
6,16,000
- CQUISITION OF BUSINESS
O Debtors and Creditors Taken Over on Behalf of Vendors

Sometimes a company does not take over the debtors and creditors of the vendor while
: -'chasing a business but merely agrees to collect the debts and pay the creditors on behalf
■’he vendor. The company will charge commission to the vendor for this service and if there
i'se s any profit or loss from such realisation from customers that will belong to the vendor,
-e following journal entries will be passed in this connection :
(0 For the acquisition of debtors and creditors on behalf of vendor
Vendor’s Debtors A/c Dr. (Gross amount)
To Vendor’s Creditors A/c (Gross amount)
To Vendor’s Suspense A/c (with difference)
(//) For realisation of amount from Debtors
Bank A/c
To Vendor’s Debtors A/c
■iif) For loss on account of bad debts and discount allowed to debtors
Vendor’s Suspense A/c Dr.
To Vendor’s Debtors A/c
i iv) When creditors are paid
Vendor’s Creditors A/c Dr.
To Bank A/c
v) For gain on account of discount received from creditors
Vendor’s Creditors A/c Dr.
To Vendor’s Suspense A/c
vi) When irrecoverable bad debts are recovered
Bank A/c Dr.
To Vendor’s Suspense A/c
vii) For commission due to purchasing company
To Commission A/c
> it) For final payment to settle the vendor’s debtors and creditors
To Bank A/c
To Share Capital A/c (if shares are issued)
To Debentures A/c (if debentures are issued)
L L U S T R A T IO N 5. On 1st July, 2017 a company purchased the business of a
mtn trader, taking over all the assets with the exception of the book debts amounting
m ‘ 25,000, which it undertook to collect on behalf of the sole trader and out of the
jr - reeds pay the creditors amounting to ? 75,000. The company was to render this
fc n ce for a commission of 3 per cent on amounts collected and 1 per cent on
jr-r-n ts paid. The debtors realised f 1,12,000 out of which ? 68,000 was paid to
sre: -ors in full settlement. The company was able to collect a debt of ? 5,000 which
: -eviously written off as bad by the sole trader. The company was also forced to
n**?- a contingent liability of ? 3,000 on account of a claim against the vendor for
■■wages. The vendor received ? 30,000 10% Debentures of f 100 each at 95 and the
p»srce in cash in settlement of his account with the company. Journalise the above
fihrsactions in the books of the company.
SOLUTION
JOURNAL
2017 ?
Ju ly 1 V e n d o r’s D ebtors A /c Dr. 1,25,000
T o V e n d o r’s C re d ito rs A /c 75.0CC
T o V e n d o r’s S u spense A /c 50.oo:
(F or v e n d o r’s d e b to rs and cre d ito rs ta ke n o ve r on b e h a lf
of the vend o r, as per a rra n g e m e n t d a te d .....)
B a n k A /c Dr. 1, 12,000
V e n d o r’s S u spense A /c Dr. 13,000
T o V e n d o r’s D ebtors A /c 1,25,00:
(F or th e am o u n t realised fro m v e n d o r’s d e b to rs and the loss of
? 13,000 on a cco u n t o f loss realisation tra n sfe rre d to V e n d o r’s
S u sp e n se A/c)
V e n d o r’s C re d ito rs A /c Dr. 75,000
T o B ank A /c 6 8 .00 :
T o V e n d o r’s S u sp e n se A /c 7,00©
(F o r the p a ym e n t o f f 6 8 ,0 0 0 to v e n d o r’s cre d ito rs t 75,0 0 0 in
full s e ttle m e n t, th e p ro fit o f ? 7 ,0 0 0 tra n s fe rre d to V e n d o r’s
S u sp e n se A/c)
B ank A /c Dr. 5,000
To V e n d o r’s S u spense A /c 5,030
(F or th e colle ctio n o f a d e b t w hich w as p re vio u sly w ritten o ff as
bad by the vendor)
V e n d o r’s S usp e n se A /c Dr. 3,000
To B ank A/c 3,03a
(F o r c o n tin g e n t lia b ility on a c c o u n t o f a cla im a g a in s t the
v e n d o r paid)
T o C om m issio n A /c 4,22*
(F or C o m m issio n @ 3% on co lle ctio n s am o u n tin g to ? 1,17,000
and 1% on p aym ents am o u n tin g to \ 68,000 + ? 3,000)
D iscount on D ebe ntu re s A /c Dr. 1,500
T o 10% D ebentures A/c
To B ank A/c
(B eing the se ttle m e n t o f v e n d o r’s a cco u n t in resp e ct o f d ebtors
a n d c re d ito rs by issu e o f ? 3 0 ,0 0 0 10% D e b e n tu re s a t a
D isco u n t o f 5% and the balance in cash)
ILLUSTRATION 6 . Blue Bird Ltd. was incorporated for taking over the busin
of Mr. Ganapati as from 1st April, 2017. The following is the Balance Sheet of
Liabilities f Assets
Capita! Account 1,00,800 Land and Buildings
Loan Creditors 1 ,20,000 Plant and Machinery
Trade Creditors 71,200 Furniture
Sundry Debtors
2,92,000 2,92,:
ACQUISITION OF BUSINESS III/2-11
The company takes over the business along with the Fixed Assets and Loan
Creditors on the following basis :
(i) The value of the Goodwill is estimated at ? 80,000, and
(ii) the Fixed Assets should be depreciated by 10%.
The company realised ? 80,000 from the Sundry Debtors as the agent of the
• endors in full settlement and discharged all the Trade Creditors by paying ? 68,000 for
= commission of 3% on the amount collected and 2% on the amount paid.
The Loan Creditors accepted 8 % preference shares of ? 100 each in discharge of
ie loans.
After realisation of the debts and discharge of the liabilities, the total amount due
to the vendor was settled by payment of t 5,440 in cash and the balance in the shape
of fully paid equity shares of ? 10 each. Pass the necessary Journal Entries in the
cooks of the company.
S O LU TIO N
CALCULATION OF PURCHASE CONSIDERATION
A ssets ta ke n o v e r : ?
Land and B uildings (? 1,20,000 - ? 12,000) 1,08,000
P lant & M a chinery (? 68 ,0 0 0 - ? 6 ,800) 61,200
F urniture (? 2 0,0 0 0 - ? 2,000) 18,000
1.87.200
G oodw ill 80,000
2.67.200
L e s s : Loan C re d ito rs taken o ve r 1,20,000
P urchase C o n sid e ra tio n 1,47,200
JOURNAL ENTRIES
B usiness P urchase A /c Dr. 1,47,200

To Mr. G anapati 1,47,200
(B eing p u rch a se c o n s id e ra tio n a g re e d to be paid fo r ta kin g
o ve r the bu sin ess o f Mr. G anapati)
Land and B uildings A /c Dr. 1,08,000

P lant & M a ch in e ry A /c Dr. 61,200
F urniture & F ixtures A /c Dr. 18,000
G oodw ill A/c Dr. 80,000
To Loan C re d ito rs A /c 1,20,000
To B usiness P urchase A /c 1,47,200
(B eing a ssets and liabilities taken over)
V e n d o r’s D ebtors A /c Dr. 84,000

To V e n d o r’s C re d ito rs A /c 71,200
T o V e n d o r’s S u sp e n se A /c 12,800
(B eing v e n d o r’s d e b to rs and cre d ito rs taken o ve r on b e h a lf of
the vendor)
B ank A /c Dr. 80,000

V e n d o r’s S u spense A /c Dr. 4 ,000
To V e n d o r’s D ebtors A /c 84,000
(B eing colle ctio n fro m V e n d o r’s d e b to rs and loss on colle ctio n
o f d e b to rs tra n sfe rre d to V e n d o r’s S u spense A /c)
m /2 -1 2 ACQUISITION OF BUSINESS
V e n d o r’s C re d ito rs A /c Dr. 71,200

T o Bank 68,000
T o V e n d o r’s S u spense A /c 3,200
(B eing p aym ent to V e n d o r’s cre d ito rs and pro fit on p a ym e n t to
cre d ito rs tra n sfe rre d to V e n d o r’s S u spense A/c)
V e n d o r’s S u spense A /c Dr. 3,760

T o C om m issio n A/c 3,760
(B e in g C o m m issio n d u e on ? 8 0 ,0 0 0 c o lle ctio n from d e b to rs
@ 3% and 2% on ? 68,0 0 0 pa ym e n t m ade to creditors)
V e n d o r’s S uspense A /c Dr. 8,240

T o Mr. G anapati 8,240
(B eing tra n s fe r o f b a la n ce o f V e n d o r’s S u sp e n se A /c to M i.
G anapati)
Mr. G anapati Dr. 1,55,440

T o B ank A /c 5,440
To S hare C apital A/c 1,50,000
(B e in g a llo tm e n t o f 1 5 ,0 0 0 e q u ity sh a re s o f ? 10 e a ch to
G a n a p a ti as fu lly paid up as a p a rt p a y m e n t m a d e fo r the
p u rc h a s e o f th e b u s in e s s o f M r. G a n a p a ti and th e b a la n ce
paid in cash)
Loan C reditors A /c Dr. 1, 20,000

T o 8% P reference S hare C apital A/c 1 , 20,000
(B e in g a llo tm e n t o f 1,200 8% P re fe re n c e S h a re s o f ? 100
each to loan creditors)
IL L U S T R A T IO N 7. (Net Assets Method) X Ltd. was incorporated for taking over

the business of X with effect from 1st April, 2017. On 31st March, 2017, the Balance
Sheet of X was as follows :
Liabilities Assets
Capital 5.04.000 Land and Buildings 8 ,00,000
Loan Creditors 6 ,00,000 Plant and Machinery 2,80,000
Trade Creditors 3.56.000 Furniture 1 ,00,000
Stock 70,400
Trade Debtors 2,09,600
14,60,000 14,60,000
The company took over the business on the following terms :

(i) The fixed assets be taken over at 90% of their book values.
(/'/) Stock be valued at ? 56,000.
(Hi) The company would realise trade debtors and pay to trade creditors on behalf
of X for a commission @ 3% on the amount collected and 2% on the amount
paid.
The company realised f 1,90,000 from trade debtors as the agent of the vendor in
fully settlement and discharged all the trade creditors by paying f 3,40,000 only.
Necessary bank overdraft was arranged.
The loan creditors accepted from X Ltd. fully paid 12% preference shares of ? 100
each at par in discharge of their claims. After realisation of the debts and payment o'
the liabilities, the amount due to X was discharged by allotment of 35,000 fully paic
equity shares ? 10 each at par and payment of cash for the balance.
e
- CQUISITION OF BUSINESS MI/2-13
You are required to ascertain the purchase consideration and pass Journal Entries
n the books of the company.
S O LU TIO N
CALCULATION OF PURCHASE CONSIDERATION
?
_and and B uildings (90% o f f 8,00,000) 7,20,000
- ant and M a ch in e ry (90% o f ? 2,80,000) 2,5 2 ,0 0 0
fu rn itu re (90% o f ? 1,00,000) 90,000
Stock 56,000
11,18,000
-ass : Loan C reditors 6,00,000
P urchase C onsid e ra tio n 5,1 8 ,0 0 0
In the Books of X Ltd.

JOURNAL ENTRIES
?
B usiness P urchase A/c Dr. 5,18,000
To X 5,18,000
(Being p urchase consid era tio n p a yable to X)
Land and B uild in g s A /c Dr. 7,20,000

P lant and M a ch in e ry A/c Dr. 2,5 2 ,0 0 0
F urniture A /c Dr. 90,000
S tock A/c Dr. 56,000
To Loan C reditors 6,00,000
To B usiness P urchase A /c 5,18,000
(B eing in co rp o ra tio n o f va rio u s a sse ts and lia b ilitie s taken
o ve r from X)
V e n d o r’s D ebtors A /c Dr. 2,09,600

T o V e n d o r’s S u spense A /c 2 ,0 9 ,6 0 0
(B eing X ’s d e b to rs to be collected on his behalf)
V e n d o r’s S u spense A /c Dr. 3,56,000
T o V e n d o r’s C re d ito rs A /c 3,56,000
(B eing X ’s cre d ito rs to be paid on his behalf)
B ank A /c Dr. 1,90,000
T o V e n d o r’s S u spense A /c Dr. 19,600
T o V e n d o r’s D ebtors A/c 2,09,600
(A m o u n t colle cte d from X ’s d e b to rs and balance not
recovered, w ritte n off)
V e n d o r’s C re d ito rs A /c Dr. 3,56,000
T o Bank 3,40,000
To V e n d o r’s S u spense A /c 16,000
(Being p a ym e n t m ade to X ’s cre d ito rs and balance gain on
pa ym e n t to X ’s creditors)
V e n d o r’s C re d ito rs A/c Dr. 16,000
To V e n d o r’s S u spense A/c 16,000
(Being gain o r p a ym e n t to X ’s C reditors)
V e n d o r’s S u sp e n se A/c Dr. 12,500
To C o m m issio n /P ro fit and Loss A /c 12,500
(B e in g c o m m is s io n @ 2% on ? 3 ,4 0 ,0 0 0 and @ 3% on
? 1,90,000 receiva b le from Mr. X)
X 1,62,500
T o V e n d o r’s S u sp e n se A/c 1,62,50!
(B e in g n e t a m o u n t re c o v e ra b le fro m X on a c c o u n t o f his
d ebtors and creditors)
X 3,55,500
T o E quity S hare C apital A/c 3,50,006
T o B ank A /c 5,50C
(B e in g s e ttle m e n t o f X ’s b a la n c e by e q u ity s h a re s and in
cash)
Loan C re d ito rs A /c Dr. 6,0 0 ,0 0 0
T o 12% P reference S hare C apital A /c 6 ,0 0 ,00 :
(B e in g a llo tm e n t o f p re fe re n c e s h a re s in s a tis fa c tio n o f
cla im s by loan creditors)
Working Notes :
(1) Calculation of amount recoverable on account o f creditors etc. f ]
A m o u n t paid to creditors 3,40.000
A d d : 2% co m m issio n on ? 3 ,4 0 ,0 0 0 paid to cre d ito rs 6,800
A d d : 3% co m m issio n on ? 1,90,000 colle cte d fro m D ebtors 5,700 j
3,52,500
L e s s : A m o u n t colle cte d fro m debto rs 1,90.000
1,62,50'!
(2) Calculation of Cash Paid to X in Settlement

P urchase consid era tio n 5,18,00'!
L e s s : A m o u n t recoverable 1,62,50!
3,55,500
L e s s : V alue o f sh a re s a llotted to X (35,000 x ? 10) 3 ,5 0 ,0 0 !
C ash paid to X 5,50!
(B) When Same Set of Books are Continued

If the purchasing company decides to continue with the same set of books, the'
the following steps may be taken :
(/) Revalue Assets and Liabilities. As the same set of books are to be continued there ~
no need of Realisation Account. Instead a Revaluation Account will be prepared on the same
lines as prepared in case of admission of a partner to bring into account the increase or
decrease in the value of assets and liabilities. The balance of Revaluation Account ;
transferred to Capital Account of a sole trader or in the profit sharing ratio in case cfj
partnership.
(/'/) Close Assets/Liabilities not taken over by the Purchasing Company. The asset:
and liabilities not taken over by the purchasing company are transferred to the capita
accounts in the profit sharing ratio. However when it is found that the asset is worth of its
book value or the value of asset is not going to fluctuate as in case of cash or bank balance
then such assets can be distributed among the partners in the ratio of final claim.
(Hi) Distribute Reserves and Losses. If there are any undistributed profits or losses
these should be closed by transfer to capital accounts in the profit sharing ratio.
(/V) Close the Capital Accounts. After making the above adjustments, the Capital J
Accounts are closed by debiting the Capital Accounts and crediting the shares or debentures
or cash.
(v) Prepare Revised Balance Sheet. After doing all this, a revised Balance Sheet can be
prepared.
- CQUISITION OF BUSINESS lll/ 2 '1 5
IL L U S T R A T IO N 8 . X and Y are partners sharing profits and losses equally. Their

Balance Sheet as on 31st March, 2017 is as under: ____________________________
?
Creditors 20,000 Land & Buildings 1 ,00,000
E Is Payable 90,000 Machinery 80,000
Capitals : Fixtures 40,000
X 1 ,20,000 Stock in trade 20,000
Y 80,000 Bills Receivable 10,000
2 ,00,000 Debtors 50.000
Cash at Bank 10.000
3,10,000 3,10,000
On 1st April, 2017, the above business was purchased by X Ltd. for ? 3,00,000 to be
nscharged by issuing shares of ? 50 each credited at ? 40 paid up. The company did
*ot take over fixtures and bills payable. It was decided that the company would take
i~6 and building at ? 1,35,000 and machinery at ? 70,000. A provision for doubtful
reots was also made at 5% of sundry debtors. There is a claim on account of bills
: scounted ? 6,000 which the company agreed to take over. But the company refused
■3 take over a worker’s claim of ? 2,000 on account of accident. Bills payable were
a■en over by X at an agreed value of ? 80,000. Fixtures were valued at ? 34,000.
You are required to make Journal Entries in the books of the Purchasing Company
Eisuming that the company continues the same set of books.
S O L U T IO N X Ltd.
JOURNAL
f
Bills P ayable A /c Dr. 10,000
Land & B uilding A /c Dr. 35,000
To R evaluation A /c 45,000
(B eing d e cre a se in lia b ility o f bills p a ya b le and a p p re cia tio n in
the value o f land and building, brou g h t into the books)
R evaluation A /c Dr. 26,500
T o M a chinery A cco u n t 10,000
” P rovision fo r D oubtful D ebts 2,500
” C la im s fo r Bills D iscounted A/c 6,000
” C la im s for A ccid e n t A /c 2,000
” F ixtures A cco u n t 6,000
(B eing d e p re cia tio n on a ssets and increase in liabilities)
G oodw ill A /c Dr. (1) 33,500
T o X ’s C apital A/c 16.750
” Y ’s C apital A /c 16,750
(B eing a m o u n t paid fo r g o o d w ill c re d ite d to p a rtn e rs ca p ita l
equally)
R evaluation A cco u n t Dr. 18,500
T o X ’s C apital A/c 9,250
’’ Y ’s C apital A/c 9,250
(P rofit on revaluation tra n sfe rre d to capital a ccounts)
C laim s fo r A ccid e n t A /c Dr. 2,000
To X ’s C apital A/c 1,361
” Y ’s C apital A /c 639
(C la im s fo r A ccid e n t cre d ite d to p a rtn e rs ’ cap ita l a cco u n ts in the
ratio o f final claim , i.e ., 113 : 53)
X ’s C apital Dr. 23,145

Y ’s C apital Dr. 10,855
T o Fixtures A /c 34,000
(B eing fix tu re s not ta ke n o ve r by th e co m p a n y d e b ite d in the
ratio of final cla im s i.e., 113 : 53)
Bills P ayable Dr. 80,0 0 0

T o X ’s C apital A /c 80,000
(Being bills p a yable taken o ve r by X) -t
X ’s C apital A/c Dr. 2,0 4 ,2 1 6
Y ’s C apital A/c Dr. 95,784
To S hare C apital A /c 3,00,000
(B alance of p a rtn e rs capital acco u n ts closed)
Working Notes :
(1) Calculation of Goodwill to be Credited to Partners
T o ta l A sse ts taken o v e r : f
Building 1.35.000
M achinery 70.000
S tock 20.000
Bills R eceivable 10,000
D ebtors 50.000
C ash 10.000
2.95.000
L e s s : Liab ilitie s taken o v e r : ?
C re d ito rs 20,000
C o n tin ge n t Liability fo r Bills D iscounted 6 ,000
Provision fo r D oubtful D ebts 2,500
28.500
N et A sse ts taken over 2,66,500
P urchase C onsid e ra tio n paid 3,00,000

G oodw ill [? 3 ,0 0 ,0 0 0 - ? 2,66,500] 33.500
(2) Calculation of Ratio of Final Claim X Y

? f
B alance o f C apital A /c 1,20,000 80,000
R evaluation Profit 9,250 9,250
Bills P ayable 80,000
G oodw ill 16,750 16,750
2,2 6 ,0 0 0 1,06,000
Ratio 113 53
© Debtors and Creditors not taken over (When Same Set of Books are
Continued)
Following accounting treatment is to be followed if the debtors and creditors are
not taken over by the company and when the same set of books are continued.
(/) Debtors’ and creditors’ accounts should not be closed.
(/'/) Two separate accounts for debtors and creditors should be opened under the head
“Debtors Suspense Account” and “Creditors Suspense Account.”
- CQUISITION OF BUSINESS III/2-17
(Hi) It should be noted that the capital accounts of the vendors have already been
credited for debtors which appeared in the Balance Sheet. As the new company is
not taking over the debtors, Vendors Capital Account must be reduced by the like
amount, without, however, cancelling the accounts of debtors. The same is done with
the help of Debtors Suspense Account by the following entry.
Vendor’s A/c Dr.
To Debtors’ Suspense A/c
Creditors’ Suspense A/c Dr.
To Vendor’s A/c
/V) For collection of cash from debtors
(a) Cash A/c (with the amount of cash received) Dr.
Discount Allowed A/c (with the amount of discount allowed) Dr.
To Debtors’ A/c (with the amount of total debtors)
Another entry is to be passed:
Debtors’ Suspense A/c (for cancellation of the credit) Dr.
To Vendor’s A/c (fresh credit to vendor for the amount
collected on his behalf)
To Discount Allowed A/c (for cancellation of debit in the
Discount Allowed A/c)
For payment to creditors
(a) Creditors A/c (with the amount of total creditors) Dr.
To Cash A/c (with the amount of cash paid)
To Discount Received A/c (with the amount of discount received)
Another entry is to be passed :
(b) Vendor’s A/c (fresh debit to vendors for the amount paid on
their behalf) Dr.
Discount Received A/c (for cancellation of credit in the Discount
Received A/c) Dr.
To Creditors Suspense A/c (for cancellation of debit)
<w) Now the net amount collected is paid to the vendors.
LLU S T R A T IO N 9. K Ltd. purchases the business of R Ltd. who did not take over
■*e debtors and creditors of R Ltd. amounting to ? 50,000 and ? 30,000 respectively,
:. t promised to collect from debtors and pay to creditors. K Ltd. collected all debts
■ = discount of ? 2,000 and a bad debt of ? 500 and paid all creditors at a discount of
fm o .
5how the Journal Entries assuming that same set of books is continued.
U TIO N
In the Books of K Ltd.
JOURNAL ENTRIES
R Ltd. A /c Dr. 50,000

T o D ebtors S u spense A/c 50,000
(B e in g a d ju s tm e n t o f V e n d o r’s A c c o u n t b y o p e n in g new
D ebtors S u sp e n se A ccount)
111/ 2-18 ACQUISITION OF BUSINESS
C re d ito rs S u spense A/c Dr. 30,0 0 0

T o R Ltd. A/c 30,000
(B e in g a d ju s tm e n t o f v e n d o rs a c c o u n t by o p e n in g new
C re d ito rs S u spense A ccount)
C ash A /c Dr. 47,500
D isco u n t A llow ed A /c Dr. 2,000
Bad D ebts A/c Dr. 500
T o D ebtors A /c 50,000
(B eing a m o u n t collected fro m debtors)
D ebtors S u spense A /c Dr. 50,000
To D iscount A llo w e d A /c 2,000
T o Bad D ebts A/c 500
T o R Ltd. A /c 47,500
(B eing c a n c e lla tio n o f D e b to rs S u sp e n se A cco u n t, Bad D ebts
A cco u n t and D isco u n t A ccount)
C re d ito rs A/c Dr. 30,000

T o D iscount R eceived A/c 600
T o C ash A/c 29,400
(Being p a ym e n t m ade to creditors)
R Ltd. A /c Dr. 29,400

D isco u n t R eceived A/c Dr. 600
T o C re d ito rs S u sp e n se A /c 30,000
(B e in g c a n c e lla tio n o f D is c o u n t R e c e iv e d A ccount and
C re d ito rs S u spense A ccount)
R Ltd. A /c Dr. 18,100

To C ash A/c 18,100
(Being p a ym e n t o f a m o u n t due to vendor)
Working Note :
Calculation of amount due to vendor (i.e., for final settlement) ?
A m o u n t received from d e b to rs on his behalf 47,500
L e s s : A m o u n t paid to cre d ito rs on his b e h a lf 29,400
N et A m o u n t d u e to V e n d o r 18,100
| Questions
(a) P u rch a se c o n s id e ra tio n is th e a m o u n t w h ic h is pa id by th e p u rc h a s in g c o m p a n y for
th e ...............
(b) If the value o f net asse ts ta ke n o ve r is less th a n the purch a se price agre e d to be paid, the
exce ss am o u n t sho u ld b e ...............
Ans. [(a) purchase of business ; (b ) debited to Goodwill Account.
2. State whether the following statements are true or false :
(a) W h e n the v a lu e o f n e t a ss e ts ta ke n o v e r is m ore th a n th e p u rch a se p ric e a g re e d to be
paid the exce ss a m o u n t should be d e bited to G oodw ill A ccount.
(b) O n a cq u isitio n o f b u sin ess, if a c o m p a n y co n tin u e s th e sa m e b o o ks m a in ta in e d by the
vendor, th e re is no need of R ealisation A ccount.
Ans. [True : ( b ), False : (a)].
- : : JISITION OF BUSINESS 111/2-19
SHORT ANSWER TYPE

1. Bring o u t any tw o a d va n ta g e s o f acq u irin g a p a rtn e rsh ip busin ess by a com pany.
2. W hat is p u rch a se co n sid era tio n ?
3. S tate th e m e th o d s o f d e te rm in in g p u rch a se c o n sid e ra tio n in c a s e o f a co m p a n y a cq u ire s the
bu sin ess o f a partn e rsh ip firm .
- W hat is ve n d o r su sp e n se a cco u n t ?
5 W h ite Ltd. agreed to a cq u ire th e b u sin e ss o f G reen Ltd. as on 3 1 -1 2 -2 0 1 6 . T h e co n sid e ra tio n
payable by W hite Ltd. w a s :
(a) A cash p a ym e n t o f f 2.50 fo r e very share in G reen Ltd.
(f>) T h e issue of 9 0 ,0 0 0 —T 10 sh a re s at an agreed va lu e o f T 12.50 per share.
(c) T h e issu e o f su ch an a m o u n t o f fu lly pa id 5% d e b e n tu re s in W h ite Ltd. a t 9 6 % as is
su fficie n t to d isch a rg e the 6 % d e b e n tu re s in G reen Ltd. at a prem ium o f 20% .
The total n u m b e r o f e q u ity sh a re s in G reen Ltd. is 60,0 0 0 (each ? 10) 6% d e b e n tu re s in G reen
Ltd., r 1,00,000.
C alcu la te purch a se consid era tio n .
[As per AS-15—Purchase Consideration : ? 12,75,000]
5. O n 1-1-2016, X Y Ltd. a cq u ire d th e b u sin ess o f X, ta kin g o v e r all th e a sse ts w ith th e exce p tio n
o f b o o k debts, w h ic h it u n d e rto o k to c o lle c t on b e h a lf o f X, and o u t o f the p ro ce e d s, p a y the
lia b ilitie s ow ing a t th e tim e o f tra n sfe r. A t th a t date, th e b o o k d e b ts a m o u n te d to ? 5 4 ,0 0 0 and
th e cre d ito rs T 3 7 ,0 0 0 . T h e co m p a n y a g re e d to do th e Jo b fo r ve n d o rs a t 3 % co m m issio n on
am o u n t colle cte d a n d 1% on a m o u n t paid.
T h e c o m p a n y co u ld n o t c o lle c t T 2 ,8 0 0 fro m e x is tin g d e b to rs and a llo w e d T 3 0 0 as ca sh
d isco u n t to th e re m a in in g d e b to rs. T h e co m p a n y c o u ld c o ile d a tim e ba rre d debt, w h ich w a s
w ritten o ff as bad by vendors, o f T 2,000. T h e co m p a n y paid 1 3 5 ,0 0 0 to cre d ito rs in satisfaction
o f to ta l a m o u n t due. H o w e ve r, th e co m p a n y w a s fo rce d to m e e t a c o n tin g e n t lia b ility on B ills
d iscounted by ve n d o rs 1 3 ,000. G iv e Jo u rn a l E ntries in th e b ooks o f X Y Ltd.
- -; [Final payment to vendors : ? 12,933; Commission : ? 1,967]
7. C alcu la te th e a m o u n t o f p u rch a se co n sid era tio n from th e fo llo w in g :
P urch a sing co m p a n y agre e d to issue 6 0 ,0 0 0 e q u ity s h a re s o f 1 10 each valu e d at f 12 each.
24,0 0 0 8% d e b e n tu re s o f ? 10 e ach at a d isco u n t o f 5 % a n d p a y cash va lu e equal to 10% o f
face value o f shares and d e b e n tu re s issued.
T h e co m p a n y also agre e d to m e e t th e d isso lu tio n e x p e n se s o f ? 10,000.
has. [? 10,32,000, otherwise with dissolution expenses ? 10,42,000]
l A and B w ere in p a rtn e rsh ip sharing p ro fits in th e p ro p o rtion o f 3 : 2 on 3 1 st M arch, 2017. T h e y
accepted the o ffe r o f the co m p a n y fo r p urchase o f th e ir bu sin ess on the b a sis o f b ook va lu e s of
assets and lia b ilitie s o f th e bu sin ess taken over. F ollow ing is the B a la n ce S heet o f th e firm :
BALANCE SHEET OF M/S A AND B
a s on 3 1 st M arch, 2 0 1 7
Liabilities r A s s e ts ?
S undry C re d ito rs 52,000 B uilding 55,000
BiHs P ayable 13.000 M a ch in e ry 25,000
Bank O ve rd ra ft 15,000 C losing S tock 40 ,0 0 0
R eserve Fund 10,000 D ebtors 30 ,0 0 0
C apital A c c o u n ts : B ills R eceivable 10,000
A 60,000 C ash & B ank B alance 20,000
B 40,000 P ro fit & Loss A cco u n t 10,000
1,90,000 1,90,000
C alculate P urchase C onsid e ra tio n .

P'S. [M ,00,000]
lli/2 -2 0 ACQUISITION OF BUSINESS
9. P ass incorporation en trie s in the books o f the co m p a n y from the follow ing p articulars.
P urchase co n sid e ra tio n = ? 11,25,000, value o f su n d ry a sse ts taken o ve r = 13,50,000, current
lia b ilitie s taken o v e r ? 1,35,000, s e ttle m e n t o f purch a se co n sid e ra tio n = 60 % in e q u ity share;
o f ? 10 each at fa ce va lu e and the b a lance is 8% d e b e n tu re s o f ? 100 each at fa ce value.
Hint. C apital R eserve ? 90,000.
10. T e ja Ltd. p u rch a se d th e b u s in e s s o f T e ja and d e cid e d to c o n tin u e the sa m e se t o f books
H ow ever, T e ja Ltd. did not ta ke its d e b to rs ? 8 ,000 and cre d ito rs o f ? 6,000, but it prom ised t:
co lle c t and pay th e m re sp e ctive ly. T h e co m p a n y co lle cte d all d e b ts, su b je ct to a d isco u n t cr
f 300 and bad d ebts o f f 100 and paid all cre d ito rs sub je ct to a d isco u n t o f ? 150.
G ive the n e cessary Journal Entries.
Ans. [Amount payable to vendor—? 1,750 in the absence of commission]
LONG ANSWER TYPE

1. G ive th e jo u rn a l e n trie s p a sse d in th e b o o ks o f th e p u rch a sin g c o m p a n y on a cq u isitio n :
busin ess w hen (/) new books are opened, (/'/) the sam e se t o f books are co ntinued.
2. E xplain w ith e xa m p le s the va rio u s m eth o d s of d e te rm in in g the purch a se c o n sid e ra tio n in case
of acq u isitio n o f a bu sin ess by a com pany.
Practical Problems iiiiitiii iliil.ii
WHEN NEW SETS OF BOOKS ARE OPENED

1. S now vie w Ltd. w a s re g iste re d w ith an a u th o rise d ca p ita l o f ? 1,00,000 e q u ity sh a re s o f ? ' I
each and it acquired the bu sin ess of Mr. B ansal at an agreed price o f ? 2,50,000.
B alance S heet of Mr. B ansal at the da te of a cquisition w as as fo llo w s :_______________________
*
Liabilities f A s s e ts
C apital 2,00,000 F reehold P rem ises 1 ,0 0 ,00 :

R eserve 20,000 P lant & M a chinery so,oo:
S un d ry C reditors 50,000 S tock ? 20,000
Bills P ayable 30,000 D ebtors 27,500
L e s s : Provision 2,500
25,oo:
C ash at B ank 75,oo:
3,0 0 ,0 0 0 3 ,0 0 ,00 :
T he co n sid era tio n w a s to be d isch a rg e d by the issue o f 2 0 ,0 0 0 e q u ity sh a re s o f ? 10 each

fu lly paid up and the balance in cash.
You are asked to J o u rn a lis e th e tra n sa ctio n s in the b o o ks o f S n o w V iew Ltd. A lso prepare t
O pening B alance. S heet of the C om pany.
Ans. [Balance Sheet Total 2,80,000; Goodwill ? 30,000]
2. A c o m p a n y w a s fo rm e d w ith an a u th o rise d ca p ita l o f ? 5 ,0 0 ,0 0 0 d ivid e d into 2 5 ,0 0 0 E qr
S h a re s o f ? 10 each and 2 ,5 0 0 6% P re fe re n ce S h a re s o f ? 100 each to p u rch a se the g o r
co ncern o f X, w h o se B alance S h e e t stood as fo llo w s :
?
Bills P ayable 3,500 C ash
S undry C reditors 6,400 B ook D ebts
C apital 1,32,100 S tock-in -T ra d e
M achinery
Building
1,42,000 1,42.:
- CQUISITION OF BUSINESS 111/2-21
T he purch a se price w a s agre e d at f 1,75,000 p a ya b le as to : ? 5 0 ,0 0 0 in fu lly paid E quity

S hares, ? 5 0 ,0 0 0 in fu lly paid P re fe re n ce S hares, ? 3 0 ,0 0 0 in D e b e n tu re s re d e e m ab le in 10
years, and th e b a lance in cash.
T he re m a in in g sh a re s w ere issued to and paid fo r by the public, w ith th e e xce p tio n o f ? 3
per share on 600 e q u ity shares, w hich w ere su b se q u e n tly fo rfe ite d and re-issued at a d isco u nt
o f 20 p e r cent. T h e bala nce on F orfeited S hares A cco u n t is utilised in w riting o ff goodw ill.
G ive Jo u rn a l E ntries to record these tra n sa ctio n s in the books o f the com pany.
3. On 1st January, 2017, a Lim ited C o m p a n y w as fo rm e d to ta ke o ve r an e sta b lishe d b usiness. It
w a s registered w ith a nom inal capital of f 2 ,0 0 ,0 0 0 d ivid e d as 1,000 8% P re fe re n ce S ha re s of
f 100 each and 1,000 E quity S hares o f ? 100 each. T h e V e n d o r agreed fo r the purch a se price
o f ? 1,16,000. T o w a rd s this, 4 0 0 fu lly paid P re fe re n ce S ha re s and 600 fu lly paid E quity S hares
w ere allotted on 15th Ja n u a ry, 2017 and the balance w a s paid in cash on 15th Feb. 2017.
T he a ssets and liabilities taken o ve r w ere as fo llo w s :
B u ild in g s f 5 0 ,0 0 0 ; M o to r L o rry f 1 2 ,4 0 0 ; S u n d ry D e b to rs f 2 9 ,4 0 0 ; S to c k -in -tra d e
? 3 6,0 0 0 ; C ash at B ank f 2 ,200 ; S u n d ry C re d ito rs ? 3 1,0 0 0 ; O utsta n d in g E xp enses ? 1,000
On 15th Jan. 2 0 1 7 th e re m a in in g sh a re s w e re issued to th e p u b lic and all a m o u n ts du ly
re ce ive d T 20 per sh a re on a p p lica tio n , f 40 on a llo tm e n t, f 20 on first call and T 20 on fin a l
call due on 15th M arch, 2017.
On 1st A pril, 2 0 1 7 th e C o m p a n y also issu e d ? 1 ,0 0 ,0 0 0 8% M o rtg a g e D e b e n tu re s a t a
prem ium of 5%.
G ive Jo u rn a l E ntries to record the above tra n sa ctio n s in the books o f the C om pany.
4. B la ck & W h ite c a rrie d on b u s in e s s a s p a rtn e rs , sh a rin g p ro fits and lo sse s e q u a lly . T h e ir
b u sin e ss w a s d ivid e d into A and B D e p a rtm e n ts and th e fo llo w in g is a d e ta ile d c o p y o f th e ir
B alance S heet as on 3 1 st D ecem ber, 2 0 1 7 :
Liabilities f A s s e ts T
C re d ito rs : ? Land & B uild in g s at cost 18,650
A Dept. 15,400 F urniture at cost,
B Dept. 2,600 L e s s : D epreciation 500
18,000 D ebtors :
Loans 1,200 A Dept. 6,400
B ank O ve rd ra ft 8,950 B Dept. 10,800
C apital A cco u n ts : 17,200
B lack 26,300 S tock-in -T ra d e
W hite 16,200 A Dept. 23 ,0 0 0
42,500 B Dept. 11,250
34,250
C ash in hand 50
70,650 70,650
A s fro m 3 1 st D ecem ber, 2 0 1 7 it w a s a rra n g ed th a t th e b u sin e ss should be ta ke n o ve r by

tw o lim ited co m p a n ie s, o n e ca lle d B lack & Co. Ltd. to ta ke o ve r “A D e p a rtm e n t” and W h ite &
Co. to ta ke o ve r “ B D e p a rtm e n t” . T h e Loan h o ld ers a gree to a cce p t 7% P re fe re n ce S h a re s of
f 1 e ach fu lly paid fo r th e ir loans, 720 o f th e se being in B la ck & Co. Ltd. and 4 8 0 in W h ite &
Co. Ltd.
B lack & Co. Ltd. to o k o ve r the prem ises, fixtu re s and cash, and the lia b ility to the Bank. The
assets and liabilities w ere tra n sfe rre d at th e B a lance S heet figures, and the partners w ere to be
paid ? 5 ,000 fo r the go o d w ill o f “A D e p a rtm e n t” and ? 4,000 fo r th a t o f “ B D e p a rtm e n t” .
T he w h o le o f the purch a se price w as satisfied by the a llo tm e n t o f fu lly paid E quity S ha re s of
f 1 each in the re spective co m p a n ie s as fo llo w s :
B lack : 23,7 5 0 sh a re s in B lack & Co. Ltd.
T he b a lance by sh a re s in W hite Co. Ltd.
W hite : 15,920 sh a re s in W h ite & Co. Ltd,
T h e b a lance by shares in B lack & Co. Ltd.
T he b ank o ve rd ra ft w a s paid o ff out o f th e p ro ce e d s o f a m ortg a g e o f f 10,000 w hich w ere
raised on the land & build in g s by B lack & Co. Ltd.
E quity shares, as follow s, w ere issued to e m p lo ye e s and paid fo r in full :

B lack & Co. Ltd. ? 1,000 ; W hite & Co. Ltd. 1,500.
S e t o u t the B a la n ce S h e e ts o f th e n e w co m p a n ie s a fte r th e fo re g o in g tra n s a c tio n s had
taken place.
Ans. [B/S Total : Black & Co. ? 55,650 and White & Co. ? 27,550].
5. O n 1st Ja n u a ry, 2 017 Ram Ltd. p u rch a se d all the a sse ts and lia b ilitie s o f S u sh il but did not
ta ke o ve r v e n d o rs ’ d e b to rs o f ? 47,5 0 0 and u n d e rto o k the re sp o n sib ility o f co lle ctin g th e m and
o u t o f th is re a lisa tio n pay v e n d o rs ’ cre d ito rs o f ? 30,0 0 0 . C o m p a n y g e ts co m m issio n fo r the
se rvice @ 5% on p a ym e n ts and 10% on realisations. C o m p a n y realised such a d e b t o f ? 400
w h ich w a s p re vio u sly d e cla re d as bad debt. C o m p a n y has also to pay a c o n tin g e n t lia b ility of
? 2 ,0 0 0 on a cc o u n t o f a cla im a g a in s t th e ve n d o rs fo r d a m a g e s. R e a lis a tio n s fro m d ebtors
a m o u n te d to T 4 5 ,0 0 0 and o u t of th is a m o u n t ? 28 ,0 0 0 w ere paid to cre d ito rs in full settlem ent
o f th e ir account. P ass the n e cessary Journal E ntries in the books o f the p u rchasing com pany.
Ans. [Commission f 6,040 ; Final settlement of Sushil by cash ? 9,360].
6. A Co. w hich p u rchased th e bu sin ess of M/s X & Y agreed to co lle ct the d ebts and pay off their
cre d ito rs fo r a co m m issio n o f 3% on a m o u n t co lle cte d and 2% on a m o u n ts paid, any loss or
p ro fit in th e p ro ce ss being th a t o f th e v e n d o rs. T h e d e b to rs on th e d a te o f a cq u isitio n w ere
? 4 0 ,0 0 0 and cre d ito rs w ere. ? 6 ,0 0 0 . 3 m o n th s la te r the c o m p a n y re p o rte d th a t out of the
d e b to rs f 2 4 ,0 0 0 had b een co lle cte d in clu d in g ? 1,500 p re v io u s ly w ritte n o ff as a bad debt.
C re d ito rs w ere paid in full, the d isco u n t earn e d being ? 200. But a claim o f ? 500 fo r dam ages
had to be a d m itte d and paid in re sp e ct of a late su p p ly o f g o o d s to one o f th e ir custom ers.
Jo u rn a lise the tra n sa ctio n s in the books o f com pany.
Ans. [Commission f 846 ; Final settlement by cash f 16,854].
7. Ram and M a n o h a r ca rry on b u sin ess o f sim ila r nature w hich th e y d e cid e to a m a lg a m a te and
. fo r th is purpose to fo rm a co m p a n y u n d e r the nam e and style o f Ram M a n o h a r Lim ited w ith an
a u th o rise d share ca p ita l o f ? 5 lakhs divid e d into 30,0 0 0 e q u ity sh a re s o f ? 10 each and 2,000
6 per c e n t p re fe re n ce sh a re s o f ? 100 each. It is agreed th a t th e asse ts and lia b ilitie s o f both
Ram a n d M a n o h a r w ill be ta ke n o v e r by th e c o m p a n y and th e c o m p a n y w ill issue to each
7 ,5 0 0 fu lly paid e q u ity s h a re s and pay th e b a la n ce in cash. B e sid e s fu lly paid p re fe re n ce
sh a re s w ill be issued to both of th e m by th e co m p a n y on a cco u n t o f go o d w ill to be valu e d on
the b a sis of tw o y e a rs ’ p u rch a se on th e a ve ra g e of the last th re e y e a rs ’ p ro fits w h ich are as
u n d e r:
Ram M anohar
r ?
1 st year 7,000 5,000
2nd ye a r 4,000 7,000
3rd ye a r 5,000 6,000
O n th e date o f ta kin g o v e r by th e co m p a n y a sse ts (e xclu d in g g o o d w ill) and lia b ilitie s o f Ram
a m o u n te d tc f 1 ,3 0 ,5 0 0 and f 1 7 ,5 0 0 w h ile th o s e o f M a n o h a r to f 1 ,0 5 ,5 0 0 and ? 8,500
respectively.
In a d d ition to the above the public sub scrib e d and paid in full fo r 10,000 e q u ity shares and the
rem aining p reference shares.
S h o w th e V e n d o rs ’ A cco u n ts in th e c o m p a n y ’s le d g e r and th e n p re p a re c o m p a n y ’s B alance
S heet incorporating the above transactions.
Ans. [B/S Total ? 4,76,000].
8. A co m p a n y w a s in c o rp o ra te d fo r ta k in g o v e r the b u sin e ss o f th e E ng in e e r on and fro m 1st
J a n u a ry, 2017. T h e fo llo w in g is th e B a la n ce S h e e t o f M r. E n g in e e r as on 3 1 st D ecem ber.
2 0 1 6 : _____________________________________
Liabilities r A s s e ts ?
T rade C reditors 18,000 Land and B uildings 40.000

Loan C re d ito rs 30.000 P lant and M a chinery 7.000
C apital A ccount 25.000 Furniture 5.000
S undry D ebtors 21.000
73,000 73,000
- : 3UISITION OF BUSINESS 111/2-23
T h e co m p a n y ta ke s o v e r th e b u sin ess w ith th e fixed asse ts and loan cre d ito rs on the follow ing
b a sis :
(1) T h e fixed a sse ts should be d e p re cia te d at 10%.
(2) T he value o f the g o o d w ill is e stim a te d a t ? 20,000.
T h e c o m p a n y re a lis e d ? 2 0 ,0 0 0 fro m th e s u n d ry d e b to rs as a g a in s t th e v e n d o rs in fu ll
se ttle m e n t and disch a rg e d all the trade cre d ito rs by payin g f 17,000.
T h e lo a n cre d ito rs a cce p te d 8 % P re fe re n ce S h a re s o f ? 100 e a ch in d is c h a rg e o f the loan.
A fte r re a lisa tio n o f th e d e b ts and d isch a rg e o f th e liabilities, the total a m o u n t due to the ve n d o r
w a s se ttle d b y issue o f fu lly paid E q u ity S ha re s o f ? 10 each.
P ass th e Journal E ntrie s fo r the above in th e b o o ks o f the com p a n y.
Mnt P urchase C o n sid e ra tio n ? 36,800.
9. T he fo llo w in g is th e B a la n ce S h e e t o f XY and C o m p a n y on 30 th Ju n e 2017, on w hich date the
e n tire bu sin ess w a s taken ove r by P Q R L im ite d :
BALANCE SHEET
Liabilities ? A s s e ts f
X s capital 40,000 P rem ises 50,000
V s capital 40,000 F urniture 10,600
B ank loan 20,000 S tock 24,000
Bills payable 13,000 Bills R eceivable 8,800
S un d ry C reditors 19,600 S undry D ebtors 35,000
C ash 4,200
1,32,600 1,32,600
O n th e a b o ve da te th e e n tire b u sin e ss w a s ta ke n o ve r by P Q R Ltd. w h o paid the p u rch a se

consid era tio n as fo llo w s :
(a) 5,000 fu lly paid e q u ity sh a re s o f ? 10 each. ( b) ? 40,0 0 0 in 6% d e b e n tu re s, (c) ? 10,000 in
cash.
W hile re co rd in g a sse ts th e c o m p a n y va lu e d p re m ise s a t 20 % a b o ve and sto c k at 10% less
than th e ir b o o k valu e s and fu rn itu re at ? 10,000. P ass n e ce ssa ry Jo u rn a l E ntries in the b ooks
o f the co m p a n y ( X Y and C o.) and show the o p ening B alance S heet in the books o f P Q R Ltd.
[B/S Total ? 1,48,400].
EN SAME SETS OF BOOKS ARE CONTINUED
*0. M and R carrying on b u sin ess in p a rtn e rsh ip and sharing p ro fits and losses in the ratio of 3 : 2
w ish to d isso lve the firm and sell the bu sin ess to a lim ited co m p a n y on 31st M arch, 2 0 1 7 w hen
the firm ’s B alance S heet sta n d s as u n d e r :
BALANCE SHEET
Liabilities ? A sse ts ?
C apital A cco u n ts : F urniture 8,000
M 70,000 M otor C ar 12,000
R 50,000 S tock 81,000
R eserve 20,000 D ebtors 60,000
S undry C reditors 25,000 C ash 4 ,000
1,65,000 1,65,000
A lim ited co m p a n y w ith an a u th o rise d ca p ita l o f ? 3 ,0 0 ,0 0 0 in e q u ity sh a re s o f ? 10 e ach is

'e g iste re d to purch a se the above bu sin ess on the follo w in g te rm s :
(/) G o o d w ill is va lu e d at ? 3 0 ,0 0 0 . (//) F u rn itu re and sto c k are re va lu e d a t 7 6 ,0 0 0 and
? 85,000 respectively. (Hi) D ebtors are subject to 5% provision.
M otor ca r is not required by th e co m p a n y and M ta ke s ove r the sam e at an agreed va lu a tion of
y 8,000.
~he p urchase consid era tio n is satisfied by the issue o f equity sh a re s of X 10 each at par.
5 how Journal E ntries and B alance S heet o f the com pany, assum ing th a t the sam e set o f books
s-e continued.
[B/S Total ? 1,82,000]
----------- --------------- — — — — --------------------------------------------------------------------------
A J '>■ "u V y V u y A m u
A y *■'<A y y *•» a a a *">A A j
Accounts
- ■ ■■: : ' • ■ s ........... ..
\ A A A / \ y V ’y ^ / X A / V \ y v \ A / V V 'V \ A /
~ ” -’T - '
■ -y. = -'Muv'
y \J\(\ • A. m A Xu =a o u \j u
Banking companies are governed by the Banking Regulation Act, 1949. Section 5 of the
cefines banking as “the accepting, for the purpose of lending or investment, of
r-roosits of money from the public repayable on demand or otherwise and
• ndrawable by cheque, draft, order or otherwise”. Therefore, any company which
--rages itself in the manufacture of goods or carries on any trade and accepts deposits of
~ : _ey from the public for financing its business activities will not be treated as doing
: . ; -ess of banking. Section 2 of the Act provides that provisions of Companies Act, 2013 in
-a absence of special provisions in that regard in Banking Companies Act, will apply to
ranks also.
3 Form of Business in which Banking Companies may Engage
Section 6 of the Act states that in addition to the business of banking, a banking
=: -pany may engage in any one or more of the following forms of business, namely:
(/) the borrowing, raising, or taking up of money;
(//) the lending or advancing of money either upon or without security;
(Hi) the drawing, making, accepting, discounting, buying, selling, collecting and dealing
in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading,
railway receipts, warrants, debentures, certificates, scrips and other instruments,
and securities whether transferable or negotiable or not;
/V) the granting and issuing of letters of credit, travellers cheques and circular notes;
v) the buying, selling and dealing in bullion and specie;
<vi) the buying and selling of foreign exchange including foreign bank notes;
. ii) the acquiring, holding, issuing on commission, underwriting and dealing in stock,
funds, shares, debentures, debenture stock, bonds, obligations, securities and
investments of all kinds; the purchasing and selling of bonds, scrips, or other forms
of securities on behalf of constituents or others;
the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody
or otherwise; the providing of safe deposit vaults;
' the collecting and transmitting of money and securities;
' acting as agents for and Government or local authority or any other person or
persons; the carrying on of agency business of any description including the
clearing and forwarding of goods, giving of receipts and discharges and otherwise
acting as an attorney on behalf of customers;
(A) contracting for public and private loans and negotiating and issuing the same;
IV /1 -2 ACCOUNTS OF BANKING COMPANIE1
(x/7) the effecting, insuring, guaranteeing, underwriting, participating in managing ar:

carrying out of any issue, public or private, or State, municipal or other loans or
shares, stock, debenture stock of any company, corporation or association and
lending of money for the purpose of any such issue;
(xiii) carrying on and transacting every kind of guarantee and indemnity business;
(xiv) managing, selling and realising any property which may come into the possession
the company in satisfaction or part satisfaction of any of its claims;
(xv) acquiring and holding and generally dealing with any property or any right, title
interest in any such property which may form the security or part of the security
any loans or advances or which may be connected with any such security;
(xvi) undertaking and executing trusts;
(xvii) undertaking the administration of estates as executor, trustee or otherwise;
{xvi/'/) establishing and supporting or aiding in the establishment and support
associations, institutions, funds, trusts and conveniences calculated to ben
employees or ex-employees of the company or the dependents or connections
such persons; granting pensions and allowances and making payments tow
insurance; subscribing or to guaranteeing money for charitable or benevo
objects or for any exhibition or for any public-general or useful object;
(xix) the acquisition, construction, maintenance and alternation of any building or wo-
necessary or convenient for the purpose of the company;
(xx) selling, improving, managing, developing, exchanging, leasing, mortgag
disposing of or turning into accounts or otherwise dealing with all or any part of
property and rights of the company;
(xx/) acquiring and undertaking the whole or any part of the business of any person
company, when such business is of a nature enumerated or described in this s
section;
(xx//) doing all such other things as are incidental or conducive to the promotion
advancement of the business of the company;
(xx///) any other form of business which the Central Government may, by notification in
Official Gazette, specify as a form of business in which it is for a banking comp
to engage.
No banking company shall engage in any form of business other than those refe
above.
0 General Information
1. No banking company can carry on business in India unless its subscribed capital is
less than one-half of the authorised capital and its paid up capital is not less than one-ha f
the subscribed capital. [Section 12 (/)].
2. The capital of the banking company shall consist of equity shares only or of ec
shares and such preference shares as may have been issued prior to the 1st of July, 1
[Section 12 (/'/)].
3. No banking company shall pay out directly or indirectly by way of commiss
brokerage, discount or remuneration in any form in respect of any shares issued by it,
amount exceeding in the aggregate two and one-half per cent of the paid-up value of the
shares. (Section 13).
As per Section 8 of the Banking Regulation Act, 1949, a banking company can ne:
itself nor on behalf of the others deal in buying or selling or bartering of goods excep-
connection with the realisation of security given to or held by it.
4. A Banking company cannot create any charge upon its uncalled capital and any
charge shall be void. (Section 14)
- CCOUNTS OF BANKING COMPANIES IV /1 -3
5. Payment of Dividend. No banking company shall pay any dividend on its shares
.'til all its capital expenses (including preliminary expenses, organisation expenses,
: -are selling commission, brokerage, amounts of losses incurred and any other item
:• expenditure not represented by tangible assets) have been completely written off.
Section 15).
However, as per the Act, it is permissible for a banking company to pay dividend on its
s'ares without writing off :
(!) The depreciation in the value of its investments in approved securities where such
depreciation has not actually been capitalised or otherwise accounted for as a loss.
ii) The depreciation in the value of its investments in shares, debentures or bonds (other
than approved securities) where adequate provision for such depreciation has been
made to the satisfaction of its auditors ; and
Hi) The bad debts where adequate provision for such bad debts has been made to the
satisfaction of its auditors.
6. A banking company must have a wholetime chairman appointed for five years at a
:~e. He may become a director of a subsidiary of the banking Company or of a guarantee
I : ~ ,pany registered under the Companies Act but cannot take up any other appointment.
~~e chairman is appointed by Board of Directors but in the case of nationalised banks, he is
iccointed by the Central Government. At least 51% of the directors of a banking company
~ -st be persons having specialized knowledge and useful to the banking industry. The
r a serve Bank of India has the power to order the removal of a director or the Chairman. No
:a eng company incorporated in a state of India shall have as a director any person who is a
: -eetor of another banking company (Section 16).
However, w. e. f. 31st January, 1994 provision has been made for appointment of a
»-z e-time or a part-time chairman for a banking company in place of only whole-time
r a 'man earlier. But where a chairman is appointed on a part-time basis, the management of
r e .vhole of the affairs of such a banking company shall be entrusted to a managing director.
7 Statutory Reserve. Every banking company incorporated in India shall, before
=- 1 dividend declared, transfer a sum equal to 25% of the profit of each year to a
Statutory Reserve. However, if the aggregate amount of statutory reserve and
securities premium is not less than the paid up capital, a banking company may be
uampted from this restriction by the Central Government on the recommendation of
*a Reserve Bank of India. If a banking company appropriates any sum from the
a serve or the securities premium account, it shall, within 21 days from the date of
i- : n appropriation report the fact to the Reserve Bank of India explaining the
: rumstances relating to such appropriation. (Section 17). The statutory Reserve is
i>-: ,vn separately from other reserves in the Balance Sheet on the liabilities side under
t*e leading ‘Reserves and Surplus’.
5 Cash Reserve and Statutory Liquidity Ratio. A scheduled bank shall maintain with
~e Reserve Bank equal to at least 3% of its time and demand liabilities (i.e., deposits
tsce ved for fixed periods as well as of its demand liabilities) as cash reserves. A non-
■:~eduled bank has to maintain similar balances either in cash or as deposit with the
-eserve Bank. The Reserve Bank of India is empowered to raise this percentage upto 15%
Ee::ion 18). In addition to the above, every bank is required to maintain in India in the form
m :ash, gold or unencumbered approved securities an amount which is not less than 25% or
*-ch other percentage not exceeding 40% (as the RBI may specify from time to time) of the
p a of its demand and time liabilities in India. It is called statutory liquidity ratio (SLR). SLR
■nl :e in addition to cash reserve to be maintained by banks.
9. Demand and Time Liabilities. Demand liabilities of a bank are those which are
pa •aole on demand. These liabilities include current deposits of depositors, demand liabilities
m m on of saving bank deposits, balances in overdue fixed deposits, cash certificates,
IV /1 -4 ACCOUNTS OF BANKING COMPANIES
outstanding telegraphic transfers, demand drafts, unclaimed deposits, and deposits held as
s e c u r itv for advances which are payable or. demand. Time liabilities of a bank are those
which are not payable on demand but are payable after a certain period. These liabilities
include fixed deposits, cumulative and recurring deposits, time liabilities portion of saving
bank deposits, margin held against letters of credit, if not payable on demand, staff security
deposits, deposits held as securities for advances which are not payable on demand etc.
10. Restriction on Loans and Advances. No banking company shall make any loans or
advances on the security of its own shares or grant or agree to grant a loan or advance to or
on behalf of ■(a) any of its directors; (b) any firm in which any of its directors is interested as
partner, manager or guarantor; (c) any company of which any of its directors is a director,
manager, employee or guarantor or in which he holds substantial interest; or (d) any
individual in respect of whom any of its directors is a partner. (Section 20).
11. Banks in India are under the general supervision of the Reserve Bank of India. The
Reserve Bank can order a bank not to accept further deposits. A bank can open a branch
only at the permission of the Reserve Bank.
12. Limits as to Investments in Shares and Debentures. Except in subsidiary
companies, no banking company shall hold shares in any other company, whether as
pledgee, mortgagee or absolute owner of an amount exceeding 30% of the paid up share
capital of that company or 30% of its own paid up share capital and reserves. The Reserve
Bank of India has removed the above limit of 30% on investments made by the banks in the
equity and debentures issues of all India financial institutions.
13. Performing and Non-performing Assets. Loans, advances and discounting and
purchasing of bills are the principal assets and the main source of income of a bank.
Sometimes some of these assets may become non-performing and may not bring any
income to the bank. Keeping in view this banks are required by the Reserve Bank of India to
classify their assets into two main categories as given below :
(a) Performing assets (or standard assets)
(b) Non-performing assets
Performing or Standard Assets. Assets (such as loans, advances, bills discounted or
purchased) in respect of which interest and principal amount due are received regularly on
due dates are called performing or standard assets. Such assets do not carry more than the
normal risk attached to the business.
Non-performing Assets. A non-performing asset (such as a loan, advance etc.) is in
respect of which interest and/or instalment of principal due remained overdue for a period of
more than 90 days. Such assets are risky and become a threat to the liquidity and profitability
of a bank. Non-performing assets may arise because of defaults on the part of borrowers and
bad lending practices followed by the banks to favour their near ones and friends. These
assets may also arise because of recession in the market or due to natural calamities.
14. Share Capital. To ensure that no banking company commences or carries on
business with inadequate capital, section 11 of the Banking Regulation Act, 1949 prescribes
the minimum limits of paid up capital and reserves of the banking company which are as
follows :
(a) For banking companies incorporated outside India :
(/) If it has a place of business in Mumbai or Kolkata ? 20 lakhs
(/'/) If the places of business are elsewhere ? 15 lakhs
The above sum must be kept deposited with the Reserve Bank of India either in cash or
in unencumbered securities.
- : COUNTS OF BANKING COMPANIES IV /1 -5
n addition to the above sum, a further amount equal to 20% of the annual profits in
?ccect of business transacted through its branches in India must be kept deposited with the
-^serve Bank of India at the end of each year.
b) For banking companies incorporated in India ;
If the places of business are in more than one
State and if any place of business is in
Mumbai or Kolkata ? 10 lakhs
(») If the places of business are in more than one
State and none of the places of business is in
Mumbai or Kolkata f 5 lakhs
iiii) If the places of business are only in
one State and none of the places of
business is in Mumbai or Kolkata ? 1 lakh
for the principal place plus f 10,000 for each
additional place of business in the same
district and ? 25,000 for a place of business
outside the district subject to a maximum of
? 5 lakhs. But if the place of business is only
at one place, the maximum amount required
is ? 50,000. For a banking company which
has commenced business after 15th
September 1962, its paid-up capital should
be at least ? 5 lakhs.
(nr) If the places of business are only in ...? 5 lakhs plus ? 25,000 for each place of
one State and if the places of business outside Mumbai and Kolkata
business are also in Mumbai or subject to a maximum of ? 10 lakhs.
Kolkata.
A banking company commencing business after the coming in force of the Banking
I : _ cany (Amendment) Act, 1962, shall have a paid-up capital of not less than f 5 lakhs
r~ ccective of the number of places of its business.
O visk-adjusted Assets
-or the calculation of capital adequacy ratio, the assets side of the Balance Sheet of a
fcar-: is recalculated on the basis of assigning risk weights to each category of assets
■bEcending on the degree of risk involved. This is based on the principle of conservatism by
S c - ssdering assets of the bank at their risk adjusted values rather than at their book values for
11** ~7 rurpose of calculation of capital adequacy ratio. For example, cash balances are risk free
■re*eas advances are susceptible to credit risks. The risk of loss in case of secured loan is
is 5 as compared to an unsecured loan. Recognising the degree of risk involved, the Reserve
f i r * of India has assigned different risk weights to different categories of assets. For
m i ~ole cash balance with RBI is assigned a risk weight of zero whereas loans and
ar i'c e s not secured have been assigned a risk weight of 100%. The risk adjusted value for
®n* category of assets is calculated by multiplying the value of the category of an asset as
;p Eaiance Sheet with the risk weight assigned thereto by RBI.
3 Capital Adequacy Ratio

~ ie limits as to share capital given above are inadequate because these were fixed a
■me back. To strengthen the capital base of the banks, the Reserve Bank of India, on
-rcommendations of the Narasimham Committee introduced in April, 1992 the risk
:ed asset ratio system. According to this system, paid up capital and reserves of a bank
•. riting off bad debts should form an adequate percentage (8 to 10%) of the assets of
I V/1-6 ACCOUNTS OF BANKING COMPANIES
the bank, its investment loans and advances. All these items have been assigned weights
according to the prescribed risks for example, cash balances are not susceptible to any risks
and are assigned zero weight and loans and advances not guaranteed susceptible to cred:
risks are assigned 100% weight. Ratio so computed is known as Capital Adequacy Ratio.
This ratio is used to protect depositors and promote the stability and efficiency of financial
systems around the world. Two types of capital are measured : Tier one capital which can
absorb losses without a bank being required to cease trading and tier two capital, which car
absorb losses in the event of winding up and so provides a lesser degree of protection to
depositors.
Capital Adequacy Ratios (CARs) are a measure of the amount of a bank’s core capita,
expressed as a percentage of its risk-weighted assets and It is known as Capital to Ris-
Weighted Asset Ratio (CRAR).
Capital Adequacy Ratio is defined as
pAR _ Capital Funds (Tier 1 Capital + Tier 2 Capital)
Risk Weighted Assets
Tier 1 Capital
= (paid up capital + statutory reserve + disclosed free reserves)
- (equity investments in subsidiary + intangible assets + current and b/f losses)
Tier 2 Capital = (A) Undisclosed Reserves + (B) General Loss reserves +(C) Hybrid deb:
capital instrument and subordinated debts where risk can either be weighted assets (a) or the
respective national regulator’s minimum total capital requirement if using risk weighted
assets.
The percentage threshold varies from bank to bank and new private sector banks (10% in
this case, a common requirement for regulators confirming to Basel Accounts) are set by the
national banking regulator of different countries.
Tier 1 Capital Ratio. The Basel rules recognise that different types of equity are more
important than others and to recognise i.e. Tier 1 capital and Tier 2 capital. Tier 1 capital is
actual contributed from equity plus retained earnings. The minimum CAR ratios as per Bas:
Record norms ; Tier 1 equity to risk weighted asset is at least 5% while minimum CAF
including Tier II is 10%.
Tier 2 Capital includes preference shares plus 50% of subordinated debt. The maximu
Tier II capital is 50% of CAR as per Basel norms.
Non-Banking Financial Companies (NBFC) are required to maintain adequate capita!
Every NBFC shall maintain a minimum capital ratio consisting of Tier I and Tier II capit
which shall not be less than 12% of its aggregate risk-weighted assets. The total of Tier
capital, at any point of time, shall not exceed 100% of Tier I capital.
Capital Adequacy Ratio is a key indicator of a bank’s financial strength. Keeping in vie
the importance of this ratio, all banks in India were to achieve the capital adequacy ratio
8% by March 31, 1996 and banks were required to raise this ratio to 10% by 2002.
Q Accounts and Audit

The provisions of the Act relating to annual accounts and audit of a banking company are
given in Sections 29-33 and are as follows :
Preparation of Annual Accounts. On 31st March each and every banking compa
incorporated in India, in respect of all business transacted by it, and every banking compa
incorporated outside India, in respect of all business transacted through its branches in Ind
shall prepare with reference to that year a Balance Sheet and Profit and Loss Account as or
the working day of the year in the Forms set out in third schedule or as near thereto a
circumstances admit. Form A in third schedule is the Balance Sheet and Form B is the Pro-
and Loss Account. Forms A and B have been revised w.e.f. 1st April, 1991. In other words
-CCOUNTS OF BANKING COMPANIES IV/1-7
:ie annual accounts for the year ending 31st March 1992 and onwards are to be prepared in
the new formats as given in the book.
The requirements of the Companies Act relating to the Balance Sheet and Profit and
Loss of a company shall, is so far as they are not inconsistent with the Banking Companies
Act, apply to the Balance Sheet and Profit and Loss Account of a banking company.
Audit of Accounts. The Balance Sheet and the Profit and Loss Account of a banking
company is required to be audited by a Chartered Accountant. The appointment of the auditor
of a banking company is made as per the provisions of the Companies Act, 2013. His
sowers, duties and liabilities are also governed by the Companies Act, but the auditor’s
•eport on the accounts of a banking company must include certain additional particulars.
Filing of Accounts. Three copies of the audited Balance Sheet and Profit and Loss
Recount together with the auditors’ report shall be furnished as returns to the Reserve Bank
of !ndia within three months from the end of the accounting year to which they relate. This
ceriod of three months can be extended by the Reserve Bank for a further period upto three
-onths. Reserve Bank is authorised to call for any further information as it may think proper
~om a banking company relating to the business of such company.
A banking company is also required to send to the Registrar of Companies three copies
ts audited Balance Sheet and Profit and Loss Account and Auditor’s Report and when the
=eserve Bank requires any additional information in connection with the accounts, a copy of
=r y such additional information shall also be sent to the Registrar.
Publication of Accounts. The Balance Sheet, Profit and Loss Account and the Auditor’s
=eport of every banking company shall be published in any newspaper circulating at the
:>ace where it has principal office, within six months from the end of the accounting year.
O Accounting System
The accounting system of a banking company is different from that of a trading or
-anufacturing enterprise. A bank has a large number of customers whose accounts are to
:e maintained in such a way so that these should be kept up-to-date and checked regularly.
lowing are the main features of a bank’s accounting system:
(/) Voucher posting—Entries in the personal ledger are made directly from vouchers
instead of being posted from the books of prime entry.
(/#) Voucher summary sheets—The vouchers entered into different personal ledgers
each day are summarised on summary sheets, totals of which are posted to the
control accounts in the general ledger.
Hi) Daily trial balance—The general ledger trial balance is extracted and agreed every
day.
W Continuos checks—All entries are checked by persons other than those who have
made the entries.
v) Control accounts—A trial balance of the detailed personal ledgers is prepared
periodically, usually every two weeks, agreed with general ledger control accounts.
W) Double voucher system—Two vouchers are prepared for every transaction not
involving cash—one debit voucher and another credit voucher.
O Books Required
A banking company is required to maintain a large number of subsidiary books but
■ere important of these are given below
= R eceiving C a s h ie r’s C o u n te r C ash Book, (g) Bills D iscounted and P urchased Ledger.
r P aying C a s h ie r’s C o u n te r C ash Book, ( h ) Loan Ledger.
r C u rre n t A cco u n ts Ledger. (/) C ash C redit Ledger.
S aving B ank A cco u n ts Ledger, (/) C u sto m e rs’ A cce p ta n ce s, E ndorsem ents
e Fixed D e p o sit A cco u n ts ledger. and G u a ra n te e Ledger.
•* Investm ent Ledger. ( k) R ecurring D eposits A cco u n t Ledger
IV /1 -8 ACCOUNTS OF BACKING COMPANIES
The proforma for Loan ledger is given on the next page.

The principal books of accounts are :
(1) Cash book. This book gives the summary of the Receiving Cashier’s Counter Cash
Book and the Paying Cashier’s Counter Cash Book.
(2) General Ledger. This ledger contains control accounts for the subsidiary ledger
listed above and accounts of expenses and assets not covered by the subsidiary ledgers.
In addition to the above books, the following are the chief registers and memorandum
books kept by a bank:
(1) Demand Draft Register. (2) Bills for Collection Register.
(3) Share Security Register. (4) Safe Custody Register.
(5) Jewellery Register. (6) Letter of Credit Register.
(7) Safe Deposit Vault Register. (8) Standing Order Register.
The proformas of Bills for Collection Register and Share Security Register are given on
the next page.
O Slip System of Posting
In this system, posting is made from slips prepared inside the organisation itself or from
slips filled in by its customers. So entries are not made in the books of original entry or
subsidiary books, but posting of entries is done from slips. In a banking company, the main
slips are pay-in-slips, withdrawal slips and cheques and all these slips are filled in by clients
of the bank. These slips serve the basis of entry in the ledgers and control accounts in the
General Ledger are prepared on the basis of analysis of these slips.
Main reasons for the adoption of the slip system of posting by the bank are the
following :
1. The bank must have customer’s account up-to-date for a customer may present a
cheque any time during hours meant for the public. Slip system helps in keeping the
accounts up-to-date.
2. The number of transactions in a bank is very large. The adoption of slip system can
suitably distribute the work of posting among many persons.
3. It ensures smooth flow of accounting work.
Main advantages of the slip system are :
1. Saving of time and labour. The bank saves a lot of time and clerical labour as most
of the slips are filled in by its customers.
2. No need of subsidiary books. Subsidiary books are avoided as posting is done
from slips.
3. Minium delay. Entries can be recorded with minimum delay as slips can easily pass
from hand to hand among clerks concerned.
4. Division of labour. The slip system enables the division of work of posting among
employees due to a large number of transactions in a bank.
5. Smooth accounting. The writing of the day book and posting of the ledger can be
done simultaneously without loss of time.
6. Reliable accounting system. Slip system provides a basis for reliable accounting
system as most of the slips are prepared by customers themselves. Moreover, each
transaction is recorded in different books which are maintained on self balancing
system.
7. Perfect basis of auditing. Individual slips (known as vouchers) are filled up by
customers and becomes a proof for a transaction to the satisfaction of the auditor.
8. Proper evidence. Slip duly filled by a customer provides evidence of a transaction.
When needed slips preserved by the banks can be shown to the customers for their
satisfaction.
A C C O U N T S O F B A N K IN G C O M P A N IE S
LOAN LEDGER
Name. Date.
Address....................... ............... Security Rate of Interest .................................. % per annum.
Date Particulars Debit Credit Dr. D ays Product In tere st
Balance
f ? f
BILLS FOR COLLECTION (OR D.D.) REGISTER
Date D.D From whom Drawn by Drawee Bill or Favouring Amount Date o f Rem arks
or (B .C .) R e ce iv e d and Station R/R f Realisation
No.
Date No.
SHARE SECURITY REGISTER

Name of Party ............................... Limit ?
Address ......................................... Margin .
Serial Date Name of Share D istinctive Number Paid M arket C la ss of D isposal Rem arks
No. of Company Scrip Number o f S h a re s Value Value S h a re s
Pledge No. R e c e iv e d
From To T
IV/1-9
IV / 1 - 1 0 ACCOUNTS OF BANKING COMPANIES
Disadvantages of the slip system are :

1. Risk of loss or destruction of slips. Slips may be lost, destroyed or
misappropriated as these are loose.
2. Difficulty in verification. Books cannot be verified if subsidiary books are not kept.
3. Inconvenience to customers. This system causes great inconvenience to the
illiterate and semi-literate customers as slips are to be filled in (especially the amount
in words and figures) with the help of other customers and arrogant bank employees.
4. Risk of manipulation and misappropriation. Dishonest employees can embazzle
the money by destroying the loose and large number of slips and manipulating the
amounts.
5. Expensive system. Slip system becomes difficult due to large number of daily
transactions in a bank and becomes expensive to keep a date-wise record of such
slips.
With the nationalisation of major commercial banks and changes brought about in the
economic and financial policies by the Government, the environment in which the banks
operate has undergone a sea change. However, no effort was made to bring about a change
in the financial statements of banks to reflect the realities of the impact of the environment.
There were suggestions emphasising the need for revising the formats in which the banks
published the financial statements as prescribed under the Banking Regulation Act, 1949.
A committee under the chairmanship of Shri A. Ghosh, Deputy Governor, Reserve Bank of
India was constituted to examine the desirability of greater or full disclosure in the published
accounts of banks having regard to the need for disclosure, public accountability of banks,
requirement of maintenance of confidentiality between the banker and customer and the
requirement of maintaining the reputation and credit worthiness of banks. The committee,
after due deliberations, has suggested suitable changes/amendments in the formats of
Balance Sheet and Profit & Loss Account of banks, having regard to :
(/) the need for greater disclosure,
(/'/) the expansion of banking operations both areawise and sectorwise over the period
and
(Hi) the need for improving the presentation of accounts.
New formats for preparation of Balance Sheet and Profit and Loss Account are to be
adopted for the accounting year ending 31st March, 1992.
It has been decided that in order to bring the true financial position of banks to pointed
focus and enable users of financial statements to study and have meaningful comparisons of
their position, the banks should disclose the accounting policies regarding key areas of
operations at one place along with notes on accounts in their financial statements for the
accounting year ending 31st March 1991 and onward on a regular basis. A specimen form in
which accounting policies may be disclosed in the financial statements is given below :
FINAL A C C O U N T S
Banks are required to prepare final accounts for each financial year, i.e., its books are
closed each year on 31st March. But for internal purpose, banks usually close their books on
30th September.
O Profit and Loss Account
A banking company is required to prepare its Profit and Loss Account according to Form
B in the Third Schedule to the Banking Regulation Act, 1949. Form B is in a summary form
and the details of the various items are given in the schedules. Form B is given as follows :
-CCOUNTS OF BANKING COMPANIES IV /1-11
Form ‘B’
FORM OF PROFIT AND LOSS ACCOUNT
PROFIT & LOSS ACCOUNT
for the ye a r en d ed 3 1 st M arch (Year)
(0 0 0 ’s om m itted)
S chedule Y e a r ended on 31.3.. Y e a r ended on 31.3..

No. (C urrent Year) (P re vio u s Y ear)
I. Income
Interest earned 13
O th e r incom e 14
T otal :
II. Expenditure
Interest e xp ended 15
O p erating e xp e n se s 16
P rovisions and co n tin g e n cie s
T o ta l :
III. Profit/Loss
Net P rofit/Loss ( — ) fo r the ye a r
P rofit/Loss ( —) b ro u g h t forw ard
T otal :
IV. Appropriations
T ra n sfe r to sta tu to ry reserve
T ra n sfe r to o th e r reserves
T ra n sfe r to G o ve rn m e n t/p ro p o se d dividend
B alance carried o ve r to b a lance sheet
T otal :
SCHEDULE 13-INTEREST EARNED

( f ’000)
Y e a r ended on 31.3.. Y e a r ended on 31.3..
(C urrent Y ear) (P re vio u s Y ear)
I. In te re st/d isco u n t on a d va n ce s/b ills
II. Incom e on investm ents
III. Interest on b alances w ith R eserve B ank of
India and o th e r in te r-b a nk funds
IV. O thers
T otal :
SCHEDULE 1 4 - OTHER INCOME

(? ’000)
Y e a r ended on 31.3.. Y e a r ended on 31.3..

(C urrent Y ear) (P revious Y ear)
I. C o m m ission, e xchange and brokerage
II. Profit on sale of investm ents
L e s s : Loss on sale o f inve stm e n ts
■1. P rofit on revaluation o f investm ents
L e s s : Loss on revaluation o f investm ents
IV/1-12 ACCOUNTS OF BANKING COMPANIEi
IV. P rofit on sale o f land, buildings and o th e r a ssets

L e s s : Loss on sale o f land, buildings and o th e r assets
V. P rofit on e xch a n g e tra n sa ctio n s
L e s s : Loss on e xch a n g e tra n sa ctio n s
VI. Incom e earned by w a y o f d ivid e n d s etc. from
su b sid ia rie s/co m p a n ie s a n d /o r jo in t ven tu re s
abroad/in India
VII. M isce lla n e o u s Incom e
T otal :
Note. U nder item s II to V loss fig u re s m ay be show n in brackets.
SCHEDULE 15 - INTEREST EXPENDED
__________ (? ’000
Y ear ended on 31.3.. Y ear ended on 31.3.
(C u rre n t Y ear) (P re vio u s Year)
I. Interest on d e p o sits
II. Interest on R eserve B ank o f In d ia /in te r-b a n k b orrow ings
III. O th e rs --------------------
T o ta l :
SCHEDULE 16 - OPERATING EXPENSES

__________ (? 000-
Y e a r ended on 31.3.. Y e a r ended on 31.3.
(C u rre n t Year) (P re vio u s Year)
I. P aym ents to and provisio n s fo r e m ployees
II. Rent, taxes and lighting
III. P rinting and sta tio n e ry
IV. A d ve rtise m e n t and publicity
V. D epreciation on b a n k ’s property
VI. D ire cto rs’ fees, a llo w a n ce s and e xpenses
VII. A u d ito rs ’ fees, a llo w a n ce s and expe n se s
(including branch auditors)
VIII. Law ch arges
IX. Postages, te le g ra m s, tele p h o n e s, etc.
X. R epairs and m a intenance
XI. Insurance
XII. O th e r e xp e n d itu re --------------------
T otal :
GUIDELINES O F RESERVE B A N K O F INDIA FOR PROFIT 61 LOSS

ACCOUNT
Income Side Items
(1) Interest earned
I. Interest/discount Includes interest and discount on all types of loans and advance;
on advances/bills like cash credits, demand loans, overdrafts, export loans, te r-
loans, domestic and foreign bills purchased and discounte:
(including those rediscounted), overdue interest and also intere;
subsidy, if any, relating to such advances/bills.
ACCOUNTS OF BANKING COMPANIES IV / 1 - 1 3
II. Income on Includes all income derived from the investment portfolio by way of
investments interest and dividend.
. Interest on bal Includes interest on balances with Reserve Bank and other banks,
ances with call loans, money market placements, etc.
Reserve Bank of
India and other
inter bank funds
IV. Others Includes any other interest/discount income not included in the
above heads.
(2) Other Income Includes all remuneration on services such as commission on
I. Commission, ex collections, commission/exchange on remittances and transfers,
change and commission on letters of credit, letting out of lockers and
brokerage guarantees, commission on Government business, commission on
other permitted agency business including consultancy and other
services, brokerage, etc. on securities. It does not include foreign
exchange income.
II. Profit on sale of Includes profit/loss on sale of securities, furniture, land and
investments Less: buildings, motor vehicles, gold, silver, etc. Only the net position
Loss on sale of should be shown. If the net position is a loss, the amount should be
investments shown as a deduction. The net profit/loss on revaluation of assets
may also be shown under this item.
Profit on
revaluation of
investments
Less: Loss
on revaluation of
investments
Profit on sale of
land, buildings
and other assets
Less: Loss on
sale of land,
buildings and
other assets
Profit on Includes profit/loss on dealing in foreign exchange, all incomes
exchange earned by way of foreign exchange, commission and charges on
transactions foreign exchange transactions excluding interest which will be
Less: Loss on shown under interest. Only the net position should be shown. If the
exchange net position is a loss, it is to be shown as a deduction.
transactions
»• Income earned by
way of dividends
etc. from sub
sidiaries, compa
nies, joint
ventures
abroad/in India
I Miscellaneous Includes recoveries from constituents for godown rents, income
income from bank’s properties, security charges, insurance etc. and any
other miscellaneous income. In case any item under this head
exceeds one percentage of the total income, particulars may be
given in the notes.
Expenditure Side
(1) Interest
Expended
i. Interest on Includes interest paid on all types of deposits including deposits
deposits from banks and other institutions.
II. Interest on Includes discount/interest on all borrowings and refinance from
Reserve Bank of Reserve Bank of India and other banks.
India/ inter bank
borrowings
III. Others Includes discount/interest on all borrowings/refinance from financial
institutions. All other payments like interest on participation
certificates, penal interest paid, etc. may also be included here.
(2) Operating
Expenses
I. Payments to and Includes staff salaries/wages, allowances, bonus, other staff
provisions for em benefits like provident fund, pension, gratuity, liveries to staff, leave
ployees fare concessions, staff welfare, medical allowance to staff, etc.
II. Rent, taxes and Includes rent paid by the bank on buildings and other municipal
lighting and taxes paid (excluding income-tax and interest tax) electricity
and other similar charges and levies. House rent allowance and
other similar payments to staff should appear under the head
‘Payments to and provisions for employees’.
III. Printing and Includes books and forms and stationery used by the bank and
stationery other printing charges which are not incurred by way of publicity
expenditure.
IV. Advertisement Includes expenditure incurred by the bank for advertisement and
and publicity publicity purposes including printing charges of publicity matter.
V. Depreciation on Includes depreciation on bank’s own property, motor cars and other
bank’s property vehicles ; furniture, electric fittings, vaults, lifts, leasehold
properties, non-banking assets, etc.
VI. Directors’ fees, Includes sitting fees and all other items of expenditure incurred on
allowances and behalf of directors. The daily allowance, hotel charges, conveyance
expenses charges, etc. which though in the nature of reimbursement of
expenses incurred may be included under this head. Similar
expenses of local Committee members may also be included under
this head.
VII. Auditors’ fees and Includes the fees paid to the statutory auditors and branch auditors
expenses for professional services rendered and all expenses for performing
(including branch their duties, even though they may be in the nature of
auditors’ fees and reimbursement of expenses. If external auditors have been
expenses) appointed by banks themselves for internal inspections and audits
and other services the expenses incurred in that context including
fees may not be included under this head but shown under ‘other
expenditure’.
VIII. Law charges All legal expenses and reimbursement of expenses incurred in
connection with legal services are to be included here.
- CCOUNTS OF BANKING COMPANIES IV/1-15
iX. P ostage, tele Includes all postal charges like stamps, telegrams, telephones,
gram s, teleprinter, etc.
telephones, etc.
X. R epairs and Includes repairstobank’sproperty, their maintenancecharges, etc.
m aintenance
XI. Insurance Includes insurance charges on bank’s property, insurance prem ia
paid to D eposit Insurance &C redit Guarantee C orporation, etc. to
theextent theyarenot recoveredfromtheconcernedparties.
: . Other expenditure Ail expenses other than those not included in any of the other
heads, like, licence fees, donations, subscriptions to papers,
periodicals, entertainment expenses, travel expenses, etc. m ay b e
included under this head. In case any particular itemunder this
head exceeds one percentage of the total incom e particulars m ay
begiven inthenotes.
(3) Provisions and Includes all provisions m adefor badanddoubtful debts, provisions
contingencies for taxation, provisions for diminution inthe value of investments,
transferstocontingencies andother sim ilar items.
IL L U S T R A T IO N 1. From the following information relating to Global Finance
Eank Ltd., prepare Profit and Loss Account for the year ended 31-3-2017. Also show
schedules 13,14,15 & 16 as necessary.
Information for the year ending 31-3-2017 :
? (in ’000) f (in ’000)
-terest/discount on advances/bills 1,58,140 Depreciation on bank’s property 1,460
ncome on investments 59,050 Directors’ fees, allowances & expenses 35
-terests on balances with R.B.I. 21,215 Auditor’s fees and expenses 205
Commission, exchange & brokerage 14,535 Law charges 110
: "ofit on sale of investments 570 Postage, telephone, etc. 1,560
—.erest on deposits 1,57,020 Repairs and maintenance 455
rarest on R.B.I. borrowings 16,810 Insurance 4,575
^-ayment to employees 48,585 Other expenditure 4,420
ênt, taxes, lighting 4,775 Balance of Profit & Loss A/c b/f 7,620
Anting and stationery 1,065 Debtors 8,500
Advertisement and publicity 435 Plant & Machinery 4,800
Following adjustments are to be made :
a) Provide for Income Tax (including surcharge) @ 51.75%
b) Every year the bank transfers 25% of profit to statuary reserve and 5% of
profit of revenue reserve.
c) Dividend amounting to ? 10,00,000 for the year ended 31-3-2017 is proposed
by the Board of Directors.
SOLUTION
Global Finance Bank Ltd.
PROFIT AND LOSS ACCOUNT
fo r the y e a r e n d ing 3 1 s t M arch, 2 0 1 7
S che d u le Y ear e n d e d
3 1 -3 -2 0 1 7
Incom e ? (in ’000)
Interest Earned 13 2,38,405
Other Income 14 15,105
2,53,510
IV/1-16 ACCOUNTS OF BANKING COMPANIES
II. E xp e n d itu re
Interest Expended 15 1,73,83!
Operating Expenses 16 67,66!
Provisions & Contingencies
(Income tax @ 51.75% on profit before tax of ? 12,000 thousands) 6,21!
2,47,72!
III. P ro fit/L o ss .4
Net Profit for the year (I - II) 5,790
Profit brought forward 7,62C
13,410
IV. A p p ro p ria tio n s :
Transfer to Statutory Reserve (25% of ? (’000) 5,790) 1,445
Transfer to Other Reserves (5%) 29!
Proposed Dividend 1,000
Balance c/d to Balance Sheet 10,671
13,41!

? ’000
1. interest/Discount on Advances/Bills 1,58,14!
2. Income on Investments 59,050
3. Interest on Balances with RBI 21,215!
4. Others
2,38,405
SCHEDULE 14-OTHER INCOME

? 'c:
Commission, Exchange and Brokerage 14,535
Profit on Sale of Investments 5T
15,105
SCHEDULE 15-INTEREST EXPENDED

? ’000
Interest on Deposits 1,57,C
Interest on RBI Borrowings 16,810
1,73.:
SCHEDULE 16—OPERATING EXPENSES
Payment to Employees
Rent, Taxes & Lighting
Printing & Stationery
Advertisement & Publicity
Depreciation on Bank’s Property
Directors’ Fees, Allowances and Expenses
A C C O U N T S O F B A N K IN G C O M P A N IE S IV/1-17
7. Auditors’ Fees 110

8. Law Charges 205
9. Postage, Telephone, etc. 1,560
10. Sundry Charges 9,450
67,680
IL L U S T R A T IO N 2. From the following information, prepare Profit and Loss

Account of South India Bank Ltd. as on 31st March, 2017.
r (’ooo) ? (’000 )
merest and discount 3,045 Printing and stationery 180
ncome from investments 115 Advertisement and publicity 95
nterest on balance with RBI 180 Depreciation 92
Commission, exchange and brokerage 820 Directors’ fees 220
Profit on sale of investments 110 Auditors’ fees 120
-iterest on deposits 1,225 Law charges 230
nterest to RBI 161 Postage, telegrams and telephone 70
=ayment to and provision for Insurance 56
employees 1,044 Repairs and maintenance 48
Pent, taxes and lighting 210
Other Informations :
(i) Interest and discount mentioned above is after adjustment for the following :
? (’000 )
Tax provision for the year 22 Q
Provision during the year for doubtful debts 102
Loss on sale of investments 12
Rebate on bills discounted 58
392
(//) 25% of profit is transferred to statutory reserve.
5% of profit is transferred to revenue reserve.
Profit brought forward from the last year ? 16,000.
S O LU TIO N
South India Bank Ltd.
PROFIT & LOSS ACCOUNT
fo r the y e a r e n d e d 3 1 s t M arch, 2 0 1 7
S ch e d u le Y ear e n d e d
No. 3 1 s t M arch
2017
I. Incom e ? (’000)
Interest Earned 13 3,674
Other Income 14 918
Total 4,592
II. E xp e n d itu re
Interest Expended 15 1,386
Operating Expenses 16 2,365
Provisions and Contingencies (220 + 102) 322
Total 4,073
III. P ro fit/L o ss
Net profit for the year (I - II) 519
Profit-brought forward It
535
IV. A p p ro p ria tio n s
Transfer to Statutory Reserve (25% of ? (’000) 519) 130
Transfer to Other Reserves (5% of 519) 26
Balance carried to B/S 379
535
Working Notes :
? (’000
1. Interest/discount (3,045 + 220 + 102+ 12) 3,37=
2. Income from investments 115
3. Interest on balance with RBI & other inter bank fund 180
4. Others
Total 3,67-i
SCHEDULE 1 4 - OTHER INCOME

? (00C
I. Commission, Exchange & Brokerage 82C
II. Profit on Sale of investments 110
Less : Loss on sale of investments 12 96
Total 918
SCHEDULE 15-INTEREST EXPENDED

f (’000
I. Interest on Deposits 1,225
il. Interest on RBI/Inter Bank Fund 161
Total 1,38c
SCHEDULE 16 - OPERATING EXPENSES

? (’000
I. Payment to and Provision for Employees 1,04-i
II. Rent, Taxes and Lighting 210
III. Printing and Stationery 18C
IV. Advertisement and Publicity 95
V. Depreciation on Bank Property / 92
VI. Directors’ Fees, Allowances & Expenses 220
VII. Auditors’ Fees & Expenses 120
VIII. Postage, Telegrams & Telephones \ °
IS***. *
v 70
IX. Law Charges 23C
X. Repairs & Maintenance > 48
XI. Insurance 56
Total 2,365
e
.ACCOUNTS OFBANK/AfG COMPANIES IV /1 -1 9
The Balance Sheet of a Banking Company is drawn up according to Form A in Third

Schedule. Form A is reproduced as follows :
FORM OF BALANCE SHEET
BALANCE SHEET O F ...... (here enter name of the Banking company)
as on 3 1 s t M a rch (Y ear) (0 0 0 's om m itted)
C a p ita l a n d L ia b ilitie s S ch e d u le a s on 31 -3- a s on 31-3 -
(C u rre n t Year) (P revious Year)
Capital 1
Reserves & Surplus 2
Deposits 3
Borrowings 4
Other Liabilities and Provisions 5
Total
Assets
Cash and Balances with Reserve
Bank of India 6
Balances with Banks and Money at Call
and Short Notice 7
Investments 8
Advances 9 Nsnv
Fixed Assets 10
Other Assets 11
Total
Contingent Liabilities 12
Bills for Collection
SCHEDULE 1 - CAPITAL
as on 31-3 - as on 31-3-
I. For Nationalised Banks
Capital (Fully owned by Central Government)
II. For Banks Incorporated Outside India Capital

(/) (The amount brought in by banks by way of start
up capital as prescribed by RBI should be shown
under this head)
(//) Amount of deposit kept with the RBI under Section
11 (2) of the Banking Regulation Act, 1949
Total
III. For Other Banks
Authorised Capital
( Shares of ? each)
Issued Capital
( Shares of ? each)
Subscribed Capital
( Shares of T each)
Called-up Capital
( Shares of T each)
Less: Calls unpaid
A d d : Forfeited Shares
IV/1 -20 ACCOUNTS OF BANKING COMPANIES
SCHEDULE 2-RESERVES & SURPLUS

as on 31-3 - as on 31-3-
I. Statutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. Capital Reserve
Opening Balance
III. Securities Premium
Opening Balance
IV. Revenue and other Reserves
Opening Balance
V. Balance in Profit and Loss Account ----------------------------------------------------------
Total : __________
_____________________ (I, II, III, IV and V)___________________________________________
_____________________________SCHEDULE 3-DEPOSITS___________________________
as on 31-3- a s o n 31-3-
A. I. Demand Deposits
(/) From Banks
(/'/) From others
II. Saving Bank Deposits
III. Term Deposits
(/) From Banks
(/'/) From others --------------------- ---------------------
Total :
(I, II and III)
B. (/) Deposits of branches in India
(//) Deposits of branches outside India --------------------- ---------------------
Total:
SCHEDULE 4-BORROWINGS
'a s on 31-3 - as on 31-3-
I. Borrowings in India
(/) Reserve Bank of India
(//) Other banks
(Hi) Other institutions and agencies
II. Borrowings outside India ---------------------
Total :
(I and II)
Secured borrowings included in I & II above — f
ACCOUNTS OF BANKING COMPANIES I V/ 1 - 21
SCHEDULE 5-O THER LIABILITIES AND PROVISIONS

as on 31.3.. as on 31.3..
(C u rre n t ye a r) (P re vio u s yea r)
I. Bills payable
II. Inter-office adjustments (net)
III. interest accrued
IV. Others (including provisions)
Total :
SCHEDULE 6-C A S H AND BALANCES WITH RESERVE BANK OF INDIA

as on 31-3 - as on 31-3-
(C u rre n t Year) (P revious Year)
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
(/) in Current Account
(/'/) in Other Deposit Accounts
Total:
(I and II)
SCHEDULE 7 - BALANCES WITH BANKS & MONEY AT CALL & SHORT NOTICE
as on 31-3 - as on 31-3-
________________________________________________ (C u rre n t Year)______ (P re vio u s Year)
I. In India
(/) Balances with banks
(a) in Current Accounts
(b) in Other Deposit Accounts
(/'/) Money at call and short notice
(a) With banks
(b) With other institutions --------------------- — — —— -—
(/) and (/'/) Total: __________
II. Outside India
(/) in Current Accounts
(/'/) in Other Deposit Accounts
(Hi) Money at call and short notice -------------------------------------------------------—
(/),(//) and (///) Total: __________ ___________ ______
Grand Total :
(I and II) __________ __________
SCHEDULE 8-INVESTMENTS
as on 31-3- as on 31-3-
I. Investments in India in
(/) Government securities
(/'/) Other approved securities
(/'/'/) Shares
(/V) Debentures and Bonds
(v) Subsidiaries and/or joint ventures
(w) Others (to be specified) ---------------------
Total :
II. Investments outside India in
(i) Government securities
(including local authorities)
(ii) Subsidiaries and/or joint ventures abroad

(/'//) Other investments (to be specified)
Total :
Grand Total :
(I & II)
SCHEDULE 9-ADVANCES
a s on 31.3.. a s on 31.3..
(C u rre n t Year) (P re vio u s Yeari
A. (/) Bills purchased and discounted
(ii) Cash credits, overdrafts and loans
repayable on demand
(///) Term loans ---------------------
Total :
B. (/) Secured by tangible assets
(ii) Covered by Bank/Government guarantees
(Hi) Unsecured ---------------------
Total :
C. I. Advances in India
(/) Priority Sectors
(ii) Public Sector
(//'/) Banks
(/V) Others ---------------------
Total :
II. Advances outside India
(/) Due from banks
(ii) Due from others
(a) Bills purchased and discounted
(b) Syndicated loans
(c) Others
Total :
Grand Total : (C I and II)
SCHEDULE 10—FIXED ASSETS

as on 31-3 - a s on 31-3-
I.Premises
At cost as on 31st March of the preceding year
Depreciation to date
II. Other Fixed Assets (including furniture and fixtures)
At cost as on 31st March of the preceding year
Depreciation to date
Total :
(I and II)
-1CCOUNTS OF BANKING COMPANIES lV/1 ■23
SCHEDULE 11-O THER ASSETS

as on 31-3- as on 31-3-
I. inter-office adjustments (net)
II. Interest accrued
III. Tax paid in advance/tax deducted at source
IV. Stationery and stamps
V. Non-banking assets acquired in satisfaction of claims
VI. Others
Total:
@ In case there is any unadjusted balance of loss the same may be shown under this item with
=opropriate footnote.
________________________ SCHEDULE 12 - CONTINGENT LIABILITIES____________________
a s on 3 1 -3 - a s on 31-3 -
___________________________________________________ (C u rre n t Year) ______ (P re vio u s Year)
I. Claims against the bank not acknowledged as debts
II. Liability for partly paid investments
III. Liability on account of outstanding forward exchange
contracts
IV. Guarantees given on behalf of constituents
(a) In India (b ) Outside India
V. Acceptances, endorsements and other obligations
VI. Other items for which the bank is contingently liable
Total:
GUIDELINES O F THE RESERVE B A N K OF IN D IA FOR BA LAN CE SHEET

CAPITAL AND LIABILITIES SIDE
Capital:
nationalised Banks
lanital (fullyowned TheC apital ow ned byC entral Governm ent asonthe dateof the
:i C entral B alance Sheet including contribution fromG overnment, if any,
1-: /em inent) for participating inW orld Bank Projects should beshown
ranking C om panies (/) The am ount brought in by banks by way of start up capital as
'corporated outside prescribed byR BI shouldbeshow n under this heading.
roa. (//) The am ount of deposit kept by R BI, under subsection 2 of
Section 11 of the Banking Regulation Act, 1949, should also be
show n.
'. ler Banks (Indian)
--norised Capital Authorised, Issued, Subscribed, C alied-up C apital should be
Sharesof given separately. C alls-in-arrears will be deducted fromC alled
‘ each) upC apital whilethe paid-up value of forfeited shares should be
*£.ed Capital added thus arriving at the paid-up capital. W here necessary,
|| Sharesof item sw hich can becom bined should beshow n under one head
* each) for instance ‘IssuedandSubscribedC apital’.
SubscribedCapital Notes—General
(...Shares of The changes in the above item s, if any, during the years, say
?each) fresh contribution m ade by G overnm ent, fresh issue of capital,
capitalisationof reserve, etc. maybeexplained inthe notes.
CalledupCapital
(...Shares of
?each)
Less: Calls unpaid
Add: Forfeited
Shares
PaidupCapital
Reserves and
Surplus
I. Statutory Reserves created interms of Section 17or any other sectionof
Reserves Banking RegulationA ct must beseparatelydisclosed.
II. Capital The expression ‘capital reserves’ shall not include any am ount
Reserves regarded as free for distribution through the profit & loss
account. Surplus on revaluation should be treated as C apita
R eserves. Surplus on translation of the financial statements of
foreign branches (w hich includes fixed assets also) is not a
revaluation reserve.
III. Securities Premiumon issue of share capital may be shown separately
Premium under this head.
IV. Revenue and The expression ‘R evenue Reserve’ shall m ean any reserve
other Reserves other than capital reserve. This itemwill include all reserves
other than those separately classified. The expression ‘reserve
shall not include any am ount written off or retained by w ay of
providing for depreciation, renew als or dim inution in value of
assetsor retainedbyw ayof providingfor anyknow n liability.
V. Balance of Includes Balance of Profit after appropriations. In case of loss
Profit thebalancem aybeshow nasadeduction.
Notes—General
M ovem ent isvarious categories of reserves should beshownas
indicatedintheschedule.
Deposits :
A. I. Demand Deposits
(/) frombanks Includes all bank deposits repayableondemand.
(/'/) fromothers Includes all demand deposits of the non-bank sectors. C redit
balances inoverdrafts, cashcredit accounts, deposits payableat
call, overdue deposits, inoperative current accounts, m atured
time deposits and cash certificates, certificates of deposits, etc
aretobeincluded under thiscategory.
II. Saving Banks Includes all savings banksdeposits (including inoperativesaving
Deposits bank accounts).
III. TermDeposits
HPANIES
rs. say.
(i) frombanks Includes all types of bank deposits repayable after aspecified
capital.
(/'/) fromothers term .
es.
Includes all types of deposits of the non-bank sector repayable
after aspecified term . Fixed deposits, cum ulative and recurring
deposits, cash certificates, certificates of deposits, annuity
deposits, deposits m obilised under various schem es, ordinary
staff deposits, foreign currency non-resident deposits accounts,
etc. aretobeincludedunder thiscategory.
B. (/) D epositsof Thetotal of thesetw oitem swill agreew iththetotal deposits.
branches in
India
(0) D epositsof
ion of
branches
outside India
Notes—General
(a) Interest payable on deposits which is accrued but not due
shouldnot beincludedbut show n under other liabilities.
(b ) Matured time deposits and cash certificates, etc. should be
treated asdemanddeposits.
(c) Deposits under special schemes should be included under term
are deposits if they are not payable on dem and. W hen such
deposits havem aturedfor payment theyshould beshow nunder
demanddeposits.
(cf) Deposits from banks will include deposits from the banking
systemin India, co-operative banks, foreign banks which mayor
m ay not haveapresencein India.
s pr Borrowings
I. Borrowings in
OSS
India
(0 Reserve Includes borrowings/refinance obtained fromReserve Bank of
Bank of India.
India
(/'/) Other Includes borrowings/refinance obtained fromcommercial banks
Banks (includingco-operative banks).
(Hi) Other Includes borrowings/reference obtained from Industrial
institutions Developm ent Bank of India, Export-Im port Bank of India,
and N ational B ank for A gricultural and Rural Development and other
agencies institutions, agencies (including liability against participation
certificates, if any).
Borrow ings Includes borrowings of Indian branches abroad as well as
outside India borrowings of foreign branches.
S ecured This item will be show n separately. Includes secured
borrow ings borrowings/refinance inIndiaandoutside India.
includedabove. &
Notes—General
(/) Thetotal of I &II will agreewiththetotal borrowings shown in
the balancesheet.
(/'/) Inter-officetransactions shouldnot beshownas borrowings.
I V/ 1 - 2 6 ACCOUNTS OF BANKING COMPANIES
(Hi) Funds raised by foreign branches by way of certificates of

deposits, notes, bonds, etc. should be classified depending
upondocum entation, as‘deposits’, ‘borrowings’, etc.
(/V) R efinanceobtained bybanks fromR eserveBank of Indiaand
various institutions are being brought under the head
‘Borrowings’. H ence, advances will be shown at the gross
am ount onthe assets side.
Other Liabilities and
Provisions
I. Bills payable Includes drafts, telegraphic transfers, traveller cheques, m ai
transfers payable, pay slips, bankers cheques and other
m iscellaneous item s.
II. Inter-office The inter-office adjustm ents balance, if in credit, should b e
adjustm ents show n under this head. O nly net position of inter-office
(net) accounts, inlandasw ell asforeign, shouldbeshow n here.
III. Interest Includes interest accrued but not due on deposits and
accrued borrow ings.
IV . O thers Includes net provision for incom e tax and other taxes like
(including interest tax (less advance paym ent, tax deducted at source
provisions) etc.), surplus in aggregate in provisions for bad debts
account, surplus in *
aggregate in provisions for depreciation in securities,
contingency funds w hich are not disclosed as reserves but are
actually inthe nature of reserves, proposed dividend/transfer to
G overnm ent, other liabilities which are not disclosed under any
of the m ajor heads such as unclaim ed dividend, provisions and
funds kept for specific purposes, unexpired discount,
outstanding charges likerent, conveyance, etc. C ertain types of
deposits likestaff security deposits, m argin deposits, etc. where
the repaym ent is not free should also be included under this
head.
Notes—General
(/) For arrival at thenet balanceof inter-office adjustments all
connected inter-officeaccounts should beaggregatedand
the net balance only w ill be shown, representing m ostly
items intransit andunadjusted item s.
(/'/) The interest accruing on all deposits, whether the
payment isdueor not, should betreated asaliability.
(//'/) It is proposed to showonly puredeposits under the head
‘deposits’ and hence all surplus provisions for bad and
doubtful debts, contingency funds, secret reserves, etc.
w hicharenot nettedoff against therelative assets, should
bebrought under thehead ‘O thers (including provisions)’.
Contingent
Liabilities
I. C laims against
the bank not
acknow ledged
asdebts.
- CCOUNTS OF BACKING COMPANIES IV/1-27
II. Liabilityfor Liabilities onpartly paidshares, debentures, etc. will be included

partly paid inthis head.
investm ents
. Liabilityon Outstandingforward exchangecontracts may beincluded here.
account of
outstanding
forward
exchange
contracts
V. G uarantees Guarantees givenfor constituents inIndiaandoutside Indiamay
given on behalf beshow nseparately.
of constitu-ents
(/) InIndia
(/'/) O utside
India.
V. A cceptances, This itemwill include letters of credit and bills accepted by the
endorsem ents bankonbehalf of custom ers.
and other
obligations.
O ther item s for Arrears of cum ulative dividends, bills rediscounted under
w hich the B ank underwriting contracts, estim ated am ounts of contracts
is continently rem aining to be executed on capital account and not provided
liable for, etc. aretobeincludedhere.
-ssets Side
lash and Balance
«rththe Reserve
Sankof India
C ash inhand Includes cash inhand including foreign currency notes and also
(including of foreign branches inthecaseof banks havingsuch branches.
foreign
currency notes)
B alancew ith
R eserve B ank
of India
(/) inC urrent
A ccount
(/'/) inother
A ccounts
zzance with banks
i *<
dmoney at call and
srart notice
InIndia Includes all balances with banks in India (including co-operative
(/) Balances w ith banks). Balances in current accounts and deposits accounts
banks shouldbeshow nseparately.
(a) in current
accounts
(b ) in other
D eposit
accounts
(ii) Money at Call Includes deposits repayable w ithin 15days or less than 15day;
and Short noticelent inthe inter-bankcall m oneymarket.
N otice
(a) w ithbanks
(b ) w ithother
institutions
II. Outside India Includes balances held byforeign branches and balances heldb y
(i) Current Indian branches of the banks outside India. Balance’held w it-
accounts foreign branches by other branches of the bank should not b e
show n under this head but should be included in inter-branc-
(ii) Deposit
accounts. The am ounts held in ‘current accounts’ and ‘depost
accounts
accounts’ shouldbeshow nseparately.
(Hi) Money at Call Includes deposits usually classified inforeign countries as mone.i
andS hort at call andshort notice.
Notice
Investments
I. Investments in Includes Central and State Governm ent securities ar:
India G overnm ent treasury bills. These securities should be shown a:
the book value. H owever, the difference betw een the book value
(/) G overnm ent
and m arket value should be given in the notes to the balance
securities
sheet.
(ii) Other Securities other than G overnment securities, which according ::

approved the Banking R egulation Act, 1949 are treated as approve:
securities securities, should beincludedhere.
(/'/'/) Shares Investm ents in shares of com panies and corporations no:
included initems (ii) shouldbeincludedhere.
(/V) Debentures Investm ents in debentures and bonds of com panies ar:
andBonds corporations not included initem(ii) should beincludedhere.
(v) Investm ents in Investments insubsidiaries/joint ventures (including RRBs) shoud

subsidiaries/ beincludedhere.
joint ventures
(v i) Others Includes residual investments, if any, likegold, commercial pape-

andother instrum ents inthenatureof shares/debentures/bonds.
II. Investments
outside India
(i) Government A ll foreign G overnm ent securities including securities issued b

securities local authorities m aybeclassified under this head.
(including local
authorities)
(ii) Subsidiaries All investments made inthe share capital of subsidiaries float
and/or joint outside India and/or joint venture abroad should be classifi
ventures under this head.
abroad
(//'/) Others All other investments outside India may be shown under t
head.
-CCOUNTS OF BANKING COMPANIES 1V/1 29
Advances
A. (/) Bills purchased In classification under S ection ‘A’, all outstandings— in India as
anddiscounted w ell as outside— less provisions m ade, w ill be classified under
three heads as indicated and both secured and unsecured
(/'/) C ashcredits,
advancesw ill beincludedunder theseheads.
overdrafts and
loans repayable
ondem and
(Hi) Termloans Includingover dueinstalments.
B. (i ) S ecuredby A ll advances or part of advances w hich are secured by tangible

tangibleassets assets m ay be show n here. The itemwill include advances in
Indiaandoutside India.
(//) Covered by Advances in India and outside India to the extent they are
Bank/ covered by guarantees of Indian and foreign governments and
Governm ent Indianandforeign banks and D ICGC&E CG Caretobeincluded.
Guarantee
(///) Unsecured All advances not classified under (/) and (//) will beincluded here.
Total of ‘A’ shouldtallywithtotal of ‘B’.
C. I. Advances in Advances should be broadly classified into ‘Advances in India’

India and ‘Advances outside India’. Advances in India w ill be further
classified onthe sectoral basis as indicated. Advances tosectors
(/) Prioritysectors
w hich for the tim e being are classified as priority sectors
(//) Publicsector according to the instructions of the R eserve B ank are to be
classified under the head ‘Prioritysectors’. Suchadvances should
(iii) Banks
be excluded from item (//) i.e . advances to public sector.
(/V)Others Advances to Central and State G overnm ents and other
G overnm ent undertakings including G overnm ent com panies and
i. Advances outside corporations w hich are, according tothe statutes to betreated as
India publicsector com panies aretobeincludedinthecategory“P ublic
(/) Due from Sector”. All advances to the banking sector including co
banks operativebanksw ill comeunder thehead ‘Banks’.
(/'/) D uefrom All the remaining advances will be included under the head
others ‘Others’ and typically this category will include non-priority
(a) B ills advancestotheprivate, joint andco-operativesectors.
purchased
and
discounted
(b ) Syndicated •
loans
(c) Others
Notes—General
(/) The gross am ount of advances including refinance and
rediscounts but excluding provisions m ade to the
satisfactionof auditorsshouldbeshow nasadvances.
(ii) Termloansw ill beloans not repayableondem and,
(iii) C onsortium advances w ould be show n net of share from
other participating banks/institutions.
Fixed Assets
I. Premises P remises wholly or partly ow ned bythe banking com pany for the
(/) A t cost at on purpose of business including residential prem ises should be
31st M archof show nagainst ‘Prem ises’. Inthecaseof prem ises andother fixed
the preceding assets, the previous balance, additions there- to and deductions
year therefromduringtheyear as alsothetotal depreciation w ritten off
(/'/) Additions should beshow n. Wheresum s have beenw rittenoff on reduction
duringtheyear of capital or revaluation of assets, every balance sheet after the
(Hi) D eductions first balance sheet subsequent to the reduction or revaluation
duringtheyear should showthe revisedfigures for aperiod of five years w iththe
dateandam ount of revision m ade.
(/V )D epreciationto
date
II. O ther Fixed M otor vehicles and all other fixed assets other than prem ises but
Assets (including includingfurniture andfixtures should beshow n under this head.
furnitureand
fixtures)
(/) At cost on 31st
M arch of the
precedingyear
(/'/) Additions
duringtheyear
(/'/'/) Deductions
duringtheyear
(/V) Depreciation to
date.
Other Assets
I. Inter/office The inter-office adjustm ents balance, if indebit, should beshow n
adjustm ents (net) under this head. O nly net position of inter-office accounts, inland
asw ell as foreign, should beshow n here. For arriving at the
net balances of inter-office adjustm ent accounts, all connected
inter-office accounts should beaggregated andthe net balance, if
indebit, only should beshow n representing m ostly items intransit
andunadjusted item s.
II. Interest accrued Interest accrued but not due on Investm ents and advances and
interest due but not collected on investm ents w ill be the main
com ponents of this item .A s banks norm ally debit the borrowers’
accounts w ith interest due on the balance sheet date, usually
there m ay not be any am ount of interest due on advances. O nly
such interest as can be realised inthe ordinary course should be
show n under this head.
ill. Tax paid in The am ount of tax deducted at sourceon securities, advancetax
advance/tax paid etc. to the extent that these items are not set off against
deductedat relativetax provisions shouldbeshow nagainst this item.
source
IV. Stationeryand O nly exceptional item s of expenditure on stationery like bulk
stam ps purchaseof security paper, loose leaf or other ledgers, etc. which
are show n as quasi-assets to bew ritten off over aperiod of time
should be show n here. The value should be on a realistic basis
and cost escalation should betaken into account, asthese item s
arefor internal use.
- CCOUNTS OF BANKING COMPANIES IV /1-31
V. Non-banking Im movable properties/tangible assets acquired in satisfaction of

assets acquired in claims aretobeshow n under this head.
satisfactionof
claim s
VI. O thers. This w ill include items like claim sw hich have not been m et, for
instance, clearing item s, debit item s, representing addition to
assets or reduction in liabilities w hich have not been adjusted for
technical reasons, w ant of particulars, etc., advances given to
staff byabank asem ployer andnot asabanker, etc. Item sw hich
are in the nature of expenses w hich are pending adjustm ents
should be provided for and the provision netted against this item
so that only realisable value is show n under this head. Accrued
incom eother thaninterest m ayalsobeincluded here.
E IIs for Collection Bills and other item s inthe course of collection and not adjusted
w ill be show n against this iteminthe sum m ary version only. N o
separatescheduleisproposed.
0 Explanation o f Some Terms Relating to Balance Sheet

Money at Call and Short Notice. This item appears on the assets side of a Bank
E alance Sheet and represents tem porary loans to B ill Brokers, Stock Brokers and other
ranks. If the loan is given for one day, it is called ‘m oney at call’ and if the loan cannot be
i ed back on dem and and w ill require at least a notice of three days for calling back, it is
r ed ‘m oney at short notice’. It also includes deposits repayablew ithin 10days or lessthan
5days notice lent inthe inter bank call m oney m arket. The rate of interest onw hich money
ent fluctuates every day, som etimes very sharply (m ore than 30% ), depending on the
:-~iand andsupplyof m oney.
3 Advances
Advances appear ontheassets sideasfourth headand include loans, cashcredits, bank
®erdrafts and bills discounted and purchased. B anks generally advance m oney to their
e.r.omers in the formof loans, cash credits, overdrafts and purchasing and discounting of
: Provisions in respect of doubtful advances are deducted from advances to extent
:essary and the excess provisions for doubtful debts is included under “Other
_ abilities and Provisions”.
i) Cash Credit. It isanarrangement bywhichthecustomer isgrantedthe right toborrow
- 'ey fromtim etotim e uptoacertain lim it. Cash credit is usuallygiven on hypothecation or
~ : i e of stock. The bank usually charges a higher bank interest on the actual am ount
:raw n than that charged on loan becausethe bank has to keep the am ount allow ed as
' credit alw ays ready under the fear that m oney allow ed m ay bedem anded at any tim e.
~er, in case of cash credit arrangem ent, the custom er is required to pay a m inimum
•= st whether thecustom er draw s any am ount or not.
Acashcredit overdraft account istreated as N P Aif it rem ains out of order for aperiod of
rethan90days. A n account istreated as ‘out of order’ if anyof thefollow ingconditions is
n ed:
£ The outstanding balance rem ains continuously in excess of the sanctioned
limit/drawing power.
: Thoughtheoutstanding balanceislessthanthesanctioned limit/drawing power—
(i) there are no credits continuously for more than 90 days as on the date of
balancesheet; or
IV /1 -3 2 ACCOUNTS OF BANKING COMPANIES
(/'/) credits during the aforesaid period are not enough to cover the interest debite:
duringthesam eperiod.
(c) Further any amount due to the bank under any credit facility is ‘overdue’ if it is nc:
paidontheduedatefixed bythebank.
(if) Overdraft. Thisfacility isavailabletoacustomer whooperates acurrent account witr
the bank. This facility is granted to custom ers w ho have high goodw ill and nam e for hones:
dealings. Incaseof bank overdraft, custom er is perm itted to overdrawm oney upto acerta"
level. Thefacilityof overdraft isbeneficial tothecustom er as hehastopay interest only ifpcr
thesumoverdraw nbyhimandnot uponthe m axim umlim it of theoverdraft.
(H i) Loan. Loan isadvanceof afixed am ount to acustom er tobew ithdrawn inlum psu~
by him . Interest is charged on the total am ount of the loan agreed to be paid to acustom s-
w hether he uses thefull am ount of the loan or not. S o, custom ers prefer to take cash crec:
and pay interest at alittle higher rate as they find it inconvenient to usethew hole am ount of
theloan im m ediately.
(/V ) Discounting of Bills. D iscounting of a bill m eans m aking the paym ent of the b«S
before the m aturity date of the bill. W hile m aking paym ent of the bill, the bank deduct:
discount for the unexpired period for the am ount of the bill discounted. The bank keeps th e
bill w ith it till them aturitydateandgets its paym ent for thecustom er ontheduedate.
( v ) Purchasing and Discounting of Bills. T he bank m ay purchaseor discount cleancr
docum entary bills at thecurrent rateof interest.
Clean Bills. These arethe bills towhich nodocuments such as bill of lading, insurance
policyetc. areattached.
Documentary Bills. These bills are supported by documents such as bills of lading
insurance policy etc. These bills are secured as incase of non-paym ent of the bill, the bar*
canattachthegoods.
Bills for Collection. These are drafts and bills drawn by sellers of goods on the
purchasers of goods and sent to the bank for collection against delivery docum ents (i.e
railway receipts, truck receipts, bill of lading). The bank hands over the document
authorisingthe delivery of thegoodsto theborrow er only after thecollection of theam ount cf
the bill. If some bills are left uncollected at the end of the year, they are shown in the
summary version only. These are not shown in any schedule
Acceptances, Endorsements and other Obligations. A bank can accommodate is
custom ers byacceptingandendorsing billsontheir behalf. This isusuallydoneinthecase(J
foreignbillstofacilitate negotiations andforeign business dealings. Insuchcases, the bank s
liabletow ardsthird partiestow hombills aregivenor endorsedguaranteeof paym ent isgive*
incase of non-paym ent of the prom ised amount. Onthe other hand, custom ers are liablet:
the bank for such claim s. The bank enters such bills in the Bills Accepted R egiste-
Outstanding amount of acceptances, endorsements and other obligations at the end or
the year has to be shown as contingent liabilities in Schedule 12 on liabilities side cr
the Balance Sheet.
IL L U S T R A T IO N 3. From the following details prepare “Acceptances
Endorsements and Other Obligations A/c” as would appear in the general ledger.
On 1-4-2016 acceptances not yet satisfied stood at ? 22,30,000. Out of which * 25
lacs were subsequently paid off by clients and bank had to honour the rest. A scrut:-*i
of the Acceptance Register revealed the following :
C lie n t A c c e p ta n c e s /G u a ra n te e s R e m a rk s
\
A 10 ,00,000 Bank honoured on 10-6-2015
B 12 ,00,000 Party paid off on 30-9-2016
C 5,00,000 Party failed to pay and bank had to
honour on 30-11-2016
ACCOUNTS OF BANKING COMPANIES IV /1 -3 3
D 8 ,00,000 Not satisfied up to 31-3-2017

E 5,00,000 — do —
F 2,70,000 — do --
Total 42,70,000
S O L U T IO N
ACCEPTANCES, ENDORSEMENTS AND OTHER OBLIGATIONS ACCOUNT
r
2016-17 To Constituents’ Liabilities 1-4-2016 By Balance b/d 22,30,000
for Acceptances/ 2016-17 By Constitutents’ Liabilities
Guarantees etc. for Acceptances/
(Paid off by Clients) 20,00,000 Guarantees etc. ?
To Constituents’ Liabilities A 10,00,000
for Acceptances/ B 12,00,000
Guarantees etc. C 5,00,000
(Honoured by bank) 2,30,000 D 8,00,000
•0-6-2016 To Constituents’ Liabilities E 5,00,000
for Acceptances/ F 2,70,000
Guarantees etc. 42,70,000
(Honoured by bank) 10,00,000
30-9-2016 To Constituents’ Liabilities
for Acceptances/
Guarantees etc. 12,00,000
30-11-2016 To Constituents’ Liabilities
for Acceptances/
Guarantees etc.
(Honoured by bank on
party's failure to pay) 5,00,000
31-3-2017 To Balance c/d 15,70,000
(Acceptances not yet
satisfied)
65,00,000 65,00,000
1-4-2017 By Balance b/d 15,70,000
Bills Payable, Theserepresent bankdrafts, telegraphictransfers, traveller cheques, m ail
H isfer payable, pay slips, bankers cheques tothe m iscellaneous item sw hich are issued by
~ebankbut rem aineduncashed uptothedateof thepreparation of thefinal accounts.
Inter office Adjustments. A bank having several branches will receive periodical
ratem ents fromthemregardingthe inter branchtransactions, it is possiblethat som eentries
~ay rem ain unadjusted inthe head office of the bank at theclose of thefinancial year. S uch
r'tries are recorded inthe B alance S heet under the sub-heading ‘B ranch Adjustm ents’ and
-av appear ontheassets side under the heading ‘O ther Assets’ if it has adebit balanceand
a ntheliabilities sideunder the heading ‘O ther Liabilities’ if it hasacredit balance.
Non-banking Assets. Abanking company is not allowed to deal directly or indirectly in
tie purchase or sale or barter of goods except in connection w ith its legitimate banking
r-siness. B ut abankcan alw ays lend against the security of theassets. The bank m ay have
- 'ake possessionof the asset given as security if the loaneefails to repaythe loans. Inthat
:^;e, the asset acquired insatisfaction of the claimof the bank w ill beshow n as an asset in
B alance S heet under the heading ‘Other Fixed Assets’. S uch assets acquired should be
: :rosed of w ithin seven years as abanking com pany is not allow ed to hold such assets for
= "• periodexceeding seven years from the date of their acquisition. P rofit or loss onsale
a >jch assets isrequiredtobeshow nseparately inthe P rofit and LossAccount of the B ank.
O Interest on Doubtful Debts

W hileclosing its booksfor anaccountingyear, abanktakescredit for interest accruedc ~
termloan, cash credits, overdrafts, bills purchased and discounted etc. B ut it must not take
such a credit for interest accrued on N on-Perform ing Assets (N PAs)/D oubtful Asses. T h e
guiding principle in line with International Accounting Standards, is that the incom e on N P A
(doubtful debt) should not be recognized on accrual basis and should betreated as incom e
only w hen actually received. H ence, no entry need be passed and, therefore, no credit for
interest canbetaken.
W hile finalising accounts of a bank som e advances m ay be doubtful for collection
Interest on such advances cannot betreated as incom e. Interest ondoubtful debts isdebite:
to Loan Account and credited to Interest Suspense A ccount. The proportionate am ount :
interest received in cash is transferred to Interest Account and the balance to the Loa'
A ccount. The LoanAccount isclosedbytransferringthebalanceto B adD ebts A ccount.
E X A M P L E . On 31st March 2017 Loan Account in the books of a bank showed a
debit balance of ? 3,00,000 including ? 24,000 due from a merchant which is doubtfu
The interest accrued on this loan upto 31-3-2017 was ? 15,000 including t 3,000 c -
doubtful debts.
The merchant became insolvent and the official receiver paid a dividend of El
paise in the rupee on 30-4-2017.
Pass necessary journal entries relating to Merchant’s Loan Account which ;
doubtful in the books of the bank on 31-3-2017 and 30-4-2017 and prepare Merchant s
Loan Account.
SOLUTION
JOURNAL
2017
March 31 Merchant’s Loan Account Dr. 3,000
To Interest Suspense Account 3,000
(Interest on doubtful loan credited to Interest Suspense Account)
April 30 Cash Account Dr. 13,500
To Merchant’s Loan Account 13,500
(Receipt of 50% of the amount due from merchant on 30-4-2017)
Interest Suspense Account Dr. 3,000
To Merchant’s Loan Account 1.500
To Interest Account 1.500
(50% of Merchant’s Loan Account transferred to Interest Account,
the balance to Loan Account)
Bad Debts Account Dr. 12,000
To Merchant’s Loan Account 12,000
(Amount Irrecoverable)
LOAN LEDGER
MERCHANT’S LOAN ACCOUNT
2017 2017
March 31 To Balance b/d 24,000 March 31 By Balance c/d 27,000
To Interest Suspense A/c 3,000
27,000 27,000
2017 2017
April 1 To Balance b/d 27,000 April 30 By Cash A/c 13,500
By Interest Suspense A/c 1,500
By Bad Debts A/c 12,000
27,000 27,000
Rebate on Bills Discounted or Unexpired Discounts. This itemislikeinterest received

in advance and represents unearned discounts for those bills w hich w ill m ature after the
closingof thefinancial accounts.
W henabankdiscounts abill, thefollowingentry isrecorded :
B ills DiscountedA ccount D r. (withfull valueof thebill)
ToC ustom ers Account (withtheam ount of present cashvalue)
ToD iscount Account (Discount deducted bythe bank)
The bankw ill deduct discount for the periodfor w hich it hastow ait toget paym ent of the
bill on the m aturity date. At the close of the financial year, som e of the bills discounted m ay
not have m atured; consequently, thetotal discount credited in respect of such bills cannot be
treated as earnedduring the current year. S o, discount for the unexpired period isdebited to
D iscount Account to cancel the credit given previously and credited to R ebate on Bills
D iscounted Account or U nexpired D iscount Account or D iscount R eceived in Advance
A ccount. Inthe Profit and Loss A ccount, this itemis deducted fromInterest and discount to
get the net incom e of the year. Inthe B alance S heet, this itemappears under the heading
other liabilities’ asunexpireddiscounts. A t thecom mencem ent of thenext year, reverseentry
ispassedasfollow s:
Rebateon B ills DiscountedAccount D r.
ToD iscount A ccount
(Beingunexpireddiscount of theprevious year expiringthisyear andbecoming income)
IL L U S T R A T IO N 4. Following balances have been extracted from the books of a
banking company as on 31st March, 2017 :
Bad Debts ? 5,00,000 ; Advances ? 74,50,00,000 ; Profit before charging bad debts
f 21,50,000 ; Required Provision for Bad Debts ? 7,00,000 ; Provision for Taxation to be
made 40% of Net Profit.
Show how the above items will appear in the banking company’s Profit and Loss
Account and Balance Sheet.
S O L U T IO N
fo r the y e a r e n d ing 3 1 s t M arch, 2 0 1 7
Schedule No. T
I. Income 21,50,000
II. Expenditure— Provisions and Contingencies (1) 15,80,000
III. Profit/Loss— Net Profit for the year 5,70,000
BALANCE SHEET
as a t 3 1 -3 -2 0 1 7
C apital & Lia b ilitie s Schedule No. 7
Other Liabilities & Provisions
Provision for Taxation (2) 5 3,80,000
Assets
Advances (3) 9 67,50,000
iVorking Notes :
(1) P ro visio n s a n d C o n tin ge n cie s 7
Bad Debts 5,00,000
Provision for Bad Debts 7,00,000
Provision for Taxation (? 21,50,000 - T 5,00,000 - T 7,00,000) x 40% 3,80,000
15.80.000
IV/1-36 A C C O U N T S O F B A N K IN G C O M P A N IE S
(2) Provision for Taxation has been shown under the heading of “Other Liabilities and Provisions'
in tne Balance Sheet.
(3) The figure of Advances in the Balance Sneet is after deducting Provision for Bad Debts. Bad
debts must have already been deducted from advances.
IL L U S T R A T IO N 5. Following balances are extracted from the Trial Balance as at
31-3-2017; Interest/Discount on Advances/Bills(Cr.) f 98,00,000; Rebate for Bil
Discounted (Cr.) ? 20,000 and Bills Discounted and Purchased ? 4,00,000. It is
ascertained that the proportionate discounts not yet earned for bills to mature in 2016-
17 amounts to ? 14,000. Prepare Ledger Accounts.
S O L U T IO N
REBATE ON BILLS DISCOUNTED ACCOUNT
To Interest/Discount 1-4-16 By Balance b/d 20,000

on Advances/Bills A/c 20,000
To Balance c/d 14,000 31-3-17 By Interest/Discount
on Advances/Bills A/c 14,000
INTEREST/DISCOUNT ON ADVANCES/BILLS ACCOUNT

r
31-3-17 To Rebate on Bill 31-3-17 By Balance b/d 98,00,000
Discounted - amount 14,000 31-3-17 By Rebate on Bills
carried forward Discounted A/c -
31-3-17 To Profit & Loss A/c 98,06,000 Opening Balance 20,000
98,20,000 98,20,000
IL L U S T R A T IO N 6 . Following is an extract from the Trial Balance of a Bank as at

31st March, 2017 :
? ?
Bills discounted 51,50,000
Rebate on bills discounted not yet due,
April 1,2016 30,501
Discount received 1,45,500
An analysis of the bills discounted as shown above shows the following :
Date of Bills Amount f Term Months Discounted @ % p.a.
January 13 7,50,000 4 12
February 17 6,00,000 3 10
March 6 4,00,000 4 11
March 16 2,00,000 2 10
Find out the amount of discount received to be credited to Profit and Loss Account
and pass appropriate Journal Entries for the same. How the relevant items will appear
in the Bank’s Balance Sheet ?
S O L U T IO N
CALCULATION OF UNEXPIRED DISCOUNTS OR REBATE ON BILLS DISCOUNTED
D ate o f D ate o f M a tu rity No. o f A m ount R ate o f T otal P ro p o rtio n a te D isco u n t
B ill inclu d in g da ys a fte r f D isco u n t Annual fo r days a fte r 3 1 s t M arch
three days M a rch 31 % p.a. D isco u n t
o f g ra ce ? r
2017 2017
Jan. 13 May 16 46 7,50,000 12 90,000 11,342 190,000 x ~ |
I
-CCOUNTS OF BACKING COMPANIES IV /1 -3 7
Feb. 17 May 20 50 6,00,000 10 60,000 8,219 Jeaooox H )

__ 100 \
Mar. 6 July 9 100 4,00,000 11 44,000 12,055 44,00° x )
Mar. 16 May 19 49 2,00,000 10 20,000 2,685 20,00° x 365 )

34,301
So, unexpired discounts on 31st March, 2017, ? 34,301.
The amount to be credited to Profit and Loss Account is ascertained from the Discount Account as
totlows :
DISCOUNT ACCOUNT
2017 2017 ?
Mar. 31 To Profit and Loss A/c Mar. 31 By Sundries ,45,500
(Bal. fig.) (transferred) 1,41,700 ” 31 By Rebate on Bills
Mar. 31 To Rebate on Bills Discounted (on 1-4-2016) 30,501
Discounted
(on 31-3-2017) 34,301
1,76,001 1,76,001
JOURNAL ENTRIES
2017 ?
Mar. 31 Rebate on Bills Discounted Account Dr. 30,501
To Discount Account 30,501
(Being unexpired discount brought forward from the
previous year, credited to Discount Account)
' 31 Discount Account Dr. 34,301
To Rebate on Bills Discounted Account 34,301
(Being provision for unexpired discount required at the
end of the year)
U&- 31 Discount Account Dr. 1,41,700
To Profit and Loss Account 1,41,700
(Being discount earned for the year 2000-2017 transferred)
BALANCE SHEET
as a t 3 1 -3 -2 0 1 7
Lia b ilitie s ? A ss e ts
Other Liabilities A d va n ce s
Rebate on Bills Discounted 34,301 Bills Discounted 51,50,000
O ! ncome Recognition
Bank advances can also be classified as perform ing assets and non-perform ing assets
-- Interest incom efromN PAis considered as incom e as and when it is received rather
■ter onaccrual basis. This is as per international practices and Accounting Standard 9on
venueR ecognition.
'"he above general rule, how ever, does not apply in case of advances against term
cits, NSCs, IVP s, KVPsand Life Policies providedadequatem argin isavailable.
- case of banks, interest on non-perform ing assets is not recognised as incom e and
to the profit and loss account. An asset becom es non-perform ing when it ceases to
IV /1 -3 8 ACCOUNTS OF BANKING COMPAN £5
generate incom e for the bank. N on-perform ing asset m eans a credit facility in respect r
w hich interest and/or principal repaym ent instalment isinarrearsfor m orethan 90days. T~d
normof m orethan 90days has been adoptedfromtheyear ending M arch31,2008. F urth er,,
if one of the accounts of a borrow er com es under the category of non-perform ing asset, a
the accounts of that borrow er (other than loans w ith a liability of less than ?25,000) w ill a*
treated as non-perform ing assets. The identification of non-perform ing assets is done ont*e
basis of the position as on the balance sheet date. If an account is regularised beforetn e
balancesheet datebypaym ent of overdueam ount, theaccount m ay not betreatedasan or-
perform ing asset. Now -a-days banks areevaluated onthe basis of percentages of their nor-
perform ing assets. Therefore, banks m ake their best possible efforts to reduce the
percentages of their N P A s.
IL L U S T R A T IO N 7. On 31st March, 2017 Lakshmi Bank Ltd. finds th a t:
(1) On a term loan of ? 2 crores, interest for the last three quarters is in arrears
beyond the due date.
(2) The amount of ? 10 lakhs of a discounted bill was due on 1st January, 2017 bt.-
the same has not been received.
(3) On a term loan of ? 1 crore, interest for the last one quarter is past due.
Which of the above items will be treated as non-performing assets (NPA) on 315-
March, 2017.
S O L U T IO N
(1) A term loan is treated as NPA if interest on it remains past due for a period of exceeding 91
days, in the present case, interest is in arrears for the last 3 quarters beyond the due 90 days
Hence the term loan is NPA.
(2) To be treated as NPA the discounted bill must remain overdue for a period of more than 9:
days. But in the present case, bill has remained overdue for 88 days (i.e., Jan. 1, 2017 fc
March 31,2017). Hence the discounted bill is not to be treated as NPA.
(3) The term loan of ? 1 crore is not to be treated as NPA because interest is past due for no-
more than 90 days.
O Provision fo r Taxation
Provision for taxation is charged to the Profit and Loss Account under the headin;
“Provisions and C ontingencies” and in the B alance S heet, it is show n under the headir:
“O ther Liabilities and Provisions” onthe liabilities side. Provision for taxation is to be made
after making provision for doubtful debts. Section 36(1)(v/'/) of the Incom e Tax, 196"
perm its banking com panies to m akeadequate provisions fromtheir current profits to provice
for risk in relationto their rural advances. The am ount of deduction perm issible in respect r
badanddoubtful debtsfor theassessm ent year 1995-96andonw ards isasfollow s:
(/) 5%of thetotal incomeof thebankingcompany beforemakingsuchdeduction; or
(/'/) 4%of aggregateaveragerural advances madebythebankingcompany.
IL L U S T R A T IO N 8 . Given below is interest on advances of a commercial bank

( f in lakhs
Performing Assets NPA
Interest Interest Interest Interest
earned received earned received
Term Loans 200 150 140 10
Cash Credits & Overdrafts 1,400 1,200 300 25
Bills purchased and discounted 300 300 150 40
Calculate the amount of interest to be recognised as income.

S O L U T IO N
Interest on performing assets should be recognised on accrual basis but interest on NPA should be
recognised on receipt basis.
T in Lakhs
Interest on Term Loans (200 + 10) 210
Interest on Cash Credit & Overdrafts (1,400 + 25) 1,425
Income from bills purchased & discounted (300 + 40) 340
1,975
O Classification o f Bank Advances

The banks are required to classify their advances into following four broad
groups :
(I) Standardassets ; (/'/) Sub-standard assets ; (HI) Doubtful assetsand ; (/V) Lossassets.
Theaboveclassification isdoneafter taking intoconsideration thedegreeof w ell defined
:redit worthiness and the extent of dependance on the collateral security for realisation of
: jes. Eachbroadcategory isdiscussedas under:
(/) S t a n d a r d A s s e t s . These assets do not disclose any problemand also do not carry
~>orethan norm al risk attachedtothebusiness. Theseare not non-perform ing assets (NPA ).
Thebanks haveto m akeageneral provision of 0.40%onstandard assets. A s per prudential
■crm s of R B I, provisions tow ards standard assets need not be netted fromgross advances
:ut show n separately as Contingent Provisions against Standard Assets under ‘O ther
.abilities and Provisions— O thers’ inSchedule5of B alanceS heet.
( ii) S u b - s t a n d a r d A s s e t s . Such assets have been classified as N P Afor a period not
exceeding one year. The current net w orth of the borrow er/guarantor or the current m arket
■aueof the securitycharged under suchcases isnot enoughto ensure recovery of thedues
athe bank in full. S uch an asset w ill have w ell defined w eaknesses that jeopardise the
; Jdation of the debt and perhaps the bankw ill havetosustain som e loss if deficiencies are
■ corrected. W here instalm ents of termloans areoverduefor aperiod exceedingoneyear
:*ould betreated assub-standard asset.
(//7) D o u b tfu l A s s e ts . A n asset w hich has remained NP Afor a period of one year. In
e
rnnloans if the instalm ents of the principal have rem ainedoverduefor aperiodof oneyear
snouldbetreated asdoubtful. Aloanisclassified asdoubtful if all thew eaknesses inherent in
m at classified as sub-standard w ith the added characteristics that weaknesses m ake
:: ection or liquidation in full on the basis of currently know n facts, conditions and values
•ghlyquestionableandim probable.
'3 Provision Norm s fo r Doubtful A ssets According to RBI

(/) 100per cent of theextent tow hichtheadvanceisnot covered bytherealisablevalue
of the security to which the bank has a valid recourse and the realisable value is
estimatedonarealistic basis.
(ii) Inregardtothesecuredportion, provision maybem adeonthefollowing basis, at the
rates rangingfrom25per cent to 100per cent of thesecuredportiondepending upon
theperiodfor w hichtheasset hasrem aineddoubtful.
3 Treatment o f Interest Suspense Account

Am ounts held in Interest Suspense Account is not to be reckoned as part of provisions.
-_ounts lying inthe Interest S uspenseA ccount isto bedeductedfromthe relative advances
thereafter, provisioning as per the norms, should be m ade on the balances after such
:+:uction.
Q Advances Covered by ECGC/D ICGC Guarantee

Inthecaseof advances guaranteedby D ICG C/EC GCprovisioncan bem adeonlyfor the
balanceinexcess of the am ount guaranteed bythese C orporations. Further, while arrivinga:
theprovision requiredto bem adefor doubtful assets, realisablevalueof thesecurities shou';
first bedeductedfromthe outstanding balance inrespect of the am ount guaranteed bythese
C orporationsandthen provision made.
«
Q Advance Covered by CGTSi Guarantee
IncasetheadvancecoveredbyC GTS I guaranteebecom es non-perform ing, noprovision
need be m ade tow ards the guaranteed portion. The am ount outstanding in excess of the
guaranteed portion should be provided for as per the guidelines on provisioning for non
performingadvances.
O Agricultural Advance
(a) Aloan granted for short duration crops w ill be treated as N P A, if the instalm ent o'
principal or interest thereon rem ainsoverduefor tw ocropseasons. Aloangrantedfor
long duration crops w ill be treated as NPA , if the instalment of principal or interest
thereon rem ainsoverduefor onecropseason.
(b ) Aloan granted for short duration crops will be treated as NPA, if the instalment o
?
principal or interest thereon rem ains overduefor tw ocropseasons. Aloangrantedfor
long duration crops w ill be treated as N P A, if the instalment of principal or interest
thereon rem ains overdue for one crop season. For the purpose of these guidelines,
“long duration” crops w ould be crops w ith crop season longer than one year anc
crops, w hicharenot “longduration” crops, w ouldbetreated as“short duration” crops.
The cropseason for each crop, w hich m eansthe period upto harvesting of thecrops
raised, w ouldbeasdeterm ined bytheS tate Level Bankers’ C om m itteeineach S tate.
D epending upon the duration of crops raised by an agriculturist, the above N PA
norm sw ouldalsobem adeapplicabletoagricultural termloans availedof byhim .
( iv ) L o s s A s s e ts . W here the loss on an asset has been identified by bank or interna
auditor or the R B I inspector but theam ount has not beenw ritten off wholly or partly isknov.'
as loss asset. S uchanasset isuncollectable and isof such littlevaluethat it isnot desirabe
toshowit as bank’sasset though it m ay havesom esalvage or recovery value. A ccordingtc
the P rudential N orm s of the R eserve B ank of India, theentire loss asset hasto bew rittenoff.
If such assets are perm itted to remain inthe books for any reason, 100%of the outstanding
needbeprovidedfor.
The above classification is done to provide a basis for determining provisions on loa'
lossestoarriveat correct profitabilityof banks.
O Provisions
The banks should m akeprovisions against sub-standard assets, doubtful assets andlo ss
assets on the following bases but after taking into account the time lag between an account
becom ing doubtful of recovery, its recognition as such, realisation of the security and the
erosionover tim einvalueof securitychargedtothebanks.
(/) L o s s A s s e t s . The entire assets should bewritten off. If the assets are to rem ain in
thebooksfor any reason, then 100%of theoutstanding should beprovided.
(//) D o u b t f u l A s s e t s .
(a ) 100%of theextent tow hichthe advance is not covered bythe realisablevalueof th e
security inthepossessionof the bank. Therealisablevalueisestim atedon realistic basis.
ACCOUNTS OF BANKING COMPANIES IV /1-41
(£
>)O ver and above item (a) above, depending on the period for w hich the assets
'emained doubtful 25%to 100%of the secured portion (i.e . estimated realisablevalue of the
outstandings) onthefollowing basis :
P e r io d fo r w h ic h th e a d v a n c e h a s b e e n
c o n s id e r e d a s d o u b tf u l % o f p r o v is io n
Uptooneyear 25
Onetothreeyears 40
Morethanthree years : 100
(///) S u b - s t a n d a r d A s s e t s . A general provision of 15 per cent on total outstanding is
•squired to be m ade w ithout m aking any allowance for DIC G C/E CGCguarantee cover and
securities available. The ‘unsecured exposures’ w hich are identified as ‘substandard’ would
attract additional provision of 10 per cent, i.e ., a total of 25 per cent on the outstanding
calance. U nsecured exposure is defined as an exposure w here the realisable value of the
security, asassessed bythe bank approvedvaluers R eserve Bank’sinspecting officers isnot
~orethan 10per cent, a b in itio of theoutstandingexposure.
RBI vide its notification No. DBOD No. B.P.B.C. 94/21.4.048/2011-12 dated 18th May
2011 has increased the provisioning rates for secured sub-standard assets from 10 %
:o 15% for secured doubtful assets upto 1 year from 20% to 25% and for secured
doubtful assets of 1 year to 3 years the provisioning rate has been increased from 30%
to 40%.
(/v) S t a n d a r d A s s e t s . A genera! provision of a m inim um of 0.40%of total standard
assets should be m ade. It has been clarified by R B I that the provision should be m ade on
sobal loan basis and not ondom estic advancesalone.
P r o v is io n s fo r O th e r P u rp o s e s . N ormally banks have tw o retirement benefits i.e .
P rovident Fund and G ratuity. S om e banks have pension schem es also. Most of the banks
*ave set up recognised gratuity or pension funds in order to cover up related liability. It is
'eoessary that such liabilities are estim ated on accrual basis and full provision is m ade for
~epurposeforthw ith.
IL L U S T R A T IO N 9. From the following information, find out the amount of
irovision to the shown in the Profit and Loss Account of a commercial bank :
? in lakhs t in lakhs
Assets Doubtful (fully secured) :
Siandard 8.000 for one year 1,000
T.b-standard for three years 1,600
iValue of Security ? 5,000 lakhs) 6.000 for more than three years 400
_oss Assets 1,200
SO LU TIO N CALCULATION OF PROVISION
A sse ts Am ount % o f P rovision P rovision
? in lakhs ? in lakhs
Standard 8,000 0.40 32
Sub-standard 6,000 15% of ? 6,000 lakhs
+ 10% of T 1,000 lakhs 1,000
Doubtful : for one year 1,000 25 250
for 3 years 1,600 40 640
for more than 3 years 400 100 400
Loss Assets 1,200 100 1,200
3,522
iL L U S T R A T IO N 10. Rajatapeeta Bank Ltd. had extended the following credit
tores to a Small Scale Industry, which had not paid any interest since March, 2010 :
Term Loan Export Loan

Balance outstanding on 31-3-2016 ? 35 lakhs f 30 lakhs
DICGC/ECGC Cover 40% 50%
Securities held ? 15 lakhs ? 10 lakhs
Realisable Value of Securities f 10 lakhs ? 08 lakhs
Compute necessary provisions to be made for the year ended 31st March, 2016.
S O L U T IO N T erm Loan E x p o rt C redit
f in lakhs ? in lakhs
Balance Outstanding on 31-3-2016 35 30
L e ss : Realisable Value of Securities 10 8
Unsecured Amount 25 22
Provision for Unsecured Portion @ 100% 25 22
A d d : Provision for Secured Portion @ 100% (1) 10 8
35 30
DICGC Cover @ 40% of ? 35 lakhs
Le ss : 14
ECGC Cover @ 50% of ? 30 lakhs 15
Total Provision Required 21 15
Note. Before 31st March 2017, Provision was @ 50%
A lte rn a te S olution Term Loan E x p o rt C redit
? in lakhs f in lakhs
Balance Outstanding on 31-3-2016 35.0 30.0
Le ss : Realisable Value of Securities 10.0 8.0
25.0 22.0
Less : DICGC Cover @ 40% of ? 25 lakhs 10.0
ECGC Cover @ 50% of ? 22 lakhs 11.0
Unsecured Balance 15.0 11.0
Required :
100% for Unsecured Balance 15.0 11.0
A d d : 100% for Secured Portion 10.0 8.0
Le ss : Covered under DICGC @ 40% 4.0
6.0
Covered under ECGC @ 50% 4.0
4.0
Total Provision Required 21.0 15.0
IL L U S T R A T IO N 11. From the following information find out the amount of
provisions required to be made in the Profit & Loss Account of a commercial bank for
the year ended 31st March, 2017.
(/) Packing credit outstanding from Food Processors ? 60 lakhs against which the
bank holds securities worth ? 15 lakhs. The above advance has remained
doubtful for more than 3 years.
(//) Other advances :
Assets classification ? in lakhs
Standard 3,000
Sub-standard 2,200
Doubtful (fully secured) :
For one year 900
For two years 600
For three years 400
For more than 3 years 300
Loss assets 600
-CCOUNTS OF BANKING COMPANIES IV /1 -4 3
S O L U T IO N
(/) Provision Required Against Packing Credit ? in lakhs
Amount outstanding (Packing Credit) 60
/.ess : Realisable value of securities 15
Advance doubtful for more than 3 years 45
Required Provision (100% to the extent not secured) 45
Add: Provision for secured portion (100% of ? 15 lakhs outstanding for more
than 3 years) 15
60
(//) Provision Required Against Other Advances
Am ount % o f P rovision P rovision
A sse ts 7 in lakhs ? in lakhs
Standard 3,000 0.40 12
Sub-standard 2,200 15% 330
Doubtful :
For one year 900 25% 225
For two years 600 40% 240
For three years 400 40% 160
For more than 3 years 300 100% 300
Loss assets 600 100% 600
1,867
Total Provision Required (60 + 1,867) = f 1,927 lakhs
Z Export Project Finance

In respect of export project finance, there coulo be instances where the actual importer
*as paid the dues to the bank abroad but the bank in turn is unable to remit the amount due
: oolitical developments such as war, strife, UN embargo, etc.
In such cases as per RBI norms, where the lending bank is able to establish through
: : : umentary evidence that the importer has cleared the dues in full by depositing the amount
" 'he bank abroad before it turned into NPA in the books of the bank, but the importer’s
: -•'try is not allowing the funds to be remitted due to political or other reasons, the asset
issification may be made after a period of one year from the date the amount was
Uroosited by the importer in the bank abroad.
Z Advances Under Rehabilitation Approved by BIFR/TLI

As per prudential norms of RBI, banks are not permitted to upgrade the classification of
advance in respect of which the terms have been re-negotiated unless the package of re-
- reflated terms has worked satisfactorily for a period of one year. While the existing credit
. : ties sanctioned to a unit under rehabilitation packages approved by BIFR/term lending
-re jtio n s will continue to be classified as substandard or doubtful as the case may be, in
fleet of additional facilities sanctioned under the rehabilitation packages, the Income
fecognition, Asset Classification norms will become applicable after a period of one year
. m ine date of disbursement.
z Government Guaranteed Advances

Government guaranteed advances : With effect from 31st March, 2001, in respect of
■m inces sanctioned against State Government guarantee, if the guarantee is invoked and
■wa ns in default for more than 90 days the banks are required to make normal provisions
“ : scussed above.
IV /1 -4 4 ACCOUNTS OF BANKING COMPAN
Advances granted under rehabilitation packages approved by BIFR/term lend

institutions.
(/) In respect of advances under rehabilitation package approved by BIFR/term lending
institutions, the provision should continue to be made in respect of dues to the ba
on the existing credit facilities as per their classification as sub-standard or doubtf j
asset.
(/'/) As regards the additional facilities sanctioned as per package finalized by BIFR
and/or term lending institutions, provision on additional facilities sanctioned need n:'r
be made for a period of one year from the date of disbursement.
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and ' tel
policies would attract provisioning requirements as applicable to their asset classification
status.
Advances against gold ornaments, government securities and all other kinds of securities
are not exempted from provisioning requirements.
o Classification o f Investments
The investment portfolio of a bank can broadly be divided into categories i.e.
(/) Approved Securities. These are predominantly government securities. These se-
curities are further bifurcated into permanent and current investments. P e r m a n e n t i n v e s -
m e n t s are those where the bank’s intention is to hold till maturity. Current investments a-®
those where the bank’s intention is to deal in i.e . buy and sell on day to day basis. To b
with the bank should keep not more than 70% of its investments in the permanent categ
from the accounting year 1992-93. This ratio has to be brought down to 50% in due course.
(/'/) Others i.e., Shares, Debentures and Bonds. There is no objection to bar
interchanging the investments from one category to another with prior authorisation of
Board of Directors in which case depreciation, if any, will have to be fully provided for}
Depreciation on permanent investments need not be provided as it is not likely to affect tt
realisable value but depreciation on current investments should be fully provided for
Permanent could be valued at cost unless it is more than the face value, in which case
premium has to be amortised over the period remaining for maturity of the security. Bar
generally are not expected to sell securities in permanent category but if they do so then
loss on such transaction in securities has to the written off but if there is only gain that sho
be transferred to Capital Reserve Account.
IL L U S T R A T IO N 12. From the following information prepare a Balance Sheet
International Bank Ltd. as on 31st March, 2017 giving the relevant schedules.
Debit Balances X in Credit Balances X in
iakhs lakhs
Current Accounts (Overdraft) 28.00 Share Capital
Cash Credits 812.10 19,80,000 shares of ? 10 each 198.
Cash in Hand 160.15 Statutory Reserve 231.
Cash v/ith RBI 37.88 Net Profit before
Cash with Other Banks 155.87 Appropriations 150.'
Money at Call 210.12 Profit & Loss A/c 412.
Gold 55.23 Fixed Deposit A/cs 517.
Govt. Securities 110.17 Saving Deposit A/cs 450.
Premises 155.70 Current A/cs 520.1.
Furniture 70.12 Bills Payable 0.
Term Loans 792.88 Borrowings from other Banks 110.
2588.22 2588.
-CCOUNTS OF BANKING COMPANIES IV / 1 - 4 5
Additional Information :
V, r
Bills for Collection V' 18,10,000
Acceptances and Endorsements 14,12,000
Claims against the Bank not acknowledged as debt 55.000
Depreciation charges— Premises 1, 10,000
Furniture 78.000
50% of the Term Loans are secured by Government guarantees. 10% of Cash
>edits is unsecured. Also calculate cash reserves required and statutory liquid
-eserve required.
Note. Cash reserve required 3% of demand and time liabilities, liquid reserves
squired 30% of demand and time liabilities.
S O LU TIO N
International Bank Ltd.
BALANCE SHEET
as on 3 1 s t M arch, 2 0 1 7
(? in lakhs)
S ch e d u le No. as on 3 1 -3 -2 0 1 7
la n ita l a n d Lia b ilitie s

Share Capital 1 198.00
Reserves and Surplus 2 793.00
Deposits 3 1,487.12
Borrowings 4 110.00
Other Liabilities and Provisions 5 0.10
Total 2,588.22
Assets
Cash and Balance with RBI 6 204.76
Balances with Banks and Money at Call and Short Notice 7 359.26
Investments 8 165.40
Advances 9 1,632.98
Fixed Assets 10 225.82
Other Assets 11 —
Total 2,588.22
Contingent Liabilities 12 14.67
Bills for Collection 18 10
SCHEDULE 1-C A P ITA L (T in lakhs)
orised Capital
teêd, Subscribed and Paid up Capital 19,80,000 shares of ?-10 each. 198.00
Total 198.00
SCHEDULE 2 - RESERVES & SURPLUS (f in lakhs)
. Statutory Reserve 231.00

Additions during the year 37.50
268.50
1 Balance in Profit & Loss A/c (1) [412 + 112.50] 524.50
Total 793.00
6
I V / 1 -46 ACCOUNTS OF BANKING COMPANIEl
SCHEDULE 3 - DEPOSITS (f in lakhs
I. Demand Deposits fiom Others 52072

II. Saving Bank Deposits 450.X
III. Fixed Deposits 517.00
Total 1,487.12
SCHEDULE 4 - BORROWINGS ( f in lakhs |

Borrowings in hdia from Other Banks 110.00
Total 110.00
SCHEDULE 5-O THER LIABILITIES & PROVISIONS (? in la k h s

Other Liabilities and Provisions 0.10
Total 0.10
SCHEDULE 6 - CASH AND BALANCE WITH RBI (f in la k h s
I. Cash in hand 160.15

II. Balance with RBI (in Current A/c) (2) 44.6"
Total 204.76
SCHEDULE 7 - BALANCES WITH BANKS & MONEY AT CALL AND SHORT NOTICE
(? in lakhs |
In India
(1) Balances with Banks
(/) in Current A/c (3) 149.14
(ii) Money at Call and Short Notice 210.12
Total 359.26
SCHEDULE 8 - INVESTMENTS (? in la kh s■
Investments in India in
(/) Govt. Securities 110.17
(ii) Others— Gold 55.23
165.40
SCHEDULE 9 - ADVANCES (? in lakhs)
(A) (') Cash credits, overdrafts 840.1:

(ii)Term Loans 792.8S
1,632.98
(B) (') Secured by tangible assets (Balancing Figure) 1,152.53
(H) Secured by bank/govt. guarantees 396.4-i
(Hi) Unsecured 84.01
1,632.98
-CCOUNTS OF BANKING COMPANIES
IV/1-47
SCHEDULE 10 — FIXED ASSETS (? in lakhs)

P re m ise s
At cost
L e ss : Depreciation to date 156.80
1.10
155.70
2. O th e r F ixe d A sse ts
Furniture at cost
L e ss: Depreciation to date 70.90
0.78
70.12
Total (1+2)
225.82
SCHEDULE 11 — OTHER ASSETS
Nil
SCHEDULE 1 2 - CONTINGENT LIABILITIES ? in lakhs)
(/) Claims against bank not acknowledged as debts 0.55
(//) Acceptances, Endorsements
14.12
14.67
C a ic u ia tio n o f C a s h R e s e r v e s a n d S ta tu to r y L iq u id R e s e r v e s
Totai of Demand and Time Liabilities
(T 517.00 + ? 450.00 + ? 520.12)
1,487.12
Cash reserve (3% of ? 1,487.12)
44.61
Statutory Liquid Reserve (30% of demand and time liabilities) 446.14
Working Notes :
(1) B a la n c e in P /L A /c :
Net Profit before Appropriations ? in lakhs)
A d d : Balance of Profit & Loss A/c
150.00
412.00
: Transfer to Statutory Reserve
Le ss
562.00
(25% of ? 150.00)
37.50
524.50
(2) T r a n s fe r fro m C a s h w ith O t h e r B a n k s to C a s h w ith R B I
Cash reserve required (@ 3% on ? 1,487.12 lakhs)
Cash with RBI 44.61
37.88
Transfer needed to maintain Cash Reserve
6.73
(3) L iq u id A s s e ts
Cash in hand (? in lakhs)
Cash with Other Banks 160.15
Money at Call and Short Notice 155.87
Gold 210.12
Government Securities 55.23
110.17
I .DH
Excess Liquid Reserves (691.54 - 446.14 i.e 30% of ? 1,487.12) = ? 245.40 lakhs.
The excess liquid reserve enables the transfer as per (2) above after transfer cash with other banks
in lakhs) (155.87 - 6.73) = ? (in lakhs) 149.14.
ACCOUNTS OF BANKING COMPANIES
IV/1-48
IL L U S T R A T IO N 13. From the following Trial Balance of Excellent Bank Ltd.

prepare the P & L A/c and B/S making ail the necessary provisions. You are required to
provide the following :
10,00,000
1. Provision for Taxation 3,00,000
2. Transfer to Dividend Equalisation Fund
3. Provision for dividend @ 10%
TRIAL BALANCE
(? ’000) (? ’000
Investment in Govt. Securities 45,200
Current Deposits 45,200
Investment in Shares 4,700
Saving Bank Deposits 14,520
Interest accrued on investments 875
Term Deposits 37,180
Loans 43,800
Sundry Creditors A/c 1,455
Bills purchased and discounted 33,100
Debts due to banks secured by
investments 12,200 Furniture, Fixtures and
15 Equipment—Depreciation 500
Rebate on bills discounted 1,200
Branch adjustment (Cr.) 4,555 Interest paid
Exchange and commission paid 100
Statutory Fund 10,000
2,500 Payment to Employees 2,400
Dividend Equalisation Fund 100
Capital 2,00,000 shares of Directors’ Fees
Printing and Stationery 400
? 100 each, ? 50 per 300
10,000 Miscellaneous Expenses
share paid-up 1,000
Interest and discount received 5,800 Furniture & Fixture
Premises 3,000
Exchange and Commission (Cr.) 1,700
55 Money at call and short notice 1,500
General Charges Recovered
852 Property acquired in satisfaction
P & L A/c Balance as on 1-4-201 ( 50
Cash in hand 438 of claims
Cash with banks 6,869 _________________ ______________
Current accounts included r 8b,uu,uuu (aeuu ucuanoc, uu...y __________ __________
accounts ? 95,000 including ? 7,000 as interest for 2016-17 is doubtful. During the year
property acquired in 2014 in satisfaction of defaulted debt of ? 25,000 was sold fo-
? 18,000. The amount of ? 18,000 was credited to the account no further adjustments
having been made. Bills for collection with the bank are of ? 22,10,000. Acceptances
endorsements and guarantees of the bank are ? 11,68,000.
S O L U T IO N
Excellent Bank Ltd.
fo r the y e a r e n d e d 3 1 s t M arch, 2 0 1 7
? ’0 0 0 om itted
S ch e d u le Y ear ende:
No. 31-3-2C -1
I. Incom e 5,80:
Interest earned 13
14 1,755
Other Income
Total 7,555
E xpen d itu re
15 1,303;
Interest expended
Operating Expenses 16 3,707

Provisions & Contingencies (1,000 + 95) 1,095
Total 6.102
III. Profit/Loss
Net profit for the year (7,555 - 6,102) 1,453
Profit brought forward 852
Total 2,305
IV. Appropriations
Transfers to statutory reserve (25% of 1,453) 363
Transfers to dividend equalisation reserve 300
Proposed Dividend @ 10% on 1 crore 1,000
Balance carried to B/S 642
Total 2,305
SCHEDULE 13 - INTEREST EARNED (T in 0 0 0 )
Year ended
31-3-2017
I. Interest/Discounton Advances/Bills 5,800
Total 5,800
SCHEDULE 14 - OTHER INCOME ( t in 0 0 0 )
I. Commission, Exchange and Brokerage 1,700
II. Miscellaneous Income
General Charges Recovered 55
Total 1,755
SCHEDULE 15 - INTEREST EXPENDED (? in 0 0 0 )
Interest on Deposits 1,200

Others : Exchange and Commission paid 100
Total 1,300
SCHEDULE 16 - OPERATING EXPENSES (f in 0 0 0 )
Payment to and provision for employees 2,400

Depreciation on Bank’s Property 500
Directors’ fees, allowances and expenses 100
Other Expenditure
Loss on sale on non-banking assets (? 25,000 - ? 18,000) 7
Miscellaneous expenditure 300
Total 3,707
PROVISIONS AND CONTINGENCIES (? in OOO)
t Provision for Income Tax 1,000

2 Provision for Doubtful Debts : on Account of Advances 88
on Account of Interest (interest suspense) 7
asp*
* I-S*»P",« SS
SW vvx'
as on 31st March, 2017
C a p it a l & L ia b ilit ie s
Capital
Reserve & Surplus
Deposits
Borrow ings
Other Liabilities and Provisions
A s s e ts
C ash a n d B a n k B alance with R BI
B a la n ce with B a n k s a n d M o n e y a t C a ll a n d S h o rt N o tice
Investments
A d v a n ce s
Fixed Assets
Other Assets
Contingent Liabilities 1,168

Bills fo r C ollection 2,210
Working Notes :
SCHEDULE 1-SHARE CAPITAL (? in ’000!
as on
31.3.2017
I. Capital (Fully owned by central govt.) 10,000
Total 10,000
SCHEDULE 2-RESERVES & SURPLUS (? in ’000)
I Statutory Reserve
(i) Opening Balance 10,000
(/'/) Additions during the year 363
10,363
IV. Revenue and other reserves
(/) Dividend Equalisation Reserve
Opening Balance 2,500
Additions during the year 300
2,800
V. Balance in P & L A/c 642
Total (I + IV + V ) 13,805
SCHEDULE 3-DEPOSITS (? in 000)

!. Current Account Deposits (45,200 + 8,800 Overdrafts) 54,000
II. Saving Bank Accounts 14,520
III. Term Deposits 37,180
Total 1,05,700
6
BALANCE SHEET OF EXCELLENT BANK LTD.

as on 3 1 s t M arch, 2 0 1 7
(? ’000 omitted
SCHEDULE as on
Capital & Liabilities 31-3-2017
Capital 1 10,000
Reserve & Surplus 2 13,805
Deposits 3 1,05,700
Borrowings 4 12,200
Other Liabilities and Provisions 5 . 7,120
Total 1,48,825
Assets
Cash and Bank Balance with RBI 6 438
Balance with Banks and Money at Call and Short Notice 7 8,369
Investments 8 49,900
Advances 9 85,700
Fixed Assets 10 3,500
Other Assets 11 918
Total 1,48,825
Contingent Liabilities 12 1,168
Bills for Collection 2,210
Working Notes :
SCHEDULE 1-SHARE CAPITAL ( f in ’000)
as on
31.3.2017
!. Capital (Fully owned by central govt.) 10,000
Total 10,000
SCHEDULE 2-RESERVES & SURPLUS _________ (? in ’000
I Statutory Reserve
(;) Opening Balance 10,000
(/'/) Additions during the year 363
10,363
IV. Revenue and other reserves
(/) Dividend Equalisation Reserve
Opening Balance 2,500
Additions during the year 300
2.800
V. Balance in P & L A/c 642
Total (I + IV + V ) 13,805
___________________________ SCHEDULE 3-DEPOSITS (T in ’000)

I. Current Account Deposits (45,200 + 8,300 Overdrafts) 54,000
II. Saving Bank Accounts 14,520
III. Term Deposits 37,180
Total 1,05,700
-CCOUNTS OF BANKING COMPANIES IV/1-51
SCHEDULE 4-BORROWINGS (e in ’0 00)

I. Borrowings in India
Debts due to Banks Secured against investments 12,200
Total 12,200
SCHEDULE 5-O THER LIABILITIES AND PROVISIONS in 0 0 0 )

II. Inter Office Adjustments (Net) 4,555
II. Other Liabilities including Provisions
Interest Suspense A/c
Sundry Creditors
Rebate on Bills Discounted
Other Liabilities & Provisions
Total 7,120
SCHEDULE 6-C A S H & BALANCES WITH RBI (f in 0 0 0 )

Cash in hand (including foreign currency notes) 438
Total 438
SCHEDULE 7-BALANCE WITH BANKS AND MONEY AT CALL AND SHORT NOTICE
_____________________________________________(T in 000)
India
Cash with other banks 6,869
Money at call and short notice 1,500
Total 8,369
SCHEDULE 8-INVESTMENTS (? in 000)

Investments in India in
(/) Govt, securities 45,200
(//) Shares 4,700
49,900
SCHEDULE 9-ADVANCES ( f in 0 0 0 )
Bills purchased & discounted 33,100
(/) Cash credits, overdrafts & loans repayable on demand
(43,800 + 8,800 Overdrafts included in Current Accounts) 52,600
Total 85,700
(/) Secured by tangible assets
(//) Covered by Bank or Govt. Securities
(/';'/) Unsecured
Total 85,700
Advances in India
(/) Priority sectors
(/'/) Public sector
(Hi) Banks
(;V) Others
Total 85,700
C. II. Advances outside India

(/) Due from banks
(//) Due from others
(a) Bills purchased and discounted
(£>) Syndicated loans
(c) Others
Total
SCHEDULE 10 —FIXED ASSETS f? in '000:

I. Premises
(i) At cost on 31st March, 2017 3,000
(//) Depreciation to date —
3.00C
II. Other Fixed assets (including Furniture & Fixture)
(/) at cost as on 31 March, 2017 1,000
(//) Depreciation to Date 500
500
Total (I + II) 3,500
SCHEDULE 11-O THER ASSETS (? in ’0 00)
Interest Accrued 875

Non-Banking Assets (50 - 7) 43
Total 916
SCHEDULE 12-CONTINGENT LIABILITIES in 000)
Acceptance, Endorsements & Other Obligations 1,168

1,168
OBJECTIVE TYPE
1. State whethe.' the following statements are true or false :
(a) A banking company cannot grant loan to any of its directors.
(,b) Provision for bad and doubtful debts is shown as deduction from interest earned in th^
Profit and Loss Account of a banking company.
(c) Paid up capital of a banking company must be at least one-half of the subscribed capital r
a banking company.
(d) Rebate on bills discounted for a banking company is an income.
(e) The accounting year of a banking company ends on 31st December.
Ans. [True : (a), (c); False : ( b ), (d ) & (e)].
SHORT ANSWER TYPE
1. What are non-banking assets ?
2. Distinguish money at call from money at short notice.
3. What is slip system of posting ?
4. State the special features of a bank’s final accounts.
ACCOUNTS OF BANKING COMPANIES IV/1-53
5. What do you mean by Statutory Reserve ?

6. What is rebate on bills discounted or unexpired discount ?
7. Give four examples of Schedule 16 of Bank’s Final Accounts.
8. How do you show bills for collection in bank accounts ?
9. Give four examples of Schedule 14 of Bank’s Final Accounts.
10. What is Section 17 as per B.R. Act 1949 ?
11. What are standard assets ?
12. What are loss assets ?
13. What are non-performing assets of Banks ?
14. What are branch adjustments in bank accounts ?
15. What constitutes the final accounts of a banking company ?
16. (a) Give two examples of Schedule 12 forming part of a Balance Sheet of a banking
company.
(b) Give three examples of Schedule 9 forming part of a Balance Sheet of a banking
company.
(c) G've classification of investments of a bank for calculating depreciation on them.
(d) What items are usually shown under the heading ‘Other Assets’ and ‘Other Liabilities’ in
the Balance Sheet of a bank ?
17. Following are the statements of interest on advances in respect of performing and non
performing assets of a Bank. Find out the income to be recognised for the year ended 31st
March, 2017.
In te re st In te re st
E a rn e d R e ce ive d
? (in lakhs) f (in lakhs)
P e rfo rm in g A sse ts
Cash Credits and Overdrafts 1,800 1,060
Term Loan 480 320
Bills Purchased and Discounted 700 550
N o n -P e rfo rm in g A sse ts
Cash Credits and Overdrafts 450 70
Term loans 300 40
Ans. [? 3,126 lakhs],
18. From the following information, calculate the amount of provision to be made in the Profit and
Loss Account of Confidence Bank Ltd. for the year 2016-17.
(? in ’000)
Standard Assets 5,96,520
Sub-Standard Assets 37,120
D o u b tfu l A ss e ts :
Upto one year (secured) 10,264
One year to three years (secured) 6,240
More than three years (secured by mortgage of plant worth 1,600 thousand) 2,632
Loss Assets 4,136
Ans. [Total Provision Required on the Assets = ? 19,784.08 thousands]
19. On the basis of the following information of Hi-Tech. Bank Ltd. for the period ended 3 is*
March, 2017; prepare—
(/) Schedule 13— Interest Earned.
(//) Schedule 14— Other Income.
f in ’000
(/) Interest and Discount 17,060
(/'/) Interest on Balances with RBI 60
(Hi) Income on Investments 4,720

(iv) Profit on Exchange Transactions 1,460
(v) Loss on Sale of Investments 100
(w) Profit on Sale of Investments 540
(vii) Commission, Exchange and Brokerage 3,040
(viii) Profit on Sale of Land, Buildings & Other Assets 1,680
Ans. [Schedule 13—? 2,18,40,000 ; Schedule 14—? 66,20,000].
20. From the following information find out the amount of provisions to be shown in the Profit and
Loss Account of a Commercial Bank as on 31st March, 2017 :
A sse ts ? (in lakhs) ? (in lakhs)
Standard 4.000 Doubtful upto three years 400
Sub-standard 2.000 Doubtful more than three years 300
Doubtful upto one year 900 Loss Assets 500
Ans. [? 1,316 lakhs]
1. Mention the disadvantages of the Slip System of Posting.

2. List out the form of business in which a Banking Company may engage as detailed in Section
6 of the Banking Regulations Act.
3. What are the main features of a bank’s accounting system?
4. Explain the Chief Registers, Memorandum Books, Subsidiary Books required by a banking
company.
5. Explain the reasons for the slip system of posting by banks and the main advantages of such a
system of posting.
6. Give in brief the various provisions of the Banking Regulation Act, 1949 relating to the annual
accounts of the Banking Company.
7. How does rebate on bills discounted arise and how it is brought into record ? Explain this with
a suitable example.
8. Show by means of imaginary figures the following assets and liabilities in the Balance Sheet of
a banking company:
(a ) Investments, (b) Advances, (c) Deposits (d) Contingent Liabilities; (e) Profit and Loss
Account.
9. Describe the particulars of advances which must be given either in the Balance Sheet or in a
separate schedule to and forming part of the Balance Sheet of a Banking Company in India.
10. State the under mentioned items appearing in the Balance Sheet of a Bank :
(/) Rebate on bills discounted; (/'/) Cash credits and overdrafts; (/'/'/) Endorsements and
Guarantees; (/V) Money at Calls and Short Notice ; (v) Performing Assets and (vi) Non-
Performing Assets.
11. Write short notes on the following items :
(a ) Statutory Reserve (b ) Non-banking Assets (c) Current Accounts (d) Bills for Collection,
(e) Rebate on Bills discounted ( f) Money at Calls and Short Notice.
12. Give a proforma of Profit and Loss Account of a Banking Company.
13. Give the format of Balance Sheet of a Banking Company with imaginary figures.
14. What are non-performing assets ? Discuss the accounting policy to the followed regarding
recognition of income in relation to non-performing assets.
15. Define :(a) Standard assets (b) Sub-standard assets (c) Doubtful assets (d) Loss assets.
16. Where under will you show the following items in a Bank Balance Sheet?
(a) Cash credit (Debit Balance), (b) Inland Letters of Credit, (c) Call Deposits Payable on
Notice, (d) Drafts Payable, (e) Recurring Deposits.
ACCOI//VTS OF BANKING COMPANIES IV/1-55
lillllllllllllllllIH Pro/^/emslIllllIIllilllllllilliSliSlillllllSillll
1. From the following particulars, prepare Profit and Loss Account of the Safety Bank for the year
ended 31st March, 2017.
r (ooo) ? (000)
Interest on Deposits 3,200 Discount on Bills Discounted 1,490
Commission (Cr.) 100 Interest on Overdrafts 1,600
Interest on Loans 2,490 Interest on Cash Credits 2,320
Sundry Charges (Dr.) 100 Auditors’ Fees 35
Rent and Taxes 200 Directors’ Fees 16
Payment to Employees 500 Bad Debts to be written off amounted to 300
Ans. [Profit ? 36,49,000],
2. Prepare Profit and Loss Account for the year ended 31st March, 2017 of Very Sound Bank Ltd.
from the following particulars :
r (ooo) ? (000)
Interest on Loans 250 Discount on Bills Discounted 40
Interest on Saving A/cs 150 Rent, Taxes, Insurance and Lighting 5
Interest on Cash Credits 160 Commission, Exchange and
Interest on Fixed Deposits 190 Brokerage 15
Interest on Overdrafts 70 Auditors’ Fees and Expenses 10
Payment to Employees 150 Directors’ Fees and Expenses 20
Ans. [Net Profit ? 10,000],
3. Prepare Profit and Loss Account in respect of the World Bank, incorporated under the Banking
Regulation Act from the following balances as on 31st March, 2017. The management decides
to make a provision of ? 1,00,000 for Bad and Doubtful Debts.
f (’000) ? (’000)
Interest received 400
Interest paid on Deposits 210
Payment to Employees 268
Commission received 300
Brokerage 150
Advertising 15
Postage, Telegrams and Telephones 29
Interest on Borrowings 250
Directors’ Fees and Allowances 30
Rent 40
Taxes 30
Discount 210
Exchange 180
Lockers Rent 110
Transfer Fees 150
Depreciation Written off on Bank Property 30
Audit Fees 20
Provision for Diminution in the Value of Govt. Securities 5
Misc. Expenses 25
Balance 500
1,500 1,500
-*s. [Net Profit ? 4,00,000],
- From the following information, prepare profit and loss account of the Vasari Bank Ltd. for the
period ended on 31st March, 2017. Working should form part of your answer:
ACCOUNTS o f b a n k in g c o m p a n ie s
IV/1-56
(? ’000
(? ’000) 87
300 Interest on saving bank deposits
Interest on loans Postage, telegrams and stamps 10
Interest on fixed deposits 275 20
10 Printing and stationery
Commission 10
20 Sundry expenses
Exchange and brokerage 15
150 Rent
Salaries and allowances Taxes and licences 10
Discount on bills (gross) 152 10
240 Audit fees
Interest on cash credits
Interest on temporary overdrafts
in current accounts 30
A d d it io n a l I n f o r m a t i o n : 3C
<A Rebate on bills discounted 3C
Salary of managing director 4C
Provision for Bad Debts
Provision for income tax is to be made @ 55% (round off to the nearest thousands)
Interest of ? 4,000 on doubtful debts was wrongly credited to interest on loan account
Provide ? 15,000 as dividend.
[Net Profit ? 27,000].
Followinq fiqures are extracted from the books of K. Bank Ltd. as on 31-3-2017 ? (oo:
9=rnnn\
? (000) 108
4,060 Rent paid
Interest and discount received Stationery
Interest paid on deposits 2,404
1,000 Postage
Capital 180 Audit fee
Commission and exchange Depreciation on Bank’s properties
60
Rent received 190 Director’s fee
Profit on sale of investment Preliminary Expenses
210
Salaries
Further information :
(a) A customer to whom a sum of ? 5,00,000 has been advanced has become insolve"
' and 40% recovered from his estate, (b ) Provision for bad and doubtful debts necessa'
? 1,00,000, (c) Rebate on bill discounted as on 31-3-2016, ? 10,000 and Rebate on bi s
discounted as on 31-3-2017, f Provide T 7,00,000 for income-tax, (e) The director
desire to declare 10% dividend']f) write off all preliminary expenses.
Prepare Profit & Loss A/c in accordance with law.
Ans. [N.P. ? 5,08,000; Surplus carried to B/S ? 2,81,000]
Hint. Transfer ? 1,27,000 of Profit to Statutory Reserve.
, 2017
6. Given below is an extract from the Trial Balance of a Bank as on March 31,
Dr.
? (000)
Bills discounted 1,264
Rebate on Bills discounted on April 1,2016
Discount received
An analysis of the Bills discounted as shown above show the following :
Am ount D u e d a te R a te o f D isco u n t
? 2017 % p.a. i
1.40.000 June 4 5
4.36.000 June 10 4.5 I
2.82.000 June 24 6
3.80.000 July 5 4
Show with the aid of working, how the relevant items will appear in the Bank’s Balance She*
as at 31st Marchv2017 and in the Bank’s P & L A/c for the period to 31st March, 2017. Ass
pass appropriate journal entries.
Ans. [Rebate on bills discounted shown as liability in the Balance Sheet f 13,000. Disco.-
credited to the Profit and Loss Account ? 80,000].
A C C O U N T S O F B A N K IN G C O M P A N IE S IV/1-57
7. On 31st March, 2016, Uncertain Bank Ltd., had a balance of t 9 crores in “Rebate on Bills
Discounted Account”. During the year ended 31st March, 2017, Uncertain Bank Ltd.
discounted bills of exchange of f 4,000 crores charging interest at 18% per annum, the
average period of discount being for 73 days. Of'these, bills of exchange of ? 600 crores were
due for realisation from the acceptors/customers after 31st March, 2017, the average period
outstanding after 31st March, 2017 being 36-5 days. Uncertain Bank Ltd. asks you to pass
journal entries and show the ledger accounts pertaining to :
(/) Discounting of bills of exchange and
(//) Rebate on bills discounted.
Ans. [Discount on Bills Discounted ? 144 Crores ; Rebate on Bills Discounted on 31-3-2017
? 10-80 Crores]
8. On the basis of the following information of Hi-Tech. Bank Ltd. for the period ended 31st
March, 2017; prepare—
(/) Schedule 13— Interest Earned.
(//) Schedule 14— Other Income.
? in ’000
(i) Interest and Discount 17,060
(«) Interest on Balances with RBI 60
(Hi) Income on Investments 4,720
(/V) Profit on Exchange Transactions 1,460
Loss on Sale of Investments 100
(vi) Profit on Sale of Investments 540
(vii) Commission, Exchange and Brokerage 3,040
(viii) Profit on Sale of Land, Buildings & Other Assets 1,680
Ans. [Schedule 1 3 - ? 2,18,40,000 ; Schedule 1 4 -? 66,20,000],
9. On 31st March, 2017 the loan account in the books of a bank
(In te r e s t o n D o u b tfu l D e b ts )
showed a debit balance of ? 2,00,000 including ? 40,000 due from a merchant which is
doubtful. The interest accrued on this loan upto 31-3-2017 was ? 10,000 including ? 2,000 on
doubtful debts.
The merchant became insolvent and the official receiver paid a dividend of 25 paise in the
rupee on 30-4-2017.
Pass necessary journal entries in the books of the bank on 31-3-2017 and 30-4-2017 and
prepare Merchant’s loan account.
Ans. [Amount realised from merchant ? 10,500 ; Bad Debts ? 30,000],
10. Following ledger balances of ABC Bank Ltd. as at 31st March, 2017, are furnished to you.
Prepare the Profit and Loss Account and Balance Sheet as per requirements of law :
f (’000) ? (’000)
Statutory Reserve 1,200 Commission 45
Bad Debts written off 128 Cash 225
Operating Expenses 182 Interest earned 550
Current Accounts 20,245 Balance with Reserve Bank 2,030
Interest Paid 160 Balance with Foreign Banks 1,206
Deposits Accounts 6,920 Bills for Collection - \ 2 - — 1,500
Profit and Loss Account, Borrowings from Banks 6,482
Balance B/F 229 Cash Credits and Overdrafts 15,457
Bills Receivable for Customers l y __ 1,500 Investments 9,882
Discount 244 Bills Discounted 6,228
Endorsements and Guarantees 575 Premises 2,217
Share Capital 2,000
Following further information is furnished :
(1) Rebate on Bills Discounted to be provided ? 64,000.
(2) The Bank had paid an interim dividend of ? 2,00,000 during the year.
Ans. [Net Profit ? 3,05,000; B/S Total ? 3,72,45,000].
v
IV/1-58 ACCOUNTS OF BANKING COMPAS £S
11 . From the following ledger balances of Laxmi Bank Limited, prepare the Profit and Lâ
Account and Balance Sheet as on 31st March, 2017 :
Share Capital : ' Payment to Employees

12,500 Equity Shares of Depreciation on Premises 23
? 100 each 1,250 Interest, discount and commission 2«fi&
Statutory Reserve 600 Cash in hand and with Reserve
Current Accounts and Deposit Bank of India 1.56*
A/cs 7,732 Money at call and short notice Z7»
P & L Account (balance) 15 Bills discounted
Interest paid 27 Loans and advances 4.65
Government securities 600 Bank premises and furniture 4*1
Other securities 825 Non-banking Assets 337
Shares and Stock 637
Make a provision for rebate on bills discounted ? 3,000.
Ans. [Profit ? 1,19,000; B/S Total f 97,19,000].
12. From the following ledger balances of Hyderabad Bank Limited as on 31st March, 20'
prepare the Profit and Loss Account and the Balance Sheet:
? (’000) ?(OCO 1
Fixed Deposits 325 S h a re C a p ita l:
Saving Deposits 1,775 5,000 Equity Shares of ? 100
Current Accounts 3,875 each, f 50 paid 250 1
Money at Call and Short Notice 240 Statutory Reserve 1501
Investments 1,550 Profit and Loss Account
Interest accrued and paid 100 (Cr.) (on 1-4-2016) 133 1
Payment to Employees 40 Bills Payable 4oe ]
Rent, Taxes & Lighting 10 Unclaimed Dividends 5I
General Expenses 5 Sundry Creditors 22S I
Dividend for 2016-17 25 Bills for Collection
Premises (after ? 50,000 Acceptances on behalf of Customers 100]
depreciation upto 31-3-2016) 600 Non Banking Assets 120
Cash in hand 75 Bills Discounted and Purchased 250
Cash at Reserve Bank 705 Loans, Overdrafts and Cash Credits 3,5CC
Cash at other Banks 520 Interest and Discount 325
Borrowed from Banks 280
Rebate on Bills Discounted amounted to f 2,500. Allow 5% Depreciation on Premises cr
original cost. Provide ? 25,000 for Doubtful Debts.
Ans. [Net Profit ?1,10,000; B/S Total ? 75,27,500].
13. Prepare the Balance Sheet of Bharat Bank Ltd. as at 31st March, 2017 from the followin;
particulars:
? (’000) ?(’000-
Paid up Capital 1,000 Customers’ Liability for
Authorised Capital 5,000 Acceptances and Endorsements 200
Money at call and short notice 500 Furniture and Fixtures 100
Investments 3,000 Land and Building 1,700
Acceptances and endorsements for Loans 80C
customers 200 Cash Credits 300
Bills discounted and purchased 400 Current Accounts 2,500
Bills payable 500 Fixed Deposits 1,400
Saving Bank Accounts 1,000 Profit for the year 400
Cash in hand and with RBI 1,000
The Statutory Reserve is equal to paid up capital. The profit for the year is arrived at before
making adjustment for unexpired discount ? 5,000 on Bills discounted during the year not
matured on 31st March, 2017.
Investments include 5,000 shares of the face value of T 100 each on which ? 50 is paid up.
Claims against the Bank not acknowledged as debts amounted to ? 50,000.
Ans. [B/S Total ? 78,00,000; Advances ? 15,00,000],
14. Following balances were extracted on the closing date, 31st March, 2017 from the books of
Adarsh Bank Ltd. You are required to prepare the Balance Sheet and Profit and Loss Account
of the Bank.
r (’ooo) ?(’000)
Current Deposits 45,500 Cash in hand and with RBI 487
Saving Bank Accounts 14,520 Cash with Banks 6,869
Fixed Deposits 37,180 Money at Call 1,500
Sundry Creditors Accounts 454 Investments in Govt. Securities 45,200
Deposits due to Other Banks Interest accrued on Investments 875
secured by Investments 12,200 Investments in Shares 4,700
Bills for Collection being Bills Cash Credit and Loans 44,100
Receivable 22,100 Bills Discounted 33,100
Acceptances and Endorsements Furniture, Fixtures and Equipment 500
for Customers 11,168 Postage & Telegrams 500
Rebate on Bills Discounted 15 Interest paid 1,200
Branch Adjustment (Cr.) 4,555 Law Charges 100
Statutory Reserve 10,000 Payment to Employees 2,400
Dividend Equalisation Fund 2,500 Directors’ Fees 100
Capital : 2 lakh shares of ? 100 Stationery and Advertisements 400
each ? 50 paid up 10,000 Miscellaneous Expenses 300
Interest and Discount received 5,800 Land and Building 3,500
Exchange and Commission (Cr.) 1,700 Depreciation Reserve 500
General Charges Recovered 55
Profit and Loss A/c—
Balance on 1-4-2016 852
Provide for (a) Reserve for Taxation f 5 lakhs (b) Transfer to General Reserve f 15 lakhs, and
(c) Transfer to Dividend Equalisation Fund ? 5 lakhs.
Ans. [Net Profit ? 20,55,000; B/S Total ? 14,08,31,000]
15. Following ledger balances of the Bontay Bank Ltd. as at 31st March, 2017 are furnished to
you. You are required to prepare the Balance Sheet as per the requirements of law after
making such adjustments as you consider necessary.
f (’000) ?(’000)
Reserve Fund 600 Cash in hand 500
Local Bills Discounted 1,800 Profit and Loss Account 220
Furniture 40 Fixed Deposits 4,000
Investments 950 Unclaimed Dividends 10
Cash Credits and Overdrafts 5,300 Paid-up Capital 2,000
Current Saving Deposits 3,800 Loans from Other Banks 1,200
Participating Certificates Loans to Customers 600
Purchased 500 Provision for Contingencies 170
Stamps and Stationery 10 Premises 1,000
Balance with Reserve Bank 1,300
The further particulars are furnished : (1) the market value of the investment is T 9,00,000.
(2) The Rebate on bills discounted is calculated at ? 5,000. (3) No credit has been taken for
interest of ? 7,000 on certain sticky advances which are not yet considered as doubtful. (4) The
Loans from other Banks are secured to the extent of ? 5,00,000 against a charge on
investment.
Ans. [B/S Total ? 1,20,07,000]
16. On 31st March, 2017 the following balances stood in the books of Asian Bank Limited afte*
preparation of its Profit and Loss Account:
? (000) r (ooo
S h a re C a p ita l (authorised and issued): Cash in hand 380
80,000 shares of ? 100 Cash with Reserve Bank of India 10,000
each, ? 50 paid 4,000 Cash with other Banks 6,000
Statutory Reserve (under Sec. 17) 6,510 Bills Discounted and Purchased 3,800
Fixed Deposits 42,600 Loans, Cash Credits and
Savings Bank Deposits 19,000 Overdrafts 51,000
Current Accounts 23,200 Drafts Payable 70
Money at Call and Short Notice 1,800 Unclaimed Dividends 6C
Government Securities 9,000 Rebate on Bills Discounted 50
Other Investments 16,000 Short Loans (Cr.) 4,750
Profit and Loss Account 2,190 Furniture and Fixtures (after
(Credit) 31-3-2017 depreciation upto 31st
Premises (after depreciation upto March, 2017 f 1,36,000) 1,164
31st March, 2017, ? 4,50,000) 2,950 Inter Office Adjustments
(debit balance) 336
You are required to prepare the Balance Sheet of the Bank as on 31st March, 2017. Ignore
particulars regarding advances required to be given. Assume ? 3,10,000 has been transferre:
to Statutory Reserve out of current year’s profits.
Ans. [B/S Total f 10,24,30,000].
17. From the following information, calculate the amount of provision to be made in the Profit a ':
Loss Account of Confidence Bank Ltd. for the year 2016-17.
(? in ’000,
Standard Assets 5,96,520
Sub-Standard Assets 37,120
D o u b tfu l A s s e ts :
Upto one year (secured) 10,26-i
One year to three years (secured) 6,240
More than three years (secured by mortgage of plant worth 1,600 thousand) 2,632
Loss Assets 4,13c
Ans. [Total Provision Required on the Assets = ? 19,784.08 thousands]
18. While closing its books of account on 31st March, 2017 a Non-banking Finance Company ha;
its advances classified as follows :
f in lakes
Standard Assets 16,802
Sub-standard Assets 1,340
Secured Positions of Doubtful Debts :
— upto one year 322
— one year to three years
— more than three years
Unsecured Portions of Doubtful Debts
Loss Assets 4®
Calculate the amount of provision, which must be made against the Advances.
Ans. [? 559.2 lakhs]
19. Following are the statements of interest on advances in respect of performing and nor-
performing assets of a Bank. Find out the income to be recognised for the year ended 31s:
March, 2017. _______________________________
In te re st Interest
E a rn e d R eceived
f (in lakhs) f (in lakhs
P e rfo rm in g A sse ts
Cash Credits and Overdrafts 1,800 1,06C
Term Loan 480 320
ACCOUNTS OF BANKING COMPANIES IV/1-61

N o n -P e rfo rm in g A sse ts
Cash Credits and Overdrafts 450 70
Term loans 300 40
20. From the following information of Great Bank Limited, compute the provisions to be made in
the Profit and Loss Account:
A sse ts f in lakhs
Standard 2,000
Substandard (fully secured) 16,000
Doubtful
For one year (secured) 6,000
For two years and three years (secured) 4,000
For more than three years (secured by mortgage of plant and machinery
? 600 lakhs) 2,000
Non-recoverable Assets 1,500
Accounts of Insurance
Companies ■■
--- - , ..................................... .......... ■ ■ - _____________ _______________ .
Insurance is a form of contract or agreement under which one party agrees in

•eturn of a consideration to pay an agreed amount of money to another party to make
:ood for a loss, damage, injury to something of value in which the insured has a
:ecuniary interest as a result of some uncertain event. This agreement or contract
_en put in writing is known as policy. The person whose risk is covered is called
"sured or assured and the company or corporation which insures is known as insurer,
=5surer or underwriter. The consideration in return for which the insurer agrees to
-ake good the loss is known as premium.
2 Types o f Insurance
From accounting point of view, insurance may be divided into two types, i.e.,
1. Life insurance. Life Insurance business is carried on by Life Insurance Corporation of
« : a since 1956 when life insurance business was nationalised. Under this type of insurance
Te :orporation guarantees to pay a certain sum of money to the policyholder on reaching a
a- ~-:n age or on his death, whichever is earlier. Life insurance has an element both of
■"-lection and investment.
2. General Insurance. It includes all other types of insurance except life insurance as fire
" . ance, marine insurance, accident insurance, burglary, fidelity, third party, workmen
■a-oensation, consequential loss etc. Under this type of insurance the insurer undertakes to
jjhce-mnify the loss suffered by the insured on happening of a certain event in consideration
ilkr a ~xed premium.
~"e general insurance business was also taken over by the Central Government with
« r - r . Tom 13th May, 1971. Recently the insurance business has been opened to the p r iv a te
W K 'Z ' The Government has allowed registration of private insurance firms under the
Csr-panies Act, 2013. Thus, private insurance firms are now-a-days allowed to engage
■e'-selves in life insurance and general insurance business.
3 Accounts o f Life Insurance Business
- nal accounts of the insurance concerns are prepared according to the provisions
_e Insurance Act, 1938. For maintaining accounts, two types of books are kept by
- concerns.
Statutory Books. Following books are to be maintained by all insurance offices :
(/) Register o f Policies. This register will contain the particulars in respect of each
policy issued by the insurer such as the name and address of the policy holder,
V/1-2 ACCOUNTS OF INSURANCE COMPANIES
the date when the policy was effected and record of the assignment of the policy
(if any).
( ii) R e g is t e r o f C la im s . It contains the particulars of each claim such as the date of
claim, the name and address of claimants, the date on which the claim was
discharged, date and ground for rejection, in case the claim is rejected.
(H i) R e g is t e r o f L i c e n s e d I n s u r a n c e A g e n t s . It contains the particulars of various
insurance agents, their names, addresses, particulars of business done and
commission due to them.
2. Subsidiary Books. For proper maintenance of accounts important subsidiary books
are maintained according to the convenience of the concern. These are register of proposals
and proposal advance cash book, first year’s premium cash book, renewal premium cash
book, agency and branch cash book, petty cash book, claims cash book, general cash book
containing the summary of all previous books, bank cash book, commission register, lapsed
and cancelled policies book, journal, agency ledger, policy loan ledger, general loan ledger,
investment ledger etc.
O Insurance Regulatory and Development Authority
In order to regulate the insurance business, the Government set up in 1996, the
Insurance Regulatory Authority (IRA). Now, this authority is known as the Insurance
Regulatory and Development Authority. In 2002, the authority came with regulations for the
preparation of the financial statements of insurance companies. According to the Insurance
(Amendment) Act, 2002, the First, Second and Third Schedules prescribed for Balance
Sheet, Profit and Loss Account and Revenue Account respectively as given in Insurance Act.
1938 have been omitted. Now Revenue Account, Profit and Loss Account and Balance Sheet
are to be prepared as per the formats prescribed by the Insurance Regulatory and
Development Authority (IRDA).
A brief description of important regulations prescribed by IRDA is given below :
LIFE INSURANCE BUSINESS
0 Preparation of Financial Statements, Management Report and Auditor's

Report
1. An insurer carrying on life insurance business, after the commencement of these
Regulations, shall comply with the requirements of Form A.
2. An insurer carrying on general insurance business, after the commencement of these
Regulations, shall comply with the requirements of Form B
3. The report of the auditors on the financial statements of every insurer and reinsure-
shall be in conformity with the requirements of Form C, or as near thereto as the
circumstances permit.
Q General instructions for Preparation of Financial Statements
1. The corresponding amounts for the immediately preceding financial year for all items
shown in the Balance Sheet, Revenue Account, Profit and Loss Account a r:
Receipts and Payments Accounts shall be given.
2. The figures in the financial statements may be rounded off to the nearest thousands
3. Interest, dividends and rentals receivable in connection with an investment should t-s
stated at gross amount, the amount of income tax deducted at source should ts
included under ‘advance taxes paid and taxes deducted at source’.
ACCOUNTS OF INSURANCE COMPANIES V/1-3
4. (I) For the purposes of financial statements, unless the context otherwise requires :
(a) the expression ‘provision’ shall, subject to (II) below mean any amount
written off or retained by way of providing for depreciation, renewals or
diminution in value of assets, or retained by way of providing for any known
liability or loss of which the amount cannot be determined with substantial
accuracy;
(b) the expression ‘reserve’ shall not, subject to as aforesaid, include any
amount written off or retained by way of providing for depreciation, renewals
or diminution in value of assets or retained by way of providing for any
known liability or loss;
(c) the expression ‘capital reserve’ shall not include any amount regarded as
free for distribution through the profit and loss account; and the expression
‘revenue reserve’ shall mean any reserve other than a capital reserve;
(d) The expression “liability” shall include all liabilities in respect of expenditure
contracted for and all disputed or contingent liabilities.
(II) Where :
(a) any amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets, or
(b) any amount retained by way of providing for any known liability or loss, is in
excess of the amount which in the opinion of the directors is reasonably
necessary for the purpose, the excess shall be treated as a reserve and not
provision.
5. The company shall make provisions for damages under lawsuits where the
management is of the opinion that the award may go against the insurer.
6. Extent of risk retained and re-insured shall be separately disclosed.
7. Any debit balance of the Profit and Loss Account shall be shown as deduction from
uncommitted reserves and the balance, if any, shall be shown separately.
O Preparation of Financial Statements

1. An insurer shall prepare the Revenue Account [Policyholders’ Account], Profit
and Loss Account [Shareholders’ Account] and the Balance Sheet in Form A-
RA, Form A-PL and Form A-BS, as prescribed in this Part, or as near thereto as
the circumstances permit.
Provided that an insurer shall prepare Revenue Account and Balance Sheet for
the under mentioned businesses separately and to that extent the application
of AS 17 shall stand modified :
(a) Participating policies and Non-participating policies;
(b) (/) Linked business [As defined in regulation 2 (/) of the IRDA
(Registration of Indian Insurance Companies) Regulations, 2000]
(/'/) Non-Linked business separately for Ordinary Life, General Annuity,
Pensions and Health Insurance;
(c) Business within India and business outside India.
2. An insurer shall prepare separate Receipts and Payments Account in
accordance with the Direct Method prescribed in AS 3 - “Cash Flow Statement”
issued by the ICAI.
_______ ________ FORM A-RA^

Name of the insurer:
Registration No. and Date of Registration with the IRDA
REVENUE ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 20
Policyholders’ Account (Technical Account)
No. P a r tic u la r s S c h e d u le C u rre n t P re v io u s
Year Year
(? ’000) (? ’000)
Premiums earned - net
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from Investments
(a) Interest, Dividends & Rent - Gross
(b) Profit on sale/redemption of investments
(c) (Loss on sale/redemption of investments)
(d) Transfer/Gain on revaluation/change in fair
value'
Other Income (to be specified)
Total (A)
Commission 2
Operating Expenses related to Insurance Business 3
Provision for doubtful debts
Bad debts written off
Provision for Tax
Provisions (other than taxation)
(a) For diminution in the value of investments (Net)
( b) Others (to be specified)
Total (B) 4
Benefits Paid (Net)
Interim Bonuses Paid
Change in valuation of liability in respect of life
policies
(a) Gross”
(b) Amount ceded in Reinsurance
(c) Amount accepted in Reinsurance
Total (C)
Surplus (Deficit) (D) = (A) - (B) - (C)
Appropriations
Transfer to Shareholders’ Account
Transfer to Other Reserves (to be specified)
Balance being Funds for Future Appropriations
Total (D)
Notes :
* Represents the deemed realised gain as per norms specified by the Authority.
** Represents Mathematical Reserves after allocation of bonus.
The total surplus shall be disclosed separately with the following details :
(a) Interim Bonuses Paid ;
(b ) Allocation of Bonus to policyholders ;
(c) Surplus shown in the Revenue Account;
(d) Total Surplus: [(a) + (b) + (c)].
ACCOUNTS OF INSURANCE COMPANIES V /1-5
See Notes appended at the end of Form A-PL

_______________________________ FORM A-PL_____________ ■ :■• ~ ■ ■■~ ■
Name of the Insurer:
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20...
Shareholders’ Account (Non-technicaj Account]
No. P a rticu la rs S che d u le C u rre n t Y ear P re vio u s
Y ear
(? ’000) (? ’000)
Amounts transferred from/to the Policyholders
Account (Technical Account).
Income From Investments
(a) Interest, Dividends & Rent - Gross
(b) Profit on sale/redemption of investments
(c) (Loss on sale/redemption of investments)
Other Income (To be specified)
Total (A)
Expense other than those directly related to the
insurance business
Bad debts written off
Provisions (Other than taxation)
(a) For diminution in the value of investments (Net)
(b) Provision for doubtful debts
(c) Others (to be specified)
Total (B )
Profit (Loss) before tax
Provision for Taxation
Profit/(Loss after tax
Appropriations
(a) Balance at the beginning of the year
(b) Interim dividends paid during the year
(c) Proposed final dividend
(d) Dividend distribution tax
(e) Transfer to reserves/other accounts (to be
specified)
Profit carried.......................to the Balance Sheet
otes to Form A-RA and A-PL.
(a) Premium income received from business concluded in and outside India shall be separately
disclosed.
b) Reinsurance premiums whether on business ceded or accepted are to be brought into account
gross (i . e before deducting commissions) under the head reinsurance premiums.
(c) Claims incurred shall comprise claims paid, specific claims settlement costs wherever applicable
and change in the outstanding provisions for claims at the year-end.
d) Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or ? 5,00,000 whichever is higher, shall be shown as a separate line item.
e) Fees and expenses connected with claims shall be included in claims.
(/) Under the sub-head “Others” shall be included items like foreign exchanqe qains or losses and
other items.
g) Interest, dividends and rentals receivable in connection with an investment should be stated at
gross amount, the amount of income tax deducted at source being included under ‘advance
taxes paid and taxes deducted at source”.
h) Income from rent shall include only the realised rent. It shall not include any notional rent.
FORMA-BS
BALANCE SHEET AS AT 31 ST MARCH, 20...
No. P a rticu la rs S ch e d u le C u rre n t Y ear P revious
Year
(? ’000) (? ’000)
Sources of Funds
S h a re h o ld e rs ’ F u n d s :
Share Capital 5
Reserves and Surplus 6
Credit/[Debit] Fair Value Change Account
Sub-Total
Borrowings 7
P o lic y h o ld e rs ’ F u n d s :
Credit/[Debit] Fair Value Change Account
Policy Liabilities
Insurance Reserves
Provision for Linked Liabilities
Sub-Total
Funds for Future Appropriations
Total
Application of Funds
Investments
Shareholders’ 8
Policyholders’ 8A
Assets held to Cover Linked Liabilities 8B
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balances 11
Advances and Other Assets 12
Sub-Total (A)
Current Liabilities 13
Provisions 14
Sub-Total (B)
Net Current Assets (C) = (A - B)
Miscellaneous Expenditure (to the extent not written
off or adjusted)
Debit Balance in Profit & Loss Account
(Shareholders’ Account)
Total
/ACCOUNTS OF /NSL/R4NCE COMPANIES V/1-7
CONTINGENT LIABILITIES
No. P a rticu la rs C u rre n t Year P re vio u s Year
(? ’000) (? ’000)
1. Partly paid-up investments
2. Claims, other than against policies, not acknowledged
as debts by the company
3. Underwriting commitments outstanding (in respect of
shares and securities)
4. Guarantees given by or on behalf of the Company
5. Statutory demands/ liabilities in dispute, not provided for
6. Reinsurance obligations to the extent not provided for in
accounts
7. Others (to be specified)
Total
SCHEDULES FORMING PART OF FINANCIAL STATEMENTS
SCHEDULE 1-PREMIUM
No. P articulars C u rre n t Y ear P re vio u s Year
(? ’000) (? ’000)
1. First Year Premiums
2. Renewal Premiums
3. Single Premiums
Total Premium
SCHEDULE 2-COMMISSION EXPENSES

P a rticu la rs C u rre n t Year P re vio u s Year
(? ’000) (? ’000)
Commission paid
Direct - First year premiums
- Renewal premium
- Single premiums , ..
Add\ Commission on Re-insurance Accepted
_ess: Commission on Re-insurance Ceded
Net Commission
Note : The profit/commission, if any, are to be combined with the Re-insurance accepted or Re
insurance ceded figures.
SCHEDULE 3—OPERATING EXPENSES RELATED TO INSURANCE BUSINESS
’000) (T ’000)
1. Employees' remuneration & welfare benefits
2. Travel, conveyance and vehicle running expenses
3. Training expenses
4. Rents, rates & taxes
5. Repairs
6. Printing & stationery
ACCOUNTS OF INSURANCE COMPANIEi
V /1 -8
7. Communication expenses
8. Legal & professional charges
9. Medical fees
10 . Auditors’ fees, expenses etc
(a) as auditor
(,b ) as adviser or in any other capacity, in respect o f:
(/) Taxation matters
(/'/) Insurance matters
(Hi) Management services; and
(c) in any other capacity
11 Advertisement and publicity
.
12 . Interest & bank charges

14. Depreciation
Total_____________ ______ ______
: Items of expenses and income in excess of one per cent of the total premiums (less
Note reinsurance) or ? 5,00,000 whichever is higher, shall be shown as a separate line item.
— “ I"I"*' n A i n rM CTl
SCHEDULE 4 - BENEFITS PAID [NET]
P revious Year
P a rticu la rs 1 C ^ urre n t Y ear
(? ’000) (? ’000)
Insurance Claims :
(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities/Pension payment,
(d) Other benefits, specify.
2. (Amount ceded in reinsurance) :
(b ) Claims by Maturity,
3. Amount accepted in reinsurance :
(b ) Claims by Maturity.
Total
Notes : (a) Claims include specific claims settlement costs, wherever applicable.
(b) Legal and other fees and expenses shall also form part of the claims cost, whereve'
applicable.
SCHEDULE 5-SH A R E CAPITAL
C u rre n t Y ear P revious Year
P articulars
No. (? ’000) (? ’000)___
1. Authorised Capital
Equity Shares of Rs.. ....each
2. Issued Capital
Equity Shares of .. each
3. Subscribed Capital
Equity Shares of ...each
ACCOUNTS OF INSURANCE COMPANIES V /1 -9
4. C a lle d -u p C apital
E quity S ha re s of ? .........each
L e s s : C alls unpaid
A d d : S ha re s fo rfe ite d (A m o u n t o rig in a lly paid up)
Less : Par value o f e q u ity sh a re s bou g h t back
L e s s : P relim inary E xpenses
E x p e n s e s in clu d in g c o m m is s io n o r b ro k e ra g e on
U nderw riting o r subscrip tio n o f shares
Total
Notes :
(a) P articulars o f the d iffe re n t classe s o f capital should be se p a ra te ly stated.
(b) T h e a m o u n t ca p ita lise d on a cco u n t o f issue o f bonus sh a re s should be disclosed.
(c) In ca se a n y p a rt o f th e ca p ita l is held by a h o lding co m p a n y, the sa m e sh o u ld be se p a ra te ly
disclosed.
SCHEDULE 5A—PATTERN OF SHAREHOLDING
S h a re h o ld e r C u rre n t Year P re vio u s Year

N u m b e r o f S hares % o f H olding N u m b e r o f S ha re s % o f H olding
Prom oters
• Indian
• Foreign
O thers
Total
SCHEDULE 6-RESERVES AND SURPLUS

No. P articulars C u rre n t Year P re vio u s Year
(? ’000) (T ’000)
1. C apital R eserve
2. C apital R edem ption R eserve
3. S hare Prem ium
4. R evaluation R eserve
5. G eneral R eserves
Less : D ebit b a lance in Profit and Loss A ccount, if any
Less : A m o u n t utilized fo r B uy-back
6. C a ta stro p h e R eserve
7. O th e r R eserves (to be specified)
8 B alance o f profit in P rofit and Loss A cco u n t
Total
%cie A d d itio n s to and d e d u c tio n s fro m th e re se rve s shall be d isclo se d u n d e r each o f th e spe cifie d
heads.
SCHEDULE 7-BORROWINGS
Mb. P a rticu la rs C u rre n t Year P re vio u s Y ear
(? ’000) ( ? ’000)
D ebentu re s/B o n d s
2. Banks
V/1-10 ACCOUNTS OF INSUPANCE COMPANIES
3. Financial Institutions
Total
Notes :
(a) The extent to which the borrowings are secured shall be separately disclosed stating the natc-T
of the security under each sub-head.
(b) Amounts due within 12 months from the date of Balance Sheet be shown separately.
SCHEDULE 8 —INVESTMENT-SHAREHOLDERS
No. P a rticu la rs C u rre n t Y ear P re vio u s Year
(? ’000) (? ’000)
Long -term Investments
1. Government Securities and Government Guaranteed
Bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(/) Subsidiaries
Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
Short-term Investments
1. Government Securities and Government Guaranteed
Bonds including Treasury Bills
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
Investment Properties-Real Estate
Total
Note : See Notes appended at the end of Schedule-8B
a c c o u n t s o f in s u r a n c e c o m p a n ie s
4N/ES V/1-11
SCHEDULE 8A—INVESTMENTS POLICYHOLDERS

No.
P a rticu la rs
C u rre n t Y ear J~ P re vio u s Y ear
Long -term Investments (? ’000)
Government Securities and Government Guaranteed
mature Bonds including Treasury Bills
2 . Other Approved Securities
3. (a) Shares
(aa) Equity
ear (bb) Preference
{b) Mutual Funds
( f) Subsidiaries
(g) Investment Properties-Real Estate
1.
Government securities and Government guaranteed
bonds including Treasury Bills
2 . Other Approved Securities
3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(/) Subsidiaries
(g ) Investment Properties-Real Estate
Investments in Infrastructure and Social Sector
Other than Approved Investments
Total
■ote : See Notes appended at theend of Schedule-8B.
SCHEDULE 8B —ASSETS HELD TO COVER LINKED LIABILITIES

P a rticu la rs
C u rre n t Year P re vio u s Year
Long-term Investments J ? ’000) J ? ’000)
Government securities and Government guaranteed
3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(/) Subsidiaries
(g) Investment Properties-Real Estate

1. Government securities and Government guaranteed
3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
(.g) Investment Properties-Real Estate
Total
Notes : (applicable to Schedules 8 and 8A & 8B) :
(a) Investments in subsidiary/holding companies, joint ventures and associates shall be separately
disclosed, at cost.
(/) Holding company and subsidiary shall be construed as defined in the Companies Act. 1956.
(//) Joint Venture is a contractual arrangement whereby two or more parties undertake an
economic activity, which is subject to joint control.
(Hi) Joint control is the contractually agreed sharing of power to govern the financial and
operating policies of an economic activity to obtain benefits from it.
(/V) Associate is an enterprise in which the company has significant influence and which is
neither a subsidiary nor a joint venture of the company.
( v) Significant influence (for the purpose of this schedule) means participation in the financial
and operating policy decisions of a company, but not control of those policies. Significant
influence may be exercised in several ways, for example, by representation on the board of
directors, participation in the policy making process, material inter-company transactions,
interchange of managerial personnel or dependence on technical information. Significant
influence may be gained by share ownership, statute or agreement. As regards share
ownership, if an investor holds, directly or indirectly through subsidiaries, 20 per cent or
more of the voting power of the investee, it is presumed that the investor does have
significant influence, unless it can be clearly demonstrated that this is not the case.
Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20
percent of the voting power of the investee, it is presumed that the investor does not have
significant influence, unless such influence is clearly demonstrated. A substantial or majority
ownership by another investor does not necessarily preclude an investor from having
significant influence.
(b) Aggregate amount of company’s investments other than listed equity securities and derivative
instruments and also the market value thereof shall be disclosed.
(c) Investment made out of Catastrophe reserve should be shown separately.
(d) Debt securities will be considered as “held to maturity” securities and will be measured at historical
costs subject to amortisation.
(e) Investment Property means a property [land or building or part of a building or both] held to earn
rental income or for capital appreciation or for both, rather than for use in services or for
administrative purposes.
(f) Investments maturing within twelve months from balance sheet date and investments made with
the specific intention to dispose of within twelve months from balance sheet date shall be classified
as short-term investments.
ACCOUNTS OF IN Sl/RyA/VCE COMPANIES V/1-13
SCHEDULE 9 -L O A N S
(? ’000) (? ’000)
1. Security-wise Classification
S e cu re d
(a) On mortgage of property
(aa) In India
(bb) Outside India
(b) On Shares, Bonds, Govt. Securities, etc.
( c) Loans against policies
(d) Others (to be specified)
U n se cu re d
Total
2. Borrower-wise Classification
(a) Central and State Governments
(b) Banks and Financial Institutions
(c) Subsidiaries
(d) Companies
(e) Loans against policies
(/) Others (to be specified)
Total
3. Performance-wise Classification
(a) Loans classified as standard
(aa) In India
(bb) Outside India
(b) Non-standard loans less provisions
(aa) In India
(bb) Outside India
Total
4. Maturity-wise Classification
(a) Short Term
(b) Long Term
Total
Notes :
(a) Short-term loans shall include those, which are repayable within 12 months from the date of
balance sheet. Long term loans shall be the loans other than short-term loans.
(b) Provisions against non-performing loans shall be shown separately.
(c) The nature of the security in case of all long term secured loans shall be specified in each case.
Secured loans for the purposes of this schedule, means loans secured wholly or partly against
an asset of the company.
(d) Loans considered doubtful and the amount of provisions created against such loans shall be
disclosed.
SCHEDULE 10 —FIXED ASSETS
Particulars C ost/G ro ss B lock D e p re cia tio n - N e t B lo ck
O pen A d d i D e d u c C lo sin g U pto F o r the On To D ate A s a t P revious
ing tions tio n s L a st Y ear S a le s / year Year
Year A d ju s t end
m e n ts
Goodwill
"tangibles
xjecify)
-and-Freehold
ACCOUNTS OF INSURANCE COMPANIES
V/1-14
Leasehold
Property
Buildings
Furniture &
Fittings
Information
Technology
Equipment
Vehicles
Office Equipment
Others (Specify
nature)
Total
Work in progress
Grand Total
Previous Year ^ __ __ _ ___ _____ j _ ____________ _______
Note : Assets included in land, property and building above exclude Investment Properties as defined
in note (e) to Schedule 8.
SCHEDULE 11- CASH AND BANK BALANCES
P a rticu la rs C u rre n t Y ear P re vio u s y e a r
___________________________________________________________________ (? *000)_______ (T ’000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
(a) Deposit Accounts
(aa) Short-term (due within 12 months of the date of
Balance Sheet)
(bb) Others
(b) Current Accounts
3. Money at Call and Short Notice
(a) With Banks
(b) With other Institutions
TOTAL
Balances with non-scheduled banks in 2 and 3 above
CASH & BANK BALANCES
1. In India
2. Outside India
______ Total__________ ____________ _____________ __ _______________________________
Note : Bank balance may include remittances in transit. If so, the nature and amount shall be separately
SCHEDULE-12 j-n-r
ADVANCES
V -AND
••- OTHER ASSETS
No. P articulars
(T ’000) (? ’000)
Advances
1. Reserve deposits with ceding companies
2. Application money for investments
3. Prepayments
4. Advances to Directors/Officers
5. Advance tax paid and taxes deducted at source (Net of
provision for taxation)
V/1-15
6.| Others (to be specified)

, Total (A)
Others Assets
1. Income accrued on investments
2 . Outstanding Premiums
3. Agents' Balances
4. Foreign Agencies Balances
5. Due from other entities carrying on insurance business
(including reinsures).
6. Due from subsidiaries/holding company
7. Deposit with Reserve Bank of India [Pursuant to section 7 of
Insurance Act, 1938]
Total (B)
Total (A+ B)
Notes :
(a) The items under the above heads shall not be shown net of provisions for doubtful amounts.
The amount of provision against each head should be shown separately.
(b) The term ‘officer’ should conform to the definition of that term as given under the Companies
Act. 1956.
(c) Sundry debtors will be shown under item 8 (Others).
SCHEDULE-13 CURRENT U ABILITIES

No. Particulars Current Year Previous Year
(? ’000) (? ’000)
1. Agents’ Balances
2. Balances due to other insurance companies
3. Deposits held on re-insurance ceded
4. Premiums received in advance
5. Unallocated premium
6. Sundry creditors
7. Due to subsidiaries/holding company
8. Claims outstanding
9. Annuities due
10. Due to Offlcers/'Directors
Total
SCHEDULE -1 4 PROVISIONS
No. Particulars Current Year Previous Year
(? ’000) (? ’000)
1.For taxation (less payments and taxes deducted at source)
2.For proposed dividends
3.For divided distribution tax
4.Others (to be specified)
_____ Total
V /1 -1 6 ACCOUNTS OF INSURANCE COMPANIES
SCHEDULE-15 MISCELLANEOUS EXPENDITURE

(To the extent not written off or adjusted)
No. P articulars C u rre n t Year P re vio u s Year
(? ’000) (? ’000)
1. Discount allowed on issue of shares/ debentures
^Total
Notes :
(a) No item shall be included under the head “Miscellaneous Expenditure" and carried forward
un'ess
1. some benefit from the expenditure can reasonably be expected to be received in future,
and
2. the amount of such benefit is reasonably determinable.
(b) The amount to be carried forward in respect of any item included under the head
“Miscellaneous Expenditure” shall not exceed the expected future revenue/other benefits
related to the expenditure.
EX PLA N A TIO N O F SOM E O F THE ITEMS IN REVENUE A C C O U N T

— ______________ ' • ' ' • - • .................
1. Claims. Any amount payable by the insurance company is called a claim. In life
insurance business, claims may arise due to two reasons i.e., by death or maturity. While
calculating the figure for claims, ail claims intimated and accepted or not accepted at
the end of the year, expenses relating to claims are to be added and out of the total,
claims outstanding at the beginning of the year and reinsurance recoveries are to be
deducted. The amount of reinsurance recoveries is received under reinsurance contract and
it reduces the total claims to be paid by the business. It may be noted that all claims
intimated during the year whether accepted or even not accepted are to be taken.
2. Annuity. It is an annual payment which a life insurance company guarantees to pay for
a lumpsum money received in the beginning. It is an expense and shown under the head
Benefits Paid (Schedule 4).
3. Surrender Value. If an insured is unable to pay the further premium, he can get his
policy paid from the corporation. It is the present cash value of the policy which a holder gets
from the corporation on surrendering all the rights of the policy. There is no surrender value in
case of general insurance policies.
4. Bonus in Cash. If the insurer has with profit policy, he will get the bonus from the
corporation. If the bonus is paid in cash, it is shown on the debit side of the revenue account
as an expense.
5. Bonus in Reduction of Premium. Instead of paying bonus in cash, the insurer may
deduct the bonus from the premiums due from the insured. This is known as bonus in
reduction of premium. It is shown both as an expense and as an income by adding to the
premium in the Revenue Account. Bonus in reduction of premium as an expense is
shown as “Other Benefits Paid” in Schedule 4.
6. Premium. The premium received during the accounting period plus outstanding at the
end of the period, plus bonus in reduction of premium minus outstanding premium at the
beginning of the period minus reinsurance premium is to be shown under the heading
“Premium Earned (Net)” (Schedule 1).
7. Consideration for Annuities Granted. Any lumpsum payment received by the
insurance company in lieu of granting annuity is called as consideration for annuity granted
and will be shown as an income under the heading “Other Income.”
8. Interest, Dividend and Rent. If the life insurance company has received any interest,
dividend and rent on its investment, income tax thereon should not be deducted. Interest
ACCOUNTS OF INSURANCE COMPANIES V /1 -1 7
accrued and outstanding is added to this item. Interest, Dividends and Rent should be shown
at gross value and tax deducted at source should be shown as Advance under the head
“Advances and Other Assets” (Schedule 12).
9. Registration Fees. This is an item of income and shown as other income in the
revenue account.
10. Reinsurance. When a company accepts a business of more value and in order to
'educe the risk, may pass on some business to the other company, it is called reinsurance.
11. Commission on Reinsurance Accepted/Ceded. The company which passes some
business to the other company gets some commission which is known as commission on
reinsurance business ceded and is deducted from commission paid account. The company
which accepts such business is required to pay commission on reinsurance business
accepted and such commission will become an expense and will be added to commission
oaid on direct business. Commission paid on reinsurance business accepted is known as
Commission on Reinsurance Accepted. Such commission will become an expense and will
ce added to commission paid on direct-business.
ILLU S TFIA TIO N 1. The Young India Life Assurance Limited had a paid-up capital
of f 2,50,000 divided into 25,000 shares of ? 10 each. Its net liability on all contracts in
force as on 31-3-2017 was ? 22,50,000 and on 31-3-2016 this liability was ? 20,00,000.
From the following figures extracted from its books for the year ended 31-3-2017
orepare revenue account. The company has paid an interim bonus of ? 1,10,000 and
20% of the surplus is to be allocated to shareholders, 10% to the Catastrophe Reserve
and the balance being carried forward.
T
Life fund 24,50,000 Annuities paid 10,000
=remiums less reinsurance Commission 54,000
premiums 13,80,000 Surrenders 85,000
rterest, dividends and rents 7,50,000 Surplus on revaluation of reversions 4,000
r nes and fees 4,000 Re-assurances irrecoverable 1,000
rcome tax 1,18,000 Claims less reinsurance claims 8,90,000
Management expenses 1,75,000 Consideration for annuities granted 45,000
SO LUTIO N
The Young India Life Assurance Company Ltd.
REVENUE ACCOUNT
_______ fo r the y e a r e n d in g 3 1 s t M arch, 2 0 1 7 _______
P articulars S che d u le C u rre n t y e a r P e rvio u s y e a r
r ’ooo ? ’000
"~-?—iums Earned (Net) 1 1,380
■ccrne from Investments :
Interest, Dividends and Rents 750
Surplus on Revaluation of Reversions 4
fife - Income
Consideration for Annuities Granted 45
Fines and Fees 4
Total (A) 2,183
C s r m ;ssion 2 54
■Derating Expenses related to Insurance Business 3 175
IL L U S T R A T IO N 2. Following Trial Balance was extracted from the books of the

Life Insurance Corporation as on 31st March, 2017.
Dr. Cr.
(? ’000) (? ’000)
Paid up Share Capital —1,00,00,000 Shares of f 10 each — 1,00,000
Life Assurance Fund as on 1st April, 2016 — 29,72,300
Bonus to Policyholders 31,500 —
Premiums received — 1,61,500
Claims paid 1,97.000 —
Commission paid 9,300 —
Management Expenses 32,300 —
Mortgages in India 4,92,200 —
Interest and Dividends received — 1,12,700
Agents’ Balances 9,300 —
Freehold Premises 40.000 —
investments 23,05,000 —
Loans on Company’s Policies 1.73,600 —
Cash on Deposits 27,000 —
Cash in hand and Current Account 7,300 —
Surrenders 7.000 —
Dividend Paid 15,000
33,46,500 33,46,500
You are required to prepare the Corporation’s Revenue Account for the year as on
31st March, 2017 and its Balance Sheet as on that date after taking the following matter
into consideration :
(a) Claims admitted but not paid ? 90,00,000 ; (b) Management expenses due
? 2,00,000 ; (c) Interest accrued ? 1,93,00,000 ; (d) Premiums outstanding ? 1,00,00,000
; (e) Bonus utilised in reduction of premium ? 20,00,000 ; (f) Claims covered under
reinsurance T 23,00,000.
S O L U T IO N
Life Insurance Corporation
REVENUE ACCOUNT
fo r the y e a r e n d in g 3 1 s t M arch, 2 0 1 7
P a rticu la rs S che d u le ? ’000

3remiums Earned - Net 1 1,73,500
ncome from Investments :
Interest, Dividends and Rent (Gross) 1,32,000
Total (A) 3,05,500
Commission 2 9,300
Operating Expenses Related to Insurance Business 3 32,500
Total (B) 41,800
Benefits Paid (Net) 4 2,27,700
Surplus (D) = (A) - (B) - (C) 36,000
allocation of Surplus :
Bonus to Policyholders 31.500
Surplus shown in the Revenue Account 4,500
36,000
V / 1 -2 0 ACCOUNTS OF INSURANCE COMPANIES
Life Insurance Corporation

BALANCE SHEET
as a t 3 1 s t M arch, 2 0 1 7
P articulars S ch e d u le r ’ooo
Sources of Funds
Share Capital 5 1,00,000
Reserves & Surplus 6 29,76,800
Borrowings 7 —
Total 30,76,800
Investments 8 23,05,000
Loans 9 6,65,800
Fixed Assets 10 40,000
Current Assets :
Cash & Bank Balances 11 7,300
Advances & Other Assets 12 67,900
Sub-Total (A) 75,200
Current Liabilities (B) 13 9,200
Net Current Assets (C) = (A) - (B) 66,000
Total 30,76,800
(Total of Schedules 8, 9, 10 & Net Currents Assets)
Schedules Forming Part of Financial Statements
SCHEDULE 1 -PREMIUMS
P a rticu la rs (? ’000)
Premiums :
Received 1,61,500
A d d : Outstanding 10,000
A d d : Bonus utilised in Reduction of Premium 2,000
1,73,500
SCHEDULE 2-COMMISSION
Commission Paid 9,300
SCHEDULE 3 —OPERATING EXPENSES RELATED TO INSURANCE BUSINESS
P a rticu la rs (f ’000)
Management Expenses Paid 32,300
A d d : Outstanding 200
32,500
SCHEDULE 4 -BENEFITS PAID (NET)
Claims Paid 1,97,000
A d d : Outstanding Claims 9,000
Le ss : Covered under Reinsurance 2,06,000
2,300
2,03,700
6
V/1-21
Bonus utilised in Reduction of Premium
Surrenders 2,000
Dividends Paid 7,000
15,000
2,27,700
---------------------------------------- SCHEDULE 5— SHARE C AP ITAL
------- ----------- ■ Particulars
{? nnn)
Paid up Share Capital
1,00,00,000 Equity Shares of 7 10 each fully paid up
1,00 000
------------ ------------------------------------ SCHEDULE 6 RESERVES & SURPLUS
---------------- ----------- Particulars
(? ’000)
A! “ 6 FUnd 3t the beginnin9 °f the year 20 V n n n
M d '■SurP,us as Per Revenue A/c for the Current year 4,500
29,76,800
----------- — -------------- ----------------------SCHEDULE 8 -IN V E S T M E N T S
--------- — --------;_______Particulars
investments ~ ‘ 4-----------------— -— -------------------------- (7 ’000)
ô,Ub,000
--------------------— ---------------------- SCHEDULE 9 —LOANS
— Particulars
aecurea . Mortgages in India — -------------- (7 ’000)
Loan on Policies 4,92,200
1,73,600
6,65,800
SCHEDULE 1 0 -FIXED ASSETS
P a rticu la rs
(7 ’000)
'eehold Premises
40,000
.S CHEDULE 11-C A S H & SANK BALANCES
P a rticu la rs
(7 ’00.,.
~sh in hand and Current Account
7,300
SCHEDULE 1 2 -ADVANCES AND OTHER ASSETS
P a rticu la rs
Advances (7 ’000)
Other A s s e t s :
Interest Accrued
Outstanding Premiums 19,300
Agents’ Balances 10,000
Amount Recoverable from Reinsurance Companies 9.300
Cash on Deposits 2.300
27,000
SCHEDULE 13-C U R R E N T LIABILITIES

P a rticu la rs _(? ’000)
Claims Unpaid 9,000
Management Expenses Outstanding 200
9,200
ILLUSTRATION 3. A Life Insurance Company disclosed a fund of f 20,00,000

and the Balance Sheet total ? 45,00,000on 31st March 2017before taking the following
into consideration :
(a) A claimof ? 10,000was intimated and admitted but not paid during the year.
(b) A claimof ? 6,000outstanding in the books for 8years is written back
(c) Interest on Securities accrued ? 800but not received during theyear.
(d) Rent of the own building occupied f 2,000.
(e) Premiumof ? 600is payable under re-insurance.
(f) Reinsurance recoveries f 26,000.
(g) Bonus utilised in reduction of premium? 10,000.
(h) Agents commission to be paid ? 8,000.
Pass the necessary Journal Entries for the above omissions recompute the fund
and showthe Balance Sheet total after making the above adjustments.
SOLUTION
JOURNAL ENTRIES
2017
March 31
(a) Claims A/c Dr.
To Outstanding Claim A/c 10,000
(Being claim intimated and admitted but not paid recorded)
(b) Outstanding Claims A/c Dr. 6,000
To Claims A/c 6,000
(Being claim outstanding in the books for 8 years is written back)
(c) Accrued Interest A/c Dr. 800
To Interest A/c 800
(Being Adjustment for accrued interest)
No Entry
Premium A/c Dr. 600
To Reinsurance Premium Payable A/c 600
(Being adjustment made for premium payable under reinsurance)
Reinsurance Claims A/c Dr. 26,000
To Claims A/c 26,000
(Being claims covered under reinsurance not received)
Bonus in Reduction of Premiums A/c Dr. 10,000
To Premiums A/c 10,000
(Being adjustment of bonus utilised in reduction of premium)
Commission A/c Dr. 8,000
To Commission Payable A/c 8,00C
(Being adjustment of commission payable to agents)
RECOMPUTATION OF LIFE ASSURANCE FUND

?
Balance of life assurance fund on 31-3-2017 20,00,000
A d d : Outstanding claim written back 6,000
Accrued interest 800
Claims covered under reinsurance 26,000
Bonus utilised in reduction of premium 10,000
20,42,800
Less : Claims intimated and admitted 10,000
Premium payable under reinsurance 600
Commission payable to agents 8,000
Bonus in reduction of premium 10,000
28,600
Correct Balance of Life Assurance Fund 20,14,200
BALANCE SHEET
as on 3 1 -3 -2 0 1 7
Lia b ilitie s ? A sse ts
B/S Total (as given) 45,00,000 B/S Total (as given) 45,00,000
Add : Increase in Life Assurance Accrued interest 800
Fund (? 20,14,200- Reinsurance Claim Receivable 26,000
? 20,00,000) ? 14,200
Outstanding Claim 10,000
Less : Outstanding Claim
written back 6,000
" 4,000
Reinsurance Premium Payable 600
Commission Payable 8,000
45,26,800 45,26,800
O Determination o f Profit in Life Insurance Business

A life policy is generally taken for a number of years. The premium received for such long
term contracts cannot be treated as income for ascertaining the profits for that year. For
example, under a contract of annuity only one premium as initial payment is received
whereas the annuitant is required to be paid annuity till he dies. In case of life insurance, the
claim must arise either on death or expiry of the period of the policy whichever is earlier. That
the future premium may or may not be received depends on the existence of the insured.
Thus on a particular date a liability of the corporation is to be calculated as the premiums to
oe received in future will generally be less than the amount payable as claims. There is a gap
oetween claims which are expected to arise and premiums which are expected to be
'eceived. This gap is known as net liability. Thus it becomes desirable to create a reserve
equal to its net liability in order to ascertain the profit made by the corporation. The Life
nsurance Corporation of India makes the valuation of its net liability every year in order to
ascertain Its profit. This is done by a person known as actuary i.e. mathematician well versed
in the intricacies of life insurance. The process by which net liability is ascertained by an
actuary, is known as actuarial valuation. This Is necessary to determine the profit in case of
fe insurance business.
O Procedure fo r Ascertaining Profit or Loss

Net liability is compared with life assurance fund on a particular date in order to calculate
the surplus or deficiency. This comparison is made by preparing a Valuation Balance Sheet,
a specimen form of which is given as follows :
VALUATION BALANCE SHEET
a s on.
T T
To Net Liability as per Actuary’s By Life Assurance Fund as per
Valuation Balance Sheet
To Surplus By Deficiency
Only surplus (and not deficiency) will be shown in the Balance Sheet. With profit
policyholders have a right to participate in the profits of life insurance business to the extent
of 95% of true profit. For calculation of true profit, surplus as disclosed by Valuation Balance
Sheet must be adjusted by :
(/) Adding interim bonus (if any) as it is really advance payment of bonus.
(//) Deducting any expenses still to be incurred.
Out of 95% of true profit, interim bonus already paid should be deducted to calculate the
amount due to the policyholders.
ILLUSTRATION 4. A iife insurance company gets its valuation made once in
every two years, its Life Assurance Fund on 31st March, 2017, amounted to ?41,40,000
before providing W30,000 for the shareholders dividend for the year 2016-17. its
actuarial valuation due on 31st March, 2017 disclosed a net liability of ? 40,40,000
under assurance annuity contracts.
An interimbonus of ? 60,000was paid to the oolicyholders during the year ending
31st March, 2017.
Prepare astatement showing the amount nowavailable as bonus to policyholders.
SOLUTION
as on 3 1 s t M arch, 2 0 1 7
To Net Liability as per Actuary’s By Life Assurance Fund as per

Valuation 40,40,000 Balance Sheet 41,40,000
” Surplus 1,00,000
41,40,000 41,40,000
STATEMENT SHOWING THE AMOUNT DUE TO POLICY HOLDERS

f
Surplus as per Valuation Balance Sheet 1,00,000
A d d : Interim bonus paid to policyholders • 60,000
1.60,000
Less : Dividend for 2016-17 due to Shareholders 30,000
Profit 1,30,000
?
Policyholders will get 95% of ? 1,30,000 1,23,500
Already paid as interim bonus
L e ss : 60,000
Amount now due to the policyholders 63,500
O Entries fo r Dealing with Profits

There are two methods to deal with the profits in the books.
Under the first method, the following entries are passed :
(/) For transferring the whole of Profits to Profit & Loss A/c
Life Assurance Fund A/c Dr.
To Profit & Loss A/c
(//) Profit & Loss A/c (and not to Revenue A/c)
To Dividend (to Shareholders) A/c
To Income Tax (on profits)
To Bonus paid to Policyholders in Cash
To Bonus Utilised in Reduction of Premiums
To General/Contingency Reserve
(Hi) For transferring reversionary bonus declared out of surplus to Life Assurance Fund
Profit & Loss A/c
To Life Assurance Fund
The balance in P. & L. A/c is shown in the Balance Sheet.
Under the Second (or Alternative) Method to deal with the profits the amount due to
various parties is determined and entries are passed through Life Assurance Fund or
Revenue Account. All items i.e., dividend to shareholders, income tax on profits, bonus
payable in Cash etc. all are debited to Revenue Account provided the amounts do not exceed
nose warranted by profits. No separate entry is required to be passed for declaring the
•eversionary bonus as full profit has not been debited to the Life Assurance Fund in the first
nstance. This will be more clear from the following illustration :
ILLUSTRATION 5. After the valuation on March 31, 2017 in the books of Life
Assurance Company Ltd. the actuary’s certificate disclosed the net liability on policies
andannuities at ? 50,40,000.
Fromthe following information prepare the Revenue Account ignoring Schedules
and ascertain profit and loss made by the company. It was further decided by the
: rectors to transfer a sum of ? 1,00,000 to the Investment Fluctuation Fund which
stood at ?2,00,000 on that date to write down investments from ? 49,00,000 to
=46,00,000if the valuation revealed asurplus :
r r
Bonus in Cash 1,00,000Expenses of Management 2,50,000
Bonus in Reduction of Premiums 10,000 Commission 1,00,000
Surrenders 2,00,000Annuities 8,00,000
=iemiums 35,00,000Consideration for Annuities
Merests, Dividends and Granted 12,00,000
Rents (net) 12,00,000Life Assurance Fund on 1-4-2016 40,00,000
-aims 22,00,000InterimBonus paid for the
valuation period 1,50,000
As a result of valuation it was decided that a reversionary bonus of ? 150 per
W ‘0.000be granted and the company gave the policyholders the option to get bonus
•rash @ ? 60per ? 10,000. The total business in force was ? 9crores. One third of the
re icy holders in value decided to get the bonus in cash. Draft the Journal Entries for
re above decisions, giving effect to utilisation of the surplus ; show how much the
sc'icyholders can get by way of share in profit (Ignore taxation).
t r n n i l NTS OF iNSURANCECOMPANIE^
V/1-26
SOLUTION Life Assurance Company Ltd.

REVENUE ACCOUNT
for the year ending 31st March, 2017
35.00. 000
Premiums Earned (Net)

Income from investm ents :
12,00,000
1 , 00,000 11.00. 000
Interest, Dividends and Rent
Less : Loss on Revaluation of Investments 12,00,000
Other Income : Consideration for Annuities Granted 58,00,000
Total (A) ' 1,00,000
2,50,000
Commission
Operating Expenses related to Insurance Business—Expenses of Management '3,5 0,00 0
Total (B) ?
22 , 00,000
Benefits Paid (Neh : Claims
8 , 00,000
32,00,000
Annuities 2 , 00,000
Surrenders
1 ,00,000
10,000 1, 10,000
Bonus in Cash 33.10.000
Bonus in Reduction of Premiums
Total (C) 21.40.000
Surplus (D) = (A) - (B) - (C)

40,00,000
21,40,000
Balance in Life Assurance at the beginning of the year
A d d : Surplus as per Revenue A/c this year 61,40,000
•—---- 1
Total Life Assurance Fund
as on 31st March, 2017
t
61,40,000
By Life Assurance Fund
To Net Liability as per Actuarial 50,40,000
Valuation 11,00,000 61 ,40,00C
To Surplus 61,40,000
f
11.00,000
Surplus as revealed by Valuation Balance Sheet
1,50,00:
"12,5000^
A d d : Interim Bonus Paid
T r 87,500
True Surplus Subject to Taxation
1,50,00'-
Policyholders will get 95% 10,37,50:
Less : Interim bonus paid to policyholders
Am ount due to policyholders
JOURNAL
2017 12.00.00C
M a r.31 Life Assurance Fund A/c
To Profit & Loss Me
(Being profit revealed by valuation balance sheet transferred
to P/L A/c)
Profit & Loss A/c Dr. 1,80,000

To Bonus in Cash 1,80,000
(Being the immediate bonus payable @ ? 60 per? 10,000 on
? 3 crores)
Profit & Loss A/c Dr. 3,60,000
To Life Assurance Fund A/c 3,60,000
(Being the transfer of the sum to Life Assurance Fund of net
liability at present value in respect of reversionary bonus @
? 60 per ? 10,000 on ? 6 crores)
As a result of the above mentioned entries the Life Assurance Fund would stand at f 54,00,000 (i.e.,
61,40,000 f 3,60,000 - 11,00,000) and Profit & Loss A/c would show a balance of ? 5,60,000 (i.e.,
M 1,00,000 - ? 1,80,000 - ? 3,60,000).
A lte rn a tiv e M e th o d
?
Life Assurance Fund A/c Dr. 1,80,000
To Bonus in Cash (Payable) 1,80,000
O I m p o r t a n t P o in t s in Final A c c o u n t s o f G e n e r a l In s u r a n c e C o m p a n ie s
Following are the important points which should be kept in mind while preparing
thefinal accounts of general insurance companies :
1. General insurance company may be doing more than one business, e.g., fire, marine,
accidental etc. For each type of business a separate revenue account is to be prepared in the
prescribed form B-RA,
2. Policies in general insurance are only for one year or for less than one year. These
can be taken by the insured at any time during the year. Premium on such policies is always
paid in advance. There may be such policies which are issued during the year but risks
covered remain unexpired at the end of the accounting period. Hence a reserve for unexpired
risk is made at 50% of the net premium in case of fire and other business but in case of
marine insurance this provision is made at 100% of the net premium. Some prudent
companies may make additional reserve also in case of fire and accidental insurance in order
to cover the full liability as and when it arises.
The Executive Committee of the General Insurance Council, set up under the Insurance Act
'or the supervision of general insurance companies, has provided that in case of marine
msurance, the provision against unexpired risk should be 100% of net premium and in case
of other general insurance business such as fire, accident, theft, etc. reserve against
-nexpired risk should be 40% of the net premium income. However, the Income Tax
Authorities allow even a provision of 50% of net premium income. Therefore, the practice with
n e general insurance companies is to maintain 50% of net premium income as reserve
against unexpired risk in case of fire, accident, theft, etc. An insurance company can also
~!ake additional reserve in addition to usual reserve if it feels necessary.
3. A combined Balance Sheet is also prepared in the prescribed form for all businesses
:n the closing date of the year.
4. Commission on policies effected through insurance agents cannot exceed 5% of the
rremium in respect of fire and marine business and 10% in case of miscellaneous
rusiness. In case policies are effected through a principal agent, the maximum limits are
10% for fire and marine policies and 15% in case of miscellaneous insurance less any
: :mmission payable to an insurance agent in respect of the policy concerned.
5. Claims paid must include all expenses directly incurred in settling claims such as legal
ex senses, medical expenses, surveyor’s expanses etc.
6. No claim of ? 20,000 or more can be paid, except as the Controller of Insurance may
otherwise direct, unless there is a report in respect thereof from an approved surveyor or loss
assessor (licensed under the Insurance Act).
7. An insurer carrying on general insurance business, after the commencement of
Regulations given by the Insurance Regulatory and Development Authority on 30th March,
2003, shall comply with the requirements of Schedule B for the preparation of financial
statements, management report and auditor’s report. Schedule B as given by IRDA is
reproduced below :
GENERAL INSTRUCTIONS FOR PREPARATION O F FINANCIAL

STATEMENTS O F GENERAL INSURANCE BUSINESS
1. The corresponding amounts for the immediately preceding financial year for all items
shown in the Balance Sheet, Revenue Account, Profit and Loss Account shall be
given.
2. The figures in the financial statements may be rounded off to the nearest thousands.
3. Interest, dividends and rentals receivable in connection with an investment should be
stated at gross value ; the amount of income tax deducted at source being included
under ‘advance taxes paid’.
4. Income from rent shall not include any notional rent.
5. (I) For the purposes of financial statements, unless the context otherwise requires :
(a) the expression ‘provision’ shall, subject to note (II) below mean any amount
written off or retained by way of providing for depreciation, renewals or
diminution in value of assets, or retained by way of providing for any known
liability or loss of which the amount cannot be determined with substantial
accuracy.
(£>) the expression ‘reserve’ shall not, subject to as aforesaid, include any
amount written off or retained by way of providing for depreciation, renewals
or diminution in value of assets or retained by way of providing for any
known liability.
(c) the expression ‘capital reserve' shall not include any amount regarded as
free for distribution through the profit and loss account; and the expression
‘revenue reserve’ shall mean any reserve other than a capital reserve.
(d) The expression “liability" shall include all liabilities in respect of expenditure
contracted for and all disputed or contingent liabilities.
(II) Where :
(a) any amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets, or
(b) any amount retained by way of providing for any known liability is in excess
of the amount which in the opinion of the directors is reasonably necessary
for the purpose, the excess shall be treated for the purpose of these
accounts as a reserve and not provision.
6. The company should make provisions for damages under lawsuits where the
management is of the opinion that the award may go against the insurer.
7. Extent of risk retained and reinsured shall be separately disclosed.
8. Any debit balance of the Profit and Loss Account shall be shown as deduction from
uncommitted reserves and the balance, if any, shall be shown separately.
- CCOUNTS OF INSURANCE COMPANIES
V /1 -2 9
___
1.
An insurer shall prepare the Revenue Account, Profit and Loss Account
[Shareholders’ Account] and the Balance Sheet in Form B-RA, Form B-PL and Form
B-BS, or as near thereto as the circumstances permit.
Provided that an insurer shall prepare Revenue Account and Balance Sheet for fire,
marine and miscellaneous insurance business and separate schedules shall be
prepared for Marine Cargo, Marine—other than Marine Cargo and the following
classes of miscellaneous insurance business under miscellaneous insurance and
accordingly application of AS17-Segment Reporting—shall stand modified.
1. Motor 2. Workmen’s Compensation/Employers’ Liability 3. Public/Product
Liability 4. Engineering 5. Aviation 6. Personal Accident 7. Health Insurance
8. Others.
An insurer shall prepare separate Receipts and Payments Account in accordance
with
ICAI. the Direct Method prescribed in AS 3 —“Cash Flow Statement” issued by the
FORM B-RA
'fame of the Insurer :
REVENUE ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 20...

Policyholders’ Account (Technical Account)
1 z Current
Previous
Year Year
Premiums Earned (Net) (f ’000) (? ’000)
Profit/Loss on Sale /Redemption of Investments
Others (to be specified)
Interest, Dividend & Rent— Gross

Total (A)
Claims incurred (Net)
Commission
Operating Expenses related to Insurance Business
Total (B)
Operating Profit/(Loss) from Fire/Marine
/Miscellaneous Business C = (A-B)
APPROPRIATIONS
Transfer to Shareholders’ Account

Transfer to Catastrophe Reserve
Transfer to Other Reserves (to be specified)
Total (C)_____________
: See Notes appended at the end of Form B-PL
FORM B-PL
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 20

Shareholders’ Account (Non-technical Account)
P a rticu la rs S ch e d u le C u rre n t Year P re vio u s
Year
Operating Profit / (Loss)

(a) Fire Insurance
(b) Marine Insurance
(c) Miscellaneous Insurance
Income from Investments
(a) Interest, Dividend & Rent - Gross
(b) Profit on Sale of Investments
Le ss : Less on sale of investments
Other Income (To be specified)

TOTAL (A)
Provisions (Other than taxation)
(a) For Diminution in the Value of Investments
(to) For Doubtful Debts
Other Expenses
(a) Expenses other than those related to Insurance
Business
(to) Bad Debts written off
Total (B)
Profit before Tax
Provision for Taxation
Profit after Tax
Appropriations
(a) Interim Dividends paid during the year
(to) Proposed Final Dividend
(c) Dividend distribution tax
(d) Transfer to Reserves or other Accounts (to be
specified)
Balance of Profit/Loss brought forward from last

year
Balance carried forward to Balance Sheet

Notes : To Form B-RA and B-PL.
(a) Premium income received from business concluded in and outside India shall be separa'
disclosed.
(.b ) Reinsurance premiums whether on business ceded or accepted are to be brought into account
gross (i.e., before deducting commissions) under the head reinsurance premiums.
(c) Claims incurred shall comprise claims paid, specific claims settlement costs wherever applicable
and change in the outstanding provisions for claims at the year-end.
(id] Items of expenses and income in excess of one per cent of the total premiums (less
reinsurance) or ? 5,00,000 whichever is higher, shall be shown as a separate line item.
(e) Fees and expenses connected with claims shall be included in claims.
(f) Under the sub-head “Others” shall be included items like foreign exchange gains or losses and
other items.
(,g) Interest, dividends and rentals receivable in connection with an investment should be stated at
gross amount, the amount of income tax deducted at source being included under ‘advance
taxes paid and taxes deducted at source”.
(h) Income from rent shall include only the realised rent. It shall not include any notional rent.
____________ FORM B-BS
Name of the insurer:
BALANCE SHEET AS AT 31 ST MARCH, 20...
No. P a rticu la rs S ch e d u le C u rre n t Year P re vio u s
Y ear
(? ’000) P ’000)
Sources of Funds
Share Capital 5
Reserves and Surplus 6
Fair Value Change Account
Borrowings 7
Total
Investments 8
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balances 11
Advances and Other Assets 12
Sub-total (A)
Current Liabilities 13
Provisions 14
Sub-Total (B)
Net Current Assets (C) = (A - B)
Miscellaneous Expenditure (to the extent not written 15
c • or adjusted)
Debit Balance in Profit & Loss Account
___ Total '
CONTINGENT
------ LIABILITIES
---- --------- --------- - . - —-------------- ■ — --------
No. P a rticu la rs C u rre n t Year F re vio u s Y ear
(f ’000) (f ’000)
1. Partly paid-up investments
2. Claims, other than against policies, not acknowledged
as debts by the company
3. Underwriting commitments outstanding (in respect of
shares and securities)
4. Guarantees given by or on behalf of the Company
ACCOUNTS o f INSURANCE COMPANIES
Statutory demands/ liabilities in dispute, not provided for

Reinsurance obligations to the extent not provided for in
Premium from direct business written

A d d : Premium on reinsurance accepted
L e ss : Premium on reinsurance ceded
Net Premium
Adjustment for change in reserve for unexpired risks
Total Premium Earned (Net)
Claims paid
Direct
A d d : Re-insurance accepted
L e ss : Re insurance ceded
Net Claims paid
Add Claims outstanding at the end of the year
Less Claims outstanding at the beginning
Total Claims Incurred
s;
N otes:
In c u rre d B u t N o t R e p o rte d (IBN R ). In c u rre d b u t n o t e n o u g h re p o rte d (IB N E R ) c la im s s h o u ld be
(a)
in c lu d e d in the a m o u n t fo r o u tsta n d in g claim s.
C la im s inclu d e s p e cific cla im s se ttle m e n t c o s t b u t n o t e xp e n se s o f m anagem ent.
The s u rv e y o r fees, le g a l a n d o th e r e x p e n se s s h a ll a lso fo rm p a rt o f cla im s cost.
C la im s c o s t s h o u ld b e a d ju s te d fo r e s tim a te d sa lva g e value i f th e re is a s u ffic ie n t c e rta in ty o f its
realisation.
SCHEDULE 3-COMMISSION
Commission paid !
Direct
A d d : Re-insurance Accepted
Less : Commission on Re-insurance Ceded
Net Commission
Note : The profit / commission, if any, are to be combined with the Re-insurance accepted or Re
insurance ceded figures
ACCOUNTS o f in s u r a n c e c o m p a n ie s
V/1 33
No.
SCHEDULE 4—-OPERATING EXPENSES RELATED TO INSURANCE BUSINESS
P a rticu la rs !
C u rre n t Year
P re vio u s Year
1. C ’ 000 )
Employees’ remuneration & welfare benefits (? ’000)
2.
Travel, conveyance and vehicle running expenses
3. Training expenses
4. Rents, rates & taxes
5. Repairs
6 .
Printing & stationery
7. Communication
8 , Legal & professional charges
9. Auditors’ fees, expenses etc.
(a) as auditor
j (b ) as adviser or in any other capacity, in respect o f;
(/) Taxation matters
(/'/) Insurance matters
(Hi) Management services; and
(c) in any other capacity
10. Advertisement and publicity
11. Interest & Bank Charges
12 . Others (to be specified)
13. Depreciation
Total
Authorised Capital
| Equity Shares of Rs........each
Issued Capital
! Equity Shares of ?...... each
I Subscribed Capital
I Equity Shares of f ...... each
Called-up Capital
Equity Shares of f .......each
L e s s : Calls unpaid
Add: Equity Shares forfeited (Amount originally paid up)

L e ss : Par Value of Equity Sharesbought back
L e s s : Preliminary Expenses
Expenses including commission or brokerage on

underwriting or subscription of shares
Total
*«otes
(a) Particulars of the different classes of capital should be separately stated.
(b) The amount capitalised on account of issue of bonus shares should be disclosed.
(c) disclosed.
in case any part of the capital is held by a holding company, the same should be separately
i ______________________________
SCHEDULE 6-RESERVES AND SURPLUS
1 C u rre n t Y ear P re vio u s Year
P articulars (? ’000)
(? ’000)
1. Capital Reserve
2 Capital Redemption Reserve
.
3. Securities Premium
4. General Reserves
L e ss : Debit balance in Profit and Loss Account
L e ss : Amount utilized for Buy-back
Catastrophe Reserve
Other Reserves (to be specified)
Balance of Profit in Profit and Loss Account
Total
SCHEDULE 7 - BORROWINGS)__________ ------- — ----- -----

P a rticu la rs
No. (? ’000)___ (t ’000)____
|
— —■
1. Debentures/Bonds
2. Banks
3. Financial Institutions
4. Others (to be specirieu;------------------------------- -----------------------
Total __________ ________ _____ _____ ----------
Note
LONG TERM INVESTMENTS

1. ii Government securities and Government guaranteed
bonds including Treasury Bills I
° ' t~'tl—■- c;counties
Other Investments
(a) Shares
(aa) Equity
(bb) Preference
(b ) Mutual Funds
(f) Subsidiaries
(,g) Investment Properties-Real Estate
SHORT TERM INVESTMENTS
1. Government securities and Government guaranteed
2, Other Approved Securities
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
(.g ) Investment Properties-Reai Estate
Total
Notes :
(a) Investments in subsidiary/holding companies, joint ventures and associates shall be separately
disclosed, at cost.
(i) Holding company and subsidiary shall be construed as defined in the Companies Act. 1956.
(/'/) Joint Venture is a contractual arrangement whereby two or more parties undertake an
economic activity, which is subject to joint control.
(Hi) Joint control — is the contractually agreed sharing of power to govern the financial and
operating policies of an economic activity to obtain benefits from it.
(/V) Associate— is an enterprise in which the company has significant influence and which is
neither a subsidiary nor a joint venture of the company.
(v) Significant influence (for the purpose of this schedule)— means participation in the financial
and operating policy decisions of a company, but not control of those policies. Significant
influence may be exercised in several ways, for example, by representation on the board of
directors, participation in the policy making process, material inter-company transactions,
interchange of managerial personnel or dependence on technical information. Significant
influence may be gained by share ownership, statute or agreement. As regards share
ownership, if an investor holds, directly or indirectly through subsidiaries, 20 per cent or
more of the voting power of the investee, it is presumed that the investor does have
significant influence, unless it can be clearly demonstrated that this is not the case.
Conversely, if the investor holds, directly or indirectly through subsidiaries less than 20 per
V/1 36
cent of the voting power of the investee,, it is presumed that the investor does not have
significant influence, unless such influence is clearly demonstrated . A substantial or majority
ownership by another investor does not necessarily preclude an investor from having
significant influence.
Aggregate amount of company’s investments other than listed equity securities and derivative
(b)
instruments and also the market value thereof shall be disclosed.
Investment made out of Catastrophe reserve should be shown separately.
(c)
Debt securities will be considered as “held to maturity” securities and will be measured at historical
(d )
costs subject to amortisation.
Investment property means a property [land or building or part of a building or both] held to earn
( e) rental income or for capital appreciation or for both, rather than for use in services or for
administrative purposes.
Investments maturing within twelve months from balance sheet date and investments made with
( f) the specific intention to dispose of within twelve months from balance sheet date shall be classified
as short-term investments.
SCHEDULE 9 -LO A N S
1. Security-wise Classification
S e c u re d
(a) On Mortgage of Property
(aa) In India
(bb) Outside India
(b) On Shares, Bonds, Govt. Securities, etc.
U n se cu re d
Total
Borrower-wise Classification
(a) Central and State Governments
(b ) Banks and Financial Institutions
(c) Subsidiaries
(d) Industrial Undertakings
(e) Others (to be specified)
Total
3. Performance-wise Classification
(a) Loans Classified as Standard
(aa) In India
(bb)Outside India
(b) Non-performing Loans less Provisions
(aa) In India
(bb) Outside India
Total
Maturity-wise Classification
(a) Short Term
(b) Long Term
Notes
tes :
(a) Short-term loans shall include those, which are repayable within 12 months from the date of
balance short. Long term loans shall be the loans other than short-term loans.
(b) Provisions against non-performing loans shall be shown separately.
(c) The nature of the security in case of all long term secured loans shall be specified in each case.
Secured loans for the purposes of this schedule, means loans secured wholly or partly against
an asset of the company.
(d) Loans considered doubtfui and the amount of provision created against such loans shall be
disclosed.
P a rticu la rs | C ost/G ro ss B lo ck D e p re cia tio n N e t B lo ck
O pen A d d it D e d u c t C losing Upto F o r the On To A s a t \ Pre'- o <
-ing ions ions L a st Y ear S ales/ D a te year \ s Y
Y ear A d ju s t end
m ents
Goodwill
Intangibles
(specify)
Land-Freehold
Leasehold
Property
Buildings
Furniture &
Fittings
Information
Technology
Equipment
Vehicles
Office
Equipment
Others (Specify
nature)
Total
Work-in
progress
Grand Total
Previous Year
Note : Assets included in land, building and property above exclude Investment Properties as defined
in note (e) to Schedule 8.
SCHEDULE 11-C A S H AND BANK BALANCES
No. P articulars C u rre n t Y ear P re vio u s Year
(? ’000) (? ’000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
(a) Deposit Accounts
(aa) Short-term (due within 12 months)
(fab) Others
(b) Current Accounts
3. Money at Call and Short Notice
(a) With Banks
(b) With Other Institutions
V/1-38
Others (to be specified)

Total
Balances with nori-scheduied banks in 2 and 3 above .
_____ _ L _ _ __ ______ ...______ ____________________________________ ___I--------------------- 1----------------
Note : Bank balance may include remittances in transit. If so, the nature and amount shall be separate; .
SIItiy ••-----
stated. --- - *.r> ATUCR ASSETS
S C H E D U L E -1 2 ADVANCES AND OTHER ASSETS P re vio u s ye a r
P a rtic u la rs C u rre n t Y e a r (f ’000)
___ , _____________________ ______________________________(? ’000)
No.
Advances
1. Reserve deposits with ceding companies
2. Application money for investments
3. Prepayments
4. i Advances to Directors/Officers
Advance tax paid and taxes deducted at source (Net of
5.
provision for taxation)
Total (A)
Others Assets
Income accrued on Investments
1.
2.
Outstanding Premiums
4. Foreign Agencies Balances
Due from other entities carrying on insurance business
5.
(including reinsurers).
Due from subsidiaries/holding
6. Deposit with Reserve B a n k of India [Pursuant to section 7 of
7.
Insurance Act, 1938]
Total (B)____
Total (A + B) _________________ _
(a): The items under the above heads shali not be shown net of provisions for doubtful amounts
Notes
The amount of provision against each head should be shown separately.
(b) The term ‘officer’ should conform to the definition of that term as given under the Companies
Act. 1956.
(c) Sundry debtors will be shown under item 8 (Others).
S C H E D U L E -1 3 CURRENT LIABILITIES P revious Year
C u rre n t Y ear
' j Cu (tW O i __
Particulars (? ’000)
Balances due to other insurance companies
2.
Deposits held on re-insurance ceded
3.
Premiums received in advance
4.
5. Unallocated premium
6 Sundry creditors
.
Due to subsidiaries/holding company
7.
8 Claims outstanding
.
9. Due to officers/directors
10
Others (to bespecified)
.
Total
ACCOUNTS OF INSURANCE COMPANIES V / 1 -3 9
SCHEDULE-14 PROVISIONS
No. P a rticu la rs C u rre n t Y ear P re vio u s y e a r
(? 000) (? ’000)
1. Reserve for Unexpired Risk
2. For taxation (less advance tax paid and taxes deducted at
source)
3. For proposed dividends
4. For dividend distribution tax
Total
SCHEDULE-15
MISCELLANEOUS EXPENDITURE
(To the extent not written off or adjusted)
No. P a rticu la rs C u rre n t Y ear P re vio u s y e a r
(? ’000) (? ’000)
1- Discount Allowed on issue of shares/debentures
TOTAL
Notes :
No item shall be included under the head “Miscellaneous Expenditure” and carried forward
(a)
unless ;
1. some benefit from the expenditure can reasonably be expected to be received in future,
and
2. the amount of such benefit is reasonably determinable.
(b ) The amount to be carried forward in respect of any item included under the head
“Miscellaneous Expenditure” shall not exceed the expected future revenue/other benefits
related to the expenditure.
IL L U S T R A T IO N 6, Prepare the Fire insurance Revenue A/c as per IRDA
regulations for the year ended 31st March, 2017 from the following details :
f r
Claims Paid 4,90,000 Expenses of Management 2,00,000
Legal Expenses Regarding Provision against Unexpired Risk
Claims 10,000 on 1st April, 2016 5,50,000
Premiums Received 13,00,000 Claims Unpaid on 1st April, 2016 50,000
Re-insurance Premium Paid 1,00,000 Claims Unpaid on
Commission 3,00,000 31st March, 2017 80,000
S O L U T IO N
Registration No. and Date of Registration with the IRDA :
FIRE INSURANCE REVENUE ACCOUNT
fo r the y e a r e n d e d 31 s t M arch, 2 0 1 7
P a rticu la rs S chedule A m o u n t (? )
(1) Premium Earned 1 11,50,000

(2) Other Income —
(3) Interest, Dividend and Rent -
Total (A) n,so,ooo
(4) Claims Incurred 2 5,30,000

(5) Commission 3 3,00,000
(6) Operating Expenses related to Insurance Business 4 2,00,000
Total (B) 10,30,000
Operating Profit (A) - (B) 1,20,000
Schedule 1 : Premium Earned (Net)
Premium Received 13,00,000

L e ss : Re-insurance Premium 1,00,000
Net Premium 12,00,000

Adjustment for Change in Reserve for Unexpired Risk (1) 50,000
11,50,000
Schedule 2 : Claims Incurred
Claims paid including Legal Expenses (? 4,90,0000 + ? 10,000) 5,00,000

A d d : Claims Outstanding at the end of the year 80,000
L e ss : Claims Outstanding at the beginning of the year (50,000)
Total Claims Incurred 5,30,000
Schedule 3 : Commission
Commission paid 3,00,000

3,00,000
Schedule 4 : Operating Expenses
Expenses of Management 2,00,000

2,00,000
Working Note (1):

C h a n ge in the P ro visio n fo r U n e xp ire d R isk
Unexpired Risk Reserve on 31st March, 2017 = 50% of Net Premium i.e. 50% of
? 12,00,000 (See Schedule 1) 6,00,000
Le ss : Unexpired Risk Reserve as on 1st April, 2016 5,50,000
Change in the Provision for Unexpired Risk 50,000
IL L U S T R A T IO N 7. From the following particulars you are required to prepare

Fire Revenue Account for the year ended on 31st March, 2017.
(? ’000) (? ’000)
Claims paid 4,80,000 Additional reserve for unexpired
Claims outstanding on risk 20,000
1st April, 2016 40,000 Reinsurance recoveries of claims 8,000
Claims intimated but not accepted Sundry expenses regarding claims 5,000
on 31 st March, 2017 10,000 Loss on sale of Motor Car 5,000
ACCOUNTS OF INSURANCE COMPANIES V/1 41
Claims intimated and accepted but Bad Debts 3,000

not paid on 31 st March, 2017 60,000 Refund of Double Taxation 5,000
Premium Received 12,12,000 Interest and Dividends 6,000
Reinsurance premium paid 1,20,000 Income Tax deducted thereon 1,000
Commission 2,00,000 Legal expenses regarding claims 3,000
Commission on reinsurance ceded 10,000 Profit on sale of investments 2,000
Commission on reinsurance Rent of staff quarters deducted
accepted 5,000 from salaries 2,000
Expenses of management 3,17,000 Depreciation on furniture 6,000
Reserve for unexpired risk on
1st April, 2016 4,00,000
You are required to provide for additional reserve for unexpired risks at 1% of the
net premium in addition to the opening balance.
SOLUTION
REVENUE ACCOUNT
fo r the y e a r e n d e d on 3 1 s t M arch, 2 0 1 7
in re s p e c t o f F ire B usin e ss (? ’000)
C u rre n t P re vio u s
P a rticu la rs S ch e d u le
Y ear Y ear
Premiums Earned (Net) 1 9.35.080
Profit on Sale of Investments 2,000
Refund of Double Taxation 5.000
Rent of Staff Quarters 2.000
Interest, Dividends & Rent (Gross) 6,000
Total (A) 9.50.080
Claims Incurred (Net) 2 5,10,000
Commission 3 1,95,000
Operating Expense related to Insurance Business 4 3,31,000
Total (B) 10,36,000
Operating Loss from Fire Business (C) = (A) - (B) 85,920
Schedules Forming Part of Financial Statements
SCHEDULE 1-PREMIUMS EARNED (NET)
C u rre n t P revious
Y ear Year
(T W O ) (7 W 0 )
Premium from direct business written 12,12,000
Less Premium on reinsurance ceded 1,20,000
10,92,000
Less Adjustment for change in reserve for unexpired risk :
Reserve for unexpired risk at the end of the year ?
50% of Net Premium T 10,92,000 5,46,000
Additional Reserve (? 20,000 old to be continued + 1%
of ? 10,92,000 net premium) 30,920
5,76,920
Less Reserve for unexpired risks at the
beginning of the year 4,20,000
1,56,920
9,35,080
—
V/1-42
?
4,80,000
Claims paid 8,000
Le ss : Reinsurance recoveries of claims
4,72,000
Claims intimated but not 10,000
accepted at the end of the year
Claims intimated and accepted 60,000
at the end of the year 5.000
Sundry expenses regarding claims 3.000
Legal expenses regarding claims
5,50,000
40,000
Less:
Claims outstanding at the beginning of the year
5.10,000
C u rre n t Previous
Y ear Year
r (? ’000) '”(? ’000)_
2 , 00,000
Commission paid 5,000
A d d : Commission on reinsurance accepted
2,05,000
10,000
Less:
C u rre n t P revious
Year Year
(? ’000) (? ’000)
3,17,000
Expenses of Management 3.000
Bad Debts 5.000
Loss on Sale of Motor Car 6.000
Depreciation on Furniture
3,31,000
IL L U S T R A T IO N 8. From the following balances of Prudential General Insurance

Co. prepare—(/) Fire Revenue Account ; (//) Marine Revenue Account ; and (i/i) Profit
and Loss Account for the year ending on 31st March, 2017 :
. i Not relate:
to any
business
? ’000 ? ’000 t ’000

3,60,000 7,60,000
Claims Paid and Outstanding 1,00,000
Additional Reserve on 1-4-2016 20,000
Sundry Expenses regarding claims 10,000 24,000
Bad Debts 2,400
Auditors’ Fees 10,000
Directors’ Fees
ACCOUNTS OF /NSURANCE CO/WPAN/ES V /1 -4 3
Share Transfer Fees 1,600

Bad Debts Recovered — 2,400
Fund on 1-4-2016 5,00,000 16,40,000 *—
Commission @ 5% of Premium Earned on
Reinsurance Ceded 20,000 40,000
Depreciation 70,000
Interest, Dividends etc. received 28,000
Difference in Exchange (Cr.) 600
Miscellaneous Receipts 10,000
Profit on Sale of Land 1,20,000
Insurance Premium less Reinsurance 12,00,000 21,60,000 —
Management Expenses 2,90,000 8,00,000 —

Additional reserve in case of fire insurance is to be raised by 5% of net premiums
in addition to usual reserve. Reinsurance premiums received amounted to
< 30,00,00,000 for fire business and ? 64,00,00,000 for marine business. Management
expenses are exclusive of commission. Rate of commission on direct business,
reinsurance accepted and reinsurance ceded is 5%.
S O L U T IO N
Prudential General Insurance Company
REVENUE ACCOUNT (IN RESPECT OF FIRE BUSINESS)
_________ fo r the y e a r e n d ing 3 1 s t M arch, 2 0 1 7 _________
P articulars S che d u le (? ’000)
Premiums Earned (Net) 1 10,40,000
Total (A) 10,40,000
Claims Incurred (Net) 2 3,80,000
Commission 3 60,000
Operating Expenses related to Insurance Business 4 3,00,000
Total (B) 7,40,000
Operating Profit from Fire Insurance Business (C) = (A) - (B) 3,00,000
REVENUE ACCOUNT IN RESPECT OF MARINE BUSINESS
__________ fo r the y e a r e n d in g 3 1 s t M arch, 2 0 1 7 __________
P a rticu la rs S ch e d u le (? ’000)
Total (A) 16,40,000
Claims Incurred (Net) 2 7.60.000
Commission 3 1.08.000
Operating Expenses related to Insurance Business 4 8,24,000
Total (B) 16,92,000
Operating Loss from Marine Business (C) = (A) - (B) 52,000
Prudential General Insurance Company
fo r the y e a r e n d in g 3 1 s t M arch, 2 0 1 7
(? ’000)
Operating Profit from Fire Insurance 3,00,000
Operating Loss from Marine Insurance (52,000)
-come from Investments : Interest & Dividend 28,000
Other Income :
Share Transfer Fees 1.600
2,400
Bad Debts Recovered 600
Difference in Exchange 1,20,000
Profit on Sale of Land 10,000
Miscellaneous Receipts
4,10,600
Total (A)
O th e r E x p e n s e s : 2,400
Auditors’ Fees 10,000
Directors’ Fees 70,000
Depreciation 82,400
Total (B)
3,28,200
Schedules Relating to Fire Revenue Account

SCHEDULE 1— PREMIUM EARNED (NET)
(? ’000)
.......... P a rticu la rs ------------------
13,00,000
Premiums from direct business written [See Working Note (1)] 4,00,000
Less : Reinsurance Premium paid
9.00. 000
3.00. 000
Add : Reinsurance Premium received 12,00,000
Net Premium
Less : Adjustment for increase in reserve for unexpired risks :
Reserve for unexpired risks (including additional reserve ^ Q00
f 1,60,000) at the end of the year
Less : Reserve for unexpired risks (including additional reserve 0Q0
of 1,00,000) at the beginning of the year — i— :------
1,60,000
10,40,000
cru e n m P o — CLAIMS INCURRED (NET) ______ _—

(? ’000)
— -------------------- — P articulars
3.60.000
Claims paid and outstanding 20,000
A d d : Sundry expenses regarding claims
3.80.000
SCHEDULE 3— COMMISSION
(? 000)
65.000
Commission paid on direct business (1) 15.000
A d d : Commission on reinsurance accepted (2)
80.000
20,000
Less : Commission on reinsurance ceded
60,000
crrNPnilL E 4 OPERATING EXPENSES RELATED TO FIRE INSURANC E

{< UUU)
2.90,000
Management Expenses 10,000
Bad Debts 3,00,000
A C C O U N T S O F IN S U R A N C E C O M P A N IE S __________________
V/1-45
Schedules Relating to Marine Revenue Account
SCHEDULE 1 - PREMIUMS EARNED (NET)
Premiums from direct business written [see working note (1)]
Less : Reinsurance Premium paid
(? ’000)
A dd: Reinsurance Premium received 23.20.000
__ 8, 00,000
'^ 2 0 ^ 0 0 0
Less : Adjustment for increase in unexpired risks at the end 6.40.000
of the year (21,6 0 ,0 0 0 - 16 ,4 0 ,0 0 0 )
21^60^000
SCHEDULE. 2-C LA IM S INCURRED (NET)

Claims paid and outstanding
(? ’000)
____________ _________ " s c h e d u l e 3-COMM!SSION~ 7.60.000
Commission paid on direct business (1)
A dd: Commission on reinsurance accepted (2)
(? ’000)
1.16.000
Less : Commission on reinsurance ceded
32.000
’ 1,48,000
40.000
1,08,000
W orking Notes :
(1) Calculation o f Commission on Direct Business :
Premium as given
Fire
? ’000 Marine
Add :Reinsurance premium paid (20 times of commission earned) ? ’000
12.00, ooo
120,000 x 1°° | 21,60,000
4.00. 000
140,000 x 1g ° |
Less :Reinsurance premium received 8 , 00,000

16700,000
Gross Premium 29.60.000
3,00,000
(2) Commission 5% thereof 6.40.000
13,00,000
Commission on reinsurance accepted 23.20.000
65.000
5% of ? 3,00,000 thousands 1.16.000
5% of f 6,40,000 thousands
15.000
32,000
IL L U S T R A T IO N 9. Following balances have been extracted from the books of

General Insurance Co. Ltd. as on 31st March, 2017 who are carrying on only Fire
Insurance business :
Premium Less Reinsurance 5,00,000 Profit and Loss Appropriation

Reserve for Unexpired Risks as Account 20,000
on 31st March, 2016 2,00,000 Amount due to other persons
Claims Less Reinsurance 2,75,000 carrying on insurance
Claims Outstanding as on 31st business 80,000
March, 2017 75,000 Amount due from other persons
Commission on Direct Business 30,000 carrying on insurance
Commission on Reinsurance Ceded 20,000 business 4,00,000
Commission on Reinsurance Cash in Hand 2,600
Accepted 10,000 Cash at Bank 1,21,400
Bad Debts 1,500 Deposit with Reserve Bank 2,00,000
Foreign Taxes 1,000 Investment: G.P. Notes 2,50,000
Rent, Rates and Taxes 12,000 Shares 1,00,000
Establishment Charges 50,000 Interest and Dividend Received
Audit Fees 2,000 (Net) 15,000
Postage and Telegrams 1,500 Director’s Fees 2,000
Printing and Stationery 2,500 Managing Director’s Remuneration,
Depreciation 4,000 Minimum 18,000
Policy Stamps (used) 500 Sundry Debtors 50,000
Share Capital 5,10,000 Sundry Creditors 20,000
General Reserve 1,00,000 Motor Car, Furniture etc. 58,000
Investment Reserve (31-3-2016) 60,000 Preliminary Expenses 10,000
Following particulars are available :
(1) Claims less reinsurance, ? 2,75,000 thousands has been arrived at after taking
into account claims paid and also outstanding claims of ? 50,000 thousands as on 31st
March, 2016.
(2) Reserve for unexpired risks to be kept at 50% of the Premium income.
(3) Share Capital is composed of 51,000 thousands Equity shares of f 10 each.
(4) Market value of investments as on 31st March, 2017 was f 2,80,000 thousands.
(5) Provision for taxation to be made at 60%.
(6) Income tax deducted at source from interest and dividend received is ? 5000
thousands.
You are required to prepare Fire Revenue Account and Profit and Loss Account
for the year ended 31st March, 2017 and to draw up the Balance Sheet as on that date.
S O L U T IO N
General Insurance Company Ltd.
REVENUE ACCOUNT (FIRE)
fo r the y e a r e n d ing 31 s f M arch, 2 0 1 7
P articulars S che d u le ? 000
Interest and Dividends Received (Gross) 20,000
(15,000 + 5,000)
Total (A) 4,70,000
a c c o u n t s o f in s u r a n c e c o m p a n ie s
Claims Incurred (Net)

Commission 2 2.75.000
Operating Expenses Related to Insurance Business 3 20,000
4 95,000
Operating Profit from Fire Business (A) - (B) Total (B) 3.90.000
80’000
PROFIT AND LOSS ACCOUNT OF GENERAL INSURANCE CO. LTD.
for the year ending 3 1 s t March, 2 0 1 7
Particulars --------—
Operating Profit from Fire Business ? '000
80,000
Provision for Investment Reserve Total (A) 80,000
10,000
Profit before Tax (A) - (B) Total (B) 10,000
Less : Provision for Taxation @ 60% 70.000
42.000
Balance of Profit b/d from last year 28,000
Balance c/d to Balance Sheet 20,000
48,000
------- P a rticu la rs
S o u rc e s o f F u n d s : “------------------------------ S che d u le ? ’000
Share Capital
Reserves and Surplus 5 5,00,000
Borrowings 6 2,18,000
7
A p p lic a tio n o f F u n d s :
Total 7,18,000
Investments
Loans 8 3,50,000
Fixed Assets 9 -_
Current Assets : 10 56,000
Cash & Bank Balances f ’000
Advances & Other Assets 1,24,000 11
6.50.000 12
Sub-Total (A)
Current Liabilities 7.74.000
Provisions 1,75,000 13
2.87.000 14
Sub-Total (B)
Net Current Assets (C) = (A) - (B) 4.62.000
3.12.000
Total 7.18.000
•wfiiiunio itmt> reinsurance

s s s : Adjustment for Incrase in Reserve for Unexpired Risks :
t ’000
Reserve for Unexpired Risks at the end of the year (50% of 5,00,000)
Less : Reserve for Unexpired Risks at the beginning of the year
2,50,000
2, 00,000
50,000
V /1 -4 8
SCHEDULE 2— CL AIMS INCURRED (NET)

P a rticu la rs y ’000 y 'ooo
2.50.000
Claims le ss Reinsurance (Paid)
A d d : Claims Outstanding at the end of the year
75.000
3.25.000
Less : Claims Outstanding at the beginning of the year 50.000 2,75,000
Note : Claims less reinsurance (y ’000) 2,75,000 given in the problem are after adjusting claims
outstanding at the beginning and at the end of the year.
SCHEDULE 3— COMMISSION
P articulars y ’000
30.000
Commission Paid on Direct Business 10.000
A d d : Commission on Reinsurance Accepted
40.000
20.000
Less : Commission on Reinsurance Ceded
Net Commission 20,000
_______SCHEDULE 4— OPERATING EXPENSES RELATED TO INSURANCE BUSINESS

P a rticu la rs _ __ y ’000
50.000
Establishment 18.000
Managing Director’s Remuneration 12,000
Rent, Rates and Taxes 2.500
Printing and Stationery 1.500
Postage and Telegrams 2,000
Audit Fees 500
Policy Stamps (used) 2,000
Directors’ Fees 1.500
Bad Debts 1,000
Foreign Taxes 4,000
Depreciation
95,000
SCHEDULE 5 -S H A R E CAPITAL
P a rticu la rs y ’000
Paid-up Share Capital 5 , 10,000
51,000 thousands shares of y 10 each fully paid 10,000
L e s s : Preliminary Expenses
Total 5,00,00-:
SCHEDULE 6-R ESERVES AND SURPLUS

P a rticu la rs y ’ooo
y ’000 1,00,00C
General Reserve
Investment Reserve on 1-4-2016 60,000
A d d : Transferred during the year
10,000 70.000
48.000
Balance of Profit in Profit & Loss Account
Total 2,18,000
SCHEDULE 8-INVESTMENTS
P a rticu la rs ? ’000
G.P. Notes 2,50,000
Shares 1,00,000
Total 3,50,000

Motor Car, Furniture etc. less Depreciation 56,000
SCHEDULE 11-C A S H AND BANK BALANCES

Cash in hand 2,600
Cash at Bank 1,21,400
Total 1,24,000
SCHEDULE 12-ADVANCES AND OTHER ASSETS

Advances —
Other Assets :
Amount due from other persons carrying on insurance business 4,00,000
Deposit with Reserve Bank of India 2,00,000
Total 6,50,000
SCHEDULE 13-CURRENT LIABILITIES

P a rticu la rs r ’ooo
Amount due to other persons carrying on insurance business 80,000
Claims Outstanding 75,000
Total 1,75,000
SCHEDULE 14-PROVISIONS
P articulars f ’000
Reserve for Unexpired Risks r ’ooo 2,50,000
Provision for Income Tax 42,000
Less : Tax deducted at source from interest and dividends received 5,000
37,000
Total 2,87,000
iiiQuest/onsninninnunninniuiiunuuiiui
OBJECTIVE TYPE
1. State whether the following statements are TRUE or FALSE :
(a) General insurance includes all types of insurance.
(b ) Final Accounts of insurance companies are prepared according to the provisions of the
Insurance Act, 1958.
(c ) Revenue Account of a life insurance business is prepared in the prescribed Form A-RA of
the Insurance Regulatory and Development Authority Act.
(d) Annuity is an income.
(e) Bonus in reduction of premium is shown as expense and income in Revenue Account.
(f) Life assurance fund represents profit of the life insurance company.
(g) Valuation balance sheet is prepared to know' surplus or deficiency of life insurance.
(,h ) Commission on reinsurance ceded is expense.
(/) Life insurance is more appropriate to be called life assurance.
0) Commission on reinsurance accepted is income.
(k) in case of marine insurance the provision against unexpired risk is 100%.
(/) In the financial statements of insurance companies, liabilities under the existing policies
are determined by actuarial valuation in case of life insurance.
Ans. [TRUE: (c), (e), (g), (/), (K), (/); False: (a), (to), (d), (f), (to), (/)].
2. Indicate the correct answer from the choices given below :
(/) Income tax on interest, dividends and rent should be :
(a) debited to Profit and Loss A/c
(to) debited to Profit and Loss Appropriation A/c
(c) debited to provision for taxation
(d) none of the above.
(//) Survey expenses for fire insurance claims must be
(a) added to management expenses
(b) shown as a separate item in Revenue A/c
(c) added to claims
(///) Valuation Balance Sheet is prepared by a
(a) life insurance company
(to) marine insurance company
(c) general insurance company
(iv) In case of marine insurance, provision against unexpired risk should be
(a) 100%
(b) 40%
(c) 50%
(d) none of the above,.
Ans. [(/) (d); (II) (c); (Hi) (a); (iv) (a)]
(/) The item surrender value is related to ...... insurance business.
(ii)Valuation Balance Sheet is prepared for ascertaining ...... in case of life insurance
business.
(Hi) Valuation of net liability in case of life insurance business is done by a person known as
(/V) Final accounts of the insurance companies are prepared according to the provisions of
the Insurance A ct........
(v) An insurer carrying on general insurance business shall comply with the requirement of
Schedule...... for preparation of financial statements.
(vi) ...... is an annual payment which a life insurance company guarantees to pay for a
lumpsum money received in the beginning.
Ans. [(/) life; (ii) surplus; (Hi) actuary; (Iv) 1938; (v) B, (vi) Annuity]
ACCOUNTS OF INSURANCE COMPANIES V /1-51
SHORT ANSWER TYPE
1. Distinguish between Life Insurance and General Insurance.

2. What is the meaning of surrender value ? Is there a surrender value of general insurance
policy also ?
3. What is the difference between Annuities and Consideration for Annuities Granted ?
4. How is Bonus in Reduction of Premium treated in the Revenue Account ?
5. What is the difference between Commission on Reinsurance Accepted and Commission on
Reinsurance Ceded ?
6. What is life assurance fund ?
7. Explain reserve for unexpired risk in general insurance.
8. What is the basic difference between life insurance and general insurance ?
9. What is the difference between life policy and endowment policy ?
10. What is Valuation Balance Sheet ? How does it differs from normal Balance Sheet ?
11. Distinguish between cash bonus and reversionary bonus.
12. How does a life insurance company ascertain its profit ?
OR
How will you determine the profits of a life insurance company ?
13. Explain the following terms :
(a) Additional Reserve for Unexpired Risks.
(b) Bonus in Reduction of Premium.
14. What is meant by reinsurance ? How is it helpful to insurance companies ?
15. Distinguish between claims by death and claims by maturity in life insurance business.
LIFE INSURANCE
16. A company dealing in Life Insurance disclosed a fund of 7 50 lakhs on 31-3-2016 before taking
the following into consideration :
(a) A claim for 7 32,000 outstanding in the books for 8 years is not honoured.
(b) Bonus utilized in reduction of premium 7 32,000.
(c) Reinsurance premium 7 14,000 and commission on it 7 4,000.
Find out the life fund after the above adjustments.
Ans. [7 50,22,000]
17. From the following you are required to calculate the claims to be debited to Revenue Accourt
for the year ending 31st March, 2016 :
Claims intimated in 2015 2016 2014 2014 2016 I 2016
Claims admitted in 2015 2016 2015 2015 2017 j 2016
Claims paid in 2016 2017 2015 2016 2017 | 2016
Amount 7 7,500 5,000 2,500 6,000 4,000 51,000
Ans. [f 60,000]
18. A Life insurance company gets its valuation made once in every two years. Its Lice Assurance
Fund amounted to 7 40,00,000 before providing 7 40,000 for the shareholders dividend for the
year 2016-17. The net liability of the company was 7 38,00,000. An interim bonus of 7 50,000
was paid to the policy holders during the two years ending 31-3-2017.
Prepare a statement showing the amount now available as bonus to policy holders
Ans. [71,49,500]
19. (/) The Revenue Account of Life Insurance company shewed the Life Fund @ 7 73,17 000 on
31-12-2017 before taking into account the following items.
(a) Claims intimated but not admitted 7 98,250.
(b ) Bonus utilised in reduction premium ? 13,750.

(c) Interest accrued on investments ? 29,750.
(c/) Outstanding premium ? 27,000.
(e) Claims covered under re-insurance f 40,500.
( f) Provision for taxation t 31,500.
Pass journal entries giving effect to the above adjustments and show the life fund.
Ans. F 72,84,500] V
(//) The revenue account of the life insurance company shows the Life Assurance Fund on 31 -
12-2017 at ? 62,21,310 before taking into account the following :
(a) Claims covered under reinsurance 12,000
(b) Bonus utilized in reduction of premium 4,500
(c) Interest accrued on securities 8,260
(d) Outstanding premium 5,420
(e) Claims intimated but not admitted 26,500
What is life assurance fund after taking into account the above omissions ?
Ans. F 62,20,490]
(/'/'/) The Revenue account of a life insurance company shows the Life Assurance Fund at
? 22,00,000 before taking into consideration the following :
(a) Bonus unutilised in reductionof premium 10,000
(.b) Outstanding premium 14,600
(c) Claims outstanding 28,700
(d) Interest accrued on securities 5,000
(e) Claims covered under re-insurance 1,000
Find out the true Life Assurance Fund.
Ans. [? 21,91,900]
20. The Life Assurance Fund of Mother Life Insurance Co. Ltd. as on 31st March 2017 is
ascertained at ? 12,20,000 before considering the following :
(/) Interest accrued on investments 30,000

(/'/) Bonus utilised in reduction of premium 36,000
(Hi) Claims intimated and admitted but not paid 1,00,000
(/V) Outstanding premium 60,000
(v) Claims covered under reinsurance 16,000
Compute the true life assurance fund.
Ans. [? 12,26,000]
21. Following figures relate to Super Life Insurance Co. Ltd. for the year ended 31st March, 2017.
Prepare the Revenue Account.
?
Claims 39,000 Bonus in reduction of premium 1,500
Management expenses 14,000 Premium received 1,51,000
Director’s fees 7,000 Life Fund (1-4-2016) 11,50,000
Agent’s commission 5,000 Annuities 1,500
Adjustments : Premium outstanding T 9,000.
Ans. [Life Assurance Fund ? 12,42,000]
22. The Life Assurance Fund of Company stood at ? 5,25,00,000 on 31st March, 2017 and the
valuation of its net liability in respect of policies in fire on that date revealed at figure of
? 4,86,00,000. How much do the policyholders stand to get by way of bonus ?
Ans. [? 37,05,000],
23. Prepare, in the proper statutory form the Revenue Account of the Mansfield Life Assurance
Company Ltd. for the year ended December 31st 2017 from the following figures :
Claims by death 76,140 Commission 9,574

Claims by maturity 30,110 Interest, dividend etc. 97,840
Premiums 7,05,690 Income tax thereon 35,710
T ransfer fees 129 Surrenders 13,140
Consideration for annuity granted 82,127 Bonus in reduction of premium 980
Annuities paid 53,461 Dividend paid to shareholders 5,500
Bonus paid in cash 2,416 Life Assurance fund at the
Expenses of Management 31,920 beginning 15,21,000
Paid up share capital of above Life Assurance Company is t 5,00,000 and net liability as per
actuary's valuation is ? 11,05,000 as on December 31st 2017.
Prepare a Valuation Balance Sheet of the company as on that date.
Ans. [Life Fund at the end of ? 21,47,835; Surplus ? 10,42,835]
24. From the following Trial Balance, prepare Revenue Account and Balance Sheet of Sunrise Life
Insurance Company.
Dr. Cr.
? ?
Loans and Mortgages 13,50,000
Investments 28,00,000
Outstanding Premium 50,000
Outstanding Interest and Dividends 10,000
Claims :
By Death 1,80,000
By Maturity 30,000
Surrenders 21,000
Cash in hand 50,000
Life Assurance Fund 40,10,000
Expenses of Management 20,000
Premium 4,86,000
45,11,000 45,11,000
Ans. [Surplus f 2,35,000; Balance Sheet Total f 42,45,000]
25. Following balance are extracted from the books of Great Life Insurance Co. Ltd. as on 31-12-
2017 :
Life Assurance Fund Claims paid during the year 64 900

(1-1-2017) 15,00,000 Annuities 2,050
Premiums 1,96,000 Bonus in Reduction of
Consideration for Annuity premium 1,600
Granted 15,000 Medical Fees 2,400
Interest and Dividend 1,00,000 Surrenders 4,000
Fines for Revival of Policies 750 Commission 18,650
Reinsurance Premium 20,750 Management Expenses 22,000
Claims Outstanding (1-1-2017) 4,500 Income-tax on Dividends 8,500
Prepare Revenue Account after making the following adjustments :
(a) Outstanding Balances : ?
Claims 14,000
Premium 1,600
(b ) Further bonus for premium 2,400
(c) Claim under Reinsurance 8,000
Ans. [Surplus ? 4,78,000]
26, From the figures stated below, prepare a Revenue account and a Valuation B/S— as at 31-12-
2017 showing surplus for policy holders.
Life Assurance Fund 40,00,000 Surplus on Revaluation of
Premiums 25,00,000 Reversions Purchased 8,000
Interest, Dividends, and Bonus on Reduction of Premium 5,000
Rents 15,00,000 Surrenders 1,00,00C
Consideration for Annuities Commission 50,000
Granted 1,00,000 Net Liability on Policies
Claims Paid 3,00,000 in Force on 31-12-2017 56,53,000
Ans. [Surplus ? 36,53,000; Surplus brought forward ? 20,00,000]
27. The life assurance fund of Life Insurance Company stood at ? 55,55,000 on 31-3-2017, before
providing for f 55,000 being the shareholders dividend for the year 2016-17. The net liability as
on 31-3-2017 as per the actuarial valuation is ? 35,00,000. An interim bonus of ? 1,00,000
was paid to the policy holders during the year 2016-17.
You are required to show : (/) Valuation Balance Sheet (//) Net Profit for the period and (Hi)
The distribution of the surplus.
Ans. [ (i) Surplus as per Valuation Balance Sheet ? 20,55,000; (ii) Net Profit ? 21,00,000;
(//) Distribution : Policyholders 95% ? 19,95,000; Government 5% ? 1,05,000; Amount
now due to Policyholders ? 18,95,000]
GENERAL INSURANCE
28. Calculate the net claim to be shown in Revenue Account of an Insurance Company :
?
Claims paid during year ended 31-3-2017 5.60.000
Claims outstanding on 1-4-2016 52.000
Claims outstanding on 31-3-2017 92.000
Claims covered under reinsurance 25.000
Ans. [? 5,75,000].
29. From the following particulars calculate the amount of claim to be debited in the Revenue
Account:
? ?
Claims paid during the year 32,00,000 Claims intimated and accepted but
Claims outstanding at the beginning not paid at the end of the year 1.20.000
of the year 1,60,000 Claims intimated but not accepted
Re-insurance claim 1,80,000 at the end of the year 90.000
Expenses on claim 30,000
Ans. [? 31,00,000]
30. From the following particulars, prepare the Fire Insurance Revenue Account for the year
ended 31-3-2017.
?
Claims Paid 5,80,000 Provisions for unexpired risks
Premiums Received 13,90,000 (as on 1-4-2016) 5,25,000
Reinsurance Premium 80,000 Claims unpaid (as on 1-4-2016) 45.000
Commission 2,20,060 Claims unpaid (as on 31-3-2017) 47.000
Make a provision for unexpired risks at the end of the year @ 50% of net premium.
Ans. [Operating Profit ? 92,940]
31. A new marine insurance company reported the following figures for the first year of its working
Make necessary reserve for unexpired risks @ 100% on net premium and ascertain profit or
loss made by the company.
? t
Premium received on original policies 80,00,000 Claims 11,00,000
Reinsurance Premium paid 11,00,000 Commission on directbusiness 4,65,000
Reinsurance Premium received 3,50,000 Expenses of management 21,00,000
Ans. [Loss ? 36,65,000; Reserve for unexpired Risks T 72,50,000],
32. Following balances are extracted from the books of Oriental General Insurance Company,
prepare Revenue Account of fire and marine business for the year ending 31-12-2017 :
F ire M a rin e
f 7
Funds on 1-1-2017 3,10,000 8,40,000
Premium 5,56,400 8,82,200
Due to reinsurers 4,400 20,200
Claims paid and outstanding 2,61,500 1,02,000
Commission 21,000 54,000
Expenses on management 42,000 73,000
It was further noticed that premium were outstanding :
Fire ? 1,400 and Marine f 1 600. Provision is to be made for unexpired risk on fire and marine
at 50% and 100% of the premium received respectively.
[Profit: Fire ? 2,64,400; Marine 7 6,11,000]
Following balances are extracted from the books of Adarsh General Insurance Company in
respect of fire insurance for the year 2017 :
<
Premium less reinsurance 82,00,000 Claims paid less reinsurance 41,00,000
Interest, dividend less tax 2,00,000 Expenses of management 5,40,000
Commission on direct business 4,00,000 Reserve for unexpired
Commission on reinsurance ceded 1,00,000 risk on 1-1-2017 30,00,000
Commission on reinsurance accepted 1,60,000 Additional reserve on 1-1-2017 1,00,000
Reserve for unexpired risk to be maintained at 50% of net premium income and additional
reserve to be increased by 10 per cent of net premium income.
Prepare revenue account for the year 2017.
Ans. [Operating Profit f 11,80,000]
LONG ANSWER TYPE
1. Explain the method followed for arriving at profit in the life insurance business.
2. Explain what do you understand by Life Fund. Where does it appear in the Final Accounts ?
3. How is profit or loss determined in Fire Insurance Business ?
4. Write short notes on the following :
(a) Reinsurance ; ( b ) Premium Deposits ; (c) Annuities ; (d ) Actuarial Valuation ;
(e) Endowment Policy; (/) Reversionary Bonus ; and (g ) Surrender Value.
5. Prepare (with imaginary figures) Revenue Account of Life Insurance Company.
6. Prepare (with imaginary figures) the Balance Sheet of a Life Insurance Company.
7. Give entries necessary to bring the following into account, at the end of each period :
(/) Outstanding premiums, (/'/) Outstanding claims (Hi) Outstanding interest, (iv) Bonus in
reduction of premium, (v) Claims covered under reinsurance.
8. Prepare (with imaginary figures) Revenue Accounts of Fire and Marine Departments of a
General Insurance Company.
9. Prepare (with imaginary figures) the Balance Sheet of an insurance company carrying on fire,
marine and miscellaneous insurance business.
10. What important points should be kept in mind in preparing the annual accounts of general
Insurance companies?
11. Point out the main features of Accounts of ‘General Insurance Companies’. What statutory
books are required to be maintained by a General Insurance Company under the Insurance
Act ?
12. What provision should be made by a Fire Insurance Company in regard to Unexpired Risks at
the end of each financial period ?
13. Explain how the profit or loss from general insurance business is ascertained and prepare a
fire Revenue Account with imaginary figures.
14. Explain the following items in the annual accounts of a General Insurance Co. :
(/) Reinsurance Recoveries, (//) Estimated Liability in respect of Outstanding Claims, (Hi) Profit
on Sale of Investments, (/V) Deposits with Reserve Bank of India, (v) Interest and Dividend
Outstanding, (vi) Unclaimed Dividends, (vii) Agent’s Balance.
Practical Problem sfM

1. From the following Trial Balance as on 31-3-2017, prepare a Balance Sheet and Revenue
Account of the Life Assurance business :
f WO ? WO
Mortgages on Properties within India 4,00,000
Mortgages on Property out of India 50,000
Loans on Life Interest 1,00,000
Loans on Reversions 2,00,000
Loans on Policies within their Surrender Values 6,00,000
Investments :
Municipal Securities 5,00,000
Indian and Foreign Government Securities 10,00,000
Freehold Ground Rents 8,00,000
Reversions 5,00,000
Outstanding Premiums 50,000
Outstanding Interests, Dividends and Rent 10,000
Surrenders on business outside India 1,000
Surrenders on business within India 20,000
Cash in hand 50,000
Claims admitted but not paid 10,000
Claims on business within India 2,00,000
Claims on business outside India 10,000
Amount of Life Insurance Fund at the beginning of the year 40,00,000
Expenses of Management 20,000
Premiums on business within India 4,80,000
Premiums on business outside India 6,000
45,11,000 45,11,000
Ans. [Surplus (? ’000) 2,35,000; Life Assurance Fund (? ’000) 42,35,000 ; B/S Total (? ’000)
42,35,000].
2. Following were the balances extracted from the Trial Balance of the Indian Life Assurance
Society at 31st March, 2017 :
? '000 ? ’000
Balance of account at the Claims admitted but not paid 6,000
beginning of the year 20,00,000 Surrenders 20,000
Govt, securities 10,00,000 Single premiums 80,000
Profit on realisation of assets 2,000 Consideration for annuities granted 50,000
Investment fluctuation A/c 10,000 Interest, dividends and rent received 70,000
Claims under policies by death 60,000 Depreciation of furniture 3,000
Claims under policies by maturity 1,00,000 Administrative expenses 36,000
Loans on mortgages 5,60,000 Salaries 3,000

Loans on policies 3,00,000 Auditor's fees 1,500
Freehold property and furniture 1,03,000 Director's fees 300
Agent’s Balances owing 3,600 Legal expenses 1,000
Sundry creditors 2,000 Advertising 1,400
Outstanding premiums 24,000 Printing, stationery and others 10,800
Commission paid 24,000 Cash at Bank 1,68,400
Interest accrued not due 3,000 Provision for depreciation 3,000
Premiums (other than single) 2,00,000
Prepare a Revenue Account and Balance Sheet.
Ans. [Surplus (? ’000) 1,41,000 ; B/S Total (? ’000) 21,51,000].
3. The Life Assurance Fund of an Insurance Company on 31st March, 2017 showed a balance of
? 87,76,500. It was later found that the following were not taken into account:
(/) Dividend from Investment ? 4,80,000. (//) Income-tax on above ? 48,000. (ill) Bonus in
reduction of premium ? 8,77,500. (not taken as expense) (/v) Claims covered under Re
insurance ? 4,23,000. (v) Claims intimated, but not accepted by the company ? 7,62,000.
Ascertain correct balance of the Fund.
Ans. [Correct Balance ? 79,92,000].
4. Following balances form part of the books of Bharat Assurance Company as on 31st March,
2017.
Life fund on 1st April, 2016 ? 15,70,562 ; Claims by death f 1,16,980. Claims by maturity
f 96,420 ; Premiums ? 2,70,572 ; Management expenses f 29,890 ; Commission ? 36,541 ;
Consideration for annuities granted ? 10,620 ; Interest, dividend and rent ? 52,461 ; Income
tax on profit ? 3,060 ; Surrenders ? 21,768 ; Annuities ? 29,420 ; Bonus paid in cash ? 9,450 ;
Bonus paid in reduction of premium ? 3,500. Preliminary expenses T 600 ; Claims admitted but
not paid at the end of the year, ? 80,034 ; Annuities due but not paid ? 22,380 ; Capital paid up
T 6,00,000 ; Govt. Securities ? 16,90,890 ; Sundry Assets 5,68,110.
Additional relevant data ; Claims covered under reinsurance ? 10,000. Further claims
intimated ? 8,000. Further bonus utilised in reduction of premiums ? 1,500, Interest accrued
? 15,400. Premiums outstanding t 7,400. Prepare a Revenue Account and the Balance Sheet.
Ans. [Surplus (? ’000) 14,484; Life Assurance Fund (? ’000) 15,81,986 ; B/S Total
(? ’000) 21,81,386].
5. A Life Assurance Corporation gets its valuation made once in every two years. The life
assurance fund on 31st March, 2017 amounted to ? 41,92,000 before providing for f 32,000
for the shareholders’ dividend for the year 2016-17. Its actuarial valuation on 31st March, 2017,
disclosed net liability of ? 40,40,000 under the assurance and annuity contracts. An interim
bonus of T 40,000 was paid to the policyholders during the period ending 31st March, 2017.
Prepare a statement showing the amount now available as bonus to policyholders.
Ans. [? 1,12,000].
6. The Life Assurance Fund of a company on 31st March, 2017 was ? 4,00,00,000. Its net liability
on that date was estimated to be ? 3,80,00,000 by the company actuary. The investment held
by the company amounted to ? 3,20,00,000 against which the Investment Reserve stood at
? 5,00,000. The investments have to be written down be ? 8,00,000.
The company declared a reversionary bonus of t 40 per 1,000 with the option to policyholders
of the bonus in cash at the rate of T 16 per T 1,000. Total value of policies in force was ? 8
crore. One fourth of the policyholders (in value) decided to receive the bonus in cash. The
company estimated that its liability for income tax would be f 3,20,000.
Pass the Journal Entries to record the above.
Ans. [True Surplus ? 17,00,000].
GENERAL INSURANCE
7. Prepare a Revenue Account in respect of Fire Business from the following details for the year
2016-17.
r r
Reserve for Unexpired Risk on Premium recovered 4,86,000
1-4-2016 @ 50% 1,80,000 Premium on Re-Insurance Accepted 32,000
Additional Reserve 36,000 Premium on Re-Insurance Ceded 43,000

Estimated Liability for Claims Commission on Direct Busiress 48.600
Intimated on 1-4-2016 31,000 Commission on Re-Insurance Accepted 1,600
on 31-3-2017 42,000 Commission on Re-Insurance Ceded 2,150
Claims paid 3,65,000 Expenses of Management 90,000
Legal Expenses 6,000 Interest, Dividend and Rent 24,000
Medical Expenses 4,000 Profit on Sale of Investments 3,000
Re-insurance Recoveries 32,000 Bad Debts 800
Create Reserve on 31st March, 2017 to the same extent as on 1st April, 2016.
Ans. [Loss 7 59,850].
8. From the following figures appearing in the books of Fire Insurance division of a General
Insurance Company, show the amount as it would appear in the Revenue Account for the year
ended 31st March, 2017 :
Direct Reinsurance
Business
7 7
Claims paid during the year 46,70,000 7,00,000
Claims Payable — 1st April, 2016 7,63,000 87,000
31st March, 2017 8,12,000 53,000
Claims Received 2,30,000
Claims Receivable— 1st April, 2016 65,000
31st March, 2017 1,13,000
(includes 7 35,000 surveyor’s fees and 7 45,000 legal expenses
for settlement of claims)
Ans. [? 51,87,000]
9. From the following balances as at March 31,2017 in the books of General Insurance Co. Ltd.,
prepare a Revenue Account in respect of Fire insurance business carried on by them :
7 ’000 7 ’000
Claims paid 4,80,000 Commission on reinsurance accepted 4,000
Claims outstanding on Expenses of Management 3,14,000
1-4-2016 40,000 Reinsurance recoveries of claims 8,000
Claims intimated and accepted Survey expenses regarding claims 5,000
but not paid on 31-3-2017 70,000 Loss on sale of motor car 3,500
Premium received 12,12,000 Bad Debts 2,500
Reinsurance Premium paid 1,20,000 Refund of Double Taxation 4,500
Commission 2,00,000 Interest and Dividends 8,000
Commission on reinsurance ceded 8,000 Income-tax deducted thereon 1,500
Reserve for unexpired risks Legal expenses regarding claims 4,000
on 1-4-2016 4,00,000 Profit on sale of investments 3,500
Additional Reserve for unexpired Rent of staff quarters deducted
risks on 1-4-2016 20,000 from salaries 2,400
Depreciation on Furniture 4,600
You are required to provide for additional reserve for unexpired risk at 1 per cent of the net
premium in addition to the opening balance of Additional Reserve.
Ans. [Operating Loss (7 ’000) 78,120].
10. Following balances relate to the S. Insurance :
Year ending Year ending
31st March, 31 st March,
2016 2017
Premiums 5,00,000 6,00,000
Commission on Direct Business 22,500 30,000
Commission on Reinsurance Accepted 17,500 25,000

Commission on Reinsurance Ceded 32,000 24,000
Claims under Policies (paid during the year) 76,250 1,42,250
Depreciation on Furniture, Car etc. 12,750 15,750
Profit on Sale of Motor Car 6,000 Nil
Loss on Sale of Old Furniture 2,000
Double Income Tax Refund 14,000 7,000
Audit Fees 10,000 10,000
Salaries to Staff 1,25,000 1,35,000
Printing, Postage & Stationery 46,500 57,500
Legal Expenses (not relating to claims) 5,000 4,000
Miscellaneous Expenses 15,500 22,500
Bad Debts 750 22,200
Reinsurance Premium 50,000 1,00,000
Total amounts of estimated liability in respect of outstanding claims as at 31-3-2015, 31-3-2016
and 31-3-2017 were ? 34,250, ? 44,750 and T 55,550 respectively.
Reserve for unexpired risks as at 31-3-2015 was ? 3,20,000 and the Additional Reserve was
? 32,000. Reserve for unexpired risks was to be provided for at 100% and Additional Reserve
at 10% of the net Premium income for the year ending 31-3-2016 and 31-3-2017.
Prepare Marine Revenue Accounts of S. Insurance Co. for the year ending 31-3-2016 and 31 -
3-2017 in the prescribed form. All figures are in thousand rupees.
Ans. [2015-16-P ro fit ? (’000) 16,750 ; 2016-17-Loss ? (’000) 1,000].
11. New Insurance Co. Ltd., is doing composite insurance business. Following balances pertaining
to its marine business as at 31st March, 2017 are submitted to you for preparing the Revenue
Account for the year ended on the date in the prescribed form :
f ’000 ? '000
Commission on Reinsurance Electric Charges 11,000
Accepted 1,86,000 Contribution to Staff Provident
Commission on Direct Business 1,95,000 Fund 10,900
Commission on Reinsurance Ceded 3,42,000 Audit Fees 4,000
Depreciation 7,000 Bad Debts 1,200
Loss on sale of Motor Car 12,000 Miscellaneous Expenses 2,500
General Manager’s Salary 48,000 Claims under policies during
Rent 62,500 the year 6,53,000
Postage, Telegram and Telephones 10,000 Reserve for Unexpired Risks
Staff Salary and Bonus 1,50,000 as on 31st March, 2016 13,67,000
Travelling Expenses 25,600 Additional Reserve for Un
Motor Car Expenses 85,000 expired Risks as on 31st
Printing, Stationery and March, 2016 46,000
Periodicals 49,000 Premium received iess
Law Charges 25,000 Reinsurances 9,90,000
You have also to consider the following information and directions :
(1) Gross premium written direct in India was ? 12,23,000 thousands.
(2) No premium was written outside India and as such no business was transacted outside
India during 2016-17.
(3) Total estimated liability in respect of claims due or intimated as on 31st March, 2016 and
31st March, 2017 were f 1,200 thousands and ? 6,300 thousands respectively.
(4) The General Manager’s salary pertaining to Marine department was T 24,000 thousands
only.
(5) Make an additional Reserve of 10 per cent of the premium in addition to the usual reserve
required to be maintained as per the code of conduct in respect of unexpired risks as on
31st March, 2017.
Ans. [Profit T 1,37,200 thousands].
12. Following balances are extracted from the books of United Insurance Co. Ltd. as on 31-3-
2017 :
Fire M a rin e
f ?
Claims Paid 1,00,000 87.000
Premiums L e ss Reinsurance received during
the year 3,73,000 2,97,000
Commission on Reinsurance Ceded 13.000
Commission 62.000 51.000
Expenses of Management 86,000 68.000
Depreciation on Assets 36.000
Loss on Realisation of Investment 8,000
Audit Fee 13.000
Director’s Remuneration 36.000
Interest & Dividend on Investment 63.000
Reserve for Unexpired Risks as on 1-4-2016 2 , 10,000 2,40,000
Additional Reserves as on 1-4-2016 60,000 10,000
Claims Outstanding as on 1-4-2016 24.000 11,000
Premium Outstanding as on 1-4-2016 26.000 17.000
Following further information is also given
(1) Premium Outstanding as on 31-3-2016 33.000 15.000
(2) Claim Outstanding as on 31-3-2017 46.000 17.000
Out of the above a fire claim amounting to 1 11,000 was covered by reinsurance.
(3) Reserve for unexpired risk is to be maintained a t:
50% of premium less reinsurance for Fire and at 100% of premium le ss reinsurance for
Marine.
(4) Additional Reserve for Fire is to be maintained at 20% of net Premium.
(5) Interest accrued on Investment f 13,000.
Prepare Revenue Accounts and Profit and Loss Account for the year ended 31-3-2017.
Ans. [Profit: Marine ? 28,000 ; Fire ? 1,38,000 ; Profit before Tax f 1,49,000].
13. From the following balances of Hi-Fi General Insurance Company Ltd. as on 31st March, 2017
prepare (/) Fire Revenue Account (/'/) Marine Revenue Account and (Hi) Profit & Loss Account.
? ’000 ? '000
Survey expenses (Fire) 10,000 Commission earned on
Additional reserve opening (Fire) 50,000 reinsurance ceded :
Commission paid : Marine 1,08,000 Marine 60,000
Fire 90,000 Fire 30,000
Claims paid & outstanding : Management expenses :
Marine 3,80,000 Fire 1,45,000
Fire 1,80,000 Marine 4,00,000
Fire fund-opening 2,50,000 Marine premium Less
Marine fund-opening 8,20,000 reinsurance 10,80,000
Bad debts recovered (General) 1,200 Fire premium Less
Share transfer fees ( ” ) 800 reinsurance 6,00,000
Directors fees (General) 5,000 Difference in exchange (Cr.)
Auditors fees ( ” ) 1,200 (General) 300
Bad debts : Marine 12,000 Interest, dividends etc. received
Fire 5,000 (General) 14,000
Profit on sale of land (General) 60,000 Depreciation (General) 35,000
Misc. receipts (General) 5,000
In addition to usual reserve, additional reserve in case of fire insurance is to be increased by
5% of net premium.
Ans. [Fire : Profit (? ’000) 1,20,000 ; Marine : Loss (? ’000) 20,000 ; Profit before Tax (? ’000)
1,40,100],
It is desirable to learn certain principles and terms before taking up the topic of insurance
claim.
O Principles and Terms in Insurance Business
(/) Principle of Indem nity. Insurance is a contract of indemnity. The insurer is called
indemnifier and the insured is the indemnified. In a contract of indemnity, only those
who suffer loss are compensated to the extent of actual loss suffered by them. One
cannot make profit by insuring his risks.
(/'/) Insurable Interest. All and stranger cannot enter into contracts of insurance. For
example, A cannot insure the life of B who is a total stranger. But if B happens to be
his wife or his debtor or business manager, A has insurable interest i.e. vested
interest and therefore he can insure the life of B. For every type of policy insurable
interest is insisted upon. In the absence of such interest the contract will amount to a
wagering contract.
(iii) Principle of UBERRIMAE FIDEI. Under ordinary law of contract there is no positive
duty to tell the whole truth in relation to the subject-matter of the contract. There is
only the negative obligation to tell nothing but the truth. In a contract of insurance,
however there is an implied condition that each party must disclose every material
fact known to him. All contracts of insurance are contracts of uberrima fidei, i.e.,
contracts of utmost good faith. This is because the assessment of the risk and the
determination of the premium by the insurer depend on the full and frank disclosure of
all material facts in the proposal form.
(/V) C atastrophic Loss. A loss (or related losses) which is unbearable i.e. it causes
severe consequences such as bankruptcy to a family, organization, or insurer.
Q Stock Insurance
Every business unit has to keep a sufficient quantity of stock in the business premises for
meeting the requirements of sales or manufacturing the goods. The stock kept in the business
premises is subject to risk of loss by fire. For protecting itself against such loss, a business
unit takes a fire insurance policy covering the loss of stock by fire. A fire insurance policy
which covers loss of stock by fire is known as loss of stock policy in which the insurance
company undertakes to compensate the business unit for loss of stock by fire in consideration
of a payment called premium.
A fire in a business place destroys a number of assets such as building, machinery,
furniture, stock, etc., so it is in the interest of a business unit to take a fire insurance policy to
mdemnify itself against the loss of stock and other assets resulting from fire. A fire insurance
claim is lodged with the insurance company for the loss of stock and other assets by fire. It is
Mil-2 INSURANCE CLAIMS
easy to lodge claim for the loss of all assets except stock-in-trade because books of account
maintain accounts of such assets except (usually) stock-in-trade.
® How to Calculate the Amount of Claim to be Lodged for the Loss of Stock
by Fire?
To lodge claim for the loss of stock by fire, the v a lu e o f s to c k - in - t r a d e o n th e d a te o f fire
Various points which are considered for the estimation of stock in hand
h a s to b e e s tim a te d .
on the date of fire are given below :
1. The most important point is the p e r c e n t a g e o f g r o s s p r o f it o n s a le s so that cost of
goods sold during the year of fire may be ascertained. In the absence of any special
circumstances, the percentage of gross profit on sales earned last year is applied to the
current year (i.e ., the year of fire). Therefore, Trading Account of the last year may be referred
to determine the gross profit ratio of the last year.
2. The next step is to p r e p a r e M e m o r a n d u m T ra d in g A c c o u n t o f th e c u r r e n t y e a r u p to th e
d a te o f fire on the basis of opening stock, purchases and sales from the beginning of the year
upto the date of fire and estimated gross profit on the basis of last year’s gross profit ratio.
The balancing figure in the Memorandum Trading Account will be the estimated value of stock
in hand on the date of fire.
3. The third step is to d e d u c t th e v a lu e o f s to c k s a lv a g e d , if any, from the value of stock
as ascertained in step 2; the resultant figure is the amount of claim for the loss of stock to be
lodged with the insurance company.
For calculating the claim, besides three points stated above, the following aspects
should also be considered :
(/) I f s to c k in tr a d e o f th e la s t y e a r w a s n o t v a lu e d a t c o s t, it should be adjusted to cost to
ascertain the correct percentage of gross profit on sales to be applied to the current
year. For example, if closing stock of the last year was valued at f 90,000 being 10%
below cost, it should be adjusted to ? 1,00,000 ji .e ., f 90,000 x j for the purpose
of preparing the Trading Account of the last year and the Memorandum Trading
Account of the current year.
(/'/) I f th e r e is a p o o r s e llin g lin e s to c k in o p e n in g a n d / o r c lo s in g s to c k , such stock should
be eliminated from the Trading Account of the last year to get the gross profit ratio to
be applied to the current year. Any sale of poor selling line should also be deducted
from the total sales to find out normal sales because gross profit ratio is to be applied
to the normal sales. The same procedure is to be followed for poor selling line stock
and sales in case of Memorandum Trading Account.
(Hi) When g r o s s p r o f it r a tio s f o r a n u m b e r o f y e a r s a r e g iv e n , an average of these ratios
may be ascertained for finding out the gross profit ratio to be applied to the current
year. But it is not advisable to take the average gross profit ratio in case of a
c o n tin u o u s a n d p e r s is t e n t f a ll in th e r a te o f g r o s s p r o f it from year to year, rather a
reasonably declining rate of gross profit as compared to the previous year should be
applied in the current year.
(/V ) F ire fig h tin g e x p e n s e s . Such expenses incurred on the date of fire for the purpose of
salvaging the goods from fire are to be added (if allowed) before calculating the total
loss or gross claim and applying the average clause.
4. Under Insurance. When an Insurance Policy is taken to cover loss of profit, under
insurance occurs if the sum assured falls short of the amount for which the cover should have
been taken. For loss of profit in the event of fire, the insurable amount is calculated by
applying the rate of gross profit to the turnover of 12 months preceding the date of fire.
INSURANCE CLAIMS V /2 -3
The insurer applies “Average Clause” to determine the amount of valid claim in the event
of under insurance. The insured has to bear a portion of the loss himself.
Suppose standard sales are ? 1,25,000 but owing to dislocation caused by fire, sales
amount to ? 1,00,000. If the applicable gross profit is 20% of the sales. The amount for which
cover should have been taken would be 20% of ? 1,25,000, i.e., ? 25,000. When cover is less
than ? 25,000, the insurer will settle claim with a proportionately lesser amount.
5. A verage Clause. A fire insurance policy usually includes an average clause to
discourage the under insurance of stock or any asset. The effect of this clause is that if the
value of stock or any asset insured on the date of fire is more than the amount of policy taken,
the full value of stock or any asset destroyed does not become payable to the insured but the
insurance company pays the proportion of the loss which the amount of policy taken bears to
the total value of stock or any asset in hand on the date of fire. For example, If the value of
insurance policy for the loss of stock is ? 1,00,000 and stock in hand on the date of fire is
? 1,40,000 out of which stock destroyed is estimated to be f 70,000. The claim admitted by
the insurance company will be as follows :
Value of Insurance Policy
Value of Stock Destroyed x ;
Value of Stock on the date of fire
? 1,00,000
? 70,000 x ~ = ? 50,000.
? 1,40,000
Therefore, insurance claim admitted will be proportionately reduced to ? 50,000 and the
total value of stock destroyed by fire {i.e., ? 70,000) will not be admissible to the Insured.
IL L U S T R A T IO N 1. (W h e re g ro s s p ro fit ra tio is given) A fire occurred on 25th
April, 2017 in the premises of a company. From the following particulars ascertain the
amount of claim to be lodged in case of the loss of stock which was insured.
? ?
Stock on 1-1 -2017 2,50,000 Manufacturing Expenses 1, 00,000
Purchases from 1-1-2017 to Saies from 1-1-2017 to the
date of fire 10,00,000 date of fire 15,00,000
Wages 2,00,000
Gross profit ratio is 15%. The stock salvaged was estimated at ? 57,500.
S O L U T IO N
MEMORANDUM TRADING ACCOUNT
?
To Opening Stock 2,50,000 By Sales 15,00,000
Purchases 10,00,000 ” Closing Stock (Balancing figure) 2,75 000
Wages 2,00,000
Manufacturing Expenses 1,00,000
Gross Profit— 15% of Sales
I/.e, n 5,00,000 x “ 0 | 2,25,000
17,75,000 17,75,000
STATEMENT SHOWING THE INSURANCE CLAIM TO BE LODGED
Value of stock in hand on the date of fire 2,75,000

Less : Stock salvaged 57,500
Claim to be lodged 2,17,500
V /2 -4 INSURANCE CLAIMS
I L L U S T R A T IO N 2. (W h e re g o o d s a re d e s tro y e d b y fire a n d s o m e g o o d s are

taken fo r p e rs o n a l use) A fire occurred in the premises of Mr. Patil on 31st March, 2017.
From the following particulars, ascertain the claim to be lodged.
w r
Stock on 1-1-2016 4,50,000 Sales Returns during the
Purchases during the year 2016 60,000
year 2016 18,55,000 Purchases from 1-1-2017 to
Purchases Returns during date of fire 4,20,000
the year 2016 15,000 Sales from 1-1-2017 to
Goods taken by Mr. Patil for his date of fire 4,95,000
personal use during the Value of stock saved 99,000
year 2016 10,000 Goods destroyed by fire during
Stock on 31-12-2016 6,30,000 the year 2016 30,000
Sales for the year 2016 20,60,000
S O L U T IO N
TRADING ACCOUNT OF MR. PATiL
f o r th e y e a r e n d in g 3 1 s t D e c e m b e r, 2 0 1 6
f
To Stock on 1-1-2G16 4.50,000 By Sales 20,60,000
To Purchases 18,55,000 Less: Sales Returns 60,000 20,00,000
L e s s : Purchases By Goods destroyed by fire 30,000
Returns 15.000 By Closing Stock 6,30,000
18,40,000
Less : Goods taken for
personal use 10,000 18,30,000
To Gross Profit 3,80,000
26,60,000 26,60,000
„ . ,„ Gross Profit ? 3,80,000 ___

Percentage of Gross Profit to Sales = — gales— x 100 = ? 20 00 000 x 100 = 19%
MEMORANDUM TRADING ACCOUNT OF MR. PATIL
U p to 3 1 s t March, 2017
r
To Stock on 1-1-2017 6,30,000 By Sales 4,95,000
To Purchases 4,20,000 By Stock on the date of fire
To Gross Profit (19% of ? 4.95,000' 94,050 (Bal. figure) 6,49,050
11,44,050 11,44,050
STATEMENT SHOWING THE INSURANCE CLAIM TO BE LODGED

?
Value of stock on 31 -3-2017 6,49.050
Less : Value of stock saved 99,000
IL L U S T R A T IO N 3. (W h ere s to c k is valu ed a b o v e cost) The premises of Bombay

Sports House caught fire on 1st April, 2017 and its stock was damaged. The firm had
made up accounts to 31st May each year. Following information is available :
INSURANCE CLAIMS V/2-5
1st June, 2 0 1 5 to 1st June, 2 0 1 6 to

3 1 s t M ay, 2 0 1 6 1st A pril, 2 0 1 7
? t
Stock at commencement conventionally
valued at 10% above cost 1,05,754 1,45,992
Purchases 4,52,580 3,48,270
Sales 5,20,000 4,91,700
in D ecem ber 2016, goods which cost ? 10,000 were given away to Gym khana
Secretaries of various colleges for advertising purpose. No entry was made in the
books. During the same month salesman had misappropriated unrecorded cash sales
of ? 4,000. The rate of gross profit is constant. From the above make an estim ate of
stock on hand on the date of fire.
S O L U T IO N
TRADING ACCOUNT OF BOMBAY SPORTS HOUSE
?
To Opening Stock By Sales 5,20,000
100 By Closing Stock
f1,05,754 x 110 96,140
(? 1,45,992 x | 1,32,720
To Purchases 4,52,580
6,52,720 6,52,720
Dercentage of Gross Profit to Sales = x 100 = 20%

< o,û,uuu
MEMORANDUM TRADING ACCOUNT OF BOMBAY SPORTS HOUSE

Upto 1st April, 2017
? r
To Opening Stock ? 1,32,720 By Sales 4,91,700
~o Purchases 3,48,270 A d d : Cash
sales
Less : Goods given away misappropriated 4 000
for advertising purpose 10,000 4,95,700
3,38,270 By Stock on the date of
~o Gross Profit fire (Bal, figure) 74,430
(20% of ? 4,95,700) 99,140
5,70,130 5.70,130
S:ock on hand on the date of fire = ? 74,430.

IL L U S T R A T IO N 4. (W h e re s ales a re missinc/) A fire broke out in the warehouse
-* Mercantile Traders Ltd. on 30th Septem ber, 2017. The com pany desires to file a
: aim with the insurance com pany for loss of stock and gives you the follow ing
iform ation to enable you to prepare a statement showing the amount to be claimed.
* - e last accounts of the company were prepared on 31st December, 2010.
Sundry debtors on 31 -12-2016 3,20,000 Purchases from 1-1-2017 to

S^ndry debtors on 30-9*2017 2,40,000 30-9-2017 10,00,000
Sash received from debtors 11,52,000 Rate of gross profit to cost
Stock on 31 -12-2016 1,20,000 of sales 25%
V/2-6 INSURANCE CLAIMS
S O L U T IO N
MEMORANDUM TRADING ACCOUNT OF MERCANTILE TRADERS LTD.
Upto 30th September, 2017 __________________
?
To Stock on 1-1-2017 1,20,000 By Sales (D 10,72,000
To Purchases By Stock on the date of fire 2,62,400
(1-1-2017 to 30-9-2017) 10,00,000 (Balancing figure)
To Gross Profit (@ 25% on Cost
i.e. 20% on ? 10,72,000 Sales) 2,14,400
13,34,400 13,34,400
Amount of Claim will be for T 2,62,400 for stock destroyed on account of fire.
Working Note (1): Calculation o f Sales
SUNDRY DEBTORS ACCOUNT
T
To Balance b/d (1-1-2017) 3,20,000 By Bank 11,52,000
To Sales (Balancing figure) 10,72,000 By Balance c/d (30-9-2017) 2,40,000
13,92,000 13,92,000
IL L U S T R A T IO N 5. ( W here p u rc h a s e s a n d s ale s a re to b e c a lc u la te d fo r a ctu al

p e rio d o f loss) Fire occurred in the premises of A & Company on 1st September, 2017
and stock of the value of ? 5,05,000 was salvaged and the business books and records
were saved. Following information was obtained :
Purchases for the year Sales from 1-3-2017 to

ended 31-3-2017 35.00. 000 1-9-2017 18,00,000
Sales for the year ended 31-3-2017 55.00. 000 Stock on 31-3-2016 15.00. 000
Purchases from 1-3-2017 to Stock on 31-3-2017 17.00. 000
1-9-2017 12,00,000
Further inform ation is also given that the stock on 31-3-2017 was overvalued by
? 1 , 00 , 000 .
Calculate the am ount of the claim to be presented to the Insurance Company in
respect of losses. Rate of Gross Profit is to be based on the year ended 31-3-2017.
S O L U T IO N
TRADING ACCOUNT OF A & COMPANY
for the year ending 31st March, 2017
f ?
To Purchases 35,00,000 By Closing Stock (? 17,00,000
To Gross Profit 21,00,000 - ? 1,00,000 over valued) 16,00,000
71,00,000 71,00,000
Rate of Gross Profit on Sale = ? 55 00 000 x 100 = 38.18%

INSURANCE CLAIMS V/2-?
MEMORANDUM TRADING ACCOUNT OF A & COMPANY

for the period from April 1, 2017 to September 1, 2017
7
To Opening Stock (at cost) 16,00,000 By Sales (? 18,00,000 x |j 15,00,000
To Purchases i 7 12,00,000 x | j 10,00,000 By Cbsing Stock (Balancing figure) 16,72,700

To Gross Profit'(38.18% of
? 15,00,000) 5,72,700
31,72,700 31,72,700
Purchases and sales for 6 months from 1-3-2017 to 1-9-2017 include purchases and sales of
March 2017, so these have been reduced to 5 months’ sales and purchases from April 1, 2017 to
5
September 1,2017 by multiplying the given figures by g •
STATEMENT SHOWING THE AMOUNT OF CLAIM

7
Value of stock on 1-9-2017 i.e., on the date of fire 16,72,700
L e s s : Stock salvaged 5,05,000
I L L U S T R A T I O N 6. (W h e re p u rc h a s e s a re m is s in g ) A fire occurred in the

premises of a businessman on 31st January, 2017, which destroyed most of the stock.
However, stock worth f 5,940 was salvaged. Insurance policy for stock destroyed was
for ? 4,50,000.
Sum m arised Trading Account for the year ended 31st Decem ber, 2016 is as
follows :
? ?
Turnover 15,00,000
Closing Stock 3,93,750
18.93.750
Less: Opening Stock 3,09,375
Purchases 13,59,375 16.68.750
Gross Profit 2.25.000
Transactions for the month of January, 2017 were as under :

? ?
Turnover 75,000 Creditors as on 1-1-2017 1.13.000
Payment to Creditors 80,010 Creditors as on 31-1-2017 1,15,490
You are required to submit claim for insurance for loss of stock.
S O L U T IO N
Gross Profit for 2016 „ „ „ 7 2,25,000 „„„
Rate of Gross Profit for 2016 =
Turnover for 2016 x 100 =^15^0000 x 100 : 15%
for the month ending 31st January, 2017
To Opening Stock 3,93,750 By Sales 75,000

V / 2 -8 INSURANCE CLAIMS
To Purchases as per Total By Closing Stock (Balancing figure) 4,12,500

Creditors A/c (1) 82,500
To Gross Profit @ 15% on ? 75,000 11,250
4,87,500 4,87,500
STATEMENT SHOWING THE AMOUNT OF CLAIM

?
Closing stock on 31-1-2017 (i . e the date of fire) 4,12,500
L e s s : Stock salvaged 5,940
There is no need of applying average clause because the amount of policy f 4,50,000 is
more than the value of stock ? 4,12,500 on the date of fire.
Working Note :
(1) Calculation o f the Value of Purchases for January, 2017
TOTAL CREDITORS ACCOUNT
?
To Bank 80,010 By Balance b/d 1,13,000
To Balance c/d 1,15,490 By Purchases (Balancing figure) 82,500
1,95,500 1,95,500
IL L U S T R A T IO N 7. ( W here a v e ra g e g ro s s p ro fit p e rc e n ta g e is re q u ire d to be

calcu lated) The premises and stock of Karam Chand Stores were totally destroyed by
fire on 30th January, 2017. From the account books and other records that were saved,
the following information is available. The stock on hand has always Ibeen valued at
10% less than cost.
2014 2015 2016 2017
r ? ? ?
Opening Stock as valued 27,090 32,400 36,000 36,900
Purchases less Returns 74,900 80,000 81,000 6,000
Sales less Returns 1,20,000 1,32,000 1,40,000 12,000
Wages 17,400 16,400 23,600 2,000
Closing Stock as valued 32,400 36,000 36,900
Prepare a statem ent of submission to the Insurance Company in support of the
claim for loss of stock.
S O L U T IO N
Percentage of gross profit on sales for each year (2014, 2015 and 2016) should be calculated to
find out the average percentage of gross profit on sales to be applied to the current year. Therefore,
trading accounts for last three years are prepared to ascertain the ratios of gross profit for the last three
years.
TRADING ACCOUNT OF KARAM CHAND STORES
for the year ended 31st December, 2014_____
/ \ ?
To Opening Stock ( ? 27,090 x 30,100 By Sales less Returns 1,20,000
To Purchases less Returns

To Wages
74,900
17,400
j
By Closing Stock ? 32,400 x j 36,000
To Gross Profit 33,600

1,56,000 1,56,000
02 600
Percentage of gross profit on sales for the year 2014 is : ? i poooo x 100 = 28%
for the year ending 31st December, 2015
To Opening Stock j ? 32,400 x '9i° j ?

36,000 By Sales le ss Returns
r
1,32,000
To Purchases le ss Returns
To Wages
80,000
16,400
By Closing Stock j ? 36,000 x 1g°° j 40,000
*
1,72,000 1,72,000
Percentage of gross profit on sales for the year 2015 is : ^ ^ 2 000 x 100 = 30%
for the year ended 31st December, 2016
=
\5=
j
To Opening Stock ? 36,000 x ^ j r
40,000 By Sales le ss Returns 1,40,000
To Purchases le ss Returns
To Wages
81,000
23,600
j
By Closing Stock ? 36,900 x j 41,000

1,81,000 1,81,000
Percentage of gross profit on sales for the year 2016 is :

? 36,400
r 1 ,40,ooo X 100 = 26%
Average percentage of gross profit
28% + 30% + 26%
= 28%
MEMORANDUM TRADING ACCOUNT OF KARAM CHAND STORES

Upto 30th January, 2017
To Opening Stock j T 36,900 x 1g^° j r

41,000 By Sales le ss Returns
By Closing Stock (Balancing figure)
12,000
40,360
To Purchases le ss Returns 6,000
To Wages 2,000
ô Gross Profit (28% of ? 12,000) 3,360
52,360 52.360
Stock worth ? 40,360 has been completely destroyed by fire, so claim for loss of stock to be lodged
s ? 40,360.
IL L U S T R A T IO N 8. ( W here s to c k is v alu e d less than c o s t a n d c o m p a n y ra is e d
prices b y a certain p ercentage). A fire broke out on 10th January, 2017 in the premises
of Vikrant Ltd. The entire stock was destroyed except to the extent of ? 2,48,000. From
the following figures, ascertain the amount of loss suffered by the company :
Book value of opening stock as on 1st April, 2015 14,40,000

Purchases during the accounting year ended 31st March, 2016 58,00,000
Sales less returns during the accounting year ended 31st March, 2016 80,00,000
V /2 -1 0 INSURANCE CLAIMS
Book value of closing stock as on 31st March, 2016 9,00,000

Purchases from 1s* April, 2016 to 10th January, 2017 58,40,000
Sales from 1st \p ril, 2016 to 10th January, 2017 75,60,000
It is the practice of the company to value stock at 20% less than cost. On 1st April,
2016, the company raised the prices by 10%.
S O L U T IO N
TRADING ACCOUNT
fo r the y e a r e n d e d 31 s t M arch, 2 0 1 6
r
To Opening Stock : By Sales less Returns 80,00,000
By Closing Stock :
|?14,40,000 x 18q°| 18,00,000
I ? 9,40,000 x g™ j 11,25,000
To Purchases 58,00,000
91,25,000 91,25,000
?15,25,000 x 100
Gross Profit Ratio in 2015-2016 = so 00 000-------= 19 06%
Calculation of Gross Profit Ratio for 2016-2017 :
When Sale Prices increased by 10%
Let Sales in 2015-16 be ? 100
Sales in 2016-17 (? 100 + 10%) ? 110.00
L e ss : Cost (100-19.06) ? 80.94
Gross Profit ? 29.06
f 29.06 x 100
Gross Profit Ratio in 2016-2017 = 26.42%
?110
from 1st April, 2 0 1 6 to 10th J a n u a ry 2 0 1 7

To Purchases 58,40,000 By Closing Stock (Balancing figure) 14,02,350
To Gross Profit
(26.42% of ? 75,60,000) 19.97.350
89.62.350 89,62,350
AMOUN T OF CLAiM
Closing stock as on 10th January 2017 14,02,350

L e ss : Salvage Value 2,48,000
Amount of Loss suffered by the Company 11,54,350
I L L U S T R A T IO N 9. ( W here c o s t o f p u rc h a s e s h av e ris en up a n d s e llin g p ric e

g o n e up b y certain % a b o v e the p re v a ilin g p rice). Prom the following figures, calculate
the amount of claim to be lodged with the insurance company for loss of stock :
INSURANCE CLAIMS
f ?
S t o c k a t c o s t o n 1s t J a n u a ry , 2 0 1 6 90,000 S a le s d u rin g 2 0 1 6 6 ,0 0,0 00
S t o c k a t c o s t o n 1 s t J a n u a ry , 2 017 7 0 ,0 0 0 S a le s fro m 1 s t J a n u a ry , 2 0 17 to
P u r c h a s e s d u rin g 2 0 1 6 4,00,000 3 0 th S e p te m b e r, 2 0 1 7 8,80,000
P u r c h a s e s fro m 1 s t J a n u a ry , 20 17
to 3 0 th S e p te m b e r, 2 0 17 6,00,000
Y o u a re in fo rm e d t h a t :
2016;
(a) In 2 0 1 7 th e c o s t o f p u r c h a s e s h a v e r is e n b y 20% a b o v e th e le v e l p r e v a ilin g in
( b ) In 2 0 1 7 th e s e llin g p r ic e s h a v e g o n e u p b y 10% o v e r th e le v e ls p r e v a ilin g in

2016;
(c) S a lv a g e v a lu e is ? 5,000,
(d) A p p ly F IF O M e th o d .
S O L U T IO N t r a d in g a c c o u n t
~ ~~ ---------------------------- — f o r th e y e a r e n d in a 31st
/wr, l u jfj
To Opening Stock 7
To Purchases 90,000 By Sales
To Gross Profit (30% on Sales) 4,00,000 By Closing Stock 6 , 00,000
1,80,000 70,000
6,70,000 j
6,70,000
______ _ I h a d in g ACCOUNT
f o r 9 m o n th s e n d in g 3 0 th S e p t., 2 0 1 7
---------- !--------------------<-----------------------
To Opening Stock
To Purchases By Sales :
To Gross Profit: Out of Opening Stock (1)1,10,000
On Sales of Opening Out of Current
Stock (2) 40,000 Purchases (3) 7,70,000
On Sales out of Current
Purchases (3) 1,82,000 By Closing Stock 8,80,000
(Balancing figures)
8,92,000 12,000
8,92,000
Value of stock on 30-9-2017, the date of fire
Le ss : Salvage value of stock destroyed by fire
7
12,000
Amount of claim to be lodged _5, OOO
Working Notes : 7,000
(1) S a le s o u t o f O p e n in g S to c k
Selling Price in 2016 (say)
L e s s : Gross Profit in 2016 derived from Trading A/c (2016)
Cost of Sales in 2016
Selling Price in 2017 (i.e., 7 100 + 10%)
L e ss : Cost of Opening Stock for 7 110 sales
Gross Profit on Sales of 7 110
Therefore, Selling Price of Opening Stock = x 7 70,000 = 7 1,10,000

Gross Profit on Sales of Opening Stock r

Selling Price 1,10,000
L e ss : Cost of Opening Stock 70,000
Gross Profit 40,000
Sales of Current Purchases and Profit thereon T
Sales at 2016 Rate (say) 100
A d d : 10% Increase in Price 10
Sales at 2017 Rate 110
Less : Cost of sales
Cost of sales at 2016 rate 70
I 20 | 14 84
A d d : 20% increase I i.e. x ? 70 j
Profit on sales of f 1i 0 in 2017 26
Total sales in 2017 8,80,000
L e ss : Sales of opening stock 1,10,000
Sales out of Current Purchases 7,70,000
Therefore, Gross Profit on Sales out of Current Purchases
= 1j 5 x ? 7,70,000 = ? 1,82,000
O Ascertainment of Claim when Abnormal Items of Goods are Available (or

Poor Selling Goods)
Abnormal items of goods are those which cannot be sold at the normal price or has a
slow rate of turnover. Such goods may include some poor selling of stock of goods and are
generally valued at below cost and thus reduce the gross profit. In order to determine the
normal rate of gross profit the stock and sale proceeds of these goods are to be eliminated
from the total sales and stock. Trading Account in such a case is prepared in columnar form
to show separately the normal and abnormal items. The following are the main steps involved
in calculating the claim in the presence of abnormal lines of goods :
Step 1 : Preparation of Last Year Trading Account

While preparing Last Year Trading Account Stock, Purchases and Sales of normal goods
must be considered in arriving the gross profit. In other words, value of abnormal goods
included in opening stock, purchases, sales and closing stock must be deducted from the
respective items.
Step 2 : Calculation of Rate of Gross Profit on Sales
Rate of gross profit on sales must be calculated with reference to gross profit on sale of
normal goods and sales of normal goods only by the following formula :
Gross Profit on Sale of Normal Goods
Rate of Gross Profit (on normal sales) = x 100
Sales of Normal Goods
Step 3 : Preparation of Memorandum Trading Account

While preparing this account, value of abnormal goods included in opening stock,
purchases and sales must be deducted from the respective item and is to be shown in a
separate column for abnormal items. Gross profit must be calculated on the sales value of
norma! goods by applying rate of gross profit on normal sales as calculated in step (2). The
balancing figure will be closing stock of normal goods on the date of fire.
Step 4 : Calculation of Actual Amount of Loss

A c t u a l a m o u n t o f lo s s c a n b e c a lc u la te d b y u s in g th e fo llo w in g fo rm a t
Stock of Normal Goods on the date of Fire (from Memorandum Trading A/c) XXX
Stock of Abnormal Goods on the date of Fire XXX
XXX
Less : Stock Salvaged XXX
XXX
A d d : Expenses for Extinguishment of Fire XXX
Actual Loss of Stock XXX
Step 5 : Calculation of Amount of Claim

There would not be any difference in calculation of amount of claim on account of
existence of abnormal goods. Calculation of claim is also based on the extent of insurance, if
the amount of policy is less than the total stock (both normal and abnormal), then average
clause is applied as there is under insurance.
I L L U S T R A T I O N 10. O n 2 5 th J u n e , 2 0 1 7 a f ir e b r o k e o u t in th e p r e m is e s o f
U n lu c k y C o . A ll th e s t o c k s w e re d e s t r o y e d e x c e p t s o m e w h ic h w e re p a rtly d a m a g e d
a n d s o ld s u b s e q u e n t ly fo r ? 7,900.
F ro m th e fo llo w in g p a r t ic u la r s a s c e rta in th e c la im to b e s u b m itte d to th e In s u ra n c e
C o m p a n y a s s u m in g th a t th e p o lic y w a s fo r ? 20,000.
? f
S t o c k a s o n 1 st J a n u a ry , 2017 24,400 P u r c h a s e s d u rin g th e
P u r c h a s e s u p to th e d a te o f y e a r 20 16 1,53,500
th e fire 73.000 S a le s d u rin g th e y e a r 2016 1,96,500
S a le s u p to th e d a te o f th e fire 97.000 S t o c k a s o n 1 s t J a n u a ry , 20 16 18,500
T h e s t o c k a s o n 1 s t J a n u a r y , 2 0 1 6 in c lu d e d a s p e c ia l ite m v a lu e d ? 5,600 w h ic h
w a s s o ld at a p r o fit o f 20% o n s a le s . A p a rt o f t h is ite m w a s s o ld in 2 0 1 6 w h ile th e
b a la n c e w a s s o ld o n 3 rd M ay, 2017 fo r ? 2,500. E x c e p t fo r t h is item , th e g r o s s p ro fit o n
a ll o th e r ite m s w a s at a u n ifo rm ra te t h ro u g h o u t th e p e rio d .
S O L U T IO N
TRADING ACCOUNT OF UNLUCKY CO.
N orm al Abnorm al Norm al A bnorm al
Items Items Items Items
? ? ?
To Opening Stock 12,900 5,600 By Sales 1,92,000 (1) 4,500
To Purchases 1,53,500 — By Closing Stock 22,400 (2) 2,000
To Gross Profit 48,000 900
2,14,400 6,500 2,14,400 6,500
(1) Sale value of special item is calculated as follows :
Cost of special item 5,600
A d d : 25% profit on cost which is equivalent to 20% on sales 1,400
Total sale value of the special item 7~000
Total sale value of the special item 7,000
L e ss : Sale of special item in 2017 2.500
Sale of special item in 2016 4.500
insurance claims . IN
M 4 _________________ ________________________
(2) Cost of the sale of special item in 2017 (or cost of closing stock of special Item on
31-12-2016) : 500
Sale value
j
L e s s : 2 0 % Profit included therein 7 2,500 x ~ ~ ]
2^000
Cost
......................... .... . Gross Profit on Normal Sales
Gross Profit on Normal Sales = ---------------Normal Sales x 100
7 48,000
" 71,92,000 100-25/o
MEMORANDUM TRADING ACCOUNT OF UNLUCKY CO
u p to 2 5 th J u n e , 2 0 1 7
Items^ Items^
Normal \ Abnormal]
7 | 94,500 I
?l 24,525
22,400 I 2,000 Bv Sates y
By Stock on 25-6-20 ■-
To Stock on 1-1-2017 i 73,0001 (Bal, fig-)
To Purchases
To Gross Profit (25%
on Normal Sales and
Balancing Figure in Case | 23.625 | 500 2,500
of Abnormal Items)
i— ii
O
o
in
| 1 19,025 cvi
7
24,525
7,900
Value of stock on the date of fire 16,625
L e s s : Sale of partly damaged stock
Value of stock destroyed by fire Insurance policy
. Claim
Claim to
to be
be lodged
lodged =
= Value
vaiuo of stock destroyed x value of stock on the date of fire
-----------
-------- x 1120,055= 7 -j13,558
= 7 16,625 3,558 ■- *>-.■» r .
I L L U S T R A T I O N 11. O n 1 s t J u ly , 2 0 1 7 a f ir e t o o k p la c e in th e G o d o w n o f R a m
K u m a r w h ic h d e s t r o y e d a ll s t o c k s . C a lc u la t e th e a m o u n t o f in s u r a n c e c la im f o r s t o c k
3= <
fro m th e fo llo w in g d e t a ils : 7 S t o c k as o n 1-1-2017 2,70,000
2,70,000
2,00,000
Purchases fro m 1-1-2017
Sales in 2015 60,000
i s in
G ross £u in 2015
Profit 3,00,000 to 30-6 -2 0 17 4 ,00,000
Saless s inP r2016
o fit in 2 0 1 6 bu,uuu
60,000 S a le s fro m 1-1-2017 to 30-6 -2 0 17 7,20,000
G ross Profit in 2016
Following are also to b e taken in t o consideration :
1. S t o c k as o n 3 1 s t December, 2 0 1 6 had been undervalued b y 1 0 per cent.
2. A s t o c k t a k in g c o n d u c t e d in M a rc h , 2 0 1 7 h a d r e v e a le d t h a t s t o c k s c o s t in g
7 8 0 ,0 0 0 w e re ly in g in a d a m a g e d c o n d it io n . 5 0 p e r c e n t o f t h e s e s t o c k s h a d b e e n s o ld
in M a y , 2 0 1 7 a t 5 0 p e r c e n t o f c o s t a n d th e b a la n c e w e re e x p e c te d t o b e s o ld a t 4 0 p e r
c e n t o f c o s t.
S O L CUaTlcIuOla Ntio n o f R a te o f G ro s s P r o fit in 2 0 1 5 7
Gross Profit as given 60,000
Sales in 2015 2,00,000
-■ ^ 0 5 ^ x 1 0 0 = 30%
C a lc u la tio n o f R a te o f G ro s s P r o fit in 2 0 1 6 7
Gross Profit as given 60,000
A d a : Profit to be increased due to increase in value of closing stock
7 2,70,000 x ^ 30.000
Gross Profit in 2016 90.000
Sales in 2016 3,00,000
Therefore, Percentage of Gross Profit to Sale I ^ qqqqq x 100 =30%
30% (2015) + 30% (2016) 60%

Average Percentage of Gross Profit= = 30%
2 2
U p to 1 s t J u ly , 2 0 1 7
N o rm a l A b n o r- N o rm a l A b n o r-
Ite m s m at T o ta l Ite m s m al T o ta l
Ite m s Ite m s
7 7 7 7 7 7
To Opening Stock 2,20,000 80,000 3,00,000 By Sales 7,00,000 20,000 7,20,000
/ 1An\ ” Gross Loss (1)44,000 44,000
? 2,70,000 x ” Closing Stock
\ yU / (Balancing
To Purchases 4,00,000 — 4,00,000 figure) 1,30,000 16,000 1,46,000
” Gross Profit
@ 30% on
normal sales 2,10,000 2,10,000
8,30,000 80,000 9,10,000 8,30,000 80,000 9,10,000
(D C a lc u la tio n o f G ro s s L o s s o n A b n o r m a l Ite m s 7
Cost of abnormal items 80,000
Cost of \ of the abnormal items 40.000
Less : Value of sales @ 50% 20.000
Gross loss on 50% abnormal items 20,000
/ 60
A d d : 60% loss on balance of 50% abnormal goods j 7 40,000 x 24,000
100
Total gross loss on abnormal items 44,000
Amount of claim for loss of stock is total of normal stock and abnormal stock, i.e., f 1,46,000.
S L L U S T R A T I O N 12. B e e a n d C o . s u ffe r e d lo s s o f s t o c k d u e to fir e o n 6 th M ay,
2017. F ro m th e f o llo w in g in fo rm a tio n , p re p a re a s ta te m e n t s h o w in g th e c la im to b e
lo d g e d :
S t o c k o n 1 s t J a n u a r y , 2 0 1 6 ? 3 8 ,4 0 0 ; P u r c h a s e s d u r in g 2 0 16 ? 1,6 0 ,0 0 0 ; S a le s
d u rin g 2 0 16 7 2,0 2,600 ; C lo s in g s t o c k o n 3 1 s t D e c e m b e r, 20 16 7 31 ,8 0 0 ; P u r c h a s e s
fro m 1 st J a n u a ry , 2017 to th e d a te o f fire 7 54,000 ; S a le s fro m 1 s t J a n u a ry , 2 0 1 7 to th e
d a te o f fire 7 61,400.
A n ite m o f s t o c k p u r c h a s e d in 20 15 at a c o s t o f 7 10,000 w a s v a lu e d at 7 6,000 o n
3 1 st D e c e m b e r, 2015. H a lf o f t h is s t o c k w a s s o ld in 20 16 fo r 7 2,600, th e re m a in in g w a s
V/2 -16 INSURANCE CLAIMS
valued at ? 2,400 on 31st December, 2016. One-fourth of the original stock was sold in
March, 2017 for f 1,400. The remaining stock was considered to be worth 60 per cent of
the original cost. Salvage was ? 12,000. The am ount of the policy was T 30,000 and
there was an average clause in the policy.
S O LU TIO N
TRADING ACCOUNT
fo r the y e a r e n d e d 3 1 s t Dec., 2 0 1 6
N o rm a l A b n o rm a l T otal N o rm a l A b n o rm a l T otal
r f ? ? r
To Opening By Sales 2,00,000 2,600 2,02,600
Stock By Profit &
(at Cost) 32,400 10,000 42,400 Loss A/c
To Purchases 1,60,000 — 1,60,000 (Loss) — 2,400 2,400
To Gross Profit 37,000 — 37,000 By Closing
Stock
(at Cost) 29,400 5,000 34,400
2,29,400 10,000 2,39,400 2,29,400 10,000 2,39,400
Gross Profit ? 37,000

Gross Profit Ratio x 100 = 100 =18.5%
Sales 2 , 00,000

u p to 6th M ay, 2 0 1 7
N o rm a l A b n o rm a l Total N orm al A b n o rm a l Total
? ? ? f r 7
To Opening By Sales 60,000 1,400 61,400
Stock By Profit &
(at Cost) 29,400 5,000 34,400 Loss A/c
To Purchases 54,000 — 54,000 (Loss) — 2,100 2,100
To Gross Profit By Stock
(18.5% on (Bal. Fig.) 34,500 1,500 36,000
normal sale) 11,100 _ 11,100
94,500 5,000 99,500 94,500 5,000 99,500
7
Value of Stock on 6th May, 201 f 36,000
L e ss : Stock Salvaged 12,000
Stock destroyed by Fire 24,000
Amount of Claim (on Average Clause Basis)
Amount of Policy ? 30,000
- x Stock Destroyed by Fire : ? 36,000 x 24,000 = ? 20,000
Stock on the Date of Fire
@ Consequential Loss (or Loss of Profit) Insurance

Consequential loss insurance indemnifies the insured any loss of profit suffered by him
consequent on the destruction of business properties by fire. An ordinary fire insurance policy
covers the loss on account of stock or properties destroyed by fire, but it does not cover loss
of profit due to inability to produce or sell on account of fire. Therefore, a separate policy
known as consequential loss policy is taken to cover ihe following losses due to fire :
INSURANCE CLAIMS V / 2 17
(a) Loss of profit due to inability to produce and sell.

(b) Loss of standing (or fixed) charges due to their non-recovery or less recovery
because of no production or less production as a result of fire.
(c) Increased cost of working as a result of fire such as renting a new business place
temporarily tor conducting the business operations.
O Explanation of Certain Terms

It is d e s ir a b ie to k n o w th e m e a n in g o f f o llo w in g te r m s in c o n n e c t io n w ith m a k in g
c la im o n lo s s o f p ro fit p o lic ie s .
(a) Gross P ro fit. It is calculated by adding the amount of insured standing charges to the
net profit. In case of net loss, gross profit is the amount of insured standing charges such a
proportion of any net trading loss as the amount of the insured standing charges bear to all
standing charges (i.e. Insured + uninsured) of the business.
(b) N e t P ro fit. In order to calculate net profit of the business, due provision should be
made for all standing and other charges including depreciation but before any deduction of
any taxation chargeable on profits from the net trading profits resulting from business of the
insured at the premises.
(c) in s u r e d S t a n d in g C h a r g e s . These charges are specified in the policy which the
insured desires to recover in case of an accident. Such charges include :
(/) Rent, rates and taxes not related with profits of the business, (//) Interest on debentures
and loans, (Hi) salaries of permanent staff, (/V) Wages of skilled workers, (v) Directors’ fees,
(vi) Auditor’s fees, (vii) Advertising, (viii) Travelling, and (ix) Unspecified standing charges (not
exceeding 5% of the amount of specified standing charges).
(d) T u rn o v e r. The money paid or payable to the insured for goods sold and delivered and
for services rendered.
(e) A n n u a l T u rn o v e r. The turnover during the velve months immediately preceding the
date of the damage.
(f) S ta n d a rd T u rn o v e r. The turnover during that period in the twelve months immediately
before the date of damage which corresponds with the indemnity period.
(g ) R a te o f G r o s s P ro fit. The rate of gross profit earned on the turnover during the
financial year immediately before the date of the damage.
(h) In d e m n ity P e rio d . T h e p e rio d b e g in n in g w ith th e o c c u r r e n c e o f th e d a m a g e a n d
e n d in g n o t la te r th a n 12 m o n th s th e re a fte r d u r in g w h ic h th e r e s u lt s o f th e b u s in e s s
s h a ll b e a ffe c te d in c o n s e q u e n c e o f th e d a m a g e .
O Difference Between Fire Insurance Policy and Loss of Profit Policy

Basis of Distinction Fire Insurance Policy Loss of Profit Policy
1. Coverage This policy covers loss of or damage This policy covers loss of gross profit
to insured property such as building, sustained in consequent of a business
stock, etc. interruption.
2. Subject Matter Subject matter of this insurance In Loss of Profit policy subject matter
policy is tangible and covers material is intangible and covers the earning
and property. capacity of the business.
C o m p u t a t io n o f C la im fo r L o s s o f P ro fit. t-ollowing procedure is followed for the
calculation of claim for loss of profit:
1. C a lc u la t e s h o r t s a le s by comparing the sales made during the abnormal period in the
•ear of fire with the sales of the same period of the year preceding the year of fire. In this
tonnection, it may be remembered that calculation of short sales is to be made for the period
dislocation due to fire or the period of indemnity for which policy is taken, whichever is less.
V/2-18 INSURANCE CLAIMS
For example, if the indemnity period is 4 months whereas dislocation of the business takes
place for 3 months, the amount of short sales is to be calculated for 3 months. But if
dislocation continues for 6 months, the amount of short sales is to be calculated for 4 months
because loss on account of short sales beyond the indemnity period will not be allowed by the
insurance company. The amount of short sales is to be calculated by adjusting the normal or
standard turnover for any increase or decrease expected in the year of fire as a result of
increasing or decreasing trend in the turnover.
2. Calculate rate of gross profit of the financial year preceding the year of fire.
Calculation of rate of gross profit for loss of profit policy is different from the normal rate of
gross profit as described earlier in this chapter. It is calculated as follows :
Net Profit + Insured Standing Charges__
Rate of Gross Profit = , x 100
Sales of the financial year preceding the year of fire
3. C alculate loss of profit on short sales by applying the rate of gross profit as
calculated in step (2).
4. Add increased cost of working incurred to mitigate the effect of the loss on account
of short sales to the loss of profit as calculated in step (3). The claim for increased cost of
working is restricted to the lowest of the following amounts :
(a) Actual increased working expenses
Net Profit + Insured Constant Expenses ,_______
' Net Profit + All Constant Expenses
Or
Gross Profit on preceding 12 months’ sales_________ Additional
Gross Profit on preceding 12 months’ sales 4- Uninsured Expenses x Expenses
(c) Gross profit on sales resulting from the increased working expenses.
5. Deduct the am ount of expenses saved as a result of fire from the total claim as
calculated In step (4) and the resultant figure will be the amount of gross claim for loss of
profit.
6. The gross claim as calculated in step (5) is subject to the average clause as follows :
r p. . _________ Amount of Policy ______________
ross aim x Qross profjt on 12 months’ (adjusted) sales immediately
preceding the date of fire
The figure so calculated will be the amount of claim for loss of profit to be lodged with the
insurance company. It may be remembered that the average clause is to be applied only
if the amount of the policy is less than the gross profit on the adjusted turnover of 12
m onths preceding the date of fire. For the calculation of the adjusted turnover,
adjustm ents are made to the turnover of 12 months immediately preceding the date of
fire as may be necessary to provide for the trend of the business. For example, if 20%
increase in sales is expected in the year of fire, turnover of 12 months immediately preceding
the date of fire will be increased by 20% to get the figure of adjusted turnover. Similarly, the
am ount of short sales will be adjusted if any increase or decrease is to be expected in
the year of fire.
I L L U S T R A T IO N 13. On 4th September, 2016, W intex Ltd. took a loss of profit
policy for T 5,00,000 with an indemnity period of six months. A fire broke out on 1st
January, 2017 because of which there was dislocation upto 31st May, 2017. Ascertain
the am ount of claim for loss of profit taking into account the follow ing additional
information :
Sales for accounting year ended 31st March, 2016 24,00,000
Net profit for accounting year ended 31st March, 2016 2,60,000
Standing charges (all covered) for the year ended 31st March, 2016 3,40,000
Sales from 1st January, 2016 to 31st December, 2016 26,00,000
Sales from 1st January, 2017 to 31st May, 2017 3,10,000
Sales from 1st January, 2016 to 31st May, 2016 11,00,000
There was a 10% upward trend in business. The policy had an average clause.
S O LU TIO N
Working Notes :
Period of dislocation : from 1-1-2017 to 31-5-2017
(1) Calculation of short sales
t
Standard turnover for the period from 1-1-2016 to 31-5-2016
(corresponding period in the previous year) 11,00,000
A d d : Upward Trend 10% 1,10,000
12,10,000
L e ss : Actual Turnover during the period of dislocation 3,10,000
Short Sales 9,00,000
(2) Calculation of gross profit ratio

Net Profit +Insured Standing Charges x 100
Turnover for the preceding year
(2,60,000 +3,40,000)1------------_
----------I---------------------:------- x 100 pco/
24,00,000
Calculation of Amount of claim
Loss of Profit on Short Sales of ? 9,00,000 x 25% =? 2,25,000

Annual Turnover for the year preceding the Fire 26,00,000
A d d : Upward Trend 10% 2,60,000
Adjusted sales for preceding 12 months 28,60,000
Insurable Amount: ? 28,60,000 x 25% =? 7,15,000
Loss of Profit x Sum Insured
Amount of Cla.m = msurable Amount
? 2,25,000 x ? 5,00,000
? 7,15,000 =? 1,57,343
ILLU S TR A TIO N 14. On 1st November, 2016 a severe fire broke out in the
premises of III Luck Co. Ltd. The indemnity period lasted for 4 months during which
the sales of the company were reduced to ? 2,00,000 only. The company closes its
account on 30th June every year. The Profit and Loss Account for the year ended 30th
June, 2016 is given below :
PRO FIT AND LOSS ACCOUNT

” Purchases 30,00,000 ” Closing Stock 2,50,000
” Variable Expenses 7,87,500
V / 2 -2 0 INSURANCE CLAIMS
To Insured Standing Charges 3,62,500

” Net Profit 3,50,000
50,00,000 50,00,000
The company took a loss of profit policy for a sum of 7 6,00,000. The sales of the
com pany for the 12 months ending the date of fire were 7 50,00,000 and for the 4
months from 1st November, 2015 to 28th February, 2016 were 7 15,00,000.
It was noted that the sales for the first four months of the year under indemnity
were 20% higher than previous year. Compute the claim for loss of profit.
S O LU TIO N
Calculation of Amount of Short Sales ?
Sales from 1-11-2015 to 28-2-2016 15,00,000
Add: 20% increase expected in the current year 3,00,000
18,00,000
L e ss : Sales from 1-11 -2016 to 28-2-2017 2,00,000
Calculation of Gross Profit
Net Profit + Insured Standing Charges „ „
-----------Sales x10°
7 3,50,000 + 7 3,62,500 7 7,12,500
--------- 7 47,50,000 “ x 100 =7 47,50,000 x 100 = 15 4
Gross Profit on sales for the 12 months ending the date of fire
15% of (7 50,00,000 + 20% increase of 7 50,00,000) = 7 9,00,000
Loss of Profit
15
15% on short sales |i.e., x 7 16,00,000 |= 7 2,40,000
Claim of Loss
Amount of Policy
Loss of Profit x Gross Profit on Preceding 12 Months’ Adjusted Sales
7 6,00,000
= ? 2,40,000 x ^ 5 ^ 0 0 = 7 1,60.000.
ILLUSTRATION 15. From the following information, you are required to work out
claim under the Loss of Profit Insurance Policy.
(1) C over—Gross Profit—71,00,000.
(2) Indemnity period—Six months.
(3) D am age—due to a fire accident on 28th D ecem ber—accounting year ends on
31st December.
(4) Net Profit plus all standing charges in the prior accounting year—71,50,000.
(5) Standing charges uninsured—? 25,000.
(6) Turnover of the last accounting year was 75,00,000, the rate of gross profit
being 25%.
(7) The annual turnover, namely, the turnover for 12 months immediately preceding
the fire —7 5,20,000.
(8) As a consequence of fire, there was a reduction in certain insured standing
charges at the rate of 7 25,000 per annum.
(9) The standard turnover 7 2,60,000.
(10) Increased cost of working during the period of indemnity was 7 20,000.
INSURANCE c l a im ?
____________________________________________ V/2-21
(11) T u r n o v e r d u r in g t h e p e r io d o f in d e m n it y w a s ? 1 ,0 0 ,0 0 0 a n d o u t o f t h is
t uO
S rnLU
o v TIO
e r o f N? 8 0 ,0 0 0 w a s m a in ta in e d d u e to in c r e a s e d c o s t o f w o rk in g .
Calculation of Short Sales

Standard turnover ?
Turnover during the indemnity period 2,60,030
1, 00,000
Calculation of Rate of Gross Profit Short Sales T6O000
Net profit plus all standing charges— Uninsured standing charges

Sales of the last accounting year x
? 1,50,000 - ? 25,000 ,
? 5,00,000 x 100 - 25 /o
Amount of Claim
Loss of profit on short sales of ? 1,60,000 @ 25%
A d d : Increased cost of working : « ? 40,000
Actual amount of increased cost 20,000
Gross profit @ 25% on turnover for 12 __months
. >vi ill IO
immediately preceding the date of fire ? 5 ,20,000 a ^ i

Gross profit as above plus uninsured standing 25 \ 1.30.000
charges (? 1,30,000 + f 25,000)
Claim for increased cost of working |? 20,000 x ^\ j 55 oqq

1.55.000
[Gross profit @ 25% on additional sales of ? 80,000 16,774

due to increased cost ? 20,000 |i.e., x ? 80 ,000 1
is more than ? 16,774, so claim admissible is ? 16,774]
Less:
Saving in standing charges for \ ye a r ( ^ 25,000 x \ )
/
Application of Average Clause
Sum Insured . . , .
Gross Profit on preceding 12 month’s sales x moun 0 aim
? 1,00,000
25%/o ui
of ?<5t>,20,000
^ 0 0 0 ~x 'f 44’274
-+‘+ ,i:/4 =
~?1 x ? 44,274 = ? 34,057.
Therefore, claim for loss of profit to be lodged is ? 34,057.
ILLU STR ATIO N 16. A fire o c c u r r e d o n 1 s t J u ly , 2017, in th e p r e m is e s o f A r o iit e

Ltd. a n d b u s in e s s w a s p r a c t ic a lly d is o r g a n is e d u p to 3 0 th N o v e m b e r, 2017. F ro m th e
b o o k s o f a c c o u n t, th e fo llo w in g in fo rm a tio n w a s e x tra c te d :
Actual turn''"— from 1st July, 2017
Actual turnover
to 30th November, 2017 Insured standing charges for
Turnover from 1st July, 2016 the last financial year
to 30th November, 2016 Turnover for the last
Net Profit for the last financial year 2, 00,000 financial year
Total standing charges for the year 90.000
Turnover for the year ending
72.000
30th June, 2017
The company incurred additional expenses amounting to ? 9,000 which reduced

the loss in turnover. There was also a saving during the indemnity period of f 2,486.
The company holds a ‘loss of profit’ policy for ? 1,65,000 having an indemnity
period for 6 months. There had been a considerable increase in trade and it had been
agreed that an adjustment of 20% be made in respect of upward trend in turnover.
Compute claim under “loss of profit insurance” assuming that all sales during the
indemnity period are because of additional cost.
S O LU TIO N
Calculation of Short Sales ?
Standard turnover: Sales from 1-7-2016 to 30-11-2016 2,00,000
A d d : 20% increase in sales due to upward trend in turnover 40,000
2,40,000
Less : Sales during the indemnity period, 1st July, 2017 to 30th November, 2017 60,000
Calculation of Rate of Gross Profit
Net profit + Insured standing charges^ ? 90,000 + ? 60,000
X 100 = 30%
Turnover for the last financial year x ? 5,00,000
Calculation of Amount of Claim ?
Loss of profit on short sales of ? 1,80,000 @ 30% 54,000
A d d : Additional expenses— Lowest of the following amounts ?
(/) Actual amount of additional expenses 9,000
(//) Gross profit on additional sales of ? 60,000
during the indemnity period @ 30% 18,000
(Hi) Gross profit @ 30% on turnover for 12 months
immediately preceding the date of fire ? 6,60,000 ?
i.e., 30% of (? 5,50,000 + 20% increase of ? 5,50,000) 1.98.000
Gross profit as above plus uninsured expenses
(? 1,98,000 + ? 12,000) 2.10.000
............... Gross profit
Additional expenses x Gross pr0fit + Uninsured expenses
____ _ ? 1,98,000 = 8,486
' 9.000 x ? 1 g8 000 + r 12,000
Therefore, claim for additional expenses is the third
figure of ? 8,486 because it is the lowest 8.486
62,486
Less : Saving in expenses 2.486
Amount of claim 60,000
Application of Average Clause
_____ Sum insured_____
Net Claim = Amount of claim x Gross profit on preceding
12 months’ adjusted sales
? 1,65,000
? 60,000 x = ? 50,000
? 1,98,000
ILLU STR ATIO N 17. A fire occurred in the premises of a businessman on 31st
January, 2017, which destroyed most of the building. However, stock worth ? 5,940 was
salvaged.
The company’s insurance policy covers the following :
?
Stock 4,50,000 Loss of Profit (including
Building 6,00,000 standing charges) 1,87,500
INSURANCE CLAIMS V /2 -2 3
P e rio d o f in d e m n ity — s ix m o n th s .
T h e s u m m a r is e d P r o fit a n d L o s s A c c o u n t fo r th e y e a r e n d e d 3 1 s t D e c e m b e r, 20 16
is a s fo llo w s :
T u rn o v e r 15,00,000
C lo s in g S t o c k 3,93,750
18,93,750
O p e n in g S t o c k 3,09,375
P u rch a se s 13,59,375
S ta n d in g C h a r g e s (In su re d ) 1,25,625
V a ria b le E x p e n s e s 60,000 18,54,375
N e t P ro fit 39,375
T h e t r a n s a c t io n s fo r th e m o n th o f J a n u a ry , 20 17 w e re a s u n d e r :
P a y m e n ts to C r e d it o r s 80,010 T ra d e C r e a t o r s :
T ra d e C r e d it o r s : B a la n c e a s o n 31 -1 -2017 1,15,490
B a la n c e a s o n 1-1-2017 1,13,000 T u rn o v e r 75,000
T h e c o m p a n y ’s b u s in e s s w a s d is r u p t e d u n til 3 0 -5 -2 0 17 d u r in g w h ic h p e r io d th e
re d u c tio n in tu r n o v e r a m o u n te d to ? 1,35,000 a s c o m p a re d w ith th e tu rn o v e r o f p e rio d
c o r r e s p o n d in g to th e p r e v io u s y e a r.
B u ild in g w a s w o rth ? 7,50,000 o n th e d a te o f fire a n d th re e q u a rte rs o f its v a lu e w a s
lo s t b y fire .
Y o u a re r e q u ir e d to s u b m it th e c la im f o r in s u r a n c e f o r lo s s o f s t o c k , lo s s o f
b u ild in g a n d lo s s o f p ro fit.
SO LU TIO N
(1) Claim for Loss o f Stock
TRADING ACCOUNT
?
To Purchases 13,59,375 By Closing Stock 3,93,750
” Gross Profit 2,25,000
18,93,750 18,93,750
„ . ,„ „ ... Gross Profit __ ? 2,25,000 __ ___

Rate of Gross Profit = — Sales
„ .---------x 100 = < 15,00,000_ x 100 = 15%

for the month ended 31st January, 2017
To Opening Stock 3,93,750 By Sales 75,00G

” Purchases as per Total ” Closing Stock (Balancing figure) 4,12,500
Creditors Account 82,500
” Gross Profit @ 15% 11,250
4,87,500 4,87,500
Closing stock as on 31-1-2017 4,12,500

L e s s : Stock salvaged 5,940
Claim for Loss of Stock 4,06,560
TOTAL CREDITORS ACCOUNT

? ?
To Bank 80,010 By Balance b/d 1,13,000
” Balance c/d 1,15,490 ” Purchases (Balancing figure) 82,500
1,95,500 1,95,500
(2) Claim for Loss of Profit

Net Profit + Insured Standing Charges
Gross Profit Ratio = x 100
Sales
? 39,375 + ? 1,25,625
x 100 = 1%
? 15.00.000
Note. It is assumed that all standing charges are insured.
Short Sales (as given) 1,35,000

Gross Profit on Short Sales @ 11% |i.e., f 1,35,000 x j 14,850
There is no need of applying average clause because loss of profit policy of T 1,87,500 is more than
the amount of net profit of ? 39,375 plus standing charges of ? 1,25,625. Therefore, claim for loss of
profit is f 14,850.
(3) Claim for Loss of Building
3
Loss of Building, ^ of T 7,50,000 ? 5,62,500
The claim is subject to average clause as building is not fully insured; so the claim is
Value of Policy
' Value of Building
? 5,62,500 x ^ 7 50 000 = ? 4>50’000-
I L L U S T R A T I O N 18. G u la m A h m e d h a s a lo s s o f p ro fit p o lic y fo r ? 12,00,000. F ire
o c c u r r e d o n 15 M a rc h , 2017. In d e m n ity p e rio d w a s fo r th re e m o n th s . N et p ro fit fo r th e
y e a r e n d e d 31 D e c e m b e r , 2 0 1 6 w a s ? 8 ,4 0 ,0 0 0 . S t a n d in g c h a r g e s ( a ll
in s u r e d ) a m o u n te d to ? 7 ,4 4 ,0 0 0 . D e te rm in e th e in s u r a n c e c la im fro m th e fo llo w in g
d e t a ils :
Sales 2014 2015 2016 2017
f ? ? ?
1 J a n u a r y — 31 M a rc h 18,00,000 19,50,000 21,30,000 19,50,000
1 A p r il— 30 J u n e 12,00,000 13,50,000 15,00,000 6,00,000
1 J u ly — 30 S e p te m b e r 15,00,000 16,50,000 18,00,000 15,00,000
1 O c to b e r— 31st D e ce m b e r 20,45,000 22,50,000 24,90,000 24,00,000
65,45,000 72,00,000 79,20,000 64,50,000
16 M a rc h 2 0 1 6 - 3 1 M a rc h 2016 — — —
4,20,000
16 M a rc h 2 0 1 7 - 3 1 M a rc h 2017 — — — —
16 J u n e 2 0 1 6 — 30 J u n e 2016 — — — 3,60,000
16 J u n e 2 0 1 7 - 3 0 J u n e 2017 — — — 90,000
Ignore d e c im a ls w h ile c o m p u tin g tre n d o f s a le .
INSURANCE CLAIMS V / 2 -2 5
SO LU TIO N
Fire occurred on 15th March, 2017 and indemnity period was for 3 months. Therefore, indemnity
period is 15-3-2017 to 15-6-2017 and short sales are to be calculated in relation to this period.
_ Net Profit + Insured Standing Charges
Rate of Gross Profit x 100
Sales for 2016 (Previous Year)
_ 7 8,40,000 + 7 7,44,000
x 100
7 79.20.000
15,84,000
7 79,20,000 x 100 = 20%
Year Sales Increase Over % Increase Over
Previous Year’s Sales Previous Year
7 7
2014 65,45,000 — —
2015 72,00,000 6,55,000 10
2016 79,20,000 7,20,000 10
Average Increase (10% + 10%) -r 2= 10%
Calculation of Short Sales (during the Indemnity Period) 7

Sales from 16-3-2016 to 31-3-2016 4.20.000
A d d : Sales from 1-4-2016 to 30-6-2016 15,00,000
19.20.000
Le ss : Sales from 16-6-2016 to 30-6-2016 3.60.000
Sales from 16-3-2016 to 15-6-2016 15.60.000
A d d : Expected Increase 10% 1.56.000
Expected Sales during the Indemnity Period 17,16,000
L e ss : Actual Sales between 16-3-2017 to 15-6-2017 :
7
Sales from 16-3-2017 to 31-3-2017 Nil
Sales from 1-4-2017 to 30-6-2017 6 , 00,000
Less : Sales from 16-6-2017 to 30-6-2017 90,000
5,10,000
Short Sales between 16-3-2017 to 15-6-2017 12,06,000
20
L o ss o f P ro fit on S h o rt S ales @ 20 % i.e. 7 12,06,000 x 2,41,200
100
Calculation of Adjusted Sales for 12 months preceding the date of fire i.e. 15-3-2017
7
Sales from 16-3-2016 to 31-3-2016 4,20,000
Sales from 1-4-2016 to 30-6-2016 15.00. 000
Sales from 1-7-2016 to 30-9-2016 18.00. 000
Sales from 1-10-2016 to 31-12-2016 24.90.000
Sales 1-1-2017 to 15-3-2017 19.50.000
(Sales from 16-3-2017 to 31-3-2017 is nil, so sales from 1-1-2017 to 31-3-2017
can be taken as sales from 1-1 -2017 to 15-3-2017 f
Sales from 16-3-2016 to 15-3-2017 81,60,000
Add : 10% Increase Expected 8,16,000
Adjusted Sales 89,76,000
(for 12 months preceding the date of fire)
INSURANCE CLAIMS
V/2-26
Calculation of Claim to be Lodged for Loss o f Profit on Average Clause Basis

___________Amount of Policy___________
oss o ro i x i_o s s 0f profjt on Preceding 12 Months' Sales
i _ 12,00,000
r 2,41,200 x 2Q% Qf ? 8g 76 000
= r 2,41,200 x §§ ,25°
O Accounting Entries for Fire Claims

1. On admission of the fire claim :
(a) If the claim relates to loss of stock :
Stock losses can be of two types, namely, (1) loss on account of stock destroyed—where
goods are totally lost; and (2) loss on account of stock damaged—when goods are not totally
lost but may be damaged to some extent by fire. The entry for the claim admitted in case of
stock is :
(/) Insurance Company Dr.
To Stock Destroyed Account
To Stock Damaged Account
(Being entry for the claim admitted for stock destroyed and stock damaged)
(//) Entry for the actual cost of stock lost is :
Stock Destroyed Account Dr.
Stock Damaged Account Dr.
To Trading Account
(Being cost of stock destroyed and damaged transferred to Trading Account)
(Hi) Entry for the sale of damaged goods :
Bank Account Dr.
To Stock Damaged Account
(Being amount realised on sale of damaged stock)
(/V) Difference of Stock Destroyed Account and Stock Damaged Account being loss or
\profit is transferred to Profit and Loss Account:
2. On admission of claim for loss of profit:
Insurance Company Account Dr.
To Profit and Loss Account (Amount of loss of profit relating to current year)
To Profit and Loss Suspense Account (Amount of loss of profit pertaining
to next year)
3. On admission of claim relating to fixed assets :
Insurance Company Account
To Fixed Assets
(Being claim admitted by the insurance company for fixed assets destroyed by fire)
4. On receipt of money relating to various claims admitted by the insurance company:
Bank Account Dr.
To Insurance Company
Difference in book value of fixed assets and claim admitted in relation thereto being loss
or profit is transferred to Profit & Loss Account.
ILLU STR ATIO N 19. A fire occurred on 10th April, 2017 in the factory of Go Well
Ltd. Following particulars are obtained as regards the cost values of stock damaged
and stock destroyed as a result of fire, amounts claimed and admitted by the insurance
company.
Cost value Claimed Admitted

f ? ?
Stock damaged 56,000 60,000 34,000
Stock destroyed 90,000 1,00,000 80,000
Fire expenses 2,000 2,000
Most of the stock lying in a godown adjacent to the factory was destroyed. The
damaged goods saved were sold for ? 25,000. The actual fire expenses incurred were
? 2,000. The insurance company paid the amount for all claims admitted on 15th July,
2017.
Make journal entries in the books of Go Well Ltd. to record the above transactions
including the cash book entries.
S O L U T IO N Books of Go Well Ltd.
JOURNAL ENTRIES
2017 ?
? Insurance C o m p a n y Dr. 1,16,000
T o S to ck D a m a g e d A /c 34,000
T o S to ck D estro ye d A/c 8 0 v000
T o Fire E xp e n se s A /c 2,000
(B eing va rio u s cla im s adm itted by th e in su ra n ce co m p a n y)
? S to ck D a m a g e d A /c Dr. 56,000
S to ck D estro ye d A /c Dr. 90 ,0 0 0
T o T ra d in g A /c 1,46,000
(B eing co st va lu e o f sto ck d a m a g e d and sto c k d e stro ye d
cre d ite d to T rading A/c)
? B ank A /c Dr. 25,000
T o S tock D a m aged A /c 25,000
(B eing sale o f d a m a g e d go o d s)
? S tock D am aged A /c Dr 3 ,000
T o P rofit and Loss A /c 3,000
(B eing b a la nce o f S to ck D a m aged A /c tra n sfe rre d to P rofit
and Loss A /c) a
9 P ro fit and Loss A /c Dr. 10,000

T o S tock D e stro ye d A /c 10,000
(B eing b a lance o f S tock D e stroyed A /c tra n sfe rre d to P rofit
and Loss A c )
? Fire E xpenses A c Dr. 2,000
T o B ank A c 2,000
(B eing pa ym e n t o f fire e xp enses)
Ju ly 15 Bank A c Dr. 1,16,000
T o Insurance C o m p a n y A c 1,16,000
(B eing rece ip t o f v a rio u s c la im s a d m itte d b y th e insurance
co m p a n y)
O B JE C T IV E T Y P E

(a) T h e a ve ra g e cla u se in a loss o f sto ck p o licy d is c o u ra g e s ........
( b) T h e d iffe re n ce b e tw e e n sta n d a rd tu rn o ve r and actual tu rn o v e r during th e in d e m n ity period
is .......
(c) T h e a ve ra g e cla u se in case o f a loss o f sto ck p olicy is a p plied w hen the va lu e o f stock on
the date o f fire is m ore than th e .......
(d) R ate o f g ro ss p ro fit in ca se o f a lo ss o f p ro fit in su ra n ce is d e te rm in e d by a p p lyin g the
fo r m u la .......
(e) Loss o f p ro fit in su ra n ce is also know n a s .......
Ans. [(a) under insurance of stock ; (to) short sales ; (c) amount of policy taken ;
Net profit + Insured standing charges ^
' ' Sales of the financial year preceding the year of fire x
(e) consequential loss insurance]
2. Select the correct answer :
(a) T he loss o f pro fit policy co ve rs loss o f profit due to :
(/) Loss o f sales
(/'/) N o n -re co ve ry o f standing ch arges
(Hi) Loss o f sales as w ell as loss o f insured sta n d in g charges.
(to) T he objective of inserting a verage cla u se in loss o f sto ck policy is to :
(;) E nco u ra g e under-in su ra n ce
(//) D isco u ra g e full insurance of stock
(/'//) E n courage full insurance o f stock.
(c) A b uilding w orth f 10,00,000 is insured fo r ? 6,00,000. It is co m p le te ly d e stro ye d by fire.
T he loss to be adm itted by the insurance co m p a n y w ill be :
(/) ? 10,00,000 ; (ii) f 6,00,000 ; (ii!) ? 5,00,000 ; (/V) N one o f these.
(d) A firm to o k an in su ra n ce policy a g a inst fire fo r ? 50,000. T h e p olicy co n ta in e d an average
clause. A fire o ccu rre d . On th e d a te of fire, g o o d s co stin g ? 75,000 w e re a va ila b le in the
stores. G oods salva g ed totalled ? 15,000. T he insurance co m p a n y w ill a d m it a claim fo r—
(/) ? 75,000; (ii) ? 60,000; (iil) ? 50,000; (/V) ? 40,000.
Ans. 1(a) (Hi) ; (b) (i); (c) (ii) ; (d) (/V)].
SHORT ANSWER TYPE
1. W h a t do you m ean by g ross profit ratio ? H ow do you ca lcu la te this ratio ?

2. W hat is the o b je ctive o f a fire insurance policy ?
3. W ho is in su re r in a fire insurance policy ?
4. W ho is insured in a fire insurance p o licy ?
5. W h a t is m eant by Fire C laim ?
6. W h a t is a verage cla u se ? W h a t it is a p plicable ?
7. W h y A ve ra g e C la u se is included in Fire C la im s ?
8. H ow do you ascertain th e a m o u n t o f claim u n d e r a fire insurance claim ?
9. W h a t d e ta ils do yo u re q u ire to m ake an in su ra n ce cla im in c o n n e ctio n w ith loss o f sto c k on
a cco u n t of fire ?
10. Illustrate the acco u n tin g m ethod fo r ca lcu la tio n o f claim of Loss o f Stock.
11. A fire o ccurred in th e prem ises o f Mr. Y on Ju n e 15, 201 7 and a co n sid e ra b le p a rt o f the sto ck
w a s destroyed.
T he value of the sto ck saved w a s f 4,000.
T h e b o o ks d is c lo s e d th a t on 1st A p ril, 2 0 1 7 th e s to c k w a s v a lu e d a t ? 4 5 ,0 0 0 ; the
p u rc h a s e s up to th e d a te o f fire a m o u n te d to ? 1 ,2 5 ,0 0 0 and the sa le s to ? 1 ,8 0 ,0 0 0 . O n
investigation, it w a s found th a t during the p a st five years, the a verage g ross pro fit on sales w as
30% .
You are required to p repare a sta te m e n t show ing th e a m o u n t Mr. Y should claim fro m the
insurance co m p a n y in resp e ct o f sto ck d e stro ye d by fire.
Ans. [? 40,000].
12. A fire o c c u rre d in th e p re m ise s o f a tra d e r on Ju n e 15, 2 0 1 7 and a p a rt o f th e sto c k w a s

d e stroyed. T h e va lu e o f the sto ck saved w as ? 4,500.
The sto ck on Ja n u a ry 1, 201 7 valu e d at ? 3 6 ,7 5 0 ; the p u rch a se s to the da te o f fire am ounted
to ? 1,04,940 and the sales ? 1,56,500. The a ve ra g e g ross profit on sales w as 36% .
Prepare a sta te m e n t to find out the cla im fo r insurance.
Ans. [? 37,030]
13. A fire o ccu rre d on 3 1 -1 2 -2 0 1 7 in th e p re m ise s o f a fa rm . From the b o o ks w hich w e re saved
from the fire, it w a s asce rta in e d t h a t :
S a le s fro m 1 -1 -2 0 1 7 to 3 1 -1 2 -2 0 1 7 ? 1 2 ,8 0 ,0 0 0 ; P u rch a se s fro m 1 -1 -2 0 17 to 3 1 -1 2 -2 0 1 7
? 8,4 0 ,0 0 0 ; S to ck on hand on 31 -12 -2 0 16 ? 2,3 6 ,0 0 0 ;
G ro ss p ro fit on sales a ve ra g e d at 35 % on sales. T h e va lu e o f sto ck saved w as ? 30,000.
Prepare a sta te m e n t show ing the a m o u n t o f the claim .
Ans. [? 2,14,000]
14. G o o d s o f ? 8 0 ,0 0 0 o f M /s Raju & S ons are in su re d fo r f 7 0 ,0 0 0 s u b je c t to a ve ra g e cla u se .
Loss d u e to fire is a sse sse d at f 16,000. C a lcu la te w h a t claim the insured w ill g e t fro m the
insurers.
Ans. [? 14,000]
15. A tra d e r has his sto c k insured a g a in st fire. S u b s e q u e n tly a fire d e stro ye d a p a rt o f the sto ck
w h ich w as va lu e d on the d a te o f fire at f 60,0 0 0 . T h e sto c k w a s insured s u b je c t to a ve ra g e
clause. S tock salva g ed w as ? 12,000. S tock w a s insured fo r f 36,000. Calculate the claim.
Ans. [? 30,000]
Hint. S tock on the da te of fire w as ? 72,0 0 0 ( i.e . f 6 0 ,0 0 0 d e stro ye d + ? 12,000 salvaged)
Insurance C laim = ? 60,000 x | y j o o o (V a 'u e of S t S ) = f 3 0 ’000
LONG ANSWER TYPE

1. E xplain in short, the follo w in g p rin cip le s and term o f insurance business :
(/) P rin cip le o f In d e m n ity ; (//) In su ra b le in te re st; (Hi) P rin cip le o f “ U B E R R IM A E F ID E I"; (/V)
C a ta stro p h ic Loss.
2. E xplain the d e ta ils and proce d u re of dete rm in in g the a m o u n t o f claim fo r the loss of sto ck to be
lodged w ith the insurance com pany.
3. W h a t d e ta ils do you req u ire to m ake an in su ra n ce cla im in co n n e ctio n w ith loss o f sto ck on
a cco u n t o f fire ?
OR
H ow w ill you asce rta in the claim fo r loss o f pro fit as a re su lt of fire ?
4. W rite short notes on :
(a) G ross P rofit R atio, (b) M e m o ra n d u m T ra d in g A cco u n t, (c) A ve ra g e C lause, (d) Indem nity
P eriod, (e) S hort S ales, (f) Loss o f P rofit Insurance Policy, (g) Increased cost of W orking.
5. W h a t is ‘c o n se q u e n tia l lo s s ’ ? D iscuss the va rio u s sta g e s involved in co m p u ta tio n o f insurance
claim fo r it, e xplaining fu lly va rio u s te rm s used in this connection.
OR
W h a t is co n se q u e n tia l loss policy fo r insurance claim ? Explain the im p o rta n t te rm s used in this
typ e o f policy and the proce d u re to file a claim u n d e r this policy.
Practical Problems
A fire o c c u rre d on 1 5 -9 -2 0 1 7 in th e g o d o w n of M /s A and B F rom th e fo llo w in g fig u re s
ascertain the claim to be lodged :
? ?
S tock on 1 -4-2017 1,05,300 S ales fro m 1 -4 -2 0 1 7 to the date
P urchases from 1 -4 -2 0 1 7 to the o f fire 6,76,000
d a te o f fire 3 ,5 0 ,4 0 0 G oods used by the partners
M anufacturing e xp e n se s and w a g e s 2,6 0 ,0 0 0 th e m se lve s (at cost) 10,500
R ate of g ross pro fit is 3 0 % on cost. T he sto ck salvaged w a s valued at ? 36,000.
Ans. [Claim ? 1,49,200]
V / 2-30 INSURANCE CLAIMS
2. O n 15th D e ce m b e r 2017, a fire occu rre d in the pre m ise s o f M /s O M E xports. M o st o f the stocks
w e re d e s tro y e d . C o s t o f sto c k sa lv a g e d b e in g ? 1,40 ,0 0 0 . F ro m th e b o o k s o f a c co u n t, the
fo llo w in g p a rticu la rs w e re available
(/) S tock a t th e close o f a cco u n t on 31 st M arch, 201 7 w a s va lu e d at ? 9,40,000.
(//) P u rch a se s from 1 -4-2017 to 15-1 2 -20 1 7 a m o u n te d to W 13,20,000 and th e sa le s during
the period a m o u n te d to ? 20,25,000.
O n th e basis o f his a cco u n ts fo r th e p a st th re e years, it a p p e a rs th a t a ve ra g e g ro ss p ro fit ratio
is 2 0 % on sales.
C om p u te the a m o u n t o f the cla im if th e sto ck w ere insured fo r ? 4,00,000.
Ans. [? 3,12,500]
3. A fire o ccu rre d in th e p re m ise s o f a m e rc h a n t on 18th S e p te m b e r, 2 0 1 7 a n d a co n s id e ra b le
part o f the sto ck w a s d e stroyed. T h e va lu e o f the sto ck saved w a s ? 8,200.
T h e b o o k s d is c lo s e d th a t o n 1st A p ril, 2 0 1 7 th e s to c k w a s v a lu e d a t ? 6 6 ,8 5 0 , th e
p u rc h a s e s to th e d a te o f fire a m o u n te d to ? 1 ,8 5 ,0 0 0 and th e sa le s to ? 2 ,8 2 ,5 0 0 . G o o d s
c o s tin g ? 5 0 0 w e re ta ke n fo r p e rs o n a l u s e and g o o d s so ld fo r ? 2 ,5 0 0 w e re re tu rn e d to the
m erchant. O n in ve stig atio n it is fo u n d th a t du rin g the p a st five ye a rs the a ve ra g e g ro ss p ro fit on
the co st w a s 25% .
You are re q u ire d to p re p a re a s ta te m e n t sh o w in g th e a m o u n t th e m e rch a n t sh o u ld cla im
fro m the in su ra n ce co m p a n y in re sp e ct o f sto ck d e stro ye d by fire.
Ans. [? 19,150].
4. A fire o ccu rre d in th e p re m ise s o f R an ja n on 25th N o ve m b e r, 2 0 1 7 w h e n a la rg e p a rt o f the
s to c k w a s d e s tro y e d . T h e v a lu e o f sa lv a g e d sto c k w a s ? 1 ,5 0 ,0 0 0 . R a n ja n g ive s y o u th e
follo w in g in fo rm a tio n fo r th e p e rio d 1st A pril, 201 7 to 25th N ovem ber, 201 7 :
(/) P u rch a se s : ? 8,05,000. (//) S a le s : ? 9,00 ,0 0 0 . (Hi) G o o d s costing ? 5 ,0 0 0 w ere taken a w a y
by R anjan fo r his perso n a l use. (/V) C ost price o f the sto ck on 1st April, 2 0 1 7 : ? 4 ,00,000.
O ve r the last fe w years, R anjan has been selling go o d s at a co n siste n t rate o f g ro ss m a rg in o f
33^% on sales.
In surance p o licy is fo r ? 5 ,00,000. It in clu d e s an a ve ra g e clause.
R anjan asks you to p repare a sta te m e n t o f claim to be m ade on th e insurance com pany.
Ans. [? 3,75,000]
5. O n 1st A p ril, 2 0 1 7 an a c c id e n ta l fire c o m p le te ly d e s tro y e d th e s to c k o f C h h o te N a w a b .
H o w e ve r, fro m th e v a rio u s re c o rd s a v a ila b le fro m his ch a rte re d a c c o u n ta n t, th e fo llo w in g
in fo rm a tio n w a s o b ta in e d , fro m w h ich you are re q u e ste d to p re p a re a s ta te m e n t sh o w in g the
a m o u n t o f cla im to be lodged w ith th e S h a rm ila In surance C o m p a n y Ltd.
S to ck o f c o s t : ? S a le s :
1st Ja n u a ry, 2016 4 .5 0 .0 0 0 Y e a r ended 3 1 st
1st Ja n u a ry, 2017 5.5 0 .0 0 0 D ecem ber, 201 6 17,00,000
P u rchases : P eriod up to the d a te o f fire 10,00,000
C a le n d a r y e a r 2 01 6 1 2 ,92,500 M a n u fa ctu rin g e xp e n se s :
T h re e m onths to C a le n d a r y e a r 201 6 2,1 0 ,0 0 0
3 1 st M arch, 201 7 6 ,0 0 ,0 0 0 T h re e m onths to 3 1 st M arch, 201 7 ?
In F e b ru a ry , 2 0 1 7 g o o d s v a lu e d a t sa le o f ? 5 0 ,0 0 0 w e re d is trib u te d a s s a m p le s .
M a n u fa ctu rin g e x p e n se s w e re n o rm a lly fo u n d to be con sta n t. T he va lu e o f th e sa lva g ed sto ck
w a s e stim ated at ? 70,000.
Ans. [?2,66,250].
6. O n 20th June, 2017, th e g o d o w n and b u sin e ss p re m ise s o f a m e rch a n t w e re a ffe cte d b y fire
and from acco u n tin g records salva g ed , th e follo w in g info rm a tio n is m ade a va ila b le to you :
?
S tock o f G o o d s a t C o st on 1st A pril, 2016 1, 00,000
S tock o f G o o d s at 10% b e lo w th a n co st as on 31 st M arch, 2017 1,08,000
P u rch a se s o f G o o d s fo r the ye a r fro m 1st A pril, 2 0 1 6 to 3 1 -3 -2 01 7 4 ,2 0 ,0 0 0
INSURANCE CLAIMS V / 2-31
S ales fo r th e sa m e period 6,0 0 ,0 0 0

P u rchases less R eturns fo r the P eriod fro m 1st A pril, 201 7 to 20th June, 201 7 1,40,000
S ales less R eturns fo r the sam e period 3 ,1 0 ,0 0 0
S a le s u p to 2 0 th Ju n e , 2 0 1 7 in c lu d e d ? 4 0 ,0 0 0 fo r w h ic h g o o d s had n o t b een d e sp a tch e d .
P u rch a se s upto 2 0 th M ay, 2 0 1 7 did not in clu d e f 2 0 ,0 0 0 fo r w h ich p u rch a se in vo ice s had not
been re ce ive d fro m suppliers, th o u g h g o o d s have been received at the godow n.
G o o d s sa lv a g e d fro m th e a c c id e n t w e re w o rth f 12,0 0 0 and th e se w e re h a n d e d o v e r to th e
insured.
A s c e rta in th e va lu e o f th e cla im fo r lo ss o f g o o d s /s to c k w h ich c o u ld be p re fe rre d on th e
insurer.
Ans. [Amount of Claim = ? 88,000]
7. A fire o c c u rre d on th e p re m is e s o f a m e rc h a n t on 3 1 s t A u g u st, 2 0 1 7 F ro m th e fo llo w in g
particulars, ca lcu la te the a m o u n t o f cla im to be lo d g ed w ith th e insurance co m p a n y fo r the loss
o f sto ck :
?
S to ck on 1st A pril, 2016 3 ,6 0 ,0 0 0 S to ck on 3 1 st M arch, 201 7 4,4 0 ,0 0 0
P u rch a se s fo r the ye a r ended P u rchases fro m 1st A pril, 2 017
3 1 st M arch, 201 7 16.00. 0 0 0 to 31 st A ugust, 2017 5,4 0 ,0 0 0
S ales fo r the ye a r ended S ales fro m 1st April, 201 7 to
3 1 st M arch, 201 7 2 5 .0 0 . 0 0 0 31 st A ug u st, 2017 6,60,000
S to ck on 1st A pril, 2 0 1 6 w a s va lu e d at 10% below co st and th e sto ck on 3 1 st M arch 201 7 w as
va lu e d at 10% ab o ve cost. S a lva g e v a lu e o f sto ck a fte r fire w a s T 99,6 0 0 . V a lu e o f in su ra n ce
p o licy o f th e sto ck w a s ? 3 ,00,000.
Ans. [Amount of Claim 7 2,42,272]
8 . A fire o c c u rre d on 15th S e p te m b e r, 2 0 1 7 in th e p re m ise s o f E xcel Ltd. F ro m th e fo llo w in g
fig u re s, ca lcu la te the a m o u n t o f cla im to be lo d g ed w ith th e in su ra n ce co m p a n y fo r the loss of
sto ck :
S tock at co st as on P u rch a se s fro m 1 st A pril, 2 017 to

1st A pril, 2 016 2 ,0 0 ,0 0 0 15th S eptem ber, 201 7 8,80,000
S tock at co st as on S ales du rin g th e ye a r ended
1st A p ril, 2 017 3 ,0 0 ,0 0 0 3 1 st M arch, 2 0 1 7 6,00,000
P u rch a se s du rin g th e ye a r S ales fro m 1 st A pril 2 017 to
ended 3 1 st M arch, 201 7 4 ,0 0 ,0 0 0 15th S eptem ber, 201 7 10,50,000
D uring th e c u rre n t year, co st o f p u rch a se s has risen by 10% above last y e a r’s level and selling
p rice s have g one up by 5% . S a lvage va lu e o f sto ck afte r fire w a s ? 20,000.
Ans. [Amount of Claim = T 6,40,000]
9. A fire o c c u rre d in th e p re m is e s o f M /s K a ila s h & C o. on 3 0 th S e p te m b e r 2017. F rom the
fo llo w in g p a rticu la rs relating to th e period fro m 1st A pril 2 0 1 7 to 30 th S e p te m b e r 2017, you are
re q u ire d to ascertain th e am o u n t o f cla im to be file d w ith the Insurance C o m p a n y fo r th e loss of
S tock. T h e co m p a n y has ta ke n an In su ra n ce p o licy fo r ? 7 5 ,0 0 0 w h ich is su b je ct to a ve ra g e
cla u se . T h e va lu e o f g o o d s sa lva g e d w a s e stim a te d a t ? 27,0 0 0 . T h e a ve ra g e rate o f G ro ss
P ro fit w a s 20 % th ro u g h o u t the period._________________________________________
Particulars Amount in
(;) O pening S tock 1,20,000

(ii) P urch a se m ade 2.40.000
(«/) W a g e s paid (inclu d in g w a g e s fo r the installation o f a m a ch in e ? 5,000) 75.000
(/v) S ales 3.1 0 .0 0 0
(v) G o o d s ta ke n by the P ro p rie to r (S ale V alue) 25.000
( vi) C o st o f g o o d s se n t to C o n sig n e e on 20th S e p te m b e r 2017, lying unsold
w ith them 18.000
( vii) Free S am p le s d is trib u te d —C o st 2,500
Ans. [Amount of Claim f 60,689]

A S C E R T A IN M E N T OF C L A IM W H E N A B N O R M A L ITEMS ARE A VA ILA B LE

10 . On 3 0 th S e p te m b e r, 2 017, th e s to c k o f Fred P e rry w a s lo st in a fire a ccid e n t. F rom the
availa b le records, the follow ing info rm a tio n is m ade availa b le to you to en a b le you to prepare a
sta te m e n t o f claim on the insurers :
f
S tock at co st on 1-4-2016 37,500 S ales less returns fo r the
S tock at co st on 3 1 -3 -2 01 7 52,000 y e a r ended 3 1 -3 -2 0 1 7 3,1 5 ,0 0 0
P urchases less returns fo r the P u rchases less returns upto
year ended 3 1 -3-2017 2,53,750 3 0 -9 -2 01 7 1,45,000
S ales less returns up to 3 0 -9 -2 01 7 1,84,050
In valuing sto ck on 3 1 -3 -2 01 7 , due to o b s o le sce n ce 50 % o f the va lu e o f the sto ck w hich
o rig in a lly co s t f 6 ,000 had been w ritte n off. In M ay 2017, th re e -fo u rth s of th is sto ck had been
sold at 9 0 % o f the o rig in a l co st and it is now e xp e cte d th a t the b a lance o f the o b so lete stock
w o u ld also re a lise the sam e price. S u b je ct to th e above, g ro ss p ro fit had re m a in e d uniform
throughout.
S tock to the value o f f 7 ,200 w as salvaged.
Ans. [Amount of Claim to be Lodged = ? 53,150].
11. O n 1 1 -1 1 -2 0 1 7 th e p re m is e s o f R o cky Ltd. w a s d e s tro y e d by fire. F o llo w in g in fo rm a tio n is
m ade available :
r
S tock as on 1-4-2015 3.7 5 .0 0 0 P u rchases from 1-4-2017
P u rchases fro m 1 -4-2015 to 3 1 -3 -2 01 7 5.2 0 .0 0 0 to 11-11-2017 3,4 1 ,0 0 0
S ales from 1 -4-2015 to 31 -3-2017 8.5 5 .0 0 0 S ales fro m 1 -4-2017 to
S tock as on 31-3 -2 01 7 2,0 0 ,0 0 0 1 1-11-2017 4,3 5 ,5 0 0
In v a lu in g th e s to c k on 3 1 -3 -2 0 1 7 , d u e to d a m a g e 5 0 % o f th e v a lu e o f th e sto c k w h ich
orig in a lly co st ? 22 ,0 0 0 w as w ritte n off.
In June, 2 017 a b o u t 50% of th is sto ck w a s sold fo r ? 5,500 and the balance of ob so lete stock is
e xpected to realize the sam e price (i.e ., 50 % o f the o riginal cost).
G ross p ro fit ratio is to be a ssu m e d as unifo rm in re sp e ct o f o th e r sales. S to ck sa lva g ed from
fire am o u n ts to f 11,500.
C om pute the value o f sto ck lost in fire.
Ans. [? 1,80,000]
12 . M alcom o w n s a retail sta tio n e ry shop w h ich w a s partly d e stro ye d by fire on 27th June, 2017.
T he stock w a s insured fo r ? 13,000.
The B alance S heet draw n on 3 1 st D ecem ber, 2016 included, inter alia, the follow ing item s:
S tock ? 12,500 ; C re d ito rs T 3,500
O n e xa m in a tio n o f the b o o ks o f a cco u n t fo r th e s u b se q u e n t period up to the date of the
fire, the fo llo w in g p articulars w ere ob ta in e d :
S ales ? 8 8 ,8 0 0 ; P aym ents to cre d ito rs fo r goods ? 75 ,0 0 0 ; C reditors as on 2 7 -6 -2 01 7 f 1,800.
A physical ch e ck o f sto ck a fte r the fire show ed th a t item s u ndam aged w ere ? 7,000.
T he no rm a l rate o f g ro ss p ro fit is 25 per c e n t on co st but the sto c k on 3 1 s t D ecem ber,
2 0 1 6 included item s o f d isco n tin u e d line to ta llin g f 3 ,8 0 0 w hich w e re all sold du rin g the next
tw o m onths at cost.
You are required to co m p u te the a m o u n t o f claim to be m ade to the insurer.
Ans. [? 6,500].
13. From the fo llo w in g p articulars ascertain the value of sto ck as on 3 1 st M arch, 201 7 :
? ?
S tock as on 1-4-2016 / 14,250 S ales 1,24,500
P urchases 76,2 5 0 M anufa ctu rin g E xpenses 15,000
A t th e tim e o f valu in g sto ck as on 31 st M arch, 2016, a sum o f f 1,750 w a s w ritten o ff on a
p a rticu la r item , w h ich w a s o rig in a lly p u rch a se d fo r ? 5 ,000 and w a s sold d u rin g the y e a r fo r
? 4 ,500. B arring th e tra n s a c tio n re la tin g to th is item , the g ro ss p ro fit e a rn e d du rin g th e ye a r
w a s 20 per ce n t on sales.
Ans. [? 6,250].
14. On 1st A pril, 2017, th e g o dow n o f H industan Lim ited w a s d e stroyed by fire. From the books of
account, the follo w in g p articulars are g athered :
S tock at co st on 1st January, 2016 27,5 7 0 S ales during 2016

2 016 3,5 1 ,0 0 0
S tock as per B alance S heet on S ales from 1st January, 2 017 to
3 1 st D ecem ber, 2016 51,120 3 1 st M arch, 2017 91,500
P urchases during 201 6 2,71,350 V alue o f goods salvaged 6,300
P urchases from 1st January, 2017
to 31 st M arch, 2 0 1 7 75,000
G o o d s o f w h ich o riginal co s t w as ? 3,600 had been va lu e d at ? 1,500 on 3 1 st D ecem ber,
2016. T h e se w e re sold in M arch, 2 0 1 7 fo r ? 2,700. E xce p t th is tra n sa ctio n , th e rate of g ross
pro fit has rem ained constant.
On 3 1 st M arch, 201 7 goods w orth ? 15,000 had been received by the godow n -ke e p e r, but
had not been entered in the p u rch a se s account.
C alcu la te the value of g o o d s d estroyed by fire.
Ans. [ r 71,160].
LOSS OF PROFIT POLICY
15. O n D e ce m b e r 3 1 ,2 0 1 6 a fire d a m a g e d the prem ises o f Behl Bros. Ltd. and the b usiness o f the
co m p a n y w a s d iso rg a n is e d until M arch 31, 2017. T h e c o m p a n y w a s insured u n d e r a loss of
pro fit policy fo r ? 26,0 0 0 w ith a six m onths period o f indem nity.
T h e c o m p a n y ’s a c c o u n ts fo r th e y e a r e n d e d M a rch 31, 2 0 1 6 sh o w e d a tu rn o v e r o f
f 70,0 0 0 w ith a net pro fit o f T 8,000. T h e a m o u n t o f standing ch a rg e s co vered by the insurance
and d e b ite d in th a t y e a r w a s ? 20,0 0 0 . T h e tu rn o v e r fo r th e 12 m onths en d e d D e ce m b e r 31,
201 6 w a s ? 78,0 0 0 . T h e tu rn o ve r during the period the b u sin ess w as d islo ca te d a m o u n te d to
f 8 ,0 0 0 w hile d u rin g the co rre sp o nd in g period in the p re ce d in g ye a r it w a s ? 17,000. A sum of
? 2 ,0 0 0 w a s sp e n t as a d d itio n a l e x p e n s e s to m itig a te th e e ffe c t o f the loss, th e re being,
how ever, no saving in standing ch a rg e s as a result o f the fire.
P repare a claim to be subm itted in resp e ct of the co n se q u e n tia l loss policy.
Ans. [? 4,667],
16. From the follow ing de ta ils find out the cla im under a loss o f profit policy :
Indem nity p eriods 6 m onths S tanding C h a rg e s fo r 2016
P olicy value ? 30,000 acco u n tin g ye a r (all insured) 17.000
Date of Fire 1-4-2017 S ales from 1-4-2016 to 3 1 -3-2017 1,60,000
D islocation upto 1-8-2017 S ales from 1-4-2017 to 1-8-2017 15.000
S ales fo r 2016 acco u n tin g ye a r ? 1,20,000 S ales from 1 -4-2016 to 1 -8-2016 50.000
N et P rofit fo r 201 6 a ccounting
ye a r ? 13,000
T h e re is a cle a r 10% upw ard trend in business.
Ans. [Short Sales ? 40,000; Claim ? 6,818]
17. F rom th e fo llo w in g p a rtic u la rs , a s c e rta in th e a m o u n t o f cla im u n d e r a lo ss o f p ro fit policy.
A ssu m e a 10% upw ard trend in the sales o f the curre n t y e a r o ve r th e se of the p revious y e a r :
(/) Indem nity period : 6 m onths
(/'/) P olicy a m o u n t: ? 6 lakh
(iii) D ate o f fire : 1st July, 2017
(/V) D isruption upto 1st N ovem ber, 2017
(v) S a le s fo r th e y e a r en d e d 3 1 st M arch, 2 0 1 7 : ? 2 4 lakh
( w) N et profit fo r the ye a r ended 31 st M arch, 2 017 : ? 2,6 0 ,0 0 0
(vii) Insured standing ch a rg e s fo r the y e a r ended 3 1 st M arch, 2017 ; ? 3 ,4 0 ,0 0 0
(viii) S ales from 1st July, 201 6 to 30th June, 2017 : ? 32 lakh
(ix) S ales from 1 st July, 201 7 to 1 st N ovem ber, 2017 : ? 3 lakh
(x) S ales from 1 st July, 201 6 to 1st N ovem ber, 201 6 : T 10 lakh.
Ans. [Short Sales ? 8,00,000 : Claim f 1,36,364]
INSURANCE CLAIMS
F rom th e fo llo w in g p a rticu la rs a sce rta in th e cla im to be lo d g ed in re sp e ct o f th e co n se q u e n tia l

18.
loss fpjuonlic
o yy :.
Fire o cc u rre d o n J u ly 1, 2 0 1 7 a n d a ffe cte d s a le s fo r 3 m onths.
(a) S a le s fo r 3 m o n th s e n d in g 3 0 th S e p te m b e r in 2 0 1 6 a n d 2 0 1 7 w e re ? 1 ,5 0 ,0 0 0 and
(b )
T 5 0 ,0 0 0 re sp e ctive ly.
(c) T h e p o licy w a s fo r ? 4 ,5 0 ,0 0 0 w ith a six m o n th s pe rio d o f indem nity.
( d) S ales fo r 12 m o n th s e n d e d Ju n e 30, 2 0 1 7 w e re ? 19,00,000.
(e) A cco u n ts are pre p a red on 3 1 s t D ecem ber. T h e n e t p ro fit fo r 2 0 1 6 a m o u n te d to ? 2,5 0 ,0 0 0
a fte r d e b iting standing ch a rg e s to ta llin g ? 1,10,000. S a le s fo r 2 0 1 6 w e re ? 18,00,000.
( f) A sum o f f 3 ,5 0 0 w a s sp e n t as additional e xp e n se s to m itig a te th e e ffe ct o f th e loss.
Ans. [? 23,500].
C o m b u stib le Ltd. has a “loss o f p ro fit” in su ra n ce p o licy o f ? 2 1 ,0 0 ,0 0 0 . T h e period o f in d e m n ity
19.
is th re e m onths. A fire occu rre d on 3 1 st M arch, 2017. F ollow ing info rm a tio n is ava ila b le :
S ales ?
F o r th e y e a r e n d e d 31 s t D ecem ber, 2 0 1 6 7 0 ,00,000
F o r th e p e rio d fro m 1st A p ril 2 0 1 6 to 3 1 s t M arch, 2 0 1 7 80,00 ,0 0 0
F or th e period fro m 1st A p ril 2 0 1 6 to 3 0 th June, 2 0 1 6 18,00,000
F o r the period fro m 1st A p ril, 2 0 1 7 to 3 0 th June, 2 0 1 7 1,20,000
S ta n d in g ch a rg e s fo r 2 0 1 6 16,00 ,0 0 0
P rofits fo r 2 016 5 ,0 0 ,0 0 0
S a vin g in sta n d in g ch a rg e s be ca u se o f fire 50 ,0 0 0
A d d itio n a l e xp e n se s to reduce th e loss o f tu rn o ve r 1,00,000
A s s u m in g no a d ju s tm e n t h a s to be m ade fo r th e u p w ard tre n d in tu rn o v e r, co m p u te the
cla im to be m a d e on th e in su ra n ce com pany.
Ans. 4,28,750].
A firm h a s d e c id e d to a rra n g e fo r a lo ss o f p ro fits in su ra n ce and you are required to fin a lise the
20. sum to be in su re d o n a fu ll in su ra n ce b a sis fro m th e fo llo w in g fig u re fo r th e last fin a n cia l yea r; it
is a n tic ip a te d th a t fo r th e c u rre n t fin a n c ia l y e a r, tu rn o v e r w ill in cre a se b y 10% a n d th a t all
sta n d in g (fixed) e x p e n se s w ill re m a in unchanged.
21 ,00,000
T o ta l V a ria b le E xpenses
F ixed E x p e n s e s ;
W a g e s a n d sa la rie s to skille d e m p lo ye e s
3,00,000
a n d sa la rie s to a d m in istra tio n sta ff
1,00,000
D e p re cia tio n o f all fixe d assets
10,000
Insurance prem ium 4 .000
A u d it Fees 4.000
D ire c to rs ’ F ees 40.000
T ra v e lle rs ’ E xp e n se s (in clu d in g M otor C ar E xp enses)
3.000
P ostage, C a b le s a n d T e le p h o n e s 1.000
T ra d e su b scrip tio n s 30.0 0 0 4.9 2 .0 0 0
R ent, R a te s a n d T a xe s
50 ,0 0 0
N o n -o p e ra tin g Incom e 4.08.000
N et P rofit
Ans. 9,35,000].
In the d islo ca tio n p e rio d la stin g 4 m o n th s co ve re d b y a C o n se qu e n tia l Loss P olicy o f ? 50,000
21. a s a le o f ? 3 5 ,0 0 0 w a s o b ta in e d o u t o f w h ic h ? 1 0 ,0 0 0 sa le w a s o b ta in e d fro m a n o th e r
p re m ise s hire d fo r th is p e rio d a t a re n t o f ? 3 0 0 p e r m o n th on te m p o ra ry basis. H ow e ve r, th e re
w a s sa vin g in in su re d c o n s ta n t e xp e n se s d u rin g th is p e rio d a t f 1 ,500 p.a.
S a le in th e s a m e p e rio d la s t y e a r a m o u n te d to ? 1 ,0 0 ,0 0 0 a n d an in c re a s e o f 20 % n
b u sin ess w a s e xp e cte d in th e c u rre n t ye a r. S a le s o f tw e lv e m o n th s im m e d ia te ly p re ce d in g i r e
a m o u n te d to ? 3,00 ,0 0 0 . F o llo w in g in fo rm a tio n is a va ila b le fro m th e la st y e a r’s P ro fit a n d Los =
A c c o u n t:
S a le s ? 2 ,7 0 ,0 0 0 ; N et P ro fit ? 2 8 ,0 0 0 ; C o n s ta n t E xp e n se s ? 3 2 ,0 0 0 (O u t o f w h ic h ? 6,0C*:
u n in s u re d ).
C a lcu la te th e a m o u n t o f th e in su ra n ce cla im to be lodged.
Ans. [? 12,208].

Corporate Accounting SP Jain

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Jr '1

N 247444 5 10+314=324, 28x40/16, 20 Form

© 2018, Jain, S .P . ■ Narang, K.L.

Typesetting a t : Times Printographic

2018 S.P. JAIN

Paper : (BC 404) : CORPORATE ACCOUNTING

Objective : To acquire knowledge of AS-14 and Preparation of Accounts of Banking

1. Com pany Liquidation I / l - l — 1-40

1. Am algam ation (AS-14) 11/M — 1-68

1. Interna! Reconstruction III/'1-1-1-25

2. Acquisition o f Business III/2-1 -2 -2 3

1 . Accounts of Banking Com panies IV/1-1— 1-61

1. Accounts o f Insurance Com panies V / M — 1-60

2. Insurance Claims V/2-1 - 2 - 3 4

1. Com pany Liquidation I / M — 1-40

1. Am algam ation (A S-14) 11/1 -1— 1-68

2. Acquisition o f Business III/2 1 — 2-23

| 1. Accounts of Banking Com panies I V / M — 1*61

1. Accounts o f Insurance Com panies V / M — 1-60

| 2. Insurance Claim s V/2-1 -2 - 3 4

O Difference Between insolvency and Liquidation

Freehold Property, Land & Buildings

*Assets specially (a) (b) (c) (d)

Estimated surplus from assets specially pledged

SUMMARY OF GROSS ASSETS

Gross realisable value of assets specially pledged

Issued and Called-up Capital :

Estimated Surplus/Deficiency as regards Members (as per list ‘H’)

O Procedure of Preparation of Statement of Affairs

O Lists to be Attached to the Statement of Affairs

Plant and Machinery (estimated to produce f 15,600) 15,000

Estimated surplus from assets specifically pledged 2,000

Items reducing Deficiency (or Contributing) to Surplus :

Deficiency/Surplus as shown by the Statement of Affairs

Note, as to Net Trading Profits and Losses :

Net trading profits or losses as shown in Deficiency or Surplus Account above

Unsecured Creditors 3,50,000

Estimated liabilities for bills discounted 60,000

Assets specifically pledged (as per List B)

Summary of Gross Assets :

O Liquidator's Final Statement of Account

(2) Legal charges

Marketable Securities Costs of notice in

Amount available for Unsecured Creditors & Liquidator’s Remuneration 1,34,640

2. Loan on Mortgage of Land

IL L U S T R A T IO N 5. The position of Valueless Ltd. on its liquidation is as under:

Working Notes (1): ?

IL L U S T R A T IO N 6. Z Ltd. went into voluntary liquidation on 31st December, 2016.

Assets realised 4,20,000

O Receiver for Debentureholders

LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT

: Total amount receivable from partly paid

Net surplus after notional call 4,950

Number of shares deemed fully paid (10,000 + 5,000) 15,000

O B' List of Contributories

(0 A 1,000 1st March, 2016 6,000

N u m b e r o f sh a re s tra n sfe rre d

2. Fill in the blanks :

SHORT/LONG ANSWER TYPE

illllllllilllll Practical Problems 111111

Cash in hand 4,050

Creditors partly secured (value of shares in B Ltd. ? 40,000) 80,000

Machinery is valued at ? 60,000 ; Leasehold Properties at ? 73,000 ; Investments at