Corporate Accounting SP Jain
Corporate Accounting SP Jain
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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facts, law and contents of the publication with original Government publication or notifications.
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one month of purchase by similar edition. All additional expenses in this connection are to be borne by the purchaser.
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.
UNIT II
UNIT III
UNIT IV
U N IT V
UNIT II
UNIT III
i '
1. Internal Reconstruction III/1-1— 1-25
UNIT IV
U N IT V
(//) 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.
1/ 1-6 COMPANY LIQUIDATION
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
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.
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
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)
Unsecured Creditors 70,000
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 :
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
1/ 1-14 COMPANY LIQUIDATION
(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
COMPANY LIQUID A TION 1/1-15
5. Estimated losses now written off or for which provision has been
made for the purpose of preparing the statement
f
Bills Receivable 6,000
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.
6
COMPANY LIQUIDA TION 1/ 1-17
‘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
1/ 1-18 COMPANY LIQUIDATION
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.
COMPANY LIQUID A TION 1/ 1-19
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
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.
LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT
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
COMPANY LIQUID A TION 1/ 1-21
4,28,000 4,28,000
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.
COMPANY LIQUID A TION 1/ 1-23
S O L U T IO N
LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT
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
1/ 1-24 COMPANY LIQUID A TION
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
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
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
COMPANY LIQUID A TION 1/ 1-27
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
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)].
: ZV^ANY LIQUID A TiON 1/ 1-29
1,78,000 1,78,000
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
Unsecured Creditors 2,83,698
Preferential Creditors 8,000
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 :
1/ 1-34 COMPANY LIQUID A TION
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
Bank Overdraft 58,000
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
COMPANY LIQUID A TION 1/ 1-35
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 ___________________________
(/'/) 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
(3) C u rre n t Lia b ilitie s
(/) 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
(2) C u rre n t A sse ts
(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
COMPANY LIQUID A TION 1/ 1-37
17. Balance Sheet of Byrtes Ltd, as on 30th September, 2017 was as follows :
1. Equity and Liabilities ?
(1) S h a re h o ld e rs ’ F unds
(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
Plant & Machinery 1,20,000
Furniture & Equipment 20,000
(2) C u rre n t A sse ts
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].
1/ 1-38 COMPANY LIQUID A TION
19. Following is the Balance Sheet as on 31-12-2016 of X Ltd. which goes into voluntary liquidation
as on that date :
I. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(a) Share Capital :
(/) 10,000 Equity Shares of ? 50 each 5,00,000
(/'/) 1,000 Preference Shares of f 100 each 1 ,00,000
(b) Reserves and Surplus :
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
(3) C u rre n t Lia b ilitie s
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
(2) C u rre n t A sse ts
(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
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
1/1-40 COMPANY LIQUID A TION
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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Amalgamation (AS-
‘ • • ' ...................................................................• ■ • > ■ * • >• <
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.
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 ..............
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
11/ 1-6 AMALGAMATION (AS-14)
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
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)
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
' 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)
11/1-10 AMALGAMATION (AS-14)
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
11/ 1-12 AMALGAMATION (AS-14)
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
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
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’.
11/ 1-14 AMALGAMATION (AS-14)
II. Assets
(1) Non-current 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)
(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
r
I. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(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
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
To Cash Account 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)
Shareholders Account Dr. 90,000
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
Y CO. LTD.
CASH ACCOUNT
SHAREHOLDERS ACCOUNT
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
6% DEBENTURES ACCOUNT
?
Realisation A/c 1,20,000 By Balance b/d 1,20,000
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
(1) Shareholders ’ Funds
(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
(b) Reserves and Surplus :
Reserve Fund 1,25,000
Surplus Account 60,000
(2) Current Liabilities
Creditors 75,000
Total 8,60,000
II. Assets
(1) Non-current 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
- VALGAMATION (AS-14) 11/ 1-25
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
SHAREHOLDERS ACCOUNT
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
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 :
?
I. Equity and Liabilities
(1) Shareholders ’ Funds
(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
(b) Reserves and Surplus :
Reserve 20,000
Surplus Account 30,000
(2) Non-current Liabilities
7% Debentures 1,00,000
(3) Current Liabilities
Sundry Creditors 1,50,000
Total 6,00,000
U. Assets
(1) Non-current Assets
Land and Building 2,00,000
Machineries 1,00,000
Debenture Discount 15.000
(2) Current Assets
Stock 2,00,000
Debtors 50.000
11/1-28 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 ?
(1) Shareholders ’ Funds
(a) Share Capital :
Equity Shares 7,80,000
Preference Shares 5,20,000
(b) Reserves and Surplus :
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
(1) Non-current 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
Realisation Account Dr. 9,15,330
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
To Realisation Account 5,20,000
(Being purchase consideration receivable as per agreement)
Bank Account Dr. 1,65,425
To Realisation Account 1,65,425
(Being amount realised from Sundry Debtors)
Liabilities Account Dr. 1,36,110
To Bank Account 1,14,842
To Realisation Account 21,268
(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)
Realisation Account Dr. 13,923
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
To Realisation Account 1,71,340
(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 Realisation Account 51,220
To Surplus Account 5,36,510
(Being loss on realisation and debit balance in Surplus
Account transferred to equity shareholders)
11/ 1-32 AMALGAMATION (AS-14)
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.
: 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
_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
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
SHAREHOLDERS ACCOUNT
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
SHARES IN A LTD.
y f
To A Ltd. 10,87,500 By Shareholders A/c 1 0 ,8 7 ,5 0 0
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
Sundry Creditors 5,70,000
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.
- VALGAMATION (AS-14) 11/ 1-37
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
To Realisation A/c 16,20,000
(Being transfer of outside liabilities to Realisation Account)
B Ltd. Dr. 4,00,000
To Realisation A/c 4,00,000
(Being the amount of purchase consideration)
Share Capital A/c Dr. 4,00,000
To Realisation A/c 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
To Realisation A/c 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)
11/ 1-38 AMALGAMATION (AS-14)
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 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
SHAREHOLDERS ACCOUNT
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
AMALGAMATION (AS-14) 11/1-41
To 7% Debentures 1 ,00,000
To Business Purchase Account 1,75,000
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
To Cash Account 10,000
(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
?=
I. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(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)
(b) R e se rve s a n d S urplus
Reserves (as given) 1 ,00,000
Capital Reserve 15,000
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
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
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
X LTD. \CCOUiMT
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
SHAREHOLDERS ACCOUNT
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
Current Assets A/c Dr. 1,80,000
Goodwill A/c (Balancing figure) Dr. 2,55,000
To Sundry Creditors A/c 1,20,000
To Business Purchase A/c 7,15,000
(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 Share Capital A/c 5,00,000
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)
?
I. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(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)
(b) R e se rve s a n d S urplus
Capita! Reserve [See Note (///)] 65,000
Total 14,30,000
11/ 1-46 AMALGAMATION (AS-14)
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
Investments (assumed to be long-term) 70,000
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
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
-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
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.
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
II. Assets
(1) N o n -c u rre n t A sse ts
Land & Building 29.00. 000 12, 00,000
Plant & Machinery 45.00. 000 18,00,000
F urniture 5.00. 000 2 , 00,000
(2) C u rre n t A sse ts
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
(1) S h a re h o ld e rs ’ F unds
(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
AMALGAMATION (AS-14) 11/1-55
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
(1) S h a re h o ld e rs ’ F unds
(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
(3) C u rre n t Liab ilitie s
Sundry Creditors 60,000
Total Equity and Liabilities 3,52,000
II. Assets
(1) N o n -c u rre n t A sse ts
Buildings 2 ,00,000
Plant & Machinery 80,000
(2) C u rre n t A sse ts
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
1. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(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
II. Assets
(1) N o n -cu rre n t A sse ts f
Land & Building 1 ,20,000
Less : Depreciation Provision 20,000
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
I. Equity and Liabilities
(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
(b) Reserves and Surplus :
General Reserve 8,07,000 25,70,000
Surplus Account 30,000 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 ?
1. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(a) Share Capital
Shares of ? 100 each 5,00,000 15,00,000
(b) Reserves and Surplus :
Capital Reserve 50,000 —
General Reserve 20,000 2 ,00,000
Development Rebate Reserve 40,000 -
Surplus Account — 1,20,000
- VALGAMATION (AS-14) 11/ 1-61
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 :
1. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(a) Share Capital:
Equity Shares of ? 100 each 30,00,000
13% Preference Shares of ? 100 each 10 ,00,000
(b ) Reserves and Surplus :
General Reserve 5,00,000
(2) N o n -c u rre n t L ia b ilitie s
11% Debentures 16,00,000
(3) C u rre n t L ia b ilitie s
Sundry Creditors 8 ,00,000
Total 69,00,000
II. Assets
( 1) N o n -c u rre n t A sse ts
Fixed Assets 40,00,000
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
II. Assets
(1) N o n -c u rre n t A sse ts
(/) 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
II. Assets
(1) N o n -c u rre n t A sse ts
(a) Tangible Assets :
Land & Buildings 85,000
Plant & Machinery 1,60,000
(b) Intangible Assets :
Goodwill 35,000
Discount on Debentures 6,000
(2) C u rre n t A sse ts
Stock 55,000
Sundry Debtors 65,000
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
(1) S h a re h o ld e rs ’ F unds
(a) Share Capital:
2,00,000, ? 10 Shares, ? 7.50 paid 15,00,000
(b) Reserves and Surplus :
General Reserve 7,50,000
Leasehold Redemption Fund 80,000
Plant Replacement Reserve 1,00,000
Surplus Account 3,95,000
(2) N o n -c u rre n t L iab ilitie s
5% Debentures 5,00,000
(3) C u rre n t Lia b ilitie s
Sundry Creditors 1,95,000
Total 35,20,000
6
¥ATION (AS—14) 11/ 1-65
II. Assets
(1) N o n -c u rre n t A sse ts
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
(2) C u rre n t A sse ts
Stock 8.73.000
Debtors 9.90.000
Cash at Bank 5,62,400
Trade Investments 90.000
Total 35,20,000
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
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
5% Debentures 7,50,000
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
(1) S h a re h o ld e rs ’ F unds
(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
(2) N o n -c u rre n t Liab ilitie s
5% Debentures (secured by a floating charge) 5,00,000
(3) C u rre n t Lia b ilitie s
Sundry Creditors 2,85,000
Accrued Interest 25,000
Total Equity and Liabilities 13,60,000
II. Assets
(1) N o n -c u rre n t A ss e ts
Fixed Assets :
Land & Buildings 2,50,000
Plant & Machinery 6,00,000
(2) C u rre n t A sse ts
Stock & Work-in-Progress 2,35,000
Sundry Debtors 2,49,000
Cash Balance 26,000
Total Assets 13,60,000
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
Surplus Account 1,20,000
8% Debentures 3,00,000
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
9% Debentures 1,00,000
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
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
E l u t io n
JOURNAL ENTRIES
?
Equity Share Capital (? 100) A/c Dr. 20,00,000
To Equity Share Capital (? 5) A/c 1,00,000
To Capital Reduction A/c 19,00,000
(Being the reduction of equity share capital)
Equity Share Capital (?5) A/c Dr. 1,00,000
To Equity Share Capital (? 10) A/c 1,00,000
(Being consolidation of 10,000 shares of f 10 each)
12% Debentures A/c Dr. 5,00,000
Outstanding Debenture Interest A/c Dr. 1,20,000
To 14% Debentures A/c 5,00,000
To Capital Reduction A/c 1,20,000
(Being conversion of 12% debentures into 14% debentures
and outstanding debenture interest foregone by debenture-
holders)
Creditors A/c Dr. 3,00,000
To Equity Share Capital A/c 2,00,000
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
To Equity Share Capital A/c 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)
Capital Reduction A/c Dr. 21,20,000
To Surplus A/c 19,80,000
To Goodwill 45,000
To Plant & Machinery A/c 90,000
To Provision for Doubtful Debts A/c 5,000
(Being the balance of capital reduction utilised for writing off
intangible asset, previous losses and fixed asset)
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 !
Plant & Machinery 3,00,000
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,:
II. Assets
(1) Non-current Assets
Fixed Assets 15.00. 000
(2) Current Assets 35.00. 000
Total 50,00,000
II. Assets
(1) N o n -C u rre n t A sse ts
Fixed Assets 15,00,000
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
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
1 '
111/ 1*16 INTERNAL RECONSTRUCTION
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 ;
111/ 1-18 INTERNAL RECONSTRUCTION
(//) 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 :________
Equity and Liabilities
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
(b) Reserves and Surplus :
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
(/) Tangible Assets :
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:
e
STERNAL RECONSTRUCTION 111/1-19
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 :
II. Assets
(1) N o n -c u rre n t A sse ts
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
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 :___________________
7. Following was the Balance Sheet of Bharat Construction Ltd, as on 31st March, 2017 :
?
I. Fquity and Liabilities
(1) S h a re h o ld e rs ’ F u n d s
(a) Share Capital :
Authorised 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
(b) Reserves and Surplus :
Surplus A/c as per last Balance Sheet (-) 22,000
Less : Profit for the year 1,200
(-) 20,800
(2) C u rre n t Lia b ilitie s
Sundry Creditors 15,425
Provision for Taxation 4,000
Total 1,09,625
II. Assets
0) N o n -cu rre n t A sse ts
(/) Tangible Assets :
Land and Buildings 20,500
Machinery 50,850
(/'/) Intangible Assets :
Goodwill 10,000
Discount on Shares 1,500
(2) C u rre n t A sse ts
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].
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
I. Equity and Liabilities
(1) S h a re h o ld e rs ’ F unds
(a) Share Capital :
Authorised & Issued :
8,000 Shares of f 100 each fully paid 8,00,000
(b ) Reserves and Surplus :
Surplus A/c (Negative Balance) (-)10,70,000
(2) N o n -cu rre n t Liab ilitie s
Debentures 13,50,000
(3) C u rre n t Lia b ilitie s
Trade Payables 4,50,000
Interest Accrued 50,000
Income Tax Payable 10,000
Total 15,90,000
II. Assets
(1) N o n -cu rre n t A ss e ts
Land, Buildings, Machinery, etc. 14,30,000
Investments 17,000
(2) C u rre n t A sse ts
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. Equity and Liabilities
( 1) S h a re h o ld e rs ’ F u n d s
(a) Authorised, Issued and Subscribed Capital:
30,000 Equity Shares of ? 10 each fully paid 3,00,000
2,000 8% Cum. Pref. Shares of ? 100 each fully paid 2,00,000
(b) Reserves and Surplus :
Securities Premium Reserve 90,000
Surplus Account (Negative Balance) (-) 2,05,000
Shareholders’ Funds 3,85,000
(2) N o n -c u rre n t L ia b ilitie s
Unsecured Loan (from Director) 50,000
(3) C u rre n t Lia b ilitie s
Sundry Creditors 3,00,000
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
(/) Tangible Assets :
Plant 3,00,000
(/'/) Intangible Asset :
Goodwill 50,000
(2) C u rre n t A sse ts
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
(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].
\ fV .
\
/
,Acquisition of Business
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s A jV W 1 l W V X A A a AA.' VXA/X> v XA/u A V IA / w v XAA/WX.*1
_________________________________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.
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.
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
Cash at Bank A/c Dr. 12,000
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
To Business Purchase A/c 2,00,000
(Being Assets & Liabilities taken over)
Bank A/c Dr. 3,00,000
To Equity Share Capital A/c 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
To Bank A/c 2,40,000
(Being purchase of additional assets)
BALANCED SHEET OF
a s on 3 1 -3 -2 0 1 7
II. Assets
(1) N o n -C u rre n t A ss e ts :
F ixe d A sse ts
(/) Tangible Assets :
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
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
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)
V e n d o r’s S usp e n se A /c Dr. 4,220
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)
V e n d o r’s S usp e n se A /c Dr. 41,780
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
JOURNAL ENTRIES
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
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'!
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)
111/2-16 ACQUISITION OF BUSINESS
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
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
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
1. Fill in the blanks :
(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
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]
1,42,000 1,42.:
- CQUISITION OF BUSINESS 111/2-21
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
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
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.
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.
: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
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.
IV/1-9
IV / 1 - 1 0 ACCOUNTS OF BANKING COMPANIES
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.
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)
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.
IV / 1 - 1 4 ACCOUNTS OF BANKING COMPANIES
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
^ent, 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!
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
67,680
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 :
SCHEDULE 13-INTEREST EARNED
? (’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
Total 918
e
.ACCOUNTS OFBANK/AfG COMPANIES IV /1 -1 9
SCHEDULE 4-BORROWINGS
'a s on 31-3 - as on 31-3-
(C u rre n t Year) (P re vio u s Year)
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 8-INVESTMENTS
as on 31-3- as on 31-3-
(C u rre n t Year) (P re vio u s Year)
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)
IV / 1 - 2 2 ACCOUNTS OF BANKING COMPANIES
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)
@ 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:
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
(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.
(/'/'/) 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.
II. Investments
outside India
(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
(//) 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.
(/'/) 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.
IV / 1 - 3 0 ACCOUNTS OF BANKING COMPANIES
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
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
(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
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
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.
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 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 :
IV /1 -4 2 ACCOUNTS OF BANKING COMPANIES
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
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
6
I V / 1 -46 ACCOUNTS OF BANKING COMPANIEl
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
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
(? ’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.
PROFIT AND LOSS ACCOUNT
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
ACCOUNTS OF BANKING COMPANIES IV /1 -4 9
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
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
6
IV/1-50 ACCOUNTS OF BANKING COMPANIES
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
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 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 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
IV/1-52 ACCOUNTS OF BANKING COMPANIES
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
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
Printing and Stationery 48
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 L^a
Account and Balance Sheet as on 31st March, 2017 :
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]
IV/1-60 ACCOUNTS OF BANKING COMPANIES
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
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 :
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.
FORMA-BS
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
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
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
.
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.
%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
4. Others (to be specified)
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
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)
(f) Subsidiaries
Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
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 9 -L O A N S
No. P a rticu la rs C u rre n t Year P re vio u s Year
(? ’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
(c) Others (to be specified)
3. Money at Call and Short Notice
(a) With Banks
(b) With other Institutions
4. Others (to be specified)
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
C u rre n t Year P re vio u s Year
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)
ACCOUNTS OF INSURANCE COMPANIES
V/1-15
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
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
ACCOUNTS OF INSURANCE COMPANIES V/1-19
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
Application of Funds
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
P a rticu la rs (? ’000)
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)
P a rticu la rs (? ’000)
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
ACCOUNTS OF INSURANCE COMPANIES
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)
^o,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
V /1 -2 2 ACCOUNTS OF INSURANCE COMPANIES
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
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)
ACCOUNTS OF INSURANCE COMPANIES V /1 -2 7
?
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.
V/1-28 ACCOUNTS OF INSURANCE COMPANIES
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 :
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 :
Registration No. and Date of Registration with the IRDA
Commission
Total (B)
Operating Profit/(Loss) from Fire/Marine
/Miscellaneous Business C = (A-B)
APPROPRIATIONS
FORM B-PL
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
(.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:
Registration No. and Date of Registration with the IRDA
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
Application of Funds
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
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
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
Other Investments
(a) Shares
(aa) Equity
(bb) Preference
(b ) Mutual Funds
(c) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(,g) 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
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)
(f) Subsidiaries
(.g ) Investment Properties-Reai Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
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
ACCOUNTS OF INSURANCE COMPANIES
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.
(c) Others (to be specified)
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.
ACCOUNTS OF INSURANCE COMPANIES V /1 -3 7
(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.
SCHEDULE 10—FIXED ASSETS
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
(c) Others (to be specified)
3. Money at Call and Short Notice
(a) With Banks
(b) With Other Institutions
V/1-38
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)
6. Others (to be specified)
Total (A)
Others Assets
Income accrued on Investments
1.
2.
Outstanding Premiums
3. Agents’ Balances
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]
8. Others (to be specified)
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)
1. Agents’ Balances
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
5. Others (to be specified)
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
2. Others (to be specified)
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
Name of the Insurer:
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 (? )
11,50,000
Schedule 3 : Commission
?
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
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
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
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
(? ’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 :
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 ° |
32,000
V /1 -4 6 ACCOUNTS OF INSURANCE COMPANIES
------- 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
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 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 8-INVESTMENTS
P a rticu la rs ? ’000
G.P. Notes 2,50,000
Shares 1,00,000
Total 3,50,000
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.
V /1 -5 0 ACCOUNTS OF INSURANCE COMPANIES
(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
(d) none of the above.
(///) Valuation Balance Sheet is prepared by a
(a) life insurance company
(to) marine insurance company
(c) general insurance company
(d) none of the above.
(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)]
3. Fill in the blanks :
(/) 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
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
Expenses of Management 2,85,000
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],
ACCOUNTS OF INSURANCE COMPANIES V /1 -5 5
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]
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 ?
V / 1 -5 6 ACCOUNTS OF INSURANCE COMPANIES
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.
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
ACCOUNTS OF INSURANCE COMPANIES V / 1 -5 7
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
ACCOUNTS OF INSURANCE COMPANIES V / 1 -5 9
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%
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
?
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
To Gross Profit 1,04,000
6,52,720 6,52,720
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
S O L U T IO N
TRADING ACCOUNT OF A & COMPANY
for the year ending 31st March, 2017
f ?
To Opening Stock 15,00,000 By Sales 55,00,000
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
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 •
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%
MEMORANDUM TRADING ACCOUNT
for the month ending 31st January, 2017
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
02 600
Percentage of gross profit on sales for the year 2014 is : ? i poooo x 100 = 28%
TRADING ACCOUNT OF KARAM CHAND STORES
for the year ending 31st December, 2015
To Purchases le ss Returns
To Wages
80,000
16,400
By Closing Stock j ? 36,000 x 1g°° j 40,000
*
To Gross Profit 39,600
1,72,000 1,72,000
Percentage of gross profit on sales for the year 2015 is : ^ ^ 2 000 x 100 = 30%
TRADING ACCOUNT OF KARAM CHAND STORES
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
?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
MEMORANDUM TRADING ACCOUNT
from 1st April, 2 0 1 6 to 10th J a n u a ry 2 0 1 7
AMOUN T OF CLAiM
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
(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
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
S O L U T IO N
TRADING ACCOUNT OF UNLUCKY CO.
for the year ending 31st December, 2016
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%
INSURANCE CLAIMS V/2-15
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
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
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
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
INSURANCE CLAIMS V/2-19
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
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
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
Short Sales 16,00,000
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 .
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.
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
for the year ending 31st December, 2016
?
To Opening Stock 3,09,375 By Sales 15,00,000
To Purchases 13,59,375 By Closing Stock 3,93,750
” Gross Profit 2,25,000
18,93,750 18,93,750
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%
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
= r 2,41,200 x §§ ,25°
O B JE C T IV E T Y P E
(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)].
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
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 :