Accounting

INTER CA
ACCOUNTING
Dear Student,
Welcome to the World of Knowledge - J.K. Shah Classes !
I have the pleasure of presenting this study material to you. It contains good
number of good problems, selected so carefully from wide-ranging sources. It
covers the problems which will bring in to focus all important concepts that you
need to study in order to fortify yourself for your examination. The subject will
be taught by eminent professors who are highly experienced and well-versed
with the job.
The coaching is very exhaustive and wholly concept based. The conceptual
explanations are entirely supported by good problems that cover the past and
the problems which peep into the future. Also, the coaching is very systematic,
well - planned and absolutely time bound. For a change, say good - bye to
mechanical learning. I am sure you will feel that the study is a pleasurable job
and not a painful exercise.
Each Topic of four parts :

(A) Theory Section : This section covers theory related to the topic.
(B) Classwork Section : This section covers good number of quality problems
which will be solved in the classroom.
(C) Homework Section : This section covers good number of problems.
Students are strongly advised to solve these problems.
(D) Past Exam Questions : This section covers questions which were asked in
past CA-IPCC/CA-Intre exams
I wish you a very happy study time.
BEST OF LUCK !
Prof. J.K. Shah.

Chartered Accountant
INTER C.A. – ACCOUNTING
INDEX
Sr. No PARTICULARS PAGE
1 Accounting Standards 1-132
Redemption of Redeemable Preference

2 Shares & Accounting for Bonus
133-155
3 Redemption of Debentures 156-167
4 Company Final Accounts 168-194
5 Cash Flow Statement 195-219
6 Profit Prior To Incorporation 220-242
7 Investment Accounts 243-262
8 Fire Insurance Claim 263-300
9 Hire Purchase Installment Selling 301-316
10 Departmental Accounts 317-340
11 Branch Accounts 341-394
12 Single Entry System 395-434

ACCOUNTING
1 STANDARDS
INTRODUCTION TO ACCOUNTING STANDARDS
1. What are Accounting Standards?

Accounting Standards are written policy documents, covering guidelines relating to
Issues in Financial Reporting.
2. Which Issues are Covered by AS?

AS deals with the following issues:-
a. Recognition; (when to recognise a transaction in Books of Accounts)
b. Measurement; (At what Value to recognise transactions in Books of Accounts)
c. Presentation; (How to present the transactions in the Financial Statements)
d. Disclosure;
3. WHY AS?
AS are introduced so that there can be:-
a. Uniformity;
b. Comparability;
c. Better Decision Making;
4. How Many AS?

At Intermediate Level there are 21 AS to be studied, Off which:-
• AS 1,2,3,10,11,12,13,16 are covered in Paper 1 Accounting;
• AS 4,5,7,9,14,17,18,19,20,22,24,26,29 are covered in Paper 5 Advanced
Accounting.
5. To Whom AS are Applicable?

AS are applicable to ALL Business entities. AS are not applicable to entities engaged
in solely Charitable Activities. (e.g. an organisation collecting donations and giving
them to flood affected people)
Business Entities are classified as:-
• Corporate entities; (Companies)
• Non-Corporate Entities; (Other than Companies)
1
HOMEWORK SECTION
Question 1
What are the issues, with which Accounting Standards deal?
Covered with Classwork Section
Question 2
List the criteria to be applied for rating a non-corporate entity as Level-I entity for the
purpose of compliance of Accounting Standards in India.
Question 3
List the criteria to be applied for rating a non-corporate entity as Level-II entity for the
purpose of compliance of Accounting Standards in India.
2
PAST PAPER SECTION
Question 1
Please explain briefly two benefits and two limitations of Accounting Standards for an
accountant. (May’19)
Answer
Accounting standards seek to describe the accounting principles, the valuation
techniques and the methods of applying the accounting principles in the preparation
and presentation of financial statements so that they may give a true and fair view. By
setting the accounting standards the accountant has the following benefits:
(i) Standardisation of alternative accounting treatments: Standards reduce to a reasonable
extent or eliminate altogether confusing variations in the accounting treatments
used to prepare financial statements.
(ii) Comparability of financial statements: The application of accounting standards would,

to a limited extent, facilitate comparison of financial statements of companies
situated in different parts of the world and also of different companies situated in
the same country. However, it should be noted in this respect that differences in the
institutions, traditional and legal systems from one country to another give rise to
differences in accounting standards adopted in different countries.
However, there are some limitations of setting of accounting standards:

(i) Difficulties in making choice between different treatments: Alternate solutions to certain
accounting problems may each have arguments to recommend them. Therefore, the
choice between different alternative accounting treatments may become difficult.
(ii) Lack of flexibilities and Restricted Scope: There may be a trend towards rigidity and
away from flexibility in applying the accounting standards. Accounting standards
cannot override the statute. The standards are required to be framed within the
ambit of prevailing statutes.
Question 2
List the Criteria for classification of non-corporate entities as level I Entities for the purpose
of application of Accounting Standards as per the Institute of Chartered Accountants of
India.
3
Answer
Criteria for classification of non-corporate entities as level 1 entities for purpose of
application of Accounting Standards decided by the Institute of Chartered Accountants of
India is given below:
Non-corporate entities which fall in any one or more of the following categories, at the
end of the relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on
any stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on
insurance business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees fifty crore in the immediately preceding accounting
year.
(iv) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees ten crore at any time during the
immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above
4
AS 1 - DISCLOSURE OF ACCOUNTING
POLICIES
1. WHAT ARE ACCOUNTING POLICIES?

Accounting policies are rules or principles and methods to adopt such principles in
financial accounts for true and fair recording and presentation of financial statements.
2. EXAMPLES OF DIFFERENT ACCOUNTING POLICIES :

• Methods of Amortization (AS26)
• Valuation of Inventories (AS 2)
• Valuation of Investments (AS 13)
• Valuation of Fixed Assets (AS10)
• Treatment of Government Grants (AS 12)
• Treatment of Contingent liabilities (AS29)
• Conversion of Foreign currency items (AS 11), etc.
3. WHY AS 1?
There is no single list of accounting policies which are applicable in all circumstances.
The differing circumstances in which enterprises operate in a situation of diverse and
complex economic activity make alternative accounting principles and methods of
applying those principles acceptable.
If every entity follows separate method to comply with principle then even if they
follow the correct accounting policy but still books are not comparable, so there is
need for disclosure.
4. DISCLOSURE REQUIREMENT :
• SIGNIFICANT ACCOUNTING POLICIES:
All significant accounting policies adopted in preparation and presentation of
financial statements should be disclosed.
Significant accounting policies means those accounting policies which deals with
material items of assets, liabilities, incomes and expenses.
Such disclosure should form part of financial statements.
These significant accounting policies should be disclosed at one place.
5
• INSIGNIFICANT ACCOUNTING POLICIES:

All accounting policies relating to immaterial items of assets, liabilities, incomes
and expenses need not be disclosed.
• FUNDAMENTAL ACCOUNTING ASSUMPTIONS:

Fundamental accounting assumptions form the basis for preparations and
presentation of financial statements.
They are usually not specifically stated because their acceptance and use are
assumed. Disclosure is necessary if they are not followed.
The following are generally accepted fundamental accounting assumptions:

• Going concern
The enterprise is normally viewed as going concern, that is, as continuing in operations
for foreseeable future.
It is assumed that enterprise neither has any need nor any will to shut down
business in near future. (As per SA 570 going concern issued by the ICAI suggests
that foreseeable future means 12 months from the date of financial statements)
• Consistency:
It is assumed that accounting policies are consistent from one period to another.
However, Consistency is not an excuse to adopt/ continue to adopt inappropriate
accounting policies.
• Accrual:
It is assumed that revenues and costs are: Recognized as they are earned/incurred
rather than as and when money is received /paid.
Recorded in financial statements of the period to which they relate.
5. FACTORS TO BE CONSIDERED WHILE CHOOSING AN ACCOUNTING POLICIES:

The primary consideration in selection of accounting policies by an enterprise is
that financial statements prepared and presented on the basis of such accounting
policies should represent a true and fair view of state of affairs of enterprise as at
balance sheet date and profit/loss for the period ended on that date.
6
Secondary consideration governing selection and application of accounting policies are:

• Prudence:
Anticipated profits should not be recorded, anticipated losses are to be recorded.
• Substance over form:

The accounting treatment and presentation in financial statements of transaction
and events should be governed by their substance and not merely by legal form.
Substance refers to economic reality.
• Materiality:
Financial statements should disclose all material items i.e. items the knowledge of
which might influence the decisions of the user of financial statements. Determination
of materiality is a matter of professional judgement.
6. CHANGES IN ACCOUNTING POLICIES:

Accounting policies can be changed if such change is required by
• Law
• AS
• Management, if they can justify better presentation and preparation of financial
statements. Any change that has material effect should be disclosed.
The amount by which any item in GPFS is affected by such change should be
disclosed. Where such amount is not ascertainable, wholly/ in part, the fact
should be indicated.
7
CLASSWORK QUESTIONS
Question 1
In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to
` 1,63,000 (on the basis of FIFO method).
The company decides to change from FIFO method to weighted average method for
ascertaining the cost of inventory from the year 2014-15. On the basis of weighted average
method, closing inventory as on 31.03.2015 amounts to ` 1,47,000. Realisable value of
the inventory as on 31.03.2015 amounts to ` 1,95,000. Discuss disclosure requirement of
change in accounting policy as per AS1.
Question 2
X Ltd. sold its building to mini Ltd. For ` 60 Lakhs on 30.09.2010 and gave possession of
the property to mini Ltd. However, documentation and legal formalities are pending. Due
to this, the company has not recorded the sale and has shown the amount received as an
advance. The book value of the building is ` 25 lakhs as on 31st March, 2011.
Do you agree with this treatment? If you do not agree, explain the reasons with reference
to the accounting standard.
Question 3
ABC Ltd. was making provision for non-moving stocks based on no issues for the last 12
months up to 31.3.2015.
The company wants to provide during the year ending 31.3.2015 based on technical
evaluation:
Total value of stock ` 100 lakhs
Provision required based on 12 months issue ` 3.5 lakhs
Provision required based on technical evaluation ` 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method
of provision?
Question 4
State whether the following statements are 'True' or 'False'. Also give reason for your
answer.
(i) Certain fundamental accounting assumptions underline the preparation and
presentation of financial statements. They are usually specifically stated because
their acceptance and use are not assumed.
8
(ii) If fundamental accounting assumptions are not followed in presentation and

preparation of financial statements, a specific disclosure is not required.
(iii) All significant accounting policies adopted in the preparation and presentation of
financial statements should form part of the financial statements.
(iv) Any change in an accounting policy, which has a material effect should be disclosed.
Where the amount by which any item in the financial statements is affected by such
change is not ascertainable, wholly or in part, the fact need not to be indicated.
(v) There is no single list of accounting policies which are applicable to all circumstances.
Question 5
Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:
Liabilities Amount (`) Assets Amount (`)
Proprietor's Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000
Sundry Creditors 50,000 Deferred Expenses 50,000
Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows :
(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even.
The net realisable value of fixed assets on 31.03.2018 was ` 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000
respectively.
(3) The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and `
2,50,000 respectively.
(4) Expenses for the year amounted to ` 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection
of another ` 25,000 depends on successful re-installation of certain product supplied
to the customer;
(7) Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2018 is ` 4,22,000.
(9) There is an early repayment penalty for the loan of ` 25,000.
You are required to prepare: (Not assuming going concern)
(1) Profit & Loss Account for the year 2017-18.
(2) Balance Sheet as on 31st March, 2018.
9
CLASSWORK SOLUTIONS
Answer 1
As per para 22 of AS 1 “Disclosure of Accounting Policies”, any change in an accounting
policy which has a material effect should be disclosed in the financial statements. The
amount by which any item in the financial statements is affected by such change should
also be disclosed to the extent ascertainable. Where such amount is not ascertainable,
wholly or in part, the fact should be indicated. Thus Prashant Ltd. should disclose the
change in valuation method of inventory and its effect on financial statements. The
company may disclose the change in accounting policy in the following manner:
The company values its inventory at lower of cost and net realisable value. Since net
realisable value of all items of inventory in the current year was greater than respective
costs, the company valued its inventory at cost. In the present year i.e. 2014 -15, the
company has changed to weighted average method, which better reflects the consumption
pattern of inventory, for ascertaining inventory costs from the earlier practice of using
FIFO for the purpose. The change in policy has reduced current profit and value of inventory
by ` 16,000.
Answer 2
As per AS 1, “Disclosure of accounting policies”, the main consideration in selection of
accounting policy is the presentation of a true and fair picture of the state of affairs
& performance of the enterprise. To ensure true and fair view, principles of prudence,
substance over form and materiality should be considered.
In this case, the economic reality and substance of the transaction is that the rights and
beneficial interest in the property has been transferred although legal title has not been
transferred.
Hence, X Ltd. In its financial statements for the year ended 31.3.2011, should record
the sale and recognize the profit of ` 35 lakhs (60 Lakhs - 25 Lakhs) in its Profit & Loss
Account statement and building should be derecognized from the balance sheet of X Ltd.
Therefore, the treatment given by the company is not correct.
Answer 3
The decision of making provision for non-moving stocks on the basis of technical
evaluation does not amount to change in accounting policy. Requirement to provide for
non-moving stocks may be said as accounting policy but the basis for making provision
will not constitute accounting policy. It will be considered as an accounting estimate.
10
Further, the method of estimating the amount of provision may be changed in case a
more prudent estimate can be made.
In the given case, considering the total value of stock, the change in the amount of
required provision of non-moving stock from ` 3.5 lakhs to ` 2.5 lakhs is also not material.
The disclosure can be made for such change in the following lines by way of notes to the
accounts in the annual accounts of ABC Ltd. for the year 2014-15: “The company has
provided for non-moving stocks on the basis of technical evaluation unlike preceding
years. Had the same method been followed as in the previous year, the profit for the year
and the corresponding effect on the year end net assets would have been higher by ` 1
lakh.”
Answer 4
(i) False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting
assumptions underlie the preparation and presentation of financial statements. They
are usually not specifically stated because their acceptance and use are assumed.
Disclosure is necessary if they are not followed.
(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern,
Consistency and Accrual are followed in financial statements, specific disclosure
is not required. If a fundamental accounting assumption is not followed, the fact
should be disclosed.
(iii) True; To ensure proper understanding of financial statements, it is necessary that
all significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed. The disclosure of the significant accounting
policies as such should form part of the financial statements and they should be
disclosed at one place.
(iv) False; Any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect in later
periods should be disclosed. Where such amount is not ascertainable, wholly or in
part, the fact should be indicated.
(v) True; As per AS 1, there is no single list of accounting policies which are applicable
to all circumstances. The differing circumstances in which enterprises operate in a
situation of diverse and complex economic activity make alternative accounting
principles and methods of applying those principles acceptable.
11
HOMEWORK SECTION
Question 1
What are the three fundamental accounting assumptions recognized by Accounting
Standard (AS) 1? Briefly describe each one of them.
Answer
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These
are as follows:
(i) Going Concern: The financial statements are normally prepared on the assumption
that an enterprise will continue its operations in the foreseeable future and neither
there is intention, nor there is need to materially curtail the scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same
accounting policies for similar transactions in all accounting periods unless the
change is required (i) by a statute, (ii) by an accounting standard or (iii) for more
appropriate presentation of financial statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is actually
received or paid.
Question 2
Mention few areas in which different accounting policies are followed by companies.
Answer
Following are the examples of the areas in which different accounting policies may be
adopted by different enterprises:
1. Valuation of Inventories.
2. Valuation of Investments.
3. Valuation of Goodwill.
12
PAST PAPER SECTION
Question 1
Please explain briefly two limitations of Accounting Standards for an accountant.
Answer
There are some limitations of setting of accounting standards:
(i) Difficulties in making choice between different treatments: Alternate solutions
to certain accounting problems may each have arguments to recommend them.
Therefore, the choice between different alternative accounting treatments may
become difficult.
(ii) Lack of flexibilities and Restricted Scope: There may be a trend towards rigidity and
away from flexibility in applying the accounting standards. Accounting standards
cannot override the statute. The standards are required to be framed within the
ambit of prevailing statutes.
Question 2
Explain in brief, the alternative measurement bases, for determining the value at which
an element can be recognized in the Balance Sheet or Statement of Profit and Loss.
Answer
The Framework for Recognition and Presentation of Financial statements recognises four
alternative measurement bases for the purpose of determining the value at which an
element can be recognized in the balance sheet or statement of profit and loss. These
bases are: (i) Historical Cost; (ii)Current cost (iii) Realisable (Settlement) Value and (iv)
Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost:
Historical cost means acquisition price. According to this, assets are recorded at an
amount of cash or cash equivalent paid or the fair value of the asset at the time of
acquisition. Liabilities are recorded at the amount of proceeds received in exchange
for the obligation.
2. Current Cost:
Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an
equivalent asset was acquired currently. Liabilities are carried at the undiscounted
amount of cash or cash equivalents that would be required to settle the obligation
currently.
13
3. Realisable (Settlement) Value:

As per realisable value, assets are carried at the amount of cash or cash equivalents
that could currently be obtained by selling the assets in an orderly disposal. Liabilities
are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value:
Under present value convention, assets are carried at present value of future net cash
flows generated by the concerned assets in the normal course of business. Liabilities
under this convention are carried at present value of future net cash flows that are
expected to be required to settle the liability in the normal course of business.
Question 3
Shankar started a business on 1st April, 2017 with ` 12,00,000 represented by 60,000
units of ` 20 each. During the financial year ending on 31st March, 2018, he sold the
entire stock for ` 30 each. In order to maintain the capital intact, calculate the maximum
amount, which can be withdrawn by Shankar in the year 2017-18 if Financial Capital is
maintained at Historical cost.
Answer
Particulars Financial Capital Maintenance at

Historical Cost (`)
Closing equity (`30 x 60,000 units) 18,00,000 represented by cash
Opening equity 60,000 units x `20 = 12,00,000
Permissible drawings to keep 6,00,000
Capital intact (18,00,000 – 12,00,000)
Therefore, ` 6,00,000 is the maximum amount which can be withdrawn by Shankar in the
year 2017-18 if the Financial Capital Maintenance is maintained at Historical Cost.
Question 4
What are the bases of measurement of Elements of Financial Statements? Explain in brief.
Answer
Measurement is the process of determining money value at which an element can be
recognized in the balance sheet or statement of profit and loss. The framework recognizes
four alternative measurement bases for the purpose. These bases can be explained as:
14
Historical Acquisition price. According to this, assets are recorded at an

cost amount of cash and cash equivalent paid or the fair value of the
assets at time of acquisition.
Assets are carried out at the amount of cash or cash equivalent
that would have to be paid if the same or an equivalent asset
Current was acquired currently. Liabilities are carried at the undiscounted
Cost amount of cash or cash equivalents that would be required to
settle the obligation currently.
Realisable For assets, amount currently realizable on sale of the asset in an
(Settlement) Value orderly disposal. For liabilities, this is the undiscounted amount
expected to be paid on settlement of liability in the normal
course of business.
Assets are carried at present value of future net cash flows
Present generated by the concerned assets in the normal course of
Value business. Liabilities are carried at present value of future net
cash flows that are expected to be required to settle the liability
in the normal course of business.
In preparation of financial statements, all or any of the measurement basis can be used
in varying combinations to assign money values to financial items
Question 5
"One of the characteristic of the financial statement is neutrality. "Do you agree with this
statement? Explain in brief.
Answer
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the
information contained in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information,
the focus of analysis could shift from one area of business to another thereby arriving
at a totally different conclusion based on the business results. Information contained in
the financial statements must be free from bias. It should reflect a balanced view of the
financial position of the company without attempting to present them in biased manner.
Financial statements cannot be prepared with the purpose to influence certain division,
i.e. they must be neutral.
15
Question 6
Following is the Balance Sheet of M/s. S Traders as on 31st March, 2019:
Liabilities (`) Assets (`)
Capital 1,50,000 Fixed Assets 1,05,000
11% Bank loan 80,000 Closing stock 76,000
Trade payables 52,000 Debtors 68,000
Profit & loss A/c 56,000 Deferred Expenditure 24,000
Cash & bank 65,000
3,38,000 3,38,000
Additional information:
(i) Remaining life Fixed Assets is 6 years with even use. The net realizable value of fixed
Assets as on 31st March, 2020 is ` 90,000.
(ii) Firm’s Sales & Purchases for the year ending 31st March, 2020 amounted to `7,80,000
and ` 6,25,000 respectively.
(iii) The cost & net realizable value of the stock as on 31st March, 2020 was ` 60,000
and ` 66,000.
(iv) General expenses (including interest on loan) for the year 2019-20 were ` 53,800.
(v) Deferred expenditure is normally amortised equally over 5 years starting from the
financial year 2018-19 i.e. `6,000 per year.
(vi) Debtors on 31st March, 2020 is `65,000 of which `5,000 is doubtful. Collection of
another `10,000 debtors depends on successful re-installation of certain products
supplied to the customer.
(vii) Closing trade payable `48,000, which is likely to be settled at 5% discount.
(viii) There is a prepayment penalty of `4,000 for bank loan outstanding.
(ix) Cash & bank balances as on 31st March, 2020 is `1,65,200.
Prepare profit & loss Account and Balance sheet for the year ended 31st March,
2020 assuming the firm is not a going concern.
(Nov’ 20)
Question 7
In the books of Rani Ltd., closing inventory as on 31.03.2020 amounts to ` 1,75,000
(valued on the basis of FIFO method).
The Company decides to change from FIFO method to weighted average method for
ascertaining the costs of inventory from the year 2019-20. On the basis of weighted
average method, closing inventory as on 31.03.2020 amounts to ` 1,59,000. Realizable
16
value of the inventory as on 31.03.2020 amounts to ` 2,07,000.

Discuss disclosure requirements of changes in accounting policy as per AS 1.
(Nov’ 20)
Question 8
What do you mean by 'Accrual' in reference to AS-1? Also, specify any three reasons for
'Accrual Basis of Accounting'. (May’ 19)
Answer
The term “Accrual” has been explained in the AS 1 on Disclosure of Accounting Policies,
as “Revenues and costs are accrued, that is, recognised as they are earned or incurred
(and not as money is received or paid) and recorded in the financial statements of the
periods to which they relate”
Reasons for Accrual Basis of Accounting
1. Accrual basis of accounting, attempts to record the financial effects of the
transactions, events, and circumstances of an enterprises in the period in which they
occur rather than recording them in the period(s) in which cash is received or paid by
the enterprise.
2. Receipts and payments of the period will not coincide with the buying producing or
selling events and other economic events that affect entity performance.
3. The goal of Accrual basis of accounting is to follow the matching concept of income
and expenditure so that reported net income measures an enterprise’s performance
during a period instead of merely listing its cash receipts and payments.
4. Accrual basis of accounting recognizes assets, liabilities or components of revenues
and expenses for amounts received or paid in cash in past, and amounts expected
to be received or paid in cash in the future.
5. Important point of difference between accrual and accounting based on cash receipts
and outlay is in timing of recognition of revenues, expenses, gains and losses.
17
AS 2 - VALUATION OF INVENTORY
1. WHY VALUATION OF INVENTORY IS REQUIRED ?

To know correct Financial Performance (net profit or loss)
And
To know True & fair Financial Position
Since, Appropriate / In-appropriate valuation of inventory affects both the profit /
loss from operations & financial position as reflected in the Balance Sheet.
2. MEANING / DEFINITION OF INVENTORY As Per AS-2 :

According to AS 2, Inventories are assets
a. held for sale in the ordinary course of business or
b. in the process of production for such sale or
c. in the form of materials or supplies to be consumed in the production process
or in the rendering of services
3. INVENTORIES INCLUDES :
Thus, Inventory consists of :
a. Goods purchased & held for re-sale
b. Finished goods produced for sale
c. Work in progress
d. Stores, spares, loose tools etc. awaiting use in production process (of goods
meant for sale)

4. AS 2 DOES NOT COVER :
a. Financial instruments such as shares, debentures etc. held as stock
b. Work in progress under construction contracts
c. Work in progress arising in the ordinary course of business of service providers
d. Live stock, agricultural & forest products, mineral oils (for whose valuation
certain established practices may exist)
5. VALUATION :
Inventories are valued at COST or NRV, whichever is less.
18
6. COST INCLUDES :
• Cost = Purchase cost + conversion cost + other costs incurred to bring the
inventory to its present location & condition
• Purchase cost = purchase price + duties & taxes + freight inward + other directly
attributable expenses (like in-transit insurance) – (duties & taxes recoverable +
trade discount & rebates etc.).
• Conversion cost = Direct labour + variable production overheads (calculated
on actual production) + fixed production overheads (calculated on normal
capacity)
• In case of joint products, the conversion cost is allocated on rational & consistent
basis (e.g. : sales).
• In case of by products, the NRV of by product is deducted from the conversion
cost
• Inventory Cost does not include : Administration cost, Selling & distribution
cost, abnormal wastage, storage costs etc.
• Normal capacity means the production expected to be achieved on an average
over a number of periods under normal conditions. Fixed production overheads
per unit will be revised if actual production exceeds normal capacity so that
inventories are not measured above their cost.
• Interest & other borrowing costs are usually not included in inventory valuation.
However, they can be included if time plays a major factor in bringing about a
change in the condition of inventories.
• Excise duty / GST paid / payable is an element of cost & should be included in
the inventory valuation. However, any amount recoverable from tax authorities
by way of CENVAT credit / ITC will have to be excluded from the valuation of
finished goods.
7. METHODS OF INVENTORY VALUATION :

a. Inventory not ordinarily interchangeable: specific identification
method
b. Inventory ordinarily interchangeable: FIFO or weighted avg. method Specific
identification method tracks the actual physical flow of goods. It is also called
the actual cost method because specific job bears the actual cost of materials
bought for the job. This method is suited for antique shops, expensive jewellery,
custom-made merchandise etc.
• Other methods allowed are standard cost method or retail price method if
19
it were to result in estimation of value of inventory that approximates the

actual cost. Standard cost is a pre-determined cost based on attainable
efficiency standard for a given volume of output. Retail price method is
generally adopted by retail stores having numerous low unit cost items.
Cost is measured by deducting gross margin from retail prices of year end
inventory.
8. NRV :
NRV = estimated selling price in the ordinary course of business – estimated cost of
completion – estimated costs necessary to make the sale. Considerations governing
estimation of NRV are :
a. Most reliable evidence available at the time estimates are made as to amounts
that inventories are expected to realize &
b. Fluctuations of prices or costs directly relating to events occurring after the
Balance Sheet date, to the extent that such events confirm the conditions
existing at the Balance Sheet date.
9. VALUATION OF MATERIAL :
Materials & other supplies held for use in production are not written down below the
cost if finished goods in which they will be used are expected to be sold at or above
cost. When finished goods are not expected to fetch the cost & there is a decline in
process of material & other supplies then the materials & other supplies are written
down to their NRV. In such a case, the replacement cost is the NRV.
10. DISCLOSURES REQUIRED :

a. Accounting policy applied in measuring inventories including cost formula
b. Carrying amount of inventory classified appropriately e.g. : finished goods,
work in progress, raw material, spare parts, loose tools etc.
c. Any changes in accounting policy with respect to valuation of inventory & its
effect on the financial statements.
20
CLASSWORK QUESTIONS
Question 1
The following are Cost and NRV value of five inventory items
Cost (`) NRV (`)

A 15,000 5,000
B 27,000 52,000
C 54,000 74,000
D 1,10,000 85,000
E 68,000 62,000
2,74,000 2,78,000
Find out the value of inventories of

a. Individual items are distinct items,
b. Individual items are not distinct items and should be taken as a group.
Question 2
Anil Pharma Ltd. ordered 16,000 kg. of certain material `160 per unit. The purchase
price includes excise duty ` 10 per kg. in respect of which full CENVAT credit is admissible.
Freight incurred amounted to ` 1,40,160. Normal transit loss is 2%. The company actually
received 15,500 kg. and consumed 13,600 kg. of material. Compute cost of inventory
under AS 2 and amount of abnormal loss.
21
Question 3
Calculate the value of raw materials and closing stock based on the following information:
Raw material X
Closing balance 500 units
` per unit
Cost price including excise duty 200
Excise duty (Cenvat credit is receivable on the excise duty paid) 10
Freight inward 20
Unloading charges 10
Replacement cost 150
Finished goods Y
Closing Balance 1200 units
` per unit
Material consumed 220
Direct labour 60
Direct overhead 40
Total Fixed overhead for the year was ` 2,00,000 on normal capacity of 20,000 units.
Calculate the value of the closing stock, when
(i) Net realizable value of the finished goods Y is ` 400
(ii) Net Realizable value of the finished goods Y is ` 300
Question 4
Materials costing ` 12,000 bought for processing and assembly for a profitable special
order. Since buying these items, the cost price has fallen to ` 10,000. How will you deal in
the valuation of raw material if the finished product is sold above the cost? Suppose the
finished product is likely to be sold less than the cost, what value will it be reasonable to
be assigned for the raw material?
Question 5
Cost of a partly finished unit at the end of 2004-05 is ` 150. The unit can be finished next
year by a further expenditure of ` 100. The finished unit can be sold at ` 250, subject to
payment of 4% brokerage on selling price. Determine the value of inventory.
22
Question 6
The Company X Ltd., has to pay for delay in cotton clearing charges. The company up to
31.3.2014 has included such charges in the valuation of closing stock. This being in the
nature of interest, X Ltd. decided to exclude such charges from closing stock for the year
2014-15. This would result in decrease in profit by ` 5 lakhs. Comment.
Question 7
You are required to value the inventory per kg of finished goods consisting of :
a. Material Cost ` 200 per Kg.
b. Direct Labour ` 40 Per Kg.
c. Direct Variable Overhead ` 20 Per Kg.
Fixed production charges for the year on normal working capacity of 2 lakh kg. is
` 20 lakhs. 4,000 Kgs. of finished goods are in stock at the year end.
23
CLASSWORK SOLUTIONS
Answer 6
According to AS - 2 “valuation of inventories” Cost of inventories generally doesn’t include
interest & other borrowing cost. Interest and other borrowing costs are usually considered
as not relating to bringing the inventories to their present location and condition.
Interests and other borrowing costs however are taken as part of inventory costs where
the inventory necessarily takes substantial period of time for getting ready for intended
sale. Example of such inventory is wine.
Here, X Ltd. has decided to exclude delay in clearing charges from closing stock for the
year 2014-15 this would result in decrease in profit by ` 5 lakhs.
So the contention of X Ltd. for not to include such delay in clearing charges is correct.
24
HOMEWORK SECTION
Question 1
The Company deals in three products, A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2014-15, the Historical
Cost and Net Realizable Value of the items of closing stock are determined as follows:
Items Historical Cost (` in lakhs) Net Realizable Value (` in lakhs)
A 40 28
B 32 32
C 16 24
Answer
As per para 5 of AS 2 on „Valuation of Inventories", inventories should be valued at the
lower of cost and net realizable value. Inventories should be written down to net realizable
value on an item-by-item basis in the given case.
Items Historical Cost (` in Net Realisable Value Valuation of
lakhs) (` in lakhs) closing stock (` in lakhs)
A 40 28 28
B 32 32 32
C 16 24 16
88 84 76
Hence, closing stock will be valued at ` 76 lakhs.
Question 2
Capital Cables Ltd., has a normal wastage of 4% in the production process. During the
year 2013-14 the Company used 12,000 MT of raw material costing ` 150 per MT. At
the end of the year 630 MT of wastage was in stock. The accountant wants to know how
this wastage is to be treated in the books. Explain in the context of AS 2 the treatment
of normal loss and abnormal loss and also find out the amount of abnormal loss if any.
Answer
As per para 13 of AS 2 (Revised) „Valuation of Inventories", abnormal amounts of wasted
materials, labour and other production costs are excluded from cost of inventories and
such costs are recognized as expenses in the period in which they are incurred. The normal
loss will be included in determining the cost of inventories (finished goods) at the year
end.
25
Amount of Abnormal Loss:

Material used (12,000 MT @ `150) `18,00,000
Normal Loss (4% of 12,000 MT) 480
MT Net quantity of material 11,520
MT Abnormal Loss in quantity 150
MT Abnormal Loss ` 23,437.50
[150 units @ ` 156.25 (` 18,00,000/11,520)]
Amount ` 23,437.50 will be charged to the Profit and Loss statement.
Question 3
Mr. Mehul gives the following information relating to items forming part of inventory as
on 31-3-2015. His factory produces Product X using Raw material A.
(i) 600 units of raw material A (purchased @ ` 120). Replacement cost of raw material
A as on 31-3-2015 is ` 90 per unit.
(i) 500 units of partly finished goods in the process of producing X and cost incurred till
date ` 260 per unit. These units can be finished next year by incurring additional cost
of ` 60 per unit.
(ii) 1500 units of finished Product X and total cost incurred ` 320 per unit. Expected
selling price of Product X is ` 300 perunit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate
the value of total inventory as on 31-3-2015.
Answer
As per AS 2 “Valuation of Inventories”, materials and other supplies held for use in the
production of inventories are not written down below cost if the finished products in
which they will be incorporated are expected to be sold at cost or above cost. However,
when there has been a decline in the price of materials and it is estimated that the cost
of the finished products will exceed net realizable value, the materials are written down
to net realizable value. In such circumstances, the replacement cost of the materials may
be the best available measure of their net realizable value. In the given case, selling price
of product X is ` 300 and total cost per unit for production is ` 320.
Hence the valuation will be done as under:
(i) 600 units of raw material will be written down to replacement cost as market value
of finished product is less than its cost, hence valued at ` 90 per unit.
(ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost
` 320 (` 260 + additional cost ` 60) or Net estimated selling price ` 240 (Estimated
26
selling price ` 300 per unit less additional cost of ` 60).

(iii) 1,500 units of finished product X will be valued at NRV of ` 300 per unit since it is
lower than cost ` 320 of product X.
Valuation of Total Inventory as on 31.03.2015:

NRV/Replacement Value = units x cost or NRV
cost whichever is less (`)
Raw material A 90 54,000
Partly finished goods 240 1,20,000
Finished goods X 300 4,50,000
Value of Inventory 6,24,000
27
PAST PAPER SECTION
Question 1
Raw materials inventory of a company includes certain material purchased at ` 100 per
kg. The price of the material is on decline and replacement cost of the inventory at the
year-end is ` 75 per kg. It is possible to convert the material into finished product at
conversion cost of ` 125.
Decide whether to make the product or not to make the product, if selling price is (i)
` 175 and (ii) ` 225. Also find out the value of inventory each case. (May’10)
Answer
As per para 24 of AS 2 ‘Valuation of Inventories’, materials and other supplies held for use
in the production of inventories are not written down below cost if the finished products in
which they will be incorporated are expected to be sold at or above cost. However, when
there has been a decline in the price of materials and it is estimated that the cost of the
finished products will exceed net realizable value, the materials are written down to net
realisable value. In such circumstances, the replacement cost of the materials may be the
best available measure of their net realisable value.
(i) When selling price is ` 175
Incremental Profit = ` 175 – ` 125 = ` 50 Current price of the material = ` 75
Therefore, it is better not to make the product. Raw material inventory would be
valued at net realisable value i.e. ` 75 because the selling price of the finished
product is less than `225 (100+125) per kg.
(ii) When selling price is `225
Incremental Profit = ` 225 – ` 125 = ` 100 Current price of the raw material =
` 75.
Therefore, it is better to make the product.
Raw material inventory would be valued at `100 per kg because the selling price of
the finished product is not less than ` 225.
Question 2
In determining the cost of inventories, it is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are incurred. Provide example
of such costs as per AS-2 Valuation of Inventories. (May’ 12)
Answer
As per AS-2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the
28
inventories and are recognised as expenses in the period in which incurred. Examples
of such costs are:
(a) abnormal amounts of wasted materials, labour, or other production costs;
(b) storage costs, unless those costs are necessary in the production process prior to a
further production stage; administrative overheads that do not contribute to bringing
the inventories to their present location and condition; and
(c) selling and distribution costs.
Question 3
Z Limited ordered 13,000 kg. of chemicals at ` 90 per kg. The purchase price includes GST
of ` 7.5 per kg, in respect of which full credit is admissible. Freight incurred amounted to `
30,000. Normal transit loss is 4%. The company actually received 12,400 kg and consumed
10,000 kg. The company has received trade discount in the form of cash amounting to `
1 per kg. The chemicals were delivered in containers. The containers were not reusable,
hence sold for ` 500. The administrative expenses incurred to bring the chemicals were `
10,000.
Compute the value of inventory and allocate the material cost as per AS – 2.
(May’16)
Answer
Cost of inventory and allocation of material cost `
Purchase price (13,000 Kg. x ` 89) 11,57,000
Less: Credit Available (13,000 Kg. x ` 5) (65,000)
10,92,000
Add: Freight Allocated 30,000
Administrative expenses
A. Total material cost 11,32,000
B. Number of units to be normally received = 96% of 13,000 Kg. Kg. 12,480
C. Normal cost per Kg. (A/B)
Allocation of material cost Kg. `/Kg. ` 90.705
Materials consumed 10,000@ 90.705 (approx.) 9,07,050
Cost of inventory (12,400- 10,000) 2,400 2,17,692
Abnormal loss 80 7,258*
Total material cost (for 12,480 kgs) 1,32,000
*The difference due to rounding off of normal cost per Kg has been adjusted. Thus the
inventory will be valued at ` 2,17,692.
29
Note:
1. The Company has received trade discount in the form of cash. This discount has
been treated as trade discount in the given answer.
2. Abnormal losses are recognized as separate expenses.
3. Containers are used for delivery of the chemicals and are not reusable. Cost of these
containers is treated as selling and distribution expense. The sale value of these
containers will be credited to Profit and Loss Account and shall not be considered
for the purpose of valuation of inventory.
Alternatively, the sales value of container amount of ` 500 may be deducted, while
computing material cost. In that case the material cost will be computed as `
11,31,500 (11,32,000-500) instead of ` 11,32,000. Accordingly the allocation of
material cost will get changed.
4. State VAT has not been included in the cost of materials in the above answer as VAT
is generally credited in the later course of time.
Question 4
A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required.
The company provides you following information for the year ended 31st March, 2017.
Raw Material X ` per unit
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300
Chemical Y ` per unit
Material consumed 440
Direct Labour 120
Variable Overheads 80
Additional Information:
(i) Total fixed overhead for the year was ` 4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was ` 2,400
units.
Qty. Rate (`) Amount (`)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
30
You are required to calculate the total value of closing stock of Raw Material X and
Chemical Y according to AS 2, when
(a) Net realizable value of Chemical Y is ` 800 per unit
(b) Net realizable value of Chemical Y is ` 600 per unit (Nov’17)
Answer
(a) When Net Realizable Value of the Chemical Y is ` 800 per unit
NRV is greater than the cost of Finished Goods Y i.e. ` 660 (Refer W.N.) Hence, Raw
Material and Finished Goods are to be valued at cost.
Value of Closing Stock:
(b) When Net Realizable Value of the Chemical Y is ` 600 per unit
NRV is less than the cost of Finished Goods Y i.e. ` 660. Hence, Raw Material is to be
valued at replacement cost and Finished Goods are to be valued at NRV since NRV is
less than the cost.
Value of Closing Stock:
Qty. Rate (`) Amount (`)

Raw Material X 1,000 300 3,00,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,40,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X `
Cost Price 380
Add: Freight Inward 40
Unloading charges 20
Cost 440
Chemical Y `
Materials consumed 440
Direct Labour 120
Variable overheads 80
Fixed overheads (`4,00,000/20,000 units) 20
Cost 660
Question 5
Wooden Plywood Limited has a normal wastage of 5% in the production process. During
31
the year 2017-18, the Company used 16,000 MT of Raw material costing ` 190 per MT.
At the end of the year, 950 MT of wastage was in stock. The accountant wants to know
how this wastage is to be treated in the books.
You are required to:
(1) Calculate the amount of abnormal loss.
(2) Explain the treatment of normal loss and abnormal loss. [In the context of AS-2
(Revised)] (May’ 19)
Answer
(i) As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted
materials, labour and other production costs are excluded from cost of inventories
and such costs are recognised as expenses in the period in which they are incurred.
The normal loss will be included in determining the cost of inventories (finished
goods) at the year end.
Amount of Abnormal Loss:
(ii) Material used 16,000 MT @ ` 190 = ` 30,40,000
Normal Loss (5% of 16,000 MT) 800 MT (included in calculation of cost of inventories)
Net quantity of material 15,200 MT
(iii) Abnormal Loss in quantity (950 - 800) 150 MT
Abnormal Loss ` 30,000
[150 units @ ` 200 (` 30,40,000/15,200)]
Amount of ` 30,000 (Abnormal loss) will be charged to the Profit and Loss statement.
Question 6
The closing stock of finished goods at cost of a company amounted to ` 4,50,000. The
following items were included at cost in the total:
(a) 100 coats, which had cost ` 2,200 each and normally sold for ` 4,000 each.
Owing to a defect in manufacture, they were all sold after the balance sheet date
at 50% of their normal selling price.
(b) 200 skirts, which had cost ` 50 each. These too were found to be defective. Remedial
work in April cost ` 2 per skirt, and selling expenses for the batch totaled ` 200.
They were sold for ` 55 each.
(c) Shirts which had cost ` 50,000, their net realizable value at Balance sheet date was
` 55,000. Commission @ 10% on sales is payable to agents.
What should the inventory value be according to AS 2 after considering the above
items? (May’ 19)
32
Answer
Valuation of closing stock
`
Closing stock at cost 4,50,000
Less: Adjustment for 100 coats (Working Note 1) (20,000)
Value of inventory 4,30,000
Working Notes:
1.
Adjustment for Coats `
Cost included in Closing Stock 2,20,000
NRV of Coats 2,00,000
Adjustment to be made as NRV is less than Cost 20,000
2. No adjustment required for skirts and shirts as their NRV is more than their cost
which was included in value of inventory.
Question 7
Mr. Rakshit gives the following information relating to items forming part of inventory as
on 31st March, 2019. His factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ` 140 per unit). Replacement cost of raw
material A as on 31st March, 2019 is ` 190 per unit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred
till date ` 310 per unit. These units can be finished next year by incurring additional
cost of ` 50 per unit.
(iii) 1,800 units of finished product X and total cost incurred ` 360 per unit. Expected
selling price of product X is ` 350 per unit.
In the context of AS-2, determine how each item of inventory will be valued as
on 31st March, 2019. Also, calculate the value of total inventory as on 31st March,
2019. (Nov’19)
Answer
As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use
in the production of inventories are not written down below cost if the finished products
in which they will be incorporated are expected to be sold at cost or above cost. However,
33
of product X is ` 350 and total cost per unit for production is ` 360.
(i) 800 units of raw material will be valued at cost 140.
(ii) 650 units of partly finished goods will be valued at 300 per unit* i.e. lower of
cost (` 310) or Net realizable value ` 300 (Estimated selling price ` 350 per unit less
additional cost of ` 50).
(iii) 1,800 units of finished product X will be valued at NRV of ` 350 per unit since it is
lower than cost ` 360 of product X.

Units Cost NRV / Value = units x cost `
(`) Replacement or NRV whichever is
Cost ` less (`)
Raw material A 800 140 190 1,12,000 (800 x
140)
Partly finished goods 650 310 300 1,95,000 (650 x
300)
Finished goods X 1,800 60 350 6,30,000 (1,800 x
350)
*It has been assumed that the partly finished unit cannot be sold in semi-finished form
and its NRV is zero without processing it further.
Question 8
Mr. Jatin gives the following information relating to the items forming part of the inventory
as on 31.03.2019. His enterprise produces product P using Raw Material X.
(i) 900 units of Raw Material X (purchases @ ` 100 per unit). Replacement cost of Raw
Material X as on 3103.2019 is ` 80 per unit
(ii) 400 units of partly finished goods in the process of producing P. Cost incurred till
date is ` 245 per unit. These units can be finished next year by incurring additional
cost of ` 50 per unit.
(iii) 800 units of Finished goods P and total cost incurred is ` 295 per unit.
Expected selling price of product P is `280 per unit, subject to a payment of 5%
brokerage on selling price.
34
Determine how each item of inventory will be valued as on 31.03.2019. Also calculate
the value of total Inventory as on 31.03.2019.
Answer
As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use
in the production of inventories are not written down below cost if the finished products
in which they will be incorporated are expected to be sold at cost or above cost. However,
of product P is ` 266 and total cost per unit for production is ` 295.
(i) 900 units of raw material X will be written down to replacement cost as market
value of finished product is less than its cost, hence valued at ` 80 per unit.
(ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower of cost
(` 245) or Net realizable value ` 216 (Estimated selling price ` 266 per unit less
additional cost of ` 50).
(iii) 800 units of finished product P will be valued at NRV of ` 266 per unit since it is
lower than cost ` 295.
Units Cost (`) NRV / Value = units
Replacement x cost or NRV
cost whichever is
less (`)
Raw material X 900 100 80 72,000
Partly finished goods 400 245 216 86,400
Finished goods P 800 295 266 2,12,800
35
REVISION QUESTIONS
Question 1
Y Ltd. purchased 500 units of raw material @ ` 150 per unit gross less 10% Trade discount,
sales tax is chargeable @ 5% on the net price. The excise duty element on product is ` 12
per unit against which MODVAT can be claimed. The company spent
` 1,000 on transportation and ` 500 for loading and unloading. Calculate the cost of
purchase of raw material.
Question 2
Mr. Mehul gives the following information relating to items forming part of inventory as
on 31-3-2019. His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ Rs. 120). Replacement cost of raw material
A as on 31-3-2019 is Rs. 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till
date Rs. 260 per unit. These units can be finished next year by incurring additional
cost of Rs. 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred Rs. 320 per unit. Expected
selling price of Product X is Rs. 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2019. Also calculate
the value of total inventory as on 31-3-2019.
36
AS – 10 PROPERTY, PLANT &

EQUIPMENT
1. MEANING :
The Property, Plant and Equipment know as Fixed asset (Tangible Assets)
These tangible assets are asset held with the intention of being used for the purpose
of producing or providing goods or services is not held for sale in normal course of
business.
Eg: Land, Building, Plant and Machinery, Furniture and fixtures, office equipments
etc.
2. AS 10 DOES NOT APPLY :

- Biological assets
• Living animals
• Living Plants (Does not include bearer plants)
- Wasting assets
- Asset Covered by another AS
Note: AS is applicable on bearer plants.
3. AT WHAT VALUE SHOULD ANY ASSET BE SHOWN IN BALANCE SHEET ?

- Historic Cost
- Revalued Price
• Historic Cost
Cost Under different circumstances
- Purchased
Cost of an item of fixed asset comprises of its purchase prices, including non
refundable taxes, any directly attributable cost and PV of decommissioning.
- Self generated fixed asset
Include all directly attributable cost (exclude any internal profits)
- Exchange
FMV of asset that goes out , if it is more evident otherwise FMV of asset
that comes in recd.
- Free
Record @ Nominal Value
37
- Cost of jointly held assets

Prorata cost of such jointly owned asset is grouped together with similar
fully owned assets.
- Cost of assets acquired under consolidated basis
Cost of each fixed asset @ FMV By component valuation officer.
• Revalued Price
- 1st time upward revaluation –RR
- Ist time downward revaluation- P/L
- Present increase is credited to RR if previous revaluation also led to
increase
- Present increase is relatable to previous decrease the credit revenue to
the extent of previous decrease and remaining increase in RR
- Present decrease is charged to P/L if previous revaluation also led to
decrease
- If present decrease is relatable to previous increase then change RR to
intent of previous increase & remaining in P/L
NOTE: Revaluation should be performed for an ENTIRE CLASS of PPE
4. COMPONENT ACCOUNTING :
- An asset may consist of several different and significant physical components.
- If an item of PPE may consist two or More Significant components with
substantially different useful life or usage then each component must be
recorded and depreciated SEPARATELY
Note:- When a significant component is replaced, the old component is de-recognized.
5. SUBSEQUENT EXPENDITURE :
- It is the expenditure, which is incurred after the initial recognition i.e. after
the asset is ready to use or being used. Here, we discuss whether subsequent
expenditure will go to P&L or will be capitalized along with PPE. It depends on
the nature and benefits from the expenditure incurred.
Does the subsequent expenditure increases future economic benefits i.e satisfies the
recognition criteria?
YES NO
Capitalise along with PPE Charge to P&L statement
- If subsequent expenditure increases the future economic benefits i.e. satisfies
38
recognition criteria then such expense is recognized as a separate component

and depreciated over its useful life.
- Costs of day to day servicing are primarily the costs of labour and consumables,
and may include the cost of small parts. The purpose of such expenditures is
often described as for the “repairs and maintenance” of item of PPE and these
expenses should be charged to Profit and loss Account.
- If a part of PPE is replaced then it should be capitalized as Component of PPE
if it meets recognition criteria given by AS, otherwise, it will be charged to P&L
statement.
- A condition of continuing to operate an item of PPE may be performed in
regular intervals as major inspection for faults regardless of whether parts of
PPE are replaced. When each such major inspections are performed, its cost
is capitalized as part of PPE as a replacement if the recognition criteria is
satisfied.
6. DEPRECIATION :
- Depreciable amount= Cost-SV
- It is systematic allocation of depreciable amount of an asset over its useful life
- Determinants-Cost-SV-Life-Future Economic benefits
- Methods- SLM, WDV, on basis of future economic benefits
- Changes in methods/ determinant – Change in Accounting estimate, effect
prospective as per AS 5
7. RETIREMENT :
Value @ Net Book Value
Or
Net realizable value, whichever is lower
8. DISPOSAL :
- If Entity followed cost model then profit or loss on sale will go to profit or loss
account.
- If entity followed revaluation model then profit or loss on sale will go to P/L
a/c (after disposal Revaluation reserve will be transferred to general reserve)
9. DISCLOSURE :
- Depreciation method
39
- Depreciation rate
- Life of PPE
- Measurement basis (cost model or revaluation method)
- Cost model
• In balance sheet show: Gross BV – Accumulated depreciation - Accumulated
Impairment loss = Net BV
- Revaluation Model
• In balance sheet show: Gross BV – SUBSEQUENT accumulated depreciation
– SUBSEQUENT accumulated impairment loss = Net BV
- Reconciliation between :
• Addition
• Retirement
• Disposal
• Acquisition
• Revaluation
• Depreciation
• Impairment loss
- Contractual commitment for acquisition of PPE
- Existence and restriction on title and PPE pledged as securities
- If the asset is revalued
• Date of revaluation
• Valuer is independent or not
• Methods and assumption of revaluation
• Revaluation surplus, if any
40
CLASSWORK QUESTIONS
Question 1
During the current year 2014-15, X Limited made the following expenditure relating to
its plant building:
` in lakhs
Routine Repairs 4
Repairing 1
Partial replacement of roof tiles 0.5
Substantial improvements to the electrical wiring system which will
increase efficiency 10
What amount should be capitalized?
Question 2
Z Ltd. is installing a new plant at its production facility. It has incurred these costs:
(Amt. in `)
Cost of the plant (cost per supplier’s invoice plus taxes) 25,00,000
Initial delivery and handling costs 2,00,000
Cost of site preparation 6,00,000
Consultants used for advice on the acquisition of the plant 7,00,000
Interest charges paid to supplier of plant for deferred credit 2,00,000
Estimated dismantling costs to be incurred after 7 years (PV) 3,00,000
Operating losses before commercial production 4,00,000
Advise Z Ltd. on the costs that can be capitalized in accordance with AS – 10.
Question 3
Aman Ltd. Contracted with a supplier to purchase a specific machinery to be installed in
Department A in two months time. Special foundations were required for the plant, which
were to be prepared within this supply lead time. The cost of site preparation and laying
foundations were ` 47,290. These activities were supervised by a technician during the
entire period who is employed for this purpose of ` 15,000 per month. The technician’s
services were given to department A by department B, which billed the services at
` 16,500 per month after adding 10% profit margin. The machine was purchased at
` 52,78,000. Sales Tax was charged at 4% on the invoice, ` 18,590 transportation charges
were incurred to bring the machine to the factory. An architect was engaged at a fee of
` 10,000 to supervise machinery installation at the factory premises. Also, payment
under the invoice was due in 3 months. However, the company made the payment in 2nd
41
month. The company operates on Bank Overdraft @11%. Ascertain the amount at which
the assets should be capitalized under AS 10.
Question 4
M/s. Tiger Ltd. allotted 7,500 equity shares of ` 100 each fully paid up to Lion Ltd. in
consideration for supply of a special machinery. The shares exchanged for machinery are
quoted at National Stock Exchange (NSE) at ` 95 per share, at the time of transaction. In
the absence of fair market value of the machinery acquired, show how the value of the
machinery would be recorded in the books of Tiger Ltd.?
As per AS 10 “Accounting for Fixed Assets”, fixed asset acquired in exchange for shares or
other securities in the enterprise should be recorded at its fair market value, or the fair
market value of the securities issued, whichever is more Clearly Evident.
Since, in the given situation, the market value of shares exchanged for the asset is more
clearly evident, the company should record the value of machinery at ` 7,12,500 (i.e.
7,500 shares × ` 95 per share) being the market price of the shares issued in exchange.
Question 5
B Ltd.owns an asset with an original cost of ‘ 2,00,000 ’. On acquisition, management
determined that the useful life was 10 years and the residual value would be ‘20,000’.
The asset is now 8 years old, and during this time there have been no revisions to the
assessed residual value.
At the end of year 8, management has reviewed the useful life and residual value and has
determined that the useful life can be extended to 12 years in view of the maintenance
program adopted by company. As a result, the residual value will reduce to ` 10,000.
How would the above changes in estimates be made by B Ltd.?
42
HOMEWORK SECTION
Question 1
PQR Ltd. constructed a fixed asset and incurred the following expenses on its construction:
`
Materials 16,00,000
Direct Expenses 3,00,000
Total Direct Labour 6,00,000
(1/15th of the total labour time was chargeable to the construction)
Total Office & Administrative Expenses 9,00,000
(4% of office and administrative expenses are specifically attributable
to construction of a fixed asset )
Depreciation on assets used for the construction of this asset 15,000
Calculate the cost of the fixed asset.

`
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of ` 6,00,000) 40,000
Office and administrative expenses (4% ` 9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000
Question 2
During the year MIs Progressive Company Limited made additions to its factory by using
its own workforce, at a cost of ` 4,50,000 as wages and materials. The lowest estimate
from an outside contractor to carry out the same work was ` 6,00,000. The directors
contend that, since they are fully entitled to employ an outside contractor, it is reasonable
to debit the Factory Building Account with ` 6,00,000. Comment Comment whether the
directors' c c contention is right in view of AS 10?
AS 10, „ Accounting for Fixed Assets", clearly states that the gross book value of the self
constructed fixed asset includes the cost of construction that relate directly to the specific
asset and the costs that are attributable to the construction activity in general can be
allocated to the specific asset. If any internal profit is there it should be eliminated. Thus,
only ` 4,50,000 should be debited to the factory building account and not ` 6,00,000.
Hence, the contention of the directors of the company to capitalize ` 6,00,000 as cost of
factory building, on the ground that the company is fully entitled to employ an outside
contractor is not justifiable.
43
PAST PAPER SECTION

Question 1
On 01.04.2010 a machine was acquired at ` 4,00.000. The machine was expected to
have a useful life of 10 years. The residual value was estimated at 10% of the original
cost. At the end of the 3rd year, an attachment was made to the machine at a cost of
` 1,80,000 to enhance its capacity. The attachment was expected to have a useful life
of 10 years and zero terminal value. During the same time the original machine was
revalued upwards by ` 90,000 and remaining useful life was reassessed at 9 years and
residual value was reassessed at NIL.
Find depreciation for the year, if
(i) Attachment retains its separate identity.
(ii) Attachment becomes integral part of the machine. (May’14)
Answer
(a) Depreciation of Original Machine
`
Original cost of Machine as on 01.04.2010 4,00,000
Less: Residual Value 10% (40,000)
Depreciable Value 3,60,000
Useful life 10 Years
Depreciation per year 36,000
Depreciation for 3 Years 1,08,000
Written down value at the end of 3rd year (as on 31.03.2013) 2,92,000
(4,00,000 – 1,08,000)
Add: Revaluation 90,000
Total Book Value after revaluation 3,82,000
Reassessed remaining useful life 9 Years
Depreciation per year from 2013-14 42,444
Depreciation of Attachment
`
Original cost of Attachment as on 01.04.2013 1,80,000
Useful life 10 Years
Depreciation per year from 2013-14 18,000
44
Depreciation for the year 2013-14

(i) If Attachment retains its separate identity:
Depreciation of Original Machine ` 42,444
Depreciation of Attachment ` 18,000
Total Depreciation for 2013-14 ` 60,444
(ii) If Attachment becomes integral part of the Machine:
Total value of Machine as on 01.04.2013
Original Machine at revalued cost (W.N.1) ` 3,82,000
Cost of attachment ` 1,80,000
` 5,62,000
Useful life 9 Years
Depreciation for 2013-14 ` 62,444
Note:
1. Since, upward revaluation of the machine and reassessment of remaining useful life
had been made at the end of the 3rd year, it is implied that depreciation for the 3rd
year has been charged on the basis of old calculation & remaining useful life of 9
years is to be calculated from the beginning of the 4th year onwards.
2. Depreciation for the 4th year i.e. 2013-14 has been given in the solution.
Question 2
Ascertain the value at which various items of Fixed Assets are to be shown in the Financial
Statements of Velvet Ltd. and amount to be debited to the Profit and Loss Account in the
context of the relevant Accounting Standard.
Narrations for the adjustments made should form part of the answer;
(i) Goodwill was valued at ` 1,20,000 by independent valuers and no consideration
was paid. The Company has not yet recorded the same.
(ii) Balance of Office Equipment as on 01-04.2013 is ` 1,20,000. On 01.04.2013, out
of the above office equipment having book value ` 20,000 has been retired from
use and held for disposal. The net realizable value of the same is ` 2,000. Rate of
depreciation is 15% p.a. on WDV basis.
(iii) Book Value of Plant and Machinery as on 01.04.2013 was ` 7,20,000. On 01.08.2013
an item of machinery was purchased in exchange for 500 equity shares of face value
` 10. The Fair Market value of the equity shares on 01.08.2013 was ` 120. Rate of
(May’14)
45
Question 3
Ascertain the value at which various items of Fixed Assets are to be shown in the Financial
Statements of Velvet Ltd. and amount to be debited to the Profit and Loss Account in the
context of the relevant Accounting Standard.
Narrations for the adjustments made should form part of the answer;
(i) Goodwill was valued at ` 1,20,000 by independent valuers and no consideration
was paid. The Company has not yet recorded the same.
(ii) Balance of Office Equipment as on 01-04.2013 is ` 1,20,000. On 01.04.2013, out
of the above office equipment having book value ` 20,000 has been retired from
use and held for disposal. The net realizable value of the same is ` 2,000. Rate of
(iii) Book Value of Plant and Machinery as on 01.04.2013 was ` 7,20,000. On 01.08.2013
an item of machinery was purchased in exchange for 500 equity shares of face value
` 10. The Fair Market value of the equity shares on 01.08.2013 was ` 120. Rate of
(May’14)
Answer
Item of Fixed Assets Amount Amount Narration Book Value as
(`) Debited on 31.3.2014
to P& L in to be shown in
2013-14 the Financial
Statements
(i) Goodwill
Book value as on 1.4.2013 0 0
Balance as on 31.3.2014
(See Note 1)
Office Equipment 1,20,000
Balance as on 1.4.2013 20,000
Less: Retired from use (Book 1,00,000
value on 1.4.2013)
Less: Depreciation for 2013- 15,000 15,000 Depreciation

14 @ 15% WDV
85,000 85,000
46
Balance as on 31.3.2014
Office Equipment
(Retired from use) 20,000
Book Value as on 1.4.2013 2,000 18,000 2,000

Less: Book Value as
on 31.3.2014 18,000
(at NRV)(See Note 2)
Loss on retirement charged to 7,20,000
P&L
Plant and Machinery

Book Value as on 1.4.2013 60,000
Add: Machine purchased on 7,80,000
01.08.2013 (See Note 3)
Less: Depreciation 76,000 76,000

Original machine for whole 7,04,000 _______ 7,04,000
year 72,000 1,09,000 7,91,000
New machine for 8 months
4,000 Balance as on 31.3.2014
Note:
1. As per para 16 of AS 10 ‘Accounting for Fixed Assets’ goodwill is to be recorded
only when some consideration in money or money’s worth has been paid for it.
Since the goodwill is self generated and no money or money’s worth has been paid
for the same, therefore, it is not to be recorded in the books.
Office equipment having book value of ` 20,000 as on 1.4.2013 has been retired
from use. It has been recorded at Net Realisable Value (NRV) as the NRV is lower
than the book value and shown separately in the financial statements. This is in
consonance with the provisions stated in para 14 of AS 10.
Question 4
In the books of Optic Fiber Ltd., plant and machinery stood at ` 6,32,000 on 1.4.2013.
However on scrutiny it was found that machinery worth ` 1,20,000 was included in the
purchases on 1.6.2013. On 30.6.2013 the company disposed a machine having book
47
value of ` 1,89,000 on 1.4.2013 at ` 1,75,000 in part exchange of a new machine costing

` 2,56,000. The company charges depreciation @ 20% WDV on plant and machinery.
You are required to calculate:
(i) Depreciation to be charged to P/L
(ii) Book value of Plant and Machinery A/c as on 31.3.2014
(iii)
Loss on exchange of machinery. (Nov’14)
Answer
(i) Depreciation to be charged to the Profit and Loss Account
`
Depreciation on old Machinery 31,600
[20% on `6,32,000 for 3 months(01.4.13 to 30.6.13)]
Add: Depreciation machinery acquired on 01.06.2013
(` 1,20,000 x 20% x 10/12) 20,000
Depreciation on Machinery after adjustment of exchange
[20% of `(6,32,000 -1,89,000+2,56,000) for 9 months] 1,04,850
Total Depreciation to be charged to Profit and Loss A/c 1,56,450
(ii) Book Value of Plant and Machinery as on 31.03.2014

` `
Balance as per books on 01.04.2013 6,32,000
Add: Included in purchases on 01.06.2013 1,20,000
Add: Purchase on 30.06.2013 2,56,000 3,76,000
10,08,000
Less: Book value of Machine sold on 30.06.2013 (1,89,000)
8,19,000
Less: Depreciation on machinery in use (1,56,450 - 9,450) (1,47,000)
Book Value as on 31.03.2014 6,72,000
(iii) Loss on exchange of Machinery

`
Book value of machinery as on 01.04.2013 1,89,000
Less: Depreciation for 3 months 9,450
WDV as on 30.06.2013 1,79,550
Less: Exchange value 1,75,000
Loss on exchange of machinery 4,550
48
Question 5
From the following information state the amount to be capitalized as per AS 10. Give the
explanations for your answers.
` 5 lakhs as routine repairs and ` 1 lakh on partial replacement of a part of a machine.
` 10 lakhs on replacement of part of a machinery which will improve the efficiency of a
machine. (Nov’14)
Answer
As per para 12 of AS 10 “Accounting for Fixed Assets”, only those expenditures that
increase the future benefits from the existing assets, beyond its previously assessed
standard of performance, is to be included in the gross book value.
Hence, in the given case, amount of ` 5 lakhs spent on routine repairs and ` 1 lakh on
partial replacement of a part of the machinery should be charged to Profit and Loss
Account as these amounts will help in maintaining the capacity but will not improve the
efficiency of the machine.
However, ` 10 lakhs incurred on replacement of a part of the machinery, which will
increase the efficiency of a machine, should be capitalized by inclusion in the gross book
value of machinery.
Question 6
M/s. Versatile Limited purchased machinery for ` 4,80,000 (inclusive of excise duty of
` 40,000). CENVAT credit is available for 50% of the duty paid. The company incurred the
following other expenses for installation.
`
Cost of preparation of site for installation 21,000
Total labour charges 66,000
(200 out of the total of 600 men hours worked, were spent for
installation of the machinery)
Spare parts and tools consumed in installation 6,000
Total salary of supervisor 24,000
(time spent for installation was 25% of the total time worked)
Total administrative expenses 32,000
(1/10 relates to the plant installation)
Test run and experimental production expenses 23,000
Consultancy charges to architect for plant set up 9,000
Depreciation on assets used for the installation 12,000
49
The machine was ready for use on 15-1-2015 but was used from 1-2-2015. Due to this
delay further expenses of ` 19,000 were incurred. Calculate the value at which the plant
should be capitalized in the books of M/s. Versatile Limited. (May’15)
Answer
Particulars ` `
Purchase Price Given 4,80,000
Add:
Site Preparation Cost Given 21,000
Labour charges (66,000/600x200) 22,000
Spare parts Given 6,000
Supervisor’s Salary 25% of ` 24,000 6,000
Administrative costs 1/10 of ` 32,000 3,200
Test run and experimental production Given 23,000
charges
Architect Fees for set up Given 9,000
Depreciation on assets used for installation Given 12,000
Total Cost of Asset 5,82,200
Less: Cenvat credit receivable 50% of ` 40,000 20,000
5,62,200
Question 7
A machinery with a useful life of 6 years was purchased on 1st April, 2012 for `1,50,000.
Depreciation was provided on straight line method for first three years considering a
residual value of 10% of cost. In the beginning of fourth year the company reassessed
the remaining useful life of the machinery at 4 years and residual value was estimated
at 5% of original cost. The accountant recalculated the revised depreciation historically
and charged the difference to profit and loss account. You are required to comment on
the treatment by accountant and calculate the depreciation to be charged for the fourth
year. (Nov’15)
Answer
As per AS 10, when there is a revision of the estimated useful life of an asset, the
unamortized depreciable amount should be charged over the revised remaining useful life.
Accordingly revised depreciation shall be calculated prospectively. Thus, the treatment
done by the accountant regarding recalculating the revised depreciation historically i.e.
retrospectively is incorrect.
50
As per para 18 of AS 10, if the depreciable assets are revalued, the provision for depreciation
should be based on the revalued amount and on the estimate of the remaining useful
lives of such assets. In case the revaluation has a material effect on the amount of
depreciation, the same should be disclosed separately in the year in which revaluation
is carried out.
Calculation of Depreciation
Depreciation per year charged for first three years = ` (1,50,000 - 15,000) / 6 = ` 22,500
WDV of the machine at the beginning of the fourth year = ` 1,50,000 – (` 22,500× 3) =
`82,500
Depreciable amount after reassessment of residual vale = ` 82,500 – (1,50,000 x 5%) =

`75,000
Remaining useful life as per revised estimate = 4 years Depreciation from the fourth year
onwards = ` 75,000 / 4 = ` 18,750
Question 8
Briefly explain the treatment of following items as per relevant accounting standards:
- The accountant of Star Limited valued the Goodwill of the company at ` 50 lakhs
and showed the same as Fixed Asset in Balance Sheet. The corresponding credit was
given to Reserves.
- An expense of ` 5 crores were incurred on a Machine towards its Repairs and
Maintenance. The accountant wants to capitalize the same considering the
significance of amount spent.
- A plant was ready for commercial production on 01.04.2014 but could commence
actual production only on 01.06.2014. The company incurred ` 50 lakhs as
administrative expenditure during the period of which 20% was allocable to the plant.
The accountant added ` 10 lakhs to cost of plant. (Nov’15)
Answer
As per AS 10 “Accounting for Fixed Assets”, goodwill, in general, is recorded in the books
only when some consideration in money or money’s worth has been paid for it. In the
given situation, the company has valued its goodwill which will be considered as earned
over the years i.e. it is self-generated goodwill. Therefore, the same shall not be recorded
in the books, as consideration in money or money’s worth has not been paid for it. Thus
raising goodwill by giving corresponding credit to Reserve is incorrect.
51
• Only expenditure that increases the future benefits from the existing asset beyond
its previously assessed standard of performance is included in the gross book value,
e.g., an increase in capacity. The cost of an addition or extension to an existing
asset which is of a capital nature and which becomes an integral part of the
existing asset is usually added to its gross book value. Any other expenses incurred,
though substantial, on machine towards its repairs and maintenance should not
be capitalized but charged to profit and loss account since it does not increase
capacity.
• If the interval between the date a project is ready to commence commercial production
and the date at which commercial production actually begins is prolonged, all
expenses incurred during this period are charged to the profit and loss statement.
However, the expenditure incurred during this period is also sometimes treated as
deferred revenue expenditure, to be amortized over a period not exceeding 3 to 5
years, after the commencement of commercial production. Thus the amount of ` 10
lakh should either be charged to profit and loss statement in the year ended 31st
March, 2015 or may be amortized for a future period not exceeding 3 to 5 years
after the commencement of commercial production i.e. 1.6.2014.
Question 9
Argon Ltd. purchased a shop on 1st January, 2001 as a cost of ` 8,50,000. The useful
life of the shop is estimated as 30 years with residual value of ` 25,000 and depreciation
is provided on a straight line basis. The shop was revalued on 30th June, 2015 for
` 19,50,000 and the Revaluation was incorporated in the accounts.
Calculate:
i. The surplus on revaluation;
ii. Depreciation to be charged in the Profit and Loss account for the year ended on 31st
December, 2015. (May’16)
Answer
As per AS 10, where the depreciable assets are revalued, the provision for depreciation
should be based on the revalued amount and on the estimate of the remaining useful
lives of such assets.
Surplus on revaluation
Depreciation provided upto 30th June, 2015 ` 27,500
[(` 8,50,000 – ` 25,000)/30] p.a.]
Total depreciation ` 3,98,750
(` 27,500 p.a. for 14.5 years)
52
W.D. V of shop on 30th June, 2015 A 4,51,250

[` 8,50,000 less ` 3,98,750]
Revalued value (b) ` 19,50,000
Surplus [(b) less (a)] ` 14,98,750
Depreciation to be charged in the profit and loss account for the year ended
31st Dec., 2015
Depreciation for Jan. to June 15 (before revaluation) ` 13,750
(` 27,500 /2)
Remaining useful life 15.5 years
Depreciation for July to Dec. 15(after revaluation) ` 62,097
[` 19,25,000 (19,50,000 less 25,000) / 15.5 x 1/2]
Total Depreciation for the year ended 31st Dec., 2015 ` 75,847
[` 13,750 + ` 62,097]
Note: Depreciation for the year ended 31st Dec., 2015 has been computed on the basis of
assumption that there is no change in residual value and the remaining useful life after
revaluation of the shop.
Question 10
Hema Ltd. purchased a machinery on 1.04.2008 for ` 15,00,000. The company charged
straight line depreciation based on 15 years working life estimate and residual value `
3,00,000. At the beginning of the 4th year, the company by way of systematic evaluation
revalued the machinery upward by 20% of net book value as on date and also re-
estimated the useful life as 7 years and scrap value as nil. The increase in net book value
was credited directly to revaluation reserves. Depreciation (on SLM basis) later on was
charged to Profit & Loss Account. At the beginning of 8th year the company decided to
dispose off the machinery and estimated the realizable value to ` 2,00,000.
You are required to ascertain the amount to be charged to Profit & Loss Account at the
beginning of 8th year with reference to AS – 10. (Nov’16)
Answer
Depreciation charged for first 3 years [(15,00,000 - 3,00,000)/15] x 3
2,40,000
W.D.V. at beginning of 4th year (15,00,000 – 2,40,000) 12,60,000
Add: Upward revaluation 2,52,000
Revalued Value (12,60,000 x 120%) 15,12,000
Revised useful life 7 years Depreciation from 4th year onwards
(15,12,000/ 7) 2,16,000
53
Depreciation from 4th to 7th year (2,16,000 x 4) 8,64,000

W.D.V. at beginning of 8th year (15,12,000 - 8,64,000) 6,48,000
Disposal value 2,00,000
Loss on disposal (6,48,000 – 2,00,000) 4,48,000
Loss to be charged against revaluation reserve as per AS 10 2,52,000
Amount to be charged to P & L Account at beginning of 8th year
(4,48,000 - 2,52,000) 1,96,000
Note: Information regarding revaluation and re-estimation of the useful life has been
given in the question. It has been given that at the beginning of the 4th year, useful life
was re-estimated as 7 years. In the above solution, this useful life has been considered
as remaining useful life. Alternatively, it may also be assumed as the total useful life.
In that case the remaining useful life will be considered as 4 years because 3 years have
already passed.
Question 11
Explain ‘Bearer Plant’ & ‘Biological Asset’ as per AS – 10. (May’18)
Answer
As per AS 10 Property, Plant and Equipment
Bearer plant is a plant that
(a) is used in the production or supply of agricultural produce; and
(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.
(d) The following are not bearer plants:
(i) plants cultivated to be harvested as agricultural produce (for example, trees
grown for use as lumber);
(ii) plants cultivated to produce agricultural produce when there is more than
a remote likelihood that the entity will also harvest and sell the plant as
agricultural produce, other than as incidental scrap sales (for example, trees
that are cultivated both for their fruit and their lumber); and
(iii) annual crops (for example, maize and wheat). When bearer plants are no
longer used to bear produce they might be cut down and sold as scrap, for
example, for use as firewood. Such incidental scrap sales would not prevent
the plant from satisfying the definition of a bearer plant. Biological Asset is a
living animal or plant
54
Question 12
Neon Enterprise operates a major chain of restaurants located in different cities. The
company has acquired a new restaurant located at Chandigarh. The new restaurant
requires significant renovation expenditure. Management expects that the renovations
will last for 3 months during which the restaurant will be closed.
Management has prepared the following budget for this period -
Salaries of the staff engaged in preparation of restaurant
before its opening ` 7,50,000
Construction and remodelling cost of restaurant ` 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property,
Plant and Equipment". (Nov’18)
Answer
As per provisions of AS 10, any cost directly attributable to bring the assets to the location
and conditions necessary for it to be capable of operating in the manner indicated by the
management are called directly attributable costs and would be included in the costs of
an item of PPE.
Management of Neon Enterprise should capitalize the costs of construction and

remodelling the restaurant, because they are necessary to bring the restaurant to
the condition necessary for it to be capable of operating in the manner intended by
management. The restaurant cannot be opened without incurring the construction and
remodelling expenditure amounting ` 30,00,000 and thus the expenditure should be
considered part of the asset.
However, the cost of salaries of staff engaged in preparation of restaurant ` 7,50,000
before its opening are in the nature of operating expenditure that would be incurred if
the restaurant was open and these costs are not necessary to bring the restaurant to
the conditions necessary for it to be capable of operating in the manner intended by
management. Hence, ` 7,50,000 should be expensed.
Question 13
Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed
in its Department A in three months' time. Special foundations were required for the
machinery which were to be prepared within this supply lead time. The cost of the site
preparation and laying foundations were `1,41,870. These activities were supervised by
a technician during the entire period, who is employed for this purpose of ` 45,000 per
month. The technician's services were given by Department B to Department A, which
55
billed the services at ` 49,500 per month after adding 10% profit margin.
The machine was purchased at ` 1,58,34,000 inclusive of IGST @ 12% for which input
credit is available to Shrishti Ltd. ` 55,770 transportation charges were incurred to bring
the machine to the factory site. An Architect was appointed at a fee of ` 30,000 to
supervise machinery installation at the factory site.
Also, payment under the invoice was due in 5 months. However, the Company made the
payment in 3rd month. The company operates on Bank Overdraft @ 14% p.a.
Ascertain the amount at which the Machinery should be capitalized under AS 10.
(Nov’18)
Answer
Particulars `
Purchase Price Given (` 158,34,000 x 100/112) 1,41,37,500
Add: Site Preparation Cost Given 1,41,870
Technician’s Salary Specific/Attributable overheads 1,35,000
for 3 months (See Note) (45,000
x3)
Initial Delivery Cost Transportation 55,770
Professional Fees for Architect’s Fees 30,000
Installation
Total Cost of Asset 1,45,00,140
Note:
(i) Interest on Bank Overdraft for earlier payment of invoice is not relevant under
AS 10.
(ii) Internally booked profits should be eliminated in arriving at the cost of machine.
Note: The above solution is given on the basis that IGST credit is availed by the Shristhi
Limited
Question 14
ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom- made
machine amounting to ` 4,00,000. As on 31st March, 2016 before delivery of the machine,
ABC Ltd. had to change its method of production. The new method will not require the
machine ordered and so it shall be scrapped after delivery. The expected scrap value is
‘NIL’.
Show the treatment of machine in the books of ABC Ltd.
(May’17)
56
Answer
(Hint: Since no Future Economic Benefits arising, Recognition criteria is not fulfilled and
hence 400000 will be charged to P&L a/c)
Question 15
With reference to AS-10, classify the items under the following heads:
HEADS
(i) Purchase Price of PPE
(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of PPE.
ITEMS
(1) Import duties and non-refundable purchase taxes.
(2) Initial delivery and handling costs.
(3) Costs of testing whether the asset is functioning properly, after deducting the net
proceeds.
(4) Initial operating losses, such as those incurred while demand for the output of an
item builds up.
(5) Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity.
(6) Trade discounts and rebates.
(7) Costs of relocating or reorganizing part or all of the operations of an enterprise.
(8) Installation and assembly costs.
(9) Cost of site preparation.
(10) Administration and other general overhead costs.
(Nov’19)
Answer
Heads
(i) Purchase price of PPE
(ii) Directly attributable cost of PPE
(iii) Cost not included in determining the carrying amount of an item of PPE
Items Classified
under Head
1 Import duties and non-refundable purchase taxes (i)
2 Initial delivery and handling costs (ii)
3 Costs of testing whether the asset is functioning properly, after (ii)
deducting the net proceeds*
57
4 Initial operating losses, such as those incurred while demand for (iii)
the output of an item builds up
5 Costs incurred while an item capable of operating in the manner (iii)
intended by management has yet to be brought into use or is
operated at less than full capacity.
6 Trade discounts and rebates (deducted for computing purchase (i)
price)
7 Costs of relocating or reorganizing part or all of the operations of (iii)
an enterprise.
8 Installation and assembly costs (ii)
9 Costs of site preparation (ii)
10 Administration and other general overhead costs (iii)
*Considered that this cost of testing is after deducting net proceeds from selling any
items produced while bringing the asset to that location and condition otherwise if the
net proceeds are after fixing the asset to its location and condition (asset ready for use),
it will be classified under category (iii) i.e. Cost not included in determining the carrying
amount of an item of PPE.
Question 16
A Ltd. had following assets. Calculate depreciation for the year ending 31st March,
2020 for each asset as per AS 10 (Revised)
(i) Machinery purchased for `10 lakhs on 1st April; 2015 and residual value after useful
life of 5 years, based on 2015 prices is ` 10 lakhs.
(ii) Land for` 50 lakhs.
(iii) A Machinery is -constructed for ` 5,00,000 for its own use (useful life is 10 years).
Construction is completed on 1st April, 2019, but the company does not begin using
the machine until 31st March, 2020.
(iv) Machinery purchased on 1st April, 2017 for ` 50,000 with useful life of 5 years and
residual value is NIL. On 1st April, 2019, management decided to use this asset for
further 2 years only. (Nov’20)
58
Answer
Computation of amount of depreciation as per AS 10
`
(i) Machinery purchased on 1/4/15 for ` 10 lakhs (having residual Nil
value of ` 10 lakhs)
Reason: The company considers that the residual value,
based on prices prevailing at the balance sheet date, will
equal the cost. Therefore, there is no depreciable amount and
depreciation is correctly zero.
(ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore, it is
not depreciated.
(iii) Machinery constructed for own use (` 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from
the date the machine is ready for use i.e. 1st April,2019. The
fact that the machine was not used for a period after it was
ready to be used is not relevant in considering when to begin
charging depreciation.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the
straight-line method at ` 10,000 per annum i.e (50,000/5
years). On 1st April,2019 the asset's net book value is [50,000
– (10,000 x 2)] i.e. ` 30,000. The remaining useful life is 2
years as per revised estimate. The company should amend the
annual provision for depreciation to charge the unamortized
cost over the revised remaining life of 2 years. Consequently,
it should charge depreciation for the next 2 years at
` 15,000 per annum i.e. (30,000 / 2 years).
59
AS – 11 ACCOUNTING FOR EFFECTS FOR

CHANGES IN FOREIGN EXCHANGE RATES
1. SCOPE :
AS 11 applies to the following:
a. Accounting for transactions in foreign currency.
b. Translating the financial statements of foreign operations for inclusion in
Company’s financial statements.
c. Accounting for foreign currency transactions in the nature of forward exchange
contracts.
2. DEFINITIONS :
a. Reporting Currency: Currency used in presenting financial statements.
b. Foreign Currency: Currency other than reporting currency of an enterprise.
c. Exchange Rate: It is the ratio for exchange of 2 currencies.
d. Average Rate : It is the mean of the exchange rates in force during a period
e. Forward Rate: It is the agreed exchange rate for exchange of 2 currencies at a
specified future date.
f. Forward Exchange Contract: It is an agreement to exchange different currencies
at a forward rate.
g. Closing Rate: It is the Exchange Rate at the Balance Sheet date.
h. Monetary items: They are money held & assets & liabilities to be received or
paid in fixed or determinable amounts of money. E.g. : Cash, Bank balance,
Receivables, Payables etc.
i. Non-monetary items: They are assets & liabilities other than monetary items.
E.g.: FAs, Inventories, Investment in equity shares etc.
j. Settlement date: Date on which a receivable is due to be collected / a payable is
due to be paid.
k. Foreign Operation : A Subsidiary, Associate, JV or Branch of the reporting
enterprise, the activities of which are based or conducted in a country other
than the country of the reporting enterprise. Under AS 11, a foreign operation
is classified as either ‘Integral Foreign Operation’ or ‘Non-Integral Foreign
Operation’, based on the way of financing & operation in relation to the reporting
enterprise.
60
l. Integral Foreign Operation (IFO) : Its activities are an integral part of those of
the reporting enterprise, its business is carried on as if it was an extension
of the reporting enterprise’s operations, IFOs generally carry on business in
a single foreign currency of the country where it is located, cash flows from
operations of the reporting enterprise are directly & immediately affected by a
change in the exchange rate between the reporting currency & currency of the
IFOs country, change in exchange rate affect individual monetary items held by
the IFO rather than the reporting enterprise’s investment in IFO etc.
m.
Non-Integral Foreign Operation (NFO) : It is a foreign operation that is not an
IFO. The business of NFO is carried on in a substantially independent manner
in its local currency, NFOs may also enter into business transactions in foreign
currencies, including transactions in reporting currency, change in the exchange
rate between the reporting currency & local currency has little or no direct effect
on the present or future cash flows from operations of the NFO or the reporting
enterprise, change in the exchange rate affects the reporting enterprise’s net
investment in the NFO rather than the individual monetary / non-monetary
items held by that NFO.
3. FOREIGN CURRENCY TRANSACTIONS :

(a)
Initial Recognition
Transactions involving foreign currencies can be brought under four groups,
namely (a) buying or selling of goods and services, (b) borrowing or lending
money, (c) acquiring or disposing of assets or incurring and settling liabilities,
or (d) by being a party to a forward exchange contract. For initial recognition,
the Accounting Standards prescribe that a foreign currency transaction should
be recorded by applying the exchange rate (defined as ratio for exchange for two
currencies) between the reporting currency and the foreign currency at the date
of the transaction.
(b)
Reporting at subsequent Balance Sheet date
For purposes of reporting as at the balance sheet date, items are classified into
monetary and non-monetary items, which are carried at either historical cost,
or at fair values.
Monetary items are money held and assets and liabilities to be received or
paid in fixed or determinable amounts of money. Examples are cash balances,
account receivables and payables. Non-monetary items are assets and liabilities
61
other than monetary items. Examples include fixed assets, inventories, and
investments in equity shares.
Accounting standards lays down the following principles for translation of
foreign currency items.
1. Apply closing rate for monetary items
Monetary items in the balance sheet should be reported using the closing
rate.
2. Apply Transaction-date rate or the rate that existed on fair-value estimation
date for non-monetary items.
(c) Recognizing exchange difference

Exchange difference has been defined in Accounting standards as the difference
resulting from reporting the same number of units of a foreign currency in the
reporting currency at different exchange rates.
Exchange differences can arise, inter alia, on three counts
• A transaction – either a monetary item, or a non-monetary item – being
settled at a rate of different from the rate at which it was initially recorded
(initial recognition)
• A transaction being reported at a rate different from the rate at which it
was either initially recorded (balance sheet reporting)
• A transaction being settled at a rate different from the one taken for
reporting in the last financial statement (settlement).
4. TRANSLATION OF FINANCIAL STATEMENT OF FOREIGN OPERATIONS

• Foreign operation is a subsidiary, associate, joint venture or branch of the reporting
enterprise, the activities of which are based on or conducted in a foreign country.
• It is not necessary that the subsidiary, associate joint venture or branch should
be based in foreign country. Its activities must be based or conducted in a
foreign country.
• Foreign operation is classified into -
(a) Integral foreign operation and
(b) Non-integral foreign operation.
Financial statement of IFO

Accounting standards requires the financial statement to be translated in the same
manner as applicable for the enterprises own foreign currency transaction, i.e.
62
(a) All transactions of foreign operation be translated at the rate prevailing

on the date of transaction (spot rate).
(b) Translation at balance sheet date
(i) Monetary items at closing rate;
(ii) Non-monetary items which are carried at historical cost at the rate
at the date of transaction and
(iii) Non-monetary items which are carried at fair value like net realizable
value at the rate of such date of ascertaining fair valuation.
Note: Accounting standards does not state about conversion of revenue items
of such organization because it will automatically get converted at spot
rate as per (a) above.
Recognition of Foreign Exchange difference-

Exchange difference arising on reinstatement/settlement of monetary items be
recognized in P & L.
Financial Statements of Non-integral Foreign Operation

For incorporating in its financial statement the financial statements of a non-
integral foreign operation should be translated in the following manner.
(a) All assets and liabilities monetary as well as non-monetary, translated
at closing rate.
(b) Income and expenses items be translated at the rate of the date of
transaction. (Average rate of the period if it approximates the actual rate
can be used)
Recognition of exchange difference -
• All exchange difference be accumulated and carried in foreign currency
translation reserve.
• When the net investment in such non-integral operation in full or in part
is disposed of then this reserve will be proportionately recognized to P&L.
• Such reserve can have debit balance as well.
5. FORWARD EXCHANGE CONTRACT :

 When forward contract is for hedging
(a) The premium or discount (difference between the value at spot rate and
forward rate) should be amortized over the life of contract.
(b) Exchange difference (difference between the value of settlement date /
63
reporting date and value at previous reporting date / inception of the

contract) be recognized in P & L of the year.
(c) Profit / loss on cancellation / renewal of forward contract be recognized
in P & L of the year.
 When forward contract is for Trading / Speculation

(a) No premium or discount is recognized.
(b) A gain or loss i.e. the difference between the forward rate as per contract/
previous year end valuation rate and the forward rate available at the year
end (reporting date) for remaining maturity period should be recognized
in the P&L of the period.
6. DISCLOSURES :
An enterprise should disclose :
a. The amount of exchange differences included in the net profit / loss for the
period &
b. Net exchange difference accumulated in FCTR as a separate component
of shareholders’ funds & a reconciliation of the amount of such exchange
differences at the beginning & end of the period.
64
CLASSWORK QUESTIONS
Question 1
Explain “monetary item” as per Accounting Standard 11. How are foreign currency
monetary items to be recognized at each Balance Sheet date? Classify the following as
monetary or non-monetary item:
(i) Share Capital
(ii) Trade Receivables
(iii) Investments
(i) Fixed Assets.
Question 2
DBK Industries Ltd. invoiced goods to West Germany worth US $ 1,00,000 on 10th March,
2005 on which date exchange rate for US $ 1 was ` 41.00.
The payment for the same was received as under :-
Date of Receipt Received Exchange rate for US $ 1
20-03-2005 US $ 40,000 ` 42.00
29-03-2005 US $ 35,000 ` 41.00
15-04-2005 US $ 25,000 ` 44.00
The company closes its accounting year on 31st March. The exchange rate as on 31-03-
2005 was 1 US $ ` 45.00. Pass Journal entries of the same.
Question 3
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25th
February, 2011, when the exchange rate was `44 per US Dollar. The transaction was
recorded in the books at the above mentioned rate. The payment for the transaction
was11 `43 made on 10th April, 2011, when the exchange rate was `48 per US Dollar. At
the year end 31st March, 2011, the rate of exchange was `49 per US Dollar.
The Chief Accountant of the company passed an entry on 31st March, 2011 adjusting the
cost of raw material consumed for the difference between ` 48 and ` 44 per US Dollar.
Discuss whether this treatment is justified as per the provisions of AS-11 (Revised).
Question 4
Beekay Ltd. purchased fixed assets costing `5,000 lakh on 01.04.2012 payable in
foreign currency (US$) on 05.04.2013. Exchange rate of 1 US$ = `50.00 and `54.98 as on
01.04.2012 and 31.03.2013 respectively.
65
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three
annual equal instalments. First instalment was due on 01.05.2013.
You are required to state, how these transactions would be accounted for in the books of
accounts ending 31st March, 2013.
Question 5
Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 2011 payable after 4
months. The company entered into a forward contract for 4 months @ `48.85 per dollar.
On 31st December, 2011, the exchange rate was `47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of Sterling
Limited for the year ended 31st March, 2012.
Question 6
Rau Ltd. purchased a plant for US$ 1,00,000 on 1st February 2012, payable after three
months. Company entered into a forward contract for three months @ `49.15 per dollar.
Exchange rate per dollar on 01st Feb. was ` 48.85. How will you recognize the Profit or
Loss on forward contract in the books of Rau Ltd.
CLASSWORK SOLUTIONS
Answer 6
Forward Rate ` 49.15
Less: Spot Rate (` 48.85)
Premium on Contract ` 0.30
Contract Amount US$ 1,00,000
Total Loss ` 30,000
Contract Period 3 Months
Two month of the year 2012- 13; therefore loss to be recognized = ` 20,000
Rest ` 10,000 will be recognized in the following year.
66
HOMEWORK SECTIONS
Question 1
Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6
months.
The company entered into a forward contract for 6 months @ ` 62.15 per dollar. On 30th
November, 2013, the exchange rate was ` 60.75 per dollar.
How will you recognise the profit or loss on forward contract in the books of Stem Ltd.
for the year ended 31st March, 2014?
Calculation of Profit or Loss on forward contract to be recognised in the book of Stem Ltd.
Forward contract rate ` 62.15 per dollar
Less: Spot Rate 60.75 per dollar
Loss ` 1.40 per dollar
Forward Contract Amount US$ 30000
Total Loss on entering into forward contract
(US$ 30,000 x ` 1.40) Rs. 42,000
Contract Period 6 Months
Out of total contract period of 6 months,
4 months are falling in the financial year 2013-14.
Loss for the period from 1st Dec.2013 to 31st March, 2014= (` 42,000/6) x 4 = ` 28,000.
Thus the loss amounting to ` 28,000 for the period is to be recognised in the year ended
31st March, 2014.
Question 2
Explain briefly the accounting treatment needed in the following cases as per AS 11 as
on 31.3.2015.
Sundry Debtors include amount receivable from Umesh` 5,00,000 recorded at the
prevailing exchange rate on the date of sales, transaction recorded at US $ 1= ` 58.50.
Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded
at US $ 1 = ` 55.60, taking exchange rate prevailing at the date of transaction.
US $ 1 = ` 61.20 on 31.3.2015.
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences
arising on the settlement of monetary items or on reporting an enterprise’s monetary
items at rates different from those at which they were initially recorded during the
period, or reported in previous financial statements, should be recognized as income or
as expenses in the period in which they arise.
67
However, at the option of an entity, exchange differences arising on reporting of long-

term foreign currency monetary items at rates different from those at which they were
initially recorded during the period, or reported in previous financial statements, in so far
as they relate to the acquisition of a non-depreciable capital asset can be accumulated
in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s
financial statements and amortized over the balance period of such long-term asset/
liability, by recognition as income or expense in each of such periods.
Debtors Foreign Currency Rate `

Initial recognition US $8,547 (5,00,000/58.50) 1 US $ = ` 58.50 5,00,000
Rate on Balance sheet date 1 US $ = ` 61.20
Exchange Difference Gain US $ 8,547 X 23,077
(61.20-58.50)
Treatment: Credit Profit and Loss A/c by
` 23,077
Long term Loan
Initial recognition US $ 1,07,913.67 1 US $ = 55.60 60,00,000
(60,00,000/55.60)
Rate on Balance sheet date 1 US $ = ` 61.20
Exchange Difference Loss US $ 1,07,913.67 X 6,04,317
(61.20 – 55.60)
Treatment: Credit Loan A/c
And Debit FCMITD A/C or Profit and Loss A/c
by ` 6,04,317
Thus Exchange Difference on Long term loan amounting ` 6,04,317 may either be charged
to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account
but exchange difference on debtors amounting ` 23,077 is required to be transferred to
Profit and Loss A/c.
Question 3
Exchange
Rate per $
Goods purchased on 1.1.2011 of US $ 10,000 `45
Exchange rate on 31.3.2011 ` 44
Date of actual payment 7.7.2011 ` 43
68
Ascertain the loss/gain for financial years 2010-11 and 2011-12, also give their
treatment as per AS 11.
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency
transactions should be recorded by applying the exchange rate on the date of transactions.
Thus, goods purchased on 1.1.2011 and corresponding creditor would be recorded at
` 4,50,000 (i.e. $10,000 × ` 45) According to the standard, at the balance sheet date all
monetary transactions should be reported using the closing rate. Thus, creditor of US
$10,000 on 31.3.2011 will be reported at ` 4,40,000 (i.e. $10,000 × ` 44) and exchange
profit of ` 10,000 (i.e. 4,50,000 – 4,40,000) should be credited to Profit and Loss account
in the year 2010-11. On 7.7.2011, creditor of $10,000 is paid at the rate of ` 43. As per
AS 11, exchange difference on settlement of the account should also be transferred to
Profit and Loss account. Therefore, ` 10,000 (i.e. 4,40,000 – 4,30,000) will be credited to
Profit and Loss account in the year 2011-12.
Question 4
Pass Journal entries for the following transactions in foreign currency NSD Ltd. imported
raw materials worth US $ 40,000 on 12th December, 2004. The exchange rate for US $ 1
as on 12-12-2004 was ` 46.50.
The payment for the above transaction was made as under :-
Date of Receipt Received Exchange rate for US $ 1
23-02-2005 US $ 18,000 ` 47.75
21-03-2005 US $ 12,000 ` 48.25
10-04-2005 US $ 10,000 ` 48.50
The accounting year of the company ends on 31st March. The exchange rate as 31st
March, 2005 for US $ 1 was ` 45.00.
69
PAST PAPER SECTION
Question 1
ABC Ltd. borrowed US $ 5,00,000 on 01/01/2017, which was repaid as on 31/07/2017.
ABC Ltd. prepares financial statement ending on 31/03/2017. Rate of Exchange between
reporting currency (INR) and foreign currency (USD) on different dates are as under:
01/01/2017 1US$ = ` 68.50
31/03/2017 1US$ = ` 69.50
31/07/2017 1US$ = ` 70.00
You are required to pass necessary journal entries in the books of ABC Ltd. as per AS
11. (May’18)
Answer
Date Particulars ` (Dr.) ` (Cr.)
Jan. 01, 2017 Bank Account (5,00,000 x 68.50) Dr. 342,50,000
To Foreign Loan Account 342,50,000
Mar. 31, 2017 Foreign Exchange Difference Account 5,00,000
Dr.
To Foreign Loan Account [5,00,000 x 5,00,000
(69.50-68.50)]
Jul. 31, 2017 Foreign Exchange Difference Account 2,50,000
[5,00,000 x (70-69.5)] Dr.
Foreign Loan Account Dr. 347,50,000
To Bank Account 350,00,000
Question 2
(i) ABC Ltd. a Indian Company obtained long term loan from WWW private Ltd., a
U.S. company amounting to ` 30,00,000. It was recorded at US $1 = ` 60.00, taking
exchange rate prevailing at the date of transaction. The exchange rate on balance
sheet date (31.03.2018) was US $1 = ` 62.00.
(ii) Trade receivable includes amount receivable from Preksha Ltd., ` 10,00,000 recorded
at the prevailing exchange rate on the date of sales, transaction recorded at US
$1 = ` 59.00. The exchange rate on balance sheet date (31.03.2018) was US $1 =
` 62.00.
You are required to calculate the amount of exchange difference and also explain the
accounting treatment needed in the above two cases as per AS 11 in the books of ABC
Ltd. (Nov’18)
70
Answer
Long term Loan Foreign Currency `
Rate
(i) Initial recognition US $ (30,00,000/60) 1 US $ = ` 60 30,00,000
` 50,000
Rate on Balance sheet date 1 US $ = ` 62
Exchange Difference Loss US $ 50,000 x 1,00,000
` (62 – 60)
Treatment: Credit Loan A/c
and Debit FCMITD A/c or Profit and Loss A/c
by ` 1,00,000
Trade receivables
(ii) Initial recognition US $ (`10,00,000/59) 1 US $ = ` 59 10,00,000
16,949.152*
Rate on Balance sheet date 1 US $ = ` 62
Exchange Difference Gain US $ 16,949.152* x 50,847.456*
` (62-59)
Treatment: Credit Profit and Loss A/c by
` 50,847.456*
And Debit Trade Receivables
Thus, Exchange Difference on Long term loan amounting ` 1,00,000 may either be
charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation
Difference Account but exchange difference on trade receivables amounting ` 50,847.456
is required to be transferred to Profit and Loss A/c.
Question 3
AXE Limited purchased fixed assets costing $ 5,00,000 on 1st January 2018 from an
American company M/s M&M Limited. The amount was payable after 6 months. The
company entered into a forward contract on 1st January 2018 for five months @ ` 62.50
per dollar. The exchange rate per dollar was as follows:
On 1st January, 2018 ` 60.75 per dollar
On 31st March, 2018 ` 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized
in the books of AXE Limited for the year ending 2017 – 18, as per the provisions of AS
11. (Nov’18)
71
Answer
(a) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise
may enter into a forward exchange contract to establish the amount of the reporting
currency required, the premium or discount arising at the inception of such a forward
exchange contract should be amortized as expenses or income over the life of the
contract.
Forward Rate ` 62.50
Less: Spot Rate (`60.75)
Premium on Contract ` 1.75
Contract Amount US$ 5,00,000
Total Loss (5,00,000 x 1.75) ` 8,75,000
Contract period 5 months
3 months falling in the year 2017-18; therefore loss to be recognized in 2017-
18 (8,75,000/5) x 3 = ` 5,25,000. Rest ` 3,50,000 will be recognized in the f o l l o w i n g
year 2018-19.
Question 4
M/s Power Track Ltd. purchased a plant for US $ 50,000 on 31st October, 2015 payable
after 6 months. The company entered into a forward contract for 6 months @ ` 64.25
per Dollar. On 31st October, 2015 the exchange rate was ` 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the
company for the year ended 31st March, 2016. (May’16)
Answer
` (Dr.)
Forward contract rate 64.25
Less: Spot rate (61.50)
Loss on forward contract 2.75
Forward Contract Amount $ 50,000
Total loss on entering into forward contract = ($ 50,000 × ` 2.75) `1,37,500
Contract period 6 months
Loss for the period 1st November, 2015 to 31st March, 2016 5 months
i.e. 5 months falling in the year 2015-2016
Hence, Loss for 5 months will be ` 1,37,500 x 5 = ` 1,14,583
6
72
Question 5
Rahul Ltd. purchased a plant for US$ 2,00,000 on 1st January 2017, payable after 5
months. Company entered into a forward contract for five months @ ` 64.75 per dollar.
Exchange rate per dollar on 1st January 2017 was ` 64.25. How will you recognize the
profit or loss on forward contract in the books of Rahul Ltd.?
(Hint: 200,000 * 0.5 = 100,000 loss over the life of the contract).
Question 6
Legal Ltd. is engaged in the manufacturing of rubber. For its plant, it required machineries
of latest technology. It usually resorts to Long Term Foreign Currency Borrowings for its
fund requirements. On 1st April, 2017, it borrowed US $1 million from International
Funding Agency, USA when exchange rate was 1 $ = ` 63. The funds were used for
acquiring machineries, on the same date, to be used in three different plants. The useful
life of the machineries is 10 years and their residual value is ` 30,00,000.
Earlier also the company used to purchase machineries out of foreign borrowings. The
exchange differences arising on such borrowings were charged to profit and loss account
and were not capitalized even though the company had an option to capitalize it as per
notified AS 11.
Now for this new purchase of machinery, Legal Ltd, is interested to avail the option of
capitalizing the same to the cost of asset. Exchange rate on 31st March, 2018 is 1 US
$ = ` 62. Assume that on 31st March, 2018, Legal Ltd. is not having any old long term
foreign currency borrowings except for the amount borrowed for machinery purchased
on 1st April, 2017.
Comment whether Legal Ltd. can capitalize the exchange difference to the cost of
asset on 31st March, 2018. If yes, then calculate the depreciation amount on machineries
as on 31st March, 2018.
Answer
As per paragraph 46A of AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, in
respect of accounting periods commencing on or after 1st April, 2011, for an enterprise
which had earlier exercised the option under paragraph 46 or not (such option to be
irrevocable and to be applied to all such foreign currency monetary items), the exchange
differences arising on reporting of long term foreign currency monetary items at rates
different from those at which they were initially recorded during the period, or reported in
previous financial statements, in so far as they relate to the acquisition of a depreciable
capital asset, can be added to or deducted from the cost of the asset and shall be
depreciated over the balance life of the asset.
73
Accordingly, though Legal Ltd. had not earlier exercised the option, yet it can avail the
option to capitalize the exchange difference to the cost of machinery by virtue of para
46A of AS 11. Further, since Legal Ltd. has no earlier long term foreign currency
borrowings, it is not required to apply capitalization option to earlier borrowing also.
Exchange difference to be capitalized and depreciation amount
Cost of the asset in $ 1 million

Exchange rate on 1st April, 2017 ` 63 = 1$
Cost of the asset in ` (1 million x ` 63) 63 million
Less: Exchange differences as on 31st March, (Gain)
2018 (63-62) x $ 1 million (1 million)
(62 million - 3 62 million
Less: Depreciation for 2017-18 million) /10 years
(5.90 million)
56.10 million
Question 7
Bansal Company Ltd. imported raw material worth US Dollars 12,000 on 15th Jan, 2019
when the exchange rate was ` 68 per US Dollar. The payment for the transaction was
made on 5th May, 2019 when exchange rate was ` 64 per US Dollar. At the year end,
31st March, 2019, the rate of exchange was ` 65 per US Dollar. The accountant of the
company passed entry on 31st March, 2019 adjusting the cost of raw material consumed
for the difference between ` 64 and ` 68 per US Dollar. Discuss whether this treatment
is justified as per the provisions of AS-11 (Revised).
(Nov’ 19)
Answer
As per AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, initial recognition of a
foreign currency transaction is done in the reporting currency by applying the exchange
rate at the date of the transaction. Accordingly, on 15th January, 2019, the raw material
purchased and its creditors will be recorded at US dollar 12,000 × ` 68 = ` 8,16,000.
Also, on balance sheet date such transaction is reported at closing rate of exchange,
hence it will be valued at the closing rate i.e. ` 65 per US dollar (USD 12,000 x ` 65
= ` 7,80,000) at 31st March, 2019, irrespective of the payment made for the same
subsequently at lower rate in the next financial year.
74
The difference of ` 3 (65 – 68) per US dollar i.e. ` 36,000 (USD 12,000 x ` 3) will be shown
as an exchange gain in the profit and loss account for the year ended 31st March, 2019
and will not be adjusted against the cost of raw materials.
In the subsequent year on settlement date, the company would recognize or provide in
the Profit and Loss account an exchange gain of ` 1 per US dollar, i.e. the difference from
balance sheet date to the date of settlement between ` 65 and ` 64 per US dollar i.e.
` 12,000.
Hence, the accounting treatment adopted by the Accountant of the company is incorrect
i.e. it is not in accordance with the provisions of AS 11.
Question 8
Explain briefly the accounting treatment needed in the following cases as per AS 11 as
on 31.03.2020
(i) Debtors include amount due from Mr. S ` 9,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $1 = ` 72.00 US $
1=`73.50 on 31st March,2020 US $ 1= ` 72.50 on 1st April,2019.
(ii) Long term loan taken on 1st April, 2019 from a U.S. company amounting to
` 75,00,000. `5,00,000 was repaid on 31st December, 2019, recorded at US $ 1 =
` 70.50. interest has been paid as and when debited by the US company. US $1=
` 73.50 on 31st March,2020 US $1=1` 72.50 on 1st April, 2019.
Answer
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences
arising on the settlement of monetary items or on reporting an enterprise’s monetary
items at rates different from those at which they were initially recorded during the
period, or reported in previous financial statements, should be recognized as income or
as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long -

term foreign currency monetary items at rates different from those at which they were
initially recorded during the period, or reported in previous financial statements, in so far
as they relate to the acquisition of a non-depreciable capital asset can be accumulated
in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s
financial statements and amortized over the balance period of such long-term asset/
liability, by recognition as income or expense in each of such periods.
75
Foreign `
Currency Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = `72 9,00,000
Rate on Balance sheet date 1 US $ = `
73.50
Exchange Difference Gain US $ 12,500 X (73.50- 72) 18,750
Treatment: Credit Profit and Loss A/c by ` 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 1 US $ = ` 75,00,000
(75,00,000/72.50) 73.50
Rate on Balance sheet date 1 US $ = `
73.50
Exchange Difference Loss after adjustment of
exchange gain on repayment of ` 5,00,000
` 67,987.48 [82,171.88 (US $ 96,356.08 X ` 73.5
Less ` 70,00,000) less profit 14,184.40
US $ 7,092.2 (5,00,000/70.5) X ` 2)] NET LOSS 67,987.48*
Treatment: Credit Loan A/c and
Debit FCMITD A/C or Profit and Loss A/c by
` 67,987.48
Thus, Exchange Difference on Long term loan amounting ` 67,987.48 may either be charged
to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account
but exchange difference on debtors amounting ` 18,750 is required to be transferred to
Profit and Loss A/c.
NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment of
` 5,00,000) has been calculated in the above solution. Alternative considering otherwise
also possible.
NOTE 2: Date of sales transaction of ` 9 lakhs has not been given in the question and
hence it has been assumed that the transaction took place during the year ended 31
March 2020.
76
AS – 12 – ACCOUNTING FOR
GOVERNMENT GRANTS
1. GOVERNMENT:
Government refers to
• government,
• government agencies and
• similar bodies whether local (like Municipal Corporation), national or international
(e.g. World Bank, Asian Development Bank).
2. GOVERNMENT GRANTS:
Government grants are –
• assistance by government
• in cash or kind to an enterprise
• for past or future compliance with certain conditions.
The term Government grant excludes

• those forms of government assistance which cannot reasonably have a value placed
upon them and
• transactions with government which cannot be distinguished from the normal
trading transactions of the enterprise.
77
3. Accounting for Government grants :
Nature of Grant Description of the At the time of initial If required to be

grant recognition - debit to refunded - credit
bank/receivable account to bank / payable
and …… account and ….
1. R e l a t e d Grant related to a. Credit to that fixed Debit to that fixed
to specific specific fixed assets asset A/c (charge asset A/c (charge
fixed assets are government d e p r e c i a t i o n depreciation on
( d e p re c i a b le grants whose on the reduced revised value
fixed assets) primary condition is value) or prospectively)
(This can also that an enterprise b. Credit to govt. Debit to govt.
be intangible should purchase, grant A/c (show grant A/c (to the
assets covered construct or in balance sheet extent of bal.)
under AS– 26) otherwise acquire in reserves) (w/off Debit to P & L a/c
such assets. it to P & L A/c over (excess if any)
the life of assets
in proportion to
depreciation)
2. Related to Same as above. a. Credit to that Debit to that fixed
Non-depreciable fixed asset or asset a/c
fixed asset b. Credit to capital Debit to capital
reserve A/c or reserve a/c (to the
extent of bal.)
Debit to P & L a/c
(excess if any)
c. But if it has Debit to capital
certain cost then reserve a/c (to the
defer it & credit to extent of bal.)
P & L A/c. in the Debit to P & L a/c
period in which (excess if any)
such cost is being
incurred.
78
3. In the nature They are given with Credit to capital Debit to deferred
of promoters reference to the reserve A/c credit a/c (to the
contribution total investment in extent of bal.)
an undertaking or by Debit to P & L a/c
way of contribution (excess if any)
towards its total
capital outlay and
no repayment is
ordinarily expected
in respect thereof.
4. Grants related Grants intended a. Credit to P & Debit to P & L a/c.
to revenue to compensate L a/c a s
expenses incurred other income
in the past or to or reduce it
be incurred in the from related
future. expenditure.
Or
b. Credit to deferred Debit to deferred
credit (w/off to P credit A/c (to the
& L in the period extent of balance)
over which Debit to P & L a/c
related cost are (excess if any)
incurred)
5. In lieu of past Government grants Credit to P & L A/c (as Debit to P & L a/c.
period cost that are receivable extraordinary item)
or with no as compensation for
corresponding expenses or losses
cost to be incurred in a previous
incurred accounting period
or for the purpose
of giving immediate
financial support to
the enterprise with
no further related
costs.
79
6. N o n - Grant in kind In case of default

monetary to comply with
grant the terms and
conditions of govt.
grant (AS is silent
on this point).
Following can be
the possibilities.
(a) Asset given at Account at the actual If asset is taken
concessional cost incurred i.e., at over-write off the
rate concessional rate book value to P &
debiting asset and L a/c.
crediting bank A/c.
(b) Given free of Account at token If the concession
cost value say ` 1 or ` 100 amount is required
debiting the asset A/c to be paid then
and crediting P & L A/c debit the asset a/c.
and credit the bank
A/c. depreciate
this revised value
prospectively.
4. DISCLOSURE :
The following should be disclosed:
(i) the accounting policy adopted for government grants, including the methods of
presentation in the financial statements;
(ii) the nature and extent of government grants recognised in financial statements,
including grants of non-monetary assets given at a concessional rate or free of
cost.
80
CLASSWORK QUESTIONS
Question 1
Explain the treatment of the following:
(a) a firm acquired a fixed asset for ` 250 lakhs on which the government grant received
was 40%
(b) Capital Subsidy received (As Promoters contribution) from the central government
for setting up a plant in the notified backward region. Cost of the plant ` 300 lakhs.
Subsidy received ` 100 lakhs.
(c) ` 50 lakhs received from the state government for the setting up of water treatment
plant.
(d) ` 25 lakhs received from the local authority for providing medical facilities to the
employees.
Question 2
Z Ltd. purchased a fixed asset for ` 50 lakhs, which has the estimated useful life of
5 years with the salvage value of ` 5,00,000. On purchase of the assets government
granted it a grant for ` 10 lakhs. Pass the necessary journal entries in the books of the
company for first two years on the assumption that Grant is credited to Defers Grant A/c.
Question 3
On 1.4.2001 ABC Ltd. received Government grant of ` 300 lakhs for acquisition of a
machinery costing ` 1,500 lakhs. The grant was credited to the cost of the asset. The
life of the machinery is 5 years. The machinery is depreciated at 20% on WDV basis.
The Company had to refund the grant in May 2004 due to non-fulfillment of certain
conditions.
How you would deal with the refund of grant in the books of ABC Ltd.?
Question 4
A Ltd. purchased a machinery for `40 lakhs. (Useful life 4 years and residual value ` 8
lakhs) Government grant received is `16 lakhs.
Show the Journal Entry to be passed at the time of refund of grant in the third year and
the value of the fixed assets, if:
(1) the grant is credited to Fixed Assets A/c.
(2) the grant is credited to Deferred Grant A/c.
81
CLASSWORK SOLUTIONS
Answer 1
(a) Receipt of grant of`100 lakhs can be credited to Depreciable Fixed Asset Account
so as to reduce its cost. Alternatively `100 lakhs can be credited to Deferred
Government Grant Account & amortised over useful life of Fixed Asset in proportion
of Depreciation.
(b) The grant received is in the nature of capital subsidy (AS Promoters contribution)
and hence to be credited to Capital Reserve A/c.
The Plant should appear at `300 lakhs.
(c) The grant received from state government should be deducted from the cost of the
asset.
Alternatively it can be credited to Deferred Government Grant Account & amortised
over useful life of Plant in proportion of Depreciation.
(d) ` 25 lacs received from local authority for providing medical facilities to the
employees is to be credited to Profit & Loss A/c.
82
HOMEWORK SECTION
Question 1
Supriya Ltd. received a grant of `2,500 lakhs during the accounting year 2010-11 from
government for welfare activities to be carried on by the company for its employees.
The grant prescribed conditions for its utilization. However, during the year 2011-12, it
was found that the conditions of grants were not complied with and the grant had to
be refunded to the government in full. Elucidate the current accounting treatment, with
reference to the provisions of AS-12.
As per para 11 of AS 12 ‘Accounting for Government Grants’, Government grants sometimes

become refundable because certain conditions are not fulfilled. A government grant
that becomes refundable is treated as an extraordinary item as per AS 5. The amount
refundable in respect of a government grant related to revenue is applied first against
any unamortized deferred credit remaining in respect of the grant. To the extent that the
amount refundable exceeds any such deferred credit, or where no deferred credit exists,
the amount is charged immediately to profit and loss statement. In the present case, the
amount of refund of government grant should be shown in the profit & loss account of
the company as an extraordinary item during the year 2011-12.
Question 2
Santosh Ltd. has received a grant of `8 crores from the Government for setting up a
factory in a backward area. Out of this grant, the company distributed ` 2 crores as
dividend. Also, Santosh Ltd. received land free of cost from the State Government but it
has not recorded it at all in the books as no money has been spent. In the light of AS 12
examine, whether the treatment of both the grants is correct.
As per AS 12 ‘Accounting for Government Grants’, when government grant is received for
a specific purpose, it should be utilized for the same. So the grant received for setting up
a factory is not available for distribution of dividend.
In the second case, even if the company has not spent money for the acquisition of land,
land should be recorded in the books of accounts at a nominal value. The treatment of
both the elements in the treatment of the grant is incorrect as per AS 12.
83
Question 3
Viva Ltd. received a specific grant of ` 30 lakhs for acquiring the plant of ` 150 lakhs
during2007-08 having useful life of 10 years. The grant received was credited to deferred
income in the balance sheet. During 2010-11, due to non-compliance of conditions laid
down for the grant, the company had to refund the whole grant to the Government.
Balance in the deferred income on that date was ` 21 lakhs and written down value of
plant was ` 105 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of
the fixed asset and the amount of depreciation to be charged during the year 2010-
11 in profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost
of the plant during 2007-08 assuming plant account showed the balance of ` 84
lakhs as on 1.4.2010?
As per para 21 of AS-12, ‘Accounting for Government Grants’, “the amount refundable
in respect of a grant related to specific fixed asset should be recorded by reducing
the deferred income balance. To the extent the amount refundable exceeds any
such deferred credit, the amount should be charged to profit and loss statement.
(i) In this case the grant refunded is ` 30 lakhs and balance in deferred income is `
21 lakhs, ` 9 lakhs shall be charged to the profit and loss account for the year
2010-11. There will be no effect on the cost of the fixed asset and depreciation
charged will be on the same basis as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2007-08
then, para 21 of AS-12 states that the amount refundable in respect of grant
which relates to specific fixed assets should be recorded by increasing the book
value of the assets, by the amount refundable. Where the book value of the
asset is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset. Therefore, in this case,
the book value of the plant shall be increased by ` 30 lakhs. The increased cost
of ` 30 lakhs of the plant should be amortized over 7 years (residual life).
Question 4
M/s A Ltd. has set up its business in a designated backward area with an investment of
` 200 Lakhs. The Company is eligible for 25% subsidy and has received ` 50 Lakhs from
the Government.
Explain the treatment of the Capital Subsidy received from the Government in the
Books of the Company.
84
As per para 10 of AS 12 “Accounting for Govt. Grants”, Where the government grants
are of the nature of promoters’ contribution, i.e., they are given with reference to the
total investment in an undertaking or by way of contribution towards its total capital
outlay (for example, central investment subsidy scheme) and no repayment is ordinarily
expected in respect thereof, the grants are treated as capital reserve.
Subsidy received by A Ltd. is in the nature of promoter’s contribution, since this grant is
given with reference to the total investment in an undertaking and by way of contribution
towards its total capital outlay and no repayment is ordinarily expected in respect
thereof. Therefore, this grant should be treated as capital reserve which can be neither
distributed as dividend nor considered as deferred income.
85
PAST PAPER SECTION
Question 1
On 01.04.2014, XYZ Ltd. received Government grant of ` 100 Lakhs for an acquisition of
new machinery costing ` 500 lakhs. The grant was received and credited to the cost of
the asset. The life span of the machinery is 5 years. The machinery is depreciated at 20%
on WDV method.
The company had to refund the entire grant in 2nd April, 2017 due to non- fulfilment
of certain conditions which was imposed by the government at the time of approval of
grant.
How do you deal with the refund of grant to the government in the books of XYZ Ltd., as
per AS 12? (May’18)
Answer
According to AS 12 on Accounting for Government Grants, the amount refundable in
respect of a grant related to a specific fixed asset (if the grant had been credited to the
cost of fixed asset at the time of receipt of grant) should be recorded by increasing the
book value of the asset, by the amount refundable. Where the book value is increased,
depreciation on the revised book value should be provided prospectively over the residual
useful life of the asset.
(` in lakhs)
1st April, 2014 Acquisition cost of machinery (` 500 – ` 100) 400.00
31st March, 2015 Less: Depreciation @ 20% (80)
1st April, 2015 Book value 320.00
31st March, 2016 Less: Depreciation @ 20% (64)
31st March, 2017 Less: Depreciation @ 20% (51.20)
2nd April, 2017 Add: Refund of grant 100.00
Revised book value 304.80
Depreciation @ 20% on the revised book value amounting ` 304.80 lakhs is to be provided
prospectively over the residual useful life of the asset.
86
Question 2
ABC Limited purchased a machinery for ` 25,00.000 which has estimated useful life
of 10 years with the salvage value of ` 5,00,000. On purchase of the assets Central
Government pays a grant for ` 5,00,000. Pass the journal entries with narrations in the
books company for the first year, treating grant as deferred income.
(May’12)
Answer
Year Particulars Dr. (`) Cr. (`)
1st Machinery Account Dr. 25,00,000
To Bank Account 25,00,000
(Being machinery purchased)
Bank Account Dr. 5,00,000
To Deferred Government Grant 5,00,000
Account
(Being grant received from the government
treated as deferred income)
Depreciation Account (25,00,000 – 2,00,000

5,00,000)/10 Dr. 2,00,000
To Machinery Account
(Being depreciation charged on Straight
line method)
Profit & Loss Account Dr. 2,00,000
To Depreciation Account 2,00,000
(Being depreciation transferred to P/L
Account)
Deferred Government Grant Account Dr. 50,000
(5,00,000/10) 50,000
To Profit & Loss Account
(Being proportionate government grant
taken to P/L Account)
Question 3
Explain in brief the treatment of Refund of Government Grants in line with AS 12 in the
following three situations: (May’14)
87
Answer
(i) When Government Grant is related to revenue,
(ii) When Government Grant is related to specific fixed assets,
(iii) When Government Grant is in the nature of Promoter's contribution.
As per AS 12, refund of Government Grant is treated in the following manner:

(a) When Government Grant is related to Revenue:
(i) The amount of refund is first adjusted against any unamortized deferred credit
balance still remaining in respect of the Grant
(ii) Any excess refund over such deferred credit balance or where no deferred credit
exists, is immediately charged to Profit & Loss Account.
(b) When Government Grant is related to specific Fixed Asset:

(i) The amount of refund will increase the Book Value of the Asset, if at the time
of receipt of Grant, the cost of asset was reduced by the amount of Grant.
(ii) If at the time of receipt, the Grant amount was credited to Deferred Grant
Account, then the amount of refund will first reduce the unamortized balance
of Deferred Grant Account, any excess refund will reduce the Capital Reserve.
When the Government Grant is in the nature of Promoter’s Contribution: Capital
Reserve will be reduced by the amount of refund.
Question 4
M/s ABC Ltd. purchased fixed assets for ` 50,00,000. Government grant received towards
it is 20%. Residual value is ` 8,00,000 and useful life is 8 years. Assumed depreciation is
on the basis of Straight Line Method. Asset is shown in the Balance Sheet net of grant.
After one year, grant becomes refundable to the extent of ` 7,00,000 due to non-
compliance of certain conditions.
Pass Journal entries for 2nd year in the books of the company. (May’16)
Answer
Year Particulars Dr. (`) Cr. (`)
2nd Fixed Asset Account To Bank Account Dr. 7
year (Being government grant on asset partly 7
refunded which increased the cost of fixed asset)
88
Depreciation Account (W.N.) Dr. 5

To Fixed Asset Account 5
(Being depreciation charged on SLM on revised
value of fixed asset prospectively)
Profit & Loss Account Dr. 5
To Depreciation Account 5
(Being depreciation transferred to Profit and
Loss Account at the end of year 2)
Working Note:
Depreciation for year 2
` in lakhs
Cost of the Asset 50
Less: Government grant (10)
40
Less: Depreciation for the first year 40 4
8
Book value at the end of 1st year 36

Add: Government grant refundable in 2nd year 7
43
Depreciation for the second year 43 5
7
Question 5
Ram Ltd. purchased machinery for ` 80 lakhs, (useful life 4 years and residual value `
8 lakhs). Government grant received is ` 32 lakhs. Show the Journal Entry to be passed
at the time of refund of grant and the value of the fixed assets in the third year and the
amount of depreciation for remaining two years, if
(i) The grant is credited to Fixed Assets A/c.
(ii) The grant is credited to Deferred Grant A/c.
(May’17)
Answer
(a) In the books of Ram Ltd.
(1) If the grant is credited to Fixed Assets Account:
89
1. Journal Entry (at the time of refund of grant)

In lakhs ` In lakhs `
I Fixed Assets Dr. 32
To Bank A/c 32
(Being grant refunded)
2. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books
= ` 80 lakhs – ` 32 lakhs
= ` 48 lakhs Depreciation p.a.
= (` 48 lakhs – `8 lakhs)/4 years
= ` 10 lakhs per year for first two years.
Value of the assets before refund of grant =` 48 lakhs - ` 20 lakhs
= ` 28 lakhs
3. Value of Fixed Assets after refund of grant
Value of Fixed Assets before refund of grant ` 28 lakhs
Add Refund of grant ` 32 lakhs
` 60 lakhs
4. Amount of depreciation for remaining two years
Value of the fixed assets after refund of grant –residual value of the assets / No. of years
= ` 60 lakhs - ` 8 lakhs / 2
= ` 26 lakhs per annum will be charged for next two years.
(2) If the grant is credited to Deferred Grant Account:

As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is
allocated to Profit and Loss account usually over the periods and in the proportions in
which depreciation on related assets is charged.
Accordingly, in the first two years (` 32 lakhs /4 years) = ` 8 lakhs p.a. x 2 years = ` 16
lakhs will be credited to Profit and Loss Account and ` 16 lakhs will be the balance of
Deferred Grant Account after two years.
Therefore, on refund of grant, following entry will be passed:
` `
I Deferred Grant A/c Dr. 16 lakhs
Profit & Loss A/c Dr. 16 lakhs
To Bank A/c 32 lakhs
(Being Government grant refunded)
90
1 Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = ` 80 lakhs
Depreciation p.a. = (` 80 lakhs – `8 lakhs)/4 years = ` 18 lakhs per year
Book value of fixed assets after two years = ` 80 lakhs – (` 18 lakhs x 2 years)
= ` 44 lakhs
2. Value of Fixed Assets after refund of grant

On refund of grant the balance of deferred grant account will become nil. The Fixed
assets will continue to be shown in the books at ` 44 lakhs.
3. Amount of depreciation for remaining two years

Depreciation will continue to be charged at 18 lakhs per annum for the remaining
two years.
Question 6
How would you treat the following in the accounts in accordance with AS-12 'Government
Grants'?
(i) ` 35 Lakhs received from the Local Authority for providing Medical facilities to the
employees.
(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up a unit
in a notified backward area.
(iii) ` 10 Lakhs Grant received from the Central Government on installation of anti-
pollution equipment. (May’ 19)
Answer
(a) ` 35 lakhs received from the local authority for providing medical facilities to
the employees is a grant received in the nature of revenue grant. Such grants are
generally presented as a credit in the profit and loss statement, either separately
or under a general heading such as ‘Other Income’. Alternatively, ` 35 lakhs may be
deducted in reporting the related expense i.e. employee benefit expenses.
(b) As per AS 12 ‘Accounting for Government Grants’, where the government grants
are in the nature of promoters’ contribution, i.e. they are given with reference to
the total investment in an undertaking or by way of contribution towards its total
capital outlay and no repayment is ordinarily expected in respect thereof, the grants
are treated as capital reserve which can be neither distributed as dividend nor
considered as deferred income.
91
In the given case, the subsidy received from the Central Government for setting
up a unit in notified backward area is neither in relation to specific fixed asset nor
in relation to revenue. Thus, amount of ` 100 lakhs should be credited to capital
reserve.
(c) ` 10 lakhs grant received for installation anti-pollution equipment is a grant
related to specific fixed asset. Two methods of presentation in financial statements
of grants related to specific fixed assets are regarded as acceptable alternatives.
Under first method, the grant is shown as a deduction from the gross value of the
asset concerned in arriving at its book value. The grant is thus recognised in the profit
and loss statement over the useful life of a depreciable asset by way of a reduced
depreciation charge. Under the second method, grants related to depreciable assets
are treated as deferred income which is recognised in the profit and loss statement
on a systematic and rational basis over the useful life of the asset.
Thus, ` 10 lakhs may either be deducted from the cost of equipment or treated as
deferred income to be recognized on a systematic basis in profit & Loss A/c over the
useful life of equipment.
Question 7
(a) Darshan Ltd. purchased a Machinery on 1st April, 2016 for ` 130 lakhs (Useful
life is 4Years). Government grant received is ` 40 lakhs for the purchase of above
Machinery.
Salvage value at the end of useful life is estimated at ` 60 lakhs. Darshan Ltd.
decides to treat the grant as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized
in profit & loss account for the year ending 31st March, 2017,31st March, 2018, 31st
March, 2019& 31st March, 2020.
Darshan Ltd. follows straight line method for charging depreciation.
Answer
(a) As per 12 “Accounting for government grants”, grants related to depreciable assets,
if treated as deferred income are recognized in the profit and loss statement on a
systematic and rational basis over the useful life of the asset.
Amount of depreciation and grant to be recognized in the profit and loss account each year
Depreciation per year:
92
`in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year(70lakhs/4) 17.50
` 17.50 Lakhs depreciation will be recognized for the year ending 31st March, 2017,
31st March, 2018, 31st March, 2019 and 31st March, 2020.
Amount of grant recognized in Profit and Loss account each year :
40 lakhs /4 years = ` 10 Lakhs for the year ending 31st March, 2017, 31st March,
2018, 31st March, 2019 and 31st March, 2020.
Question 8
(i) Zinga Limited received a 20% Subsidy on ` 100 lakhs for investment in designated
backward area during 2016-17. The Subsidy received was credited to General
Reserve. During 2019-2020, the company paid dividend out of the amount of
Subsidy Received for ` 10 lakhs. Is the above treatment done for Subsidy received
and Dividend paid is correct ? If not, give correct treatment.
(ii) Singha Limited received a specific grant of ` 90 lakhs for acquiring a plant of `
250 lakhs (having useful life of 10 years) during 2016-17. The grant received was
credited to deferred income in the Balance Sheet, During 2019-2020, the company
could not comply some condition laid down for the grant for plant, it had to refund
the whole grant for plant to the Government. Balance in the deferred income on that
date was ` 63 lakhs and written down value of plant was ` 175 lakhs.
You are required to state :

(i) What should be the treatment of the refund of grant in 2019-2020?
(ii) What would be the effect on cost of the fixed asset?
(iii) What amount of depreciation should be charged during the Financial year
2019-2020 ? (Nov’ 20)
Answer
(i) As per AS 12 ‘Accounting for Government Grants’, when government grant is received
for a specific purpose, it should be utilized for the same. So the grant received
93
for investment in backward area cannot be credited to General Reserve and is not
available for distribution of dividend.
(ii) (i) As per AS12, ‘Accounting for Government Grants’, the amount refundable in
respect of a grant related to specific fixed asset should be recorded by reducing
the deferred income balance. To the extent the amount refundable exceeds
any such deferred credit, the amount should be charged to profit and loss
statement In this case the grant refunded is `90 lakhs and balance in deferred
income is ` 63 lakhs, ` 27 lakhs shall be charged to the profit and loss account
for the year 2019-20.
(ii) There will be no effect on the cost of the fixed asset
(iii) Depreciation charged will be on the same basis as charged in the earlier years.
Hence charged during the year 2019-20 shall be ` 25 lakhs (175 years /7
years).
Question 8
On 1st April, 2016, Mac Ltd. received a Government Grant of ` 60 lakhs for acquisition
of machinery costing ` 300 lakhs. The grant was credited to the cost of the asset. The
estimated useful life of the machinery is 10 years. The machinery is depreciated @ 10%
on WDV basis. The company had to refund the grant in June 2019 due to non-compliance
of certain conditions.
How the refund of the grant is dealt with in the books of Mac Ltd. assuming that the
company did not charge any depreciation for the year 2019-20. Pass necessary Journal
Entries for the year 2019-20. (Nov’20)
Answer
(` in lakhs)
1st April, 2016 Acquisition cost of machinery 300.00
Less: Government Grant 60.00

94
Less: Depreciation @10% for 2 months (2.916)

1st June, 2019 Book value 172.044
June 2019 Add: Refund of grant* 60.00
Revised book value 232.044
Depreciation @10% on the revised book value amounting to ` 232.044 lakhs is to be

provided prospectively over the residual useful life of the machinery.
*considered refund of grant at beginning of June month and depreciation for two months
already charged. Alternative answer considering otherwise also possible.
Journal Entries
Machinery Account Dr. 60
To Bank Account 60
(Being government grant on asset partly refunded
which increased the cost of fixed asset)
Depreciation Account Dr. 19.337
To Machinery Account 19.337
(Being depreciation charged on revised value of
fixed asset prospectively for 10 months)
Profit & Loss Account Dr. 22.253
To Depreciation Account
(Being depreciation transferred to Profit and Loss 22.253
Account amounting to ` (2.916 + 19.337= 22.253)
95
REVISION QUESTIONS
Question 1
X Limited received a grant of ` 2 crores from the Central Government for the purpose of
a special Machinery during 1998 – 99. The cost of Machinery was ` 20 crores and had a
useful life of 9 years. During 2002 – 03, the grant has become refundable due to non-
fulfillment of certain conditions attached to it. Assuming the entire grant was deducted
from the cost of Machinery in the year of acquisition. State with reasons, the accounting
treatment to be followed in the year 2002 -03.
Question 2
Siva Limited received a grant of ` 1,500 lakhs during the last accounting year (2009-10)
from Government for welfare activities to be carried on by the company for its employees.
The grant prescribed conditions for its utilization. However during the year 2010-11, it
was found that the conditions of the grant were not complied with and the grant had to
be refunded to the Government in full. Elucidate the current accounting treatment with
reference to the provisions of AS 12.
Answer 2
As per para 11 of AS 12 ‘Accounting for Government Grants’, Government Grant may,
sometimes, become refundable if certain conditions are not fulfilled. A government grant
that becomes refundable is treated as extra-ordinary item as per AS, 5 ‘Net Profit or Loss
for the Period, Prior Period Items and Changes in Accounting Policies.
The amount refundable in respect of a government grant related to revenue is applied first
against any unamortized deferred credit remaining in respect of the grant. To the extent
that the amount refundable exceeds any such deferred credit, or where no deferred credit
exists, the amount is charged immediately to profit and loss statement.
In the given case, the amount of refund of grant of ` 1,500 lakhs should be charged to the
profit and loss account in the year 2010 – 2011 as an extraordinary item.
96
AS 13 - ACCOUNTING FOR
INVESTMENT
1. WHAT ARE INVESTMENTS?

Investments are:-
• Assets
• Held by an enterprise for earning incomes by way of dividends, interest, a n d ,
rentals, for capital appreciation, or for other benefits to the investing
enterprise.
Assets held as stock in trade are not 'investments'.
Some investments have no physical existence and are represented merely by
certificates or similar documents while others exist in physical form.
2. DETERMINATION OF COST:
• If investments are purchased:
The cost of an investment includes acquisition charges such as brokerage, fees
and duties. Interest, dividends and rentals receivables in connection with an
investment are generally regarded as income, being the return on investment.
However, in some circumstances, such inflows represent a recovery of cost and
do not form part of income. In such case, it should be deducted from the cost.
• If investments are acquired for consideration other than cash:
Sr. no. Consideration in the form of Valued at

1. Shares or securities Fair value of securities issued
2. Other assets Fair value of asset given up or Fair value
of asset acquired whichever is known more
appropriately.
• Cost of right shares:

- When right shares offered are subscribed for, the cost of right shares is added
to the carrying amount of the original holding.
- If the right shares are not subscribed for but are sold in the market, the sale
proceeds are taken to the profit and loss statement.
97
• However, where the investments are acquired on cum cum-right basis and the
market value of investments immediately after their becoming ex- right is lower
than the cost for which they were acquired, it may be appropriate to apply the
sale proceeds of right to reduce the carrying amount of such investments to the
market value.
3. DETERMINATION OF FAIR VALUE:

Fair value is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arms'
length transaction.
4. DETERMINATION OF CARRYING AMOUNT OF INVESTMENTS (VALUATION):

• Current investments
Current Investments should be carried in the financial statement at lower of
cost or fair value. The lower of cost or fair value should not be determined on
overall basis. It should be determined-
a. On an individual investment basis (More prudent) or
b. By category of investment.
Any reduction to fair value of current investments or any reversal of such
reduction should be included in profit or loss account.
• Long term Investments:
Long term investments are usually carried at cost.
However, when there is a decline, other than temporary, in the value of a long term
investment, the carrying amount is reduced to recognize the decline.
Such reduction should be determined and made for each long term investments
individually.
4. Disposal:
On disposal of an investment, the difference between the carrying amount and
disposal proceeds, net of expenses, is recognized in profit or loss account. When
disposing of a part of the holding of an individual investment, the carrying amount
to be allocated to that part is to be determined on the basis of the average carrying
amount of the total holding of the investment (i.e. weighted average cost)
5. RECLASSIFICATION OF INVESTMENTS:
From long term investment to current investment.
98
Transfers are made at the lower of cost and carrying amount on the date of transfer
From current investment to long term investment.
Transfers are made at the lower of cost and fair value on date of transfer.
6. DISCLOSURE:
• The accounting policies for determination of carrying amount of investments.
• An Enterprise should disclose current Investments and long term investments
separately.
• As per Schedule III of Companies Act, 2013 further classification should disclose
investments in:
a. Government securities
b. Shares, Debentures or bonds
c. Investment properties
d. Others-Specifying nature.
• The amounts included in profit or loss statement for:
a. Interest, dividends and rentals on investments showing separately such in-
come from long term and current investments. Gross income should be stated,
the amount of income tax deducted at source being included under Advance
Taxes paid.
b. Profit or loss on disposal of current investments and changes in the carrying
amount of such investments.
c. Profit or loss on disposal of Long term investments and changes in the carrying
amount of such investments.
• Significant restrictions on the rights of ownership, realisability of investments or the
remittance of income and proceeds of the disposal.
99
CLASSWORK QUESTIONS
Question 1
Albert Ltd. has made the following investments:
(i) Purchased the following equity shares from stock exchange on 1st June, 2010:
Cost `
Scrip X 1,80,000
Scrip Y 50,000
Scrip Z 1,70,000
4,00,000
(ii) Purchased gold of ` 3,00,000 on 1st April, 2007.
(iii) Invested in mutual funds at a cost of ` 6,00,000 on 31st March, 2010.
(iv) Purchased government securities at a cost of ` 5,00,000 on 1st April, 2010.
How will you treat these investments as per applicable AS in the books of the company
for the year ended on 31st March, 2011, if the values of these investments are as follows:
Shares ` `
Scrip X 1,90,000
Scrip Y 70,000
Scrip Z 40,000 3,00,000
Gold 5,00,000
Mutual funds 4,50,000
Government securities 7,00,000
Also explain is it possible to set of diminution in investment in mutual funds against
appreciation of the value of investment in government securities?
Question 2
An unquoted long-term investment is carried in the books at a cost of ` 2 lakhs. The
published accounts of the unlisted company received in May, 2012 showed that the
company was incurring cash losses with declining market share and the long term
investment may not fetch more than ` 20,000. Financial statement of 31st March, 2012
of investor are yet to be completed and approved by the Board of Directors.
Question 3
Bharat Ltd. wants to re-classify its investments in accordance with AS 13. Decide on the
amount of transfer, based on the following information:
100
1) A portion of current investments purchased for ` 20 lakhs, to be re - classified as

Long - term investments, as the company has decided to retain them. The market
value as on the date of balance sheet was ` 25 lakhs.
2) Another portion of current investments purchased for ` 15 lakhs, to be re- classified
as long-term investments. The market value of these investments as on the date of
balance sheet was ` 6.5 lakhs.
3) Certain Long-term investments no longer considered for holding purposes, to be
re-classified as current investments. The original Cost of these were ` 18 lakhs but
had been written down to ` 12 lakhs to recognize permanent decline as per AS 13.
Question 4
Sabka Bank has classified its total investment on 31-3-2017 into three categories (a)
held to maturity (b) available for sale (c) held for trading. ‘Held to maturity’ investments
are carried at acquisition cost less amortised amount. ‘Available for sale’ investments
are carried at marked to market. ‘Held for trading’ investments are valued at weekly
intervals at market rates or as per the prices declared by FIMMDA. Net depreciation, if
any, is charged to revenue and net appreciation, if any, is ignored. Comment whether the
policy of the bank is in accordance with AS 13?
Question 5
Following is the Investment made by Ranka Ltd. as on 31.03.2005.
Type of Share Quantity Cost Market
Value
(i) Equity Shares:
X Ltd. 250 124 175
Y Ltd. 400 106 156
Z Ltd. 200 97 95
(ii) Preference Shares:
F Ltd. 400 102 88
M Ltd. 10 115 149
R Ltd. 55 116 121
Value the investments as per Global/Category/Individual method.
101
CLASSWORK SOLUTIONS
Answer 2
As it is stated in the question that financial statement for the year ended 31st March,
2012 are under preparation, the views have been given on the basis that the financial
statements are yet to be completed and approved by the Board of Directors.
As per AS 13, Accounting for investment, long term investment should be valued at cost
unless reduction is other than temporary. Here, cost of unquoted long term investment
was ` 2,00,000, however, fair value of this investment is ` 20,000 only and this reduction
is due to cash losses suffered by company with declining market share, which is other
than temporary in nature.
On this basis, the facts of the given case clearly suggest that the provision for diminution
of ` 1,80,000 (` 2,00,000 - ` 20,000) should be made to reduce the carrying amount of
long term investment to ` 20,000 in the financial statements as on 31st March, 2012.
Answer 4
As per para 2(d) of AS 13 ‘Accounting for Investments’, the accounting standard is not
applicable to Bank, Insurance Company, Mutual Funds. In this case Sabka Bank is a
bank, therefore, AS 13 does not apply to it. For banks, the RBI has issued guidelines for
classification and valuation of its investment and Sabka Bank should comply with those
RBI Guidelines/Norms. Therefore, though Sabka Bank has not followed the provisions of
AS 13, yet it would not be said as non-compliance since, it is complying with the norms
stipulated by the RBI.
102
HOMEWORK SECTION
Question 1
Blue-chip Equity Investments Ltd., wants to re-classify its investments in accordance
with AS 13. State the values, at which the investments have to be reclassified in the
following cases:
(i) Long term investments in Company A, costing ` 8.5 lakhs are to be re-classified as
current. The company had reduced the value of these investments to ` 6.5 lakhs to
recognize a permanent decline in value. The fair value on date of transfer is ` 6.8
lakhs.
(ii) Long term investments in Company B, costing ` 7 lakhs are to be re-classified as
current. The fair value on date of transfer is ` 8 lakhs and book value is ` 7 lakhs.
(iii) Current investment in Company C, costing ` 10 lakhs are to be re-classified as long
term as the company wants to retain them. The market value on date of transfer is
` 12 lakhs.
(iv) Current investment in Company D, costing ` 15 lakhs are to be re-classified as long
term. The market value on date of transfer is ` 14 Lakhs.
Answer
As per AS 13 „Accounting for Investments", where long-term investments are reclassified
as current investments, transfers are made at the lower of cost and carrying amount at
the date of transfer.
And where investments are reclassified from current to long term, transfers are made at
lower of cost and fair value on the date of transfer. Accordingly, the re-classification will
be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the
cost; hence this re-classified current investment should be carried at ` 6.5 lakhs in
the books.
(ii) The carrying / book value of the long term investment is same as cost i.e. ` 7 lakhs.
Hence this long term investment will be reclassified as current investment at book
value of ` 7 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will
be made at ` 10 lakhs as cost is less than its market value of ` 12 lakhs.
(iv) In this case, market value is ` 14 lakhs which is lower than the cost of ` 15 lakhs.
The reclassification of current investment as long-term investments will be made at
` 14 lakhs.
103
Question 2
M/s Innovative Garments Manufacturing Company Limited invested in the shares of
another company on 1st October, 2014 at a cost of ` 2, 50,000. It also earlier purchased
Gold of ` 4, 00,000 and silver of ` 2, 00,000 on 1st March, 2012. Market value as on 31st
March, 2015 of above investments are as follows:
`
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative
Garments Manufacturing Company Limited for the year ending 31st March, 2015 as per
the provisions of Accounting Standard 13 "Accounting for Investments"?
Answer
As per AS 13 „Accounting for Investments", for investment in shares - if the investment is
purchased with an intention to hold for short-term period then it will be shown at the
realizable value of ` 2,25,000 as on 31st March, 2015.
If equity shares are acquired with an intention to hold for long term period then it will
continue to be shown at cost in the Balance Sheet of the company. However, provision for
diminution shall be made to recognize a decline, if other than temporary, in the value of
the investments.
As per the standard, investment acquired for long term period shall be shown at cost.
Gold and silver are generally purchased with an intention to hold it for long term period
until and unless given otherwise. Hence, the investment in Gold and Silver (purchased
on 1st March, 2009) shall continue to be shown at cost as on 31st March, 2015 i.e., `
4,00,000 and ` 2,00,000 respectively, though their realizable values have been increased.
104
PAST PAPER SECTION
Question 1
M/s. Active Builders Ltd. invested in the shares of another company on 31st October,
2015 at a cost of ` 4,50,000. It also earlier purchased Gold of ` 5,00,000 and Silver of
` 2,25,000 on 31st March, 2013. Market values as on 31st March, 2016 of the above
investment are as follows:
Shares ` 3,75,000; Gold ` 7,50,000 and Silver ` 4,35,000
How will the above investments be shown in the books of accounts of M/s. Active Builders
Ltd. for the year ending 31st March, 2016 as per the provision of AS – 13?
(May’16)
Answer
As per AS 13 „Accounting for Investments", if the shares are purchased with an intention
to hold for short-term period then investment will be shown at the realizable value.
If equity shares are acquired with an intention to hold for long term period then it will
continue to be shown at cost in the Balance Sheet of the company. However, provision
for diminution shall be made to recognize a decline, if other than temporary, in the value
of the investments. In the given case, shares purchased on 31st October, 2015, will be
valued at ` 3,75,000 as on 31st March, 2016.
Gold and silver are generally purchased with an intention to hold it for long term period
until and unless given otherwise. Hence, the investment in gold and silver (purchased
on 31st March, 2013) shall continue to be shown at cost as on 31st March, 2016 i.e.,
` 5,00,000 and ` 2,25,000 respectively, though their realizable values have been increased.
Thus the shares, gold and silver will be shown at
` 3,75,000, ` 5,00,000 and ` 2,25,000 respectively and hence, total investment will be
valued at ` 11,00,000 in the books of account of M/s Active Builders for the year ending
31st March, 2016 as per provisions of AS 13
Question 2
How you will deal with following in the financial statement of the Paridhi Electronics Ltd.
as on 31.3.16 with reference to AS – 13?
(i) Paridhi Electronics Ltd. invested in the shares of another unlisted company on 1st
May 2012 at a cost of ` 3,00,000 with the intention of holding more than a year.
The published accounts of unlisted company received in Jan 2016 reveals that the
company has incurred cash losses with decline market share and investment of
Paridhi Electronics Ltd. may not fetch more than ` 45,000.
105
(ii) Also Paridhi Electronics Ltd. has current investment (X Ltd.'s shares) purchased for `
5 lakhs, which the company wants to reclassify as long term investment. The market
value of these investments as on date of Balance Sheet was ` 2.5 lakhs.
(Nov’16)
Answer
(i) As per AS 13, “Accounting for investments” Investments classified as long term
investments should be carried in the financial statements at cost. However, provision
for diminution shall be made to recognise a decline, other than temporary, in the
value of the investments, such reduction being determined and made for each
investment individually. The standard also states that indicators of the value of an
investment are obtained by reference to its market value, the investee's assets and
results and the expected cash flows from the investment. On this basis, the facts of
the given case clearly suggest that the provision for diminution should be made to
reduce the carrying amount of shares to ` 45,000 in the financial statements for the
year ended 31st March, 2016 and charge the difference of loss of ` 2,55,000 to Profit
and Loss account.
(ii) As per AS 13 ‘Accounting for Investments’, where investments are reclassified from
current to long-term, transfers are made at the lower of cost or fair value at the
date of transfer. In the given case, the market value of the investment (X Ltd. shares)
is ` 2.50 lakhs, which is lower than its cost i.e. `5 lakhs. Therefore, the transfer to
long term investments should be made at cost i.e. `2.50 lakhs. The loss of ` 2.50
lakhs should be charged to profit and loss account
Question 3
Sun Ltd. wants to re-classify its investments in accordance with AS-13.
State the values at which the investments have to be re-classified as per AS-13 in the
following cases:
(1) Current investments in Company Fine Ltd., costing ` 39,000 are to be re- classified
as long term investments. The fair value on the date of transfer is ` 37,000.
(2) Long term investments in Company Bold Ltd., costing ` 16 lakhs are to be re-classified
as current investments. The fair value on the date of transfer is ` 15 lakhs and book
value is ` 16 lakhs. (May’18)
Answer
Re-classification will be done on the following basis:
(i) As per AS 13, where investments are reclassified from current to long term, transfers
106
are made at lower of cost and fair value on the date of transfer. In this case, fair
value is ` 37,000 which is lower than the cost of ` 39,000. The reclassification of
current investment as long-term investments will be made at
` 37,000.
(ii) As per AS 13 ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and
carrying amount at the date of transfer. The carrying / book value of the long term
investment is same as cost i.e. ` 16 lakhs. Hence this long term investment will be
reclassified as current investment at book value of ` 16 lakhs only.
Question 4
The Investment portfolio of XYZ Ltd. as on 31.03.2018 consisted of the following:
(` in lakhs)
Current Investments Cost Fair Value as on 31.03.2018
1 1000 Equity Shares of A Ltd. 500 5 7
2 Equity Shares of B Ltd. 10 15
3
1000 Equity Shares of C Ltd. 15 12
Total 30 34
Give your comments on below:

(i) The company wants to value the above portfolio at ` 30 lakhs being lower of cost
or fair market value.
(ii) Company wants to transfer 1000 Equity Shares of C Ltd. from current investments to
long term investments on 31.03.2018 at cost of ` 15 lakhs.
(Hint: i) Value at 30 Lakhs; ii) Reclassified at 12 Lakhs.
Question 5
On 15th June, 2018, Y limited wants to re-classify its investments in accordance
with AS 13 (revised). Decide and state the amount of transfer, based on the following
information:
(1) A portion of long term investments purchased on 1st March, 2017 are to be re-
classified as current investments. The original cost of these investments was ` 14
lakhs but had been written down by ` 2 lakhs (to recognise 'other than temporary'
decline in value). The market value of these investments on 15th June, 2018 was
` 11 lakhs.
(2) Another portion of long term investments purchased on 15th January, 2017 are to
be re-classified as current investments. The original cost of these investments was `
107
7 lakhs but had been written down to ` 5 lakhs (to recognise 'other than temporary'
decline in value). The fair value of these investments on 15th June, 2018 was ` 4.5
lakhs.
(3) A portion of current investments purchased on 15th March, 2018 for ` 7 lakhs are
to be re-classified as long term investments, as the company has decided to retain
them. The market value of these investments on 31st March, 2018 was ` 6 lakhs and
fair value on 15th June 2018 was ` 8.5 lakhs,
(4) Another portion of current investments purchased on 7th December, 2017 for ` 4
lakhs are to be re-classified as long term investments. The market value of these
investments was:
on 31st March, 2018 ` 3.5 lakhs
on 15th June, 2018` 3.8 lakhs (May’ 19)
Answer
As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and carrying
amount at the date of transfer; and where investments are reclassified from current to
long term, transfers are made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
cost; hence this re-classified current investment should be carried at ` 12 lakhs in
the books.
(ii) In this case also, carrying amount of investment on the date of transfer is less
than the cost; hence this re-classified current investment should be carried at ` 5
lakhs in the books.
be made at ` 7 lakhs as cost is less than its fair value of ` 8.5 lakhs on the date of
transfer.
(iv) In this case, market value (considered as fair value) is ` 3.8 lakhs on the date of
transfer which is lower than the cost of ` 4 lakhs. The reclassification of current
investment into long-term investments will be made at ` 3.8 lakhs.
Question 6
State whether the following statements are 'True' or 'False'. Also give reason for your
answer.
(1) As per the provisions of AS-5, extraordinary items should not be disclosed in the
108
statement of profit and loss as a part of net profit or loss for the period.
(2) As per the provisions of AS-12, government grants in the nature of promoters'
contribution which become refundable should be reduced from the capital reserve.
(3) As per the provisions of AS-2, inventories should be valued at the lower of cost and
selling price.
(4) As per the provisions of AS-13, a current investment is an investment, that by its
nature, is readily realisable and is intended to be held for not more than six months
from the date on which such investment is made.
(5) As per the provisions of AS-4, a contingency is a condition or situation, the ultimate
outcome of which (gain or loss) will be known or
Determined only on the occurrence of one or more uncertain future events. (May’19)
Answer
(1) False: The nature and the amount of each extraordinary item should be separately
disclosed in the statement of profit and loss in a manner that its impact on current
profit or loss can be perceived.
(2) True: When grants in the nature of promoters’ contribution becomes refundable, in
part or in full to the government on non-fulfillment of some specified conditions, the
relevant amount refundable to the government is reduced from the capital reserve.
(3) False: Inventories should be valued at the lower of cost and net realizable value (not
selling price) as per AS 2.
(4) False: A current investment is an investment that is by its nature readily realizable
and is intended to be held for not more than one year from the date on which such
investment is made.
(5) False: A contingency is a condition or situation, the ultimate outcome of which, gain
or loss, will be known or determined only on the occurrence, or non-occurrence, of
one or more uncertain future events.
Question 7
Mother Mart Ltd., wants to re-classify its investment in accordance with AS 13. Decide
the treatment to be given in each of the following cases assuming that the market value
has been determined in an arm's length transaction between knowledgeable and willing
buyer and seller:
(i) A portion of current investments purchased for ` 25 lakhs to be reclassified as long-
term investments, as the company has decided to retain them. The market value
as on the date of balance sheet was ` 30 lakhs.
109
(ii) Another portion of current investments purchased for ` 20 lakhs has to be re-
classified as long-term investments. The market value of these investments as on
the date of the balance sheet was ` 12.5 lakhs.
(iii) One portion of long-term investments, no longer considered for holding purposes,
to be reclassified as current investments. The original cost of these was ` 15 lakhs,
but had been written down to ` 11 lakhs to recognize permanent decline as
per AS 13. (May’19)
Ans.
As per AS 13 ‘Accounting for Investments’, where investments are reclassified from
current to long-term, transfers are made at the lower of cost and fair value at the date
of transfer.
When long-term investments are re-classified as current investments, transfers are
made at the lower of cost and carrying amount at the date of transfer.
(i) In the first case, the market value of the investments is ` 30 lakhs , which is higher
than its cost i.e. ` 25 lakhs. Therefore, the transfer to long term investments should
be made at cost i.e. ` 25 lakhs
(ii) In the second case, the market value of the investment is ` 12.5 lakhs*, which is
lower than its cost i.e. ` 20 lakhs. Therefore, the transfer to long term investments
should be made in the books at the market value i.e. ` 12.5 lakhs. The loss of ` 7.50
lakhs (20-12.5) should be charged to Profit and Loss account.
(iii) In the third case, the book value of the investments is ` 11 lakhs, which is lower
than its cost, i.e. ` 15 lakhs. As the transfer should be at carrying amount, hence this
re- classified current investment should be carried at ` 11 lakhs.
Question 8
PQR Investments Ltd., wants to re-classify its investments in accordance with AS 13.
State the values, at which the investments have to be reclassified in the following cases:
(i) Long term investments in Company A, costing ` 10 lakhs are to be re-classified as
current. The company had reduced the value of these investments to ` 8 lakhs to
recognize a permanent decline in value. The fair value on date of transfer is ` 8.50
lakhs.
(ii) Long term investments in Company B, costing ` 5 lakhs are to be re-classified as
current. The fair value on date of transfer is ` 6 lakhs and book value is ` 5 lakhs.
(iii) Current investment in Company C costing ` 8 lakhs are to be re-classified as long
term as the company wants to retain them. The market value on date of transfer is
` 9 lakhs.
110
(iv) Current investment in Company D, costing ` 12 lakhs are to be re-classified as long

term. The market value on date of transfer is ` 11 Lakhs.
You are required to advise PQR Investments Ltd., the correct treatment in light of
relevant accounting standard.
Answer
As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified
as current investments, transfers are made at the lower of cost and carrying amount at
the date of transfer. And where investments are reclassified from current to long term,
transfers are made at lower of cost and fair value on the date of transfer.
cost; hence this re-classified current investment should be carried at ` 8 lakhs in the
books.
(ii) The carrying / book value of the long term investment is same as cost i.e. ` 5 lakhs.
Hence this long term investment will be reclassified as current investment at book
value of ` 5 lakhs only.
be made at ` 8 lakhs as cost is less than its market value (considered as fair value)
of ` 9 lakhs.
(iv) In this case, market value is ` 11 lakhs which is lower than the cost of ` 12 lakhs.
The reclassification of current investment as long-term investments will be made at
` 11 lakhs.
Question 9
A Limited invested in the shares of XYZ Ltd. on 1st December, 2019 at a cost of ` 50,000.
Out of these shares ` 25,000'shares were purchased with an intention to hold for 6 months
and ` 25,000 shares were purchased with an intention to hold as long-term Investment.
A Limited also earlier purchased Gold of ` 1,00,000 and Silver of ` 30,00,000 on 1st April,
2019. Market value as on 31st March, 2020 of above investments are as follows:
Shares ` 47,500 (Decline in the value of shires is temporary.)
Gold ` 1,80,000
Silver ` 30,55,000
How above investments will be shown in the books of accounts of M/s A Limited for the
year ending 31st March, 2020 as per the provisions of AS 13 (Revised)?
(Nov’20)
111
Answer
As per AS 13 (Revised) ‘Accounting for Investments, for investment in shares - if the
investment is purchased with an intention to hold for short-term period (less than one
year), then it will be classified as current investment and to be carried at lower of cost
and fair value.
In the given case ` 25,000 shares held as current investment will be carried in the books
at ` 23,750 (` 47,500/2).
If equity shares are acquired with an intention to hold for long term period (more than
one year), then should be considered as long-term investment to be shown at cost in
the Balance Sheet of the company. However, provision for diminution should be made
to recognize a decline, if other than temporary, in the value of the investments. Hence,
` 25,000 shares held as long-term investment will be carried in the books at ` 25,000.
Gold and silver are generally purchased with an intention to hold them for long term
period (more than one year) until and unless given otherwise.
Hence, the investment in Gold and Silver (purchased on 1st March, 2019) should continue
to be shown at cost (since there is no ‘other than temporary’ diminution) as on 31st March,
2020. Thus Gold at ` 1,00,000 and Silver at ` 30,00,000 respectively will be shown in the
books.
Question 10
M/s. Gowtham Limited invested in shares of another company (with the intention to hold
the shares for short-term period) on 30th November, 2019 at a cost of ` 4,25,000. It also
earlier purchased Gold of ` 8,00,000 and Silver of ` 3 50,000 on 31st March, 2017.
Market values as on 31st March, 2020, of the above investments are as follows :
Shares ` 3,50,000
Gold ` 10,25,000
Silver ` 5,10,000
You are required to explain how will the above investments be shown (individually and in
total) in the books of account of M/s. Gowtham Limited for the year ending 31st March,
2020 as per the provisions of As 13. (Nov’ 20)
Question 11
Kunal Securities Ltd. wants to reclassify its investments in accordance with AS-13 (Revised).
State the values, at which the investments have to be reclassified in the following cases:
(i) Long term investment in Company A, costing ` 10.5 lakhs is to be re-classified as
current investment. The company had reduced the value of these investments to
112
` 9 lakhs to recognize a permanent decline in value. The fair value on the date of
reclassification is ` 9.3 lakhs.
(ii) Long term investment in Company B, costing ` 14 lakhs is to be re-classified as
current investment The fair value on the date of reclassification is ` 16 lakhs and
book value is ` 14 lakhs.
(iii) Current investment in Company C, costing `12 lakhs is to be re-classified as long
term investment as the company wants to retain them. The market value on the
date of reclassification is ` 13.5 lakhs.
(iv) Current investment in Company D, costing ` 18 lakhs is to be re-classified as long
term investment. The market value on the date of reclassification is ` 16.5 lakhs.
Answer
As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and carrying
amount at the date of transfer. And where investments are reclassified from current to
long term, transfers are made at lower of cost and fair value on the date of transfer.
cost; hence this re-classified current investment should be carried at ` 9 lakhs in the
books.
(ii) The carrying / book value of the long-term investment is same as cost i.e., ` 14
lakhs. Hence this long-term investment will be reclassified as current investment at
book value of ` 14 lakhs only.
be made at ` 12 lakhs as cost are less than its market value of ` 13.5 lakhs.
(iv) Market value of the investment is ` 16.5 lakhs, which is lower than its cost i.e., ` 18
lakhs. Therefore, the transfer to long term investments should be done in the books
at the market value i.e., ` 16.5 lakhs.
113
REVISION QUESTIONS
Question 1
A manufacturing company purchased shares of another company from stock exchange
on 1st May, 2007 at a cost of ` 5,00,000. It also purchased Gold of ` 2,00,000 and
Silver of ` 1,50,000 on 1st April, 2005. How will you treat these investments as per the
applicable AS in the books of the company for the year ended on 31st March, 2008, if the
values of these investments are as follows:
`
Shares 2,00,000
Gold 4,00,000
Silver 2,50,000
114
AS – 16 BORROWING COST
1. BORROWING COST :
Borrowing Cost includes interest and other costs incurred in connection with borrowed
funds.
Elements of borrowing costs generally include:
1. Interest and commitment charges on bank borrowings
2. Discounts and premiums on borrowings to the extent amortized
3. Other ancillary costs for arranging borrowings to the extent amortized
4. Finance charges in respect of assets under Finance lease, Hire purchase
5. Exchange rate differences relatable to foreign currency borrowings, to the extent
that they are regarded as an adjustment to interest costs.
2. QUALIFYING ASSET :
Qualifying Asset Is an asset that necessarily takes substantial period of time to get
ready for its:
• Intended use [Fixed Assets or Investment properties], OR
• Sale [Inventory]

Note:
Ordinarily a period of 12 months is considered substantial period unless a shorter or
longer period can be justified.
The following are, however, not qualifying assets:
• Inventories routinely manufactured
• Inventories produced in large quantities on repetitive basis over short period
• Assets ready for intended use at the time of acquisition
115
3. ACCOUNTING FOR BORROWING COSTS :

Accounting Treatment - Borrowing Costs
Sr. Nature of borrowing costs Accounting treatment Remarks
No. prescribed by AS-16
1. Borrowing costs that are Capitalize as part of the Amount to be capitalized
directly attributable to the cost of that asset (i.e. period for which
acquisition construction or include in the cost of that capitalization should be
production of a qualifying assets) done to be determined as
asset per AS-16.
2. Other borrowing costs To be expensed in the -
period in which they are
incurred -
From the above table, it is clear that borrowing costs directly attributable to the
acquisition, construction or production of a qualifying asset should be capitalized as
part of cost of that asset.
4. SPECIFIC AND GENERAL BORROWINGS :

Borrowing costs can be related to either specific borrowings, or general borrowings.
i) Specific Borrowings:
As a general rule, specific borrowings are those which could have been avoided,
but for expenditure on Qualifying Asset. In this case, capitalisation rate is done
for the “actual borrowing costs” incurred.
Income on temporary investment of funds forming part of specific borrowings
alone should be deducted from borrowing cost & ONLY net amount should be
capitalized.
ii) General Borrowings:
Under this category, falls more than one type of borrowing (loans, debentures
ICDs, working capital borrowings, etc) used – either wholly or partly for
expenditure on Qualifying Asset. In this case, capitalisation rate will be
“weighted average of the borrowing costs outstanding” during the relevant
period
iii) Capitalisation ceiling:
Borrowing cost capitalized should not exceed borrowing cost actually incurred
during the period. This situation will arise in the case of general borrowings.
116
1. CAPITALISATION CRITERIA :
A. Commencement of Capitalisation:
The borrowing cost incurred on qualifying asset is to be capitalized only if all
the three following conditions are fulfilled
• Expenditure on Qualifying Asset is being incurred
• Borrowing Costs are incurred
• Activities are in progress; such activities include technical/administrative
work also. However, it does not include those, which do not result in a
change in the condition of the asset.
It follows, therefore, that there would be circumstances in which capitalisation
of borrowing costs are either to be suspended or stopped.
B. Suspension of capitalization:
It is possible that after commencement of capitalisation of Borrowing Cost,
one or more of the three conditions (stated above) may not subsequently be
fulfilled. Activities could stand suspended for (i) avoidable reasons, or (ii) for
unavoidable reasons.
Suspension of activity for avoidable reasons (do not capitalise)
Where activity necessary to prepare the asset for its intended use or sale stands
suspended.
• Over extended periods, and
• Active development is interrupted
Borrowing Cost incurred during such periods of suspension represents cost of
holding incomplete asset and hence should not be capitalized.
Suspension of activity for unavoidable reasons (can continue to capitalise
subject to prudence)
The suspension which is in the nature of temporary delay and where such
delay is necessary for getting asset ready, e.g., maintaining of inventory (wine)
and high water level for bridge construction, the borrowing cost should be
capitalized.
C. Cessation of capitalization – stoppage

Capitalization of borrowing costs should cease when:
• All activities necessary for making assets ready for intended use/sale are
substantially complete
117
• Items of administrative work or finishing touches to be completed happen

to be minor in nature
• Where an asset is completed “in parts”, and completed part is capable of
use, when work on others is in progress, capitalization for completed part
should be stopped.
2. DISCLOSURE REQUIREMENTS:
1. The accounting policy followed for treatment of borrowing costs
2. The amount of borrowing costs capitalized during the period
118
CLASSWORK QUESTIONS
Question 1
On 20.4.2003 JLC Ltd. obtained a loan from the Bank for ` 50 lakhs to be utilized as
under:
`
Construction of a shed 20 lakhs
Purchase of machinery 15 lakhs
Working capital 10 lakhs
Advance for purchase of truck 5 lakhs
In March, 2004 construction of shed was completed and machinery installed. Delivery of
truck was not received. Total interest charged by the bank for the year ending 31.3.2004
was ` 9 lakhs. Show the treatment of interest under AS 16.
Question 2
Paras Ltd. has the following borrowings during a year in respect of capital expansion.
Plant Cost of Asset (`) Remarks
Plant P 100 lakhs No Specific Borrowings
Plant Q 125 lakhs Bank loan of ` 65 lakhs at 10%
Plant R 175 lakhs 9% Debentures of ` 125 lakhs were issued.
In addition to the specific borrowings stated above, the company had obtained term
loans from banks (1) ` 100 lakhs at 10% from corporation Bank and (2) ` 110 lakhs at
11.5% from State Bank of India to meet its capital expansion requirements. Determine
the amount of borrowing costs to be capitalized in each of the above plants, as per AS
16.
Question 3
A company capitalizes interest cost of holding investments and adds to cost of investment
every year, thereby understating interest cost in profit & loss account. Comment on the
accounting treatment done by the company in context of the relevant AS.
Question 4
Axe Limited began construction of a new plant on 1st April, 2011 and obtained a special
loan of `4,00,000 to finance the construction of the plant. The rate of interest on loan
was 10%.
119
The expenditure that were made on the project of plant were as follows:
`
1st April, 2011 5,00,000
1st August, 2011 12,00,000
1st January, 2012 2,00,000
The company’s other outstanding non-specific loan was `23,00,000 at an interest rate
of 12%.
The construction of the plant completed on 31st March, 2012. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS 16
“Borrowing Cost”.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the
plant.
120
CLASSWORK SOLUTIONS
Answer 3
The Accounting Standard Board (ASB) has opinioned that investments other than
investment properties are not qualifying assets as per AS 16 Borrowing Costs. Therefore,
interest cost of holding such investments cannot be capitalized. Further, even interest
in respect of investment properties can only be capitalized if such properties meet the
definition of qualifying asset, namely, that it necessarily takes a substantial period of
time to get ready for its intended use or sale.
Also, where the investment properties meet the definition of ‘qualifying asset’, for the
capitalization of borrowing costs, the other requirements of the standard such as that
borrowing costs should be directly attributable to the acquisition or construction of the
investment property and suspension of capitalization as per paragraphs 17 and 18 of
AS16 have to be complied with.
121
HOMEWORK SECTION
Question 1
Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.05.2013, to be utilized
as under:
Particulars Amount (` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2014, construction of the factory building was completed and machinery
wasinstalled and ready for it's intended use. Total interest on debentures for the financial
year ended 31.03.2014 was ` 11,00,000. During the year 2013-14, the company had
invested idle fund out of money raised from debentures in banks' fixed deposit and had
earned an interest of ` 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature
of assets.
According to para 6 of AS 16 “Borrowing Costs”, borrowing costs that are directly

attributable to the acquisition, construction or production of a qualifying asset should be
capitalised as part of the cost of that asset. The amount of borrowing costs eligible for
capitalisation should be determined in accordance with this Standard. Other borrowing
costs should be recognised as an expense in the period in which they are incurred.
Also para 10 of AS 16 “Borrowing Costs” states that to the extent that funds are borrowed
specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs
eligible for capitalisation on that asset should be determined as the actual borrowing
costs incurred on that borrowing during the period less any income on the temporary
investment of those borrowings.
Thus, eligible borrowing cost = ` 11,00,000 – ` 2,00,000 = ` 9,00,000
Sr. Particulars Nature of as- Interest to be Capi- Interest to be
No. sets talized (`) charged to Profit &
Loss Account (`)
I Construction of Qualifying 9,00,000x40/100 = NIL
factory Building Asset* ` 3,60,000
122
II Purchase of Not a NIL 9,00,000x35/100 =

Machinery Qualifying ` 3,15,000
Asset
III Working Capital Not a NIL 9,00,000x25/100 =
Qualifying ` 2,25,000
Asset
Total ` 3,60,000 ` 5,40,000
Question 2
M/s. Ayush Ltd. began construction of a new building on 1st January, 2014. It obtained
`3 lakh special loan to finance the construction of the building on 1st January, 2014 at
an interest rate of 12% p.a. The company's other outstanding two non-specific loans
were:
Amount Rate of Interest
` 6,00,000 11% p.a.
` 11,00,000 13% p.a.
The expenditure that were made on the building project were as follows:
Amount (`)
January, 2014 3,00,000
April, 2014 3,50,000
July, 2014 5,50,000
December, 2014 1,50,000
Building was completed on 31st December, 2014. Following the principles prescribed in
AS 16 ‘Borrowing Cost’, calculate the amount of interest to be capitalized and pass one
Journal entry for capitalizing the cost and borrowing in respect of the building.
(i) Computation of average accumulated expenses

`
` 3,00,000 x 12 / 12 = 3,00,000
` 3,50,000 x 9 / 12 = 2,62,500
` 5,50,000 x 6 / 12 = 2,75,000
` 1,50,000 x 1 / 12 = 12,500
13,50,000 8,50,000
123
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of interest
(`)
6,00,000 11% = 66,000
11,00,000 13% = 1,43,000
17,00,000 2,09,000
Weighted average rate = 12.29 %
` 2,09,000
` 100
` 17,00,000
(iii) Interest amount to be capitalized
`
Specific borrowings (` 3,00,000 x 12%) = 36,000
Non-specific borrowings
[` 5,50,000(` 8,50,000 – ` 3,00,000) x 12.29%] = 67,595
Amount of interest to be capitalized = 1,03,595
Question 3
Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial
Year 2014-15 for its residential project at LIBOR + 3 %. The interest is payable at the end
of the Financial Year. At the time of availment, exchange rate was ` 56 per US $ and the
rate as on 31st March, 2015 ` 62 per US $. If Shan Builders Limited borrowed the loan in
India in Indian Rupee equivalent, the pricing of loan would have been 10.50%.
Compute Borrowing Cost and exchange difference for the year ending 31st March, 2015
as per applicable Accounting Standards. (Applicable LIBOR is 1%).
(i) Interest for the period 2014-15
= US $ 10 lakhs x 4% × ` 62 per US $ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only
124
` 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would
be ` 58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on foreign currency
borrowings plus the exchange difference to the extent of difference between interest on
local currency borrowing and interest on foreign currency borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for as
per AS 16 “Borrowing Costs” and the remaining ` 26 lakhs (60 - 34) would be considered
as the exchange difference to be accounted for as per AS 11 “The Effects of Changes in
Foreign Exchange Rates”.
Question 4
GHI Limited obtained a loan for `70 lakhs on 15th April, 2010 from JKL Bank, to be
utilized as under:
` in lakhs
Construction of Factory shed 25
Working capital 15
Advance for purchase of Truck 10
In March 2011, construction of the factory shed was completed and machinery, which
was ready for its intended use, was installed. Delivery of Truck was received in the next
financial year. Total interest of ` 9,10,000 was charged by the bank for the financial year
ending 31-03-2011.
Show the treatment of interest under AS 16 and also explain the nature of Assets
S. Particulars Nature Interest to be Interest to be charged
No. capitalized to P & L A/c
(i) Construction of Qualifying Asset
Factory Shed (Refer
Note 1)
(ii) Purchase of Machinery Not a
(Refer Note 2) Qualifying Asset
(iii) Working Capital Not a Qualifying
Asset
(iv) Advance for Not a Qualifying
Purchase of Truck Asset
Total ` 3,25,000 ` 5,85,000
125
PAST PAPER SECTION
Question 1
Rohini Limited has obtained loan from an Institution for ` 500 Lakhs for modernization
and renovating its plant and machinery. The installation of and ` 50 lakhs advanced to
supplier of additional assets and the balance of ` 130 lakhs has been utilized for working
capital requirements. Total interest paid for the above loan amounted to ` 65 lakhs
during 2008 – 09. You are required to state how the interest on institutional loan is to be
accounted for in the year 2008 – 09. (May’10)
Answer
(Hint): Interest to be capitalised (` in lakhs) 48.10
Interest to be charged to Profit and Loss A/c (` in lakhs) 16.90
Question 2
On 25th April, 2010 Neel Limited obtained a loan from the bank for ` 70 lakhs to be
utilised as under:
` In lakhs
Instruction of factory shed 28
Working Capital 14
Advance for purchase of truck 7
In March 2011, Construction of shed was completed and machinery installed. Delivery
of truck was not received. Total interest charged by the bank for the year ending 31st
March, 2011 was ` 12 lakhs. Show the treatment of inter under Accounting Standard –
16. (Nov’ 11)
Answer
(Hint): Interest to be capitalised (` in lakhs) 4.8
Interest to be charged to Profit and Loss A/c (` in lakhs) 7.2
Question 3
Write short note on ‘Suspension of Capitalisation’ in context of Accounting Standard 16.
(May’16)
Answer
Capitalisation of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete. An
126
asset is normally ready for its intended use or sale when its physical construction or
production is complete even though routine administrative work might still continue. If
minor modifications such as the decoration of a property to the user’s specification, are
all that are outstanding, this indicates that substantially all the activities are complete.
When the construction of a qualifying asset is completed in parts and a completed part
is capable of being used while construction continues for the other parts, capitalisation
of borrowing costs in relation to a part should cease when substantially all the activities
necessary to prepare that part for its intended use or sale are complete.
Question 4
M/s. Zen Bridge Construction Limited obtained a loan of ` 64 crores to be utilized as
under:
i. Construction of Hill link road in Kedarnath: ` 50 crores
(work was held up totally for a month during the year due
to heavy rain which are common in the geographic region
involved)
ii. Purchase of Equipment and Machineries ` 6 crores
iii. Working Capital ` 4 crores
iv. Purchase of Vehicles ` 1 crores
v. Advances for tools / cranes etc. ` 1 crores
vi. Purchase of Technical Know how ` 2 crores
vii. Total Interest charged by the Bank for the year ending ` 1.6 crores
31st March, 2016
Show the treatment of Interest according to Accounting Standard by M/s. Zen Bridge
Construction Limited. (Nov’16)
Answer
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing
costs that are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalized as part of the cost of that asset. Other borrowing
costs should be recognized as an expense in the period in which they are incurred.
Capitalization of borrowing costs is also not suspended when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale.
127
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualify- Interest to Interest to
ing Asset be capital- be charged
ized to Profit &
` in crores Loss A/c ` in
crores
Construction of hill road* Yes 1.25 1.6/64 x 50
Purchase of equipment and No 0.15 1.6/64 x 6
machineries
Working capital No 0.10 1.6/64 x 4
Purchase of vehicles No 0.025 1.6/64 x 1
Advance for tools, cranes etc. No 0.025 1.6/64 x 1
Purchase of technical know- how No 0.05 1.6/64 x 2
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year
(substantial period of time), hence considered as.
Question 5
First Ltd. began construction of a new factory building on 1st April, 2017. It obtained `
2,00,000 as a special loan to finance the construction of the factory building on
1st April, 2017 at an interest rate of 8% per annum. Further, expenditure on construction
of the factory building was financed through other non-specific loans. Details of other
outstanding non-specific loans were:
Amount (`) Rate of Interest per annum
4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
Date Amount (`)
1st April, 2017 3,00,000
31st May, 2017 2,40,000
1st August, 2017 4,00,000
31st December, 2017 3,60,000
The construction of factory building was completed by 31st March, 2018. As per the
provisions of AS 16, you are required to:
128
(1) Calculate the amount of interest to be capitalized.

(2) Pass Journal entry for capitalizing the cost and borrowing cost in respect of the
factory building. (May’ 19)
Answer
(i) Computation of average accumulated expenses
`
` 3,00,000 x 12 / 12 = 3,00,000
` 2,40,000 x 10 / 12 = 2,00,000
` 4,00,000 x 8 / 12 = 2,66,667
` 3,60,000 x 3 / 12 = 90,000
8,56,667
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of interest (`)
4,00,000 9% = 36,000
5,00,000 12% = 60,000
3,00,000 14% = 42,000
1,38,00
Weighted average rate of interest = 11.5%
1,38,000
×100
1,38,000
(iii) Amount of interest to be capitalized

`
Interest on average accumulated expenses:
Specific borrowings (` 2,00,000 x 8%) = 16,000
Non-specific borrowings (` 6,56,667* x 11.5%) = 75,517
Amount of interest to be capitalised = 91,517
(iv) Total expenses to be capitalised for building

`
Cost of building ` (3,00,000 + 2,40,000 + 4,00,000 + 3,60,000) 13,00,000
Add: Amount of interest to be capitalized 91,517
13,91,517
129
(v) Journal Entry

Date Particulars Dr. (`) Cr. (`)
31.3.2018 Building A/c Dr. 13,91,517
To Building WIP** A/c 13,00,000
To Borrowing costs A/c 91,517
(Being amount of cost of building and
borrowing cost thereon capitalised)
Question 6
On 15th April, 2019 RBM ltd. obtained a Term Loan from the Bank for 320 lakhs to be
utilized as under:
` in (Lakhs)
Construction for factory shed 240
Working capital 24
Purchase of vehicles 12
Advance for tools/cranes etc. 8
Purchase of technical know how 6
In March, 2020 construction of shed was completed and machinery was installed. Total
interest charged by the bank for the year ending 31St March, 2020 was 40 lakhs. In the
context of provisions of AS 16 'Borrowing Costs', show the treatment of interest and also
explain the nature of Assets. (Nov’ 20)
Answer
As per AS 16 A qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale. Other investments and those inventories
that are routinely manufactured or otherwise produced in large quantities on a repetitive
basis over a short period of time, are not qualifying assets. Assets that are ready for their
intended use or sale when acquired also are not qualifying assets. Borrowing costs that
are directly attributable to the acquisition, construction or production of a qualifying
asset should be capitalized as part of the cost of that asset. Other borrowing costs
should be recognized as an expense in the period in which they are incurred.
Construction of factory shed amounting ` 240 lakhs is qualifying asset in the given case.
The interest for this amount during the year will be added to the cost of factory shed.
130
All others (purchase of machinery, vehicles and technical know how, working capital,
advance for tools/cranes) are non-qualifying assets and related borrowing cost will be
charged to Profit and Loss statement.
Qualifying Asset as per AS 16 (construction of a shed) = ` 240 lakhs Borrowing cost to

be capitalized = ` 40 lakhs x 240/320 = ` 30 lakhs Interest to be debited to Profit or Loss
account: ` (40 – 30) = ` 10 lakhs.
Note: Assumed that construction of factory shed completed on 31st March, 2020.
Question 7
Expert Limited issued 12% secured debentures of ` 100 lakhs on 01.06.2019. Money
raised from debentures to be Utilized as under :
Intended Purpose Amount ` in lakhs
Construction of factory building 40
Working Capital 30
Purchase of Furniture 2
Purchase of truck 13
(i) Interest on debentures for the Financial Year 2019-2020 was paid by the Company.
(ii) During the year, the company invested idle fund of ` 5 lakhs (out of the money
raised from debentures) in Bank's fixed deposit and earned interest of ` 50,000.
(iii) In March, 2020 construction of factory building was not completed (it is expected
that it will take another 6 months).
(iv) In March 2020, Machinery was installed and ready for its intended use.
(v) Furniture was put to use at the end of March 2020.
(vi) Truck is going to be received in April, 2020.
You are required to show the treatment of interest as per AS 16 in respect of borrowing
cost for the year ended 31st March, 2020 in the Books of Expert Limited.
(Nov’ 20)
131
REVISION QUESTIONS
Question 1
On 1st April, 2011, Amazing Construction Ltd. obtained a loan of ` 32 crores to be utilized
as under:
(i) Construction of sealink across two cities:
(work was held up totally for a month during the year
due to high water levels) : ` 25 crores
(ii) Purchase of equipments and machineries: ` 3 crores
(iii)
Working capital: ` 2 crores
(iv)
Purchase of vehicles: ` 50,00,000
(v) Advance for tools/cranes etc.: ` 50,00,000
(vi) Purchase of technical know-how: ` 1 crores
(vii) Total interest charged by the bank for the year ending
31st March, 2012 ` 80,00,000
Show the treatment of interest by Amazing Construction Ltd.
132
REDEMPTION OF REDEEMABLE
2 PREFERENCE SHARES &
ACCOUNTING FOR BONUS
PART A : THEORY SECTION
The preference shares are those shares where the shareholders have following two
preferences
1. At the time of dividend, they are paid first
2. At the time of liquidation, their capital is repaid first
The preference share capital is a periodical capital (maximum 20 years) and on expiry of
stipulated period, their capital should be repaid which is called as 'Redemption'.
Legal Provisions (section 55)

1. As per companies Act, only fully paid preference shares can be redeemed. But if it is
specifically mentioned in the question to redeem partly paid shares then, it should
be assumed that first the call is made on these shares to make them fully paid and
then they are redeemed
2. All those preference shares where there are calls-in-arrears cannot be redeemed.
3. When the preference shares are redeemed at a premium, the premium on redemption
should be met out of divisible profits (Divisible Profits means profits available for
dividend and it includes General Reserve or Reserve Fund, Profit & Loss A/c, dividend
equalisation reserve, Revenue reserve, etc.).
4. Creation of CRR:
The Preference Shares can be redeemed either out of fresh issue or profits available
for dividend. When the preference share capital is redeemed, the company's capital
base goes down which is required to be re-instated by either the proceeds of fresh
issue of shares or out of divisible profits.
Note:
(1) If the proceeds of fresh issue is less than the nominal value of preference shares
redeemed, then CRR Should be created for difference amount.
133
F.V. of preference shares redeemed xx

(-) Proceeds of fresh issue of shares xx
CRR Required xx
(2) The term 'proceeds of fresh issue of shares' means either nominal value of
shares issued or called up value whichever is less.
Journal Entries
1 Entry for fresh issue
Bank a/c Dr.
To Share Capital a/c
To Securities Premium a/c
2 Entry for Redemption (money payable to PSH)
Preference share capital a/c Dr.
Premium on redemption a/c Dr.
To Preference shareholders a/c
3 Entry for writing off the premium
Divisible Profit a/c Dr.
To Premium on redemption a/c
Note: If nothing is specified it is assumed that the company
is governed by section 133 of the companies Act, 2013 which
does not allow use of securities premium to write off premium
on Redemption.
4 Entry for creation of CRR
Divisible Profit a/c Dr.
To CRR a/c
5 Entry for pay off
Preference shareholders a/c Dr.
To Bank a/c
134
135
(I) Types of Reserves

All Reserves of a Joint stock company can be classified into 3 parts.
1. Capital type of reserves
They are created out of capital events and they are not available for dividend
purpose. They are normally used for Bonus purpose.
Examples:
a. Capital Redemption Reserve
b. Capital Reserve
c. Securities Premium
d. Revaluation Reserve
2. Statutory Types of Reserves

They are created as per some statute or law and they are neither available for
dividend nor for bonus.
Examples:
(a) Investment Allowance Reserve
(b) Development Rebate Reserve
(c) Development Reserve
(d) Export profit reserves
3. Revenue type of reserves: (also called as free reserves or divisible profits)

They are created out of revenue events and they are available for dividend
purpose
Examples:
(a) General Reserve/Reserve Fund
(b) Profit and Loss A/c
(c) Dividend equalisation reserve
(d)
Subsidy Reserve
(II) Issue of Bonus Shares (Sec. 63):

(a) Conversion of partly paid shares into fully paid by way of bonus
Demand Final Call
(i) Share final call A/c Dr.
To equity shares capital A/c
Declaration of Bonus
(ii) Divisible profits A/c GRRDP Dr.
136
To Bonus to shareholders A/c

Adjustments of Bonus & Final Call
(iii) Bonus to share holder A/c Dr.
To Share final call A/c
(b) Issue of fully paid bonus shares
Declaration of Bonus
(i) Capital Redemption Reserve A/c Dr.
Capital Reserve (earned in cash) A/c Dr.
Securities Premium (earned in cash) A/c Dr.
Divisible Profit (if required) A/c Dr.
To Bonus to shareholders A/c
Issue of Bonus Shares
(ii) Bonus to shareholders A/c Dr.
To Equity share capital A/c
Notes:
As per bonus guidelines given in the companies Act, no company can issue fully paid
bonus shares until all partly paid shares are converted into fully paid shares by way of
bonus.

137
PART B : CLASSWORK SECTION
Question 1
The Balance sheet of BHAVANA LTD., as on 31st March, 2017 is as follows:
Liabilities ` Assets `
Share Capital: Fixed Assets:
Issued & fully paid shares: Land & Building 1,00,000
500, 11% Red. Preference Plant 30,000
Shares of ` 100 each 50,000 Furniture 2,000 1,32,000
9,000 equity shares of Current Assets:
` 10 each 90,000 Stocks 30,000
Reserves and Surplus: Debtors 15,000
Securities Premium 10,000 Investment 28,000
General Reserve 20,000 Bank 20,000 93,000
P & L A/c 25,000 55,000
Current Liabilities 30,000
2,25,000 2,25,000
The company decided to redeem its preference shares at a premium of 5% on 1st April,
2017.
A fresh issue of 1,000 equity shares of ` 10/- each was made at ` 12/- per share payable in
full. These were fully subscribed and all moneys were duly collected. All the investments
were sold realising ` 27,000.
You are required to give the journal entries, including those relating to cash, to record the
above transactions and draw up the balance sheet as would appear after redemption of
preference shares.
Question 2
The Balance Sheet of A Ltd. as at 31.3.2015 is as follow:
Balance Sheet as at 31.3.2015
Authorised Share Capital Sundry Assets 17,00,000
1,50,000 Equity Shares of `10 each 15,00,000
Issued, Subscribed and Paid-up
80,000 Equity Shares of ` 10 each 6,00,000
`7.50 each paid-up
Reserves:
138
Capital Redemption Reserve 1,50,000

Plant Revaluation Account 20,000
Securities Premium A/c 1,50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
General Reserve 3,00,000
17,00,000 17,00,000
The company wanted to issue bonus shares to its shareholders at the rate of one share for
every two shares held. Necessary resolutions were passed; requisite legal requirements
were compiled with:
You are required to give effect to the proposal by passing journal entries in the books of
A Ltd.
Question 3
SK Ltd. had ` 1,00,000 Equity share capital (` 10),1,000 8% ` 100 redeemable preferences
shares and ` 60,000 and ` 40,000 respectively in general reserve and profit and loss
account. It had also ` 3,000 in securities premium account. The company exercised its
option to redeem the preference shares at 10% premium.
For this purpose 5,000 ` 10 rights shares were issued at 10% premium which were fully
paid at a time. The company had also ` 30,000 investments which were sold for ` 38,000.
All payments were made except to holders of 50 shares who could not be traced.
The directors then issued bonus shares to the then shareholders at the rate of 2 for 3 held.
Pass entries (without narration).
Question 4
The books of B Ltd. showed the following balance on 31st December, 2013: 30,000.
Equity Shares of ` 10 each fully paid; 18,000 12% Redeemable Preference Shares of ` 10
each fully paid; 4,000 10% Redeemable Preference Shares of ` 10 each, ` 8 paid up (all
shares issued on 1st April, 2012).
Undistributed Reserve and Surplus stood as: Profit and Loss Account ` 80,000; General
Reserve ` 1,20,000; Securities Premium Account ` 15,000 and Capital Reserve ` 21,000.
Preference shares are redeemed on 1st January, 2014 at a premium of ` 2 per share. The
whereabouts of the holders of 100 shares of ` 10 each fully paid are not known.
For redemption, 3,000 equity shares of ` 10 each are issued at 10% premium. At the same
time, a bonus issue of equity share was made at par, two shares being issued for every
139
five held on that date out of the Capital Redemption Reserve Account.
Show the necessary Journal Entries to record the transactions.
Question 5
In addition to Equity Shares, Kamini Ltd. has issued at par 6,000 6% redeemable preference
shares of ` 100 each fully paid, and 2,000. 7% redeemable preference shares of ` 100
each ` 75 paid. All these preference shares were redeemable, on or after 1st April, 2018
at premium of 5%.
The summarised Balance Sheet of the Company on 31st March, 2018 was as follows:
Issued Share Capital : Fixed Assets 17,00,000
6,000 6% Red. Pref. Shares of ` Cash & Bank Balance 9,00,000
100 each fully paid 6,00,000
2,000 7% Red. Pref. Shares of `
100 each, ` 75 paid 1,50,000
1,00,000 Equity Shares of ` 10
each fully paid 10,00,000
Securities Premium A/c 1,00,000
Profit & Loss A/c 2,40,000
Creditors 5,10,000
26,00,000 26,00,000
1. It was decided to redeem both classes of preference shares on 1st April, after taking
the steps necessary to comply with the requirements of the Companies Act, 2013.
2. Company issued for cash so many (but no more) equity shares of ` 10 each at par as
were necessary to provide for the redemption of all preference shares which could
not otherwise be redeemed. These equity shares were fully paid up on allotment.
3. All necessary steps were duly taken and the redemption of both classes of preference
shares was effected on 1st April, 2018
You are required to show : i) Journal entries (including cash) necessary to record the
foregoing transactions.
140
Question 6
The following is the summarised Balance Sheet of Redeemable Limited :
Paid up Share Capital Bank 90,000
50,000 Equity shares of ` 10 Other Assets 8,10,000
Each 5,00,000
1,000, 10% Red. Pref. shares
of ` 100 each 1,00,000
(-) calls in Arrears 1,000 99,000
(On 50 shares @ ` 20 each)
Development Rebate Reserve 50,000
Other Liabilities 1,51,000
9,00,000 9,00,000
The Redeemable Preference Shares were redeemed on the following basis:

(1) Further 4,500 equity shares were issued at a premium of 10%
(2) Of the 50 Preference Shares, holder for 40 shares paid the call money before the
date of redemption. The balance 10 shares were forfeited and reissued for a total
sum of ` 500.
(3) Preference shares were redeemed at a premium of 10 per cent.
(4) Securities premium was utilised to write off premium on redemption.
Show journal entries including those relating to cash.
Question 7
The capital structure of a company consists of 20,000 Equity Shares of ` 10 each fully
paid up and 1,000 8% Redeemable Preference Shares of ` 100 each fully paid up (issued
on 1.4.2011).
Undistributed reserve and surplus stood as: General Reserve ` 80,000; Profit and Loss
Account ` 20,000; Investment Allowance Reserve (out of which ` 5,000, not free for
distribution as dividend) ` 10,000; Securities Premium ` 2,000, Cash at bank amounted to
` 98,000. Preference shares are to be redeemed at a Premium of 10% and for the purpose
of redemption, the directors are empowered to make fresh issue of Equity Shares at par
after utilizing the undistributed reserve and surplus, subject to the conditions that a sum
of ` 20,000 shall be retained in general reserve and which should not be utilized.
Pass Journal Entries to give effect to the above arrangements.
141
Question 8
The Balance Sheet of M Ltd. as on 31.3.2017 is given below:
9% Red. Pref. Shares of `100 Fixed Assets 9,50,000
each, fully paid up 6,50,000 Investments 2,75,000
Equity Shares of ` 5 each Cash at Bank 67,500
fully paid up 2,25,000
P & L A/c 2,60,000
Sundry Creditors 57,500
12,92,500 12,92,500
The preference shares are to be redeemed on 1.4.2017, at a premium of 7½%. In order to

facilitate redemption the company had decided:
(i) To sell the investments for ` 2,60,000.
(ii) To finance part of the redemption from company’s fund;
(iii) Premium on Redemption was met out of Securities Premium a/c
(iv) To issue sufficient equity shares at a premium of Re. 1 per share to raise the balance
of funds required.
(v) Minimum Bank Balance to be retained at ` 10,500. The investments were sold, the
equity shares were fully subscribed and the shares were duly redeemed.
Show the entries and prepare the Balance Sheet.
Note: Minimum reduction was to be made against general reserve.
Question 9
The following is the summarized Balance Sheet of Trinity Ltd. as at 31.3.2011:
Share Capital Fixed Assets
Authorised Gross Block 3,00,000
10,000 10% Redeemable Less: Depreciation 1,00,000
Preference Shares of ` 10 each 1,00,000 2,00,000
90,000 Equity Shares of ` 10 Investments 1,00,000
each 9,00,000 Current Assets
10,00,000 Inventory 45,000
Issued, Subscribed and Paid- Trade receivables 25,000
up Capital Cash & Bank Balance 50,000
142
10,000 10% Redeemable

Preference Shares of ` 10 each 1,00,000
10,000 Equity Shares of `10
Each 1,00,000
(A) 2,00,000
Reserve and Surplus
Securities Premium 70,000
Profit and Loss A/c 18,500
(B) 2,08,500
Current Liabilities (C) 11,500
Total (A + B + C) 4,20,000 Total 4,20,000
For the year ended 31.3.2012, the company made a net profit of ` 35,000 after providing
` 20,000 depreciation.
The following additional information is available with regard to company’s operation:
1. The preference dividend for the year ended 31.3.2012 was paid before 31.3.2012.
2. Except cash and bank balances other current assets and current liabilities as on
31.3.2012 was the same as on 31.3.2011.
3. The company redeemed the preference shares at a premium of 10%.
4. The company issued bonus shares in the ratio of one share for every equity share
held as on 31.3.2012.
5. To meet the cash requirements of redemption, the company sold portion of
investments, so as to leave as minimum cash/ bank balance of ` 30,000 after
redemption.
6. Investments were sold at 90% of cost on 31.3.2012.
You are required to prepare necessary journal entries to record redemption and issue of
bonus shares.

Question 10
The Balance Sheet of XYZ as at 31st December, 2011 inter alia includes the following:
`
50,000, 8% Preference Shares of ` 100 each, ` 70 paid up 35, 00,000
1,00,000 Equity Shares of ` 100 each fully paid up 1,00,00,000
Securities Premium 5, 00,000
143
Capital Redemption Reserve 20, 00,000

General Reserve 50, 00,000
Under the terms of their issue, the preference shares are redeemable on 31st March,
2012 at 5% premium. In order to finance the redemption, the company makes a rights
issue of 50,000 equity shares of ` 100 each at ` 110 per share, ` 20 being payable on
application, ` 35 (including premium) on allotment and the balance on 1st January, 2013.
The issue was fully subscribed and allotment made on 1st March, 2012. The money due
on allotment were received by 31st March, 2012. The preference shares were redeemed
after fulfilling the necessary conditions of Section 55 of the Companies Act, 2013.
You are asked to pass the necessary Journal Entries and show the relevant extracts from
the balance sheet as on 31st March, 2012 with the corresponding figures as on 31st
December, 2011.
144
PART C : HOMEWORK SECTION
Question 11
C Ltd. had 10,000, 10% Redeemable Preference Shares of ` 100 each, fully paid up. The
company decided to redeem these preference shares at par by issue of sufficient number
of equity shares of ` 10 each at a premium of ` 2 per share as fully paid up.
You are required to pass necessary Journal Entries including cash transactions in the
books of the company.
Question 12
The Balance Sheet of X Ltd. as on 31st March, 2013 is as follows:
Particulars `
EQUITY AND LIABILITIES
1. Shareholder’s funds
(a) Share Capital 2,90,000
(b) Reserves and Surplus 48,000
2. Current liabilities
Trade Payables 56,500
Total 3,94,500
ASSETS
1. Fixed Assets
Tangible asset 3,45,000
Non-Current Investments 18,500
2. Current Assets
Cash and cash equivalents (bank) 31,000
Total 3,94,500
The share capital of the company consists of ` 50 each equity shares of ` 2,25,000 and
` 100 each Preference shares of ` 65,000(issued on 1.4.2008). Reserves and Surplus
comprises Profit and Loss Account only.
In order to facilitate the redemption of preference shares at a premium of 10%, the
Company decided:
(a) To sell all the investments for ` 15,000.
(b) To finance part of redemption from company funds, subject to, leaving a bank
balance of ` 12,000.
(c) To issue minimum equity share of ` 50 each at a premium of ` 10 per share to raise
the balance of funds required.
145
You are required to pass:

The necessary Journal Entries to record the above transactions and prepare the balance
sheet as on completion of the above transactions.
Question 13
C Limited had 3,000, 12% Redeemable Preference Shares of ` 100 each, fully paid up. The
company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 25,000 Equity Shares of ` 10 each at par,
(ii) 1,000 14% Debentures of ` 100 each.
The issue was fully subscribed and all amounts were received in full .The payment was
duly made. The company had sufficient profits. Show Journal Entries in the books of the
company.
Question 14
The TATA STEEL LTD. whose issued share capital on 31st March 2011 consisted of 6,000;
8% redeemable preference shares of ` 100 each fully paid and 20,000 equity shares of
` 100 each, ` 80 paid up, decided to redeem preference shares at a premium of ` 10
per share. The Co.'s Balance Sheet as at 31st March, 2011 showed a General Reserve
of ` 9,00,000 and a Capital Reserve of ` 85,000. The redemption was effected partly
out of profits and partly out of the proceeds of a new issue of 3,000; 7.5% cumulative
preference shares of ` 100 each at a premium of ` 25 per share. The premium payable on
redemption met out of the premium received on the new issue. On 1st July, the company
at its General Meeting resolved that all the capital reserves be applied in the following
manner:
(a) The declaration of bonus at the rate of ` 20 per share on equity shares for the
purpose of making the said shares fully paid; and
(b) The issue of bonus shares to the equity shareholders in the ratio of 1 share for every
four shares held.
Required: Pass necessary Journal Entries.
Question 15
Following is the Balance Sheet of Comfortable Ltd. as on 31.3.2018
SOURCES: ` in lakhs ` in lakhs
(I) OWN FUND :
1. Share Capital
146
(i) Equity Shares 1.00

(ii) 11% Red. Preference Shares of ` 100 1.00
each
Less : Calls in arrears (@ ` 20/-per
share) 0.06 0.94
(iii) 10% Redeemable Preference Shares 1.00
2. Reserves A Surplus :
(i) Share Premium Account 0.06
(ii) Capital Reserve (Profit on Sale of 0.36
Assets available for Distribution by
way of Dividend as per A/A of Co.)
(iii) General Reserve Account 0.40
(iv) P&L Account 0.20 1.02
3.96
APPLICATIONS :
(I) Fixed Assets 2.60
(ii) Investments 0.30
(iii) Working Capital 1.06 3.96
Directors Resolved:
(1) To issue reminders to 300 shareholders in default.
(2) To issue 2000 Equity Shares of `10/-each @ Premium of ` 5/-per share
(3) To redeem 11% Redeemable Preference Shares @ Premium of ` 10/-each.
(4) To sell off all investments to redeem Preference Shares.
(5) To forfeit shares on which calls are not received.
Accordingly:
(1) 200 shareholders paid off their dues and remaining shares forfeited.
(2) Sold off investments @ 90% of the costs.
(3) Utilised divisible profit for redemption.
(4) Redeem 11% Redeemable Preference Shares of which shareholders holding 20 shares
were not traceable.

(1) Pass necessary Journal entries to implement redemption.
(2) Prepare Balance Sheet after redemption.
147
PART D : PAST EXAM QUESTIONS
Question 16
The following is the Balance Sheet of Bumbum Limited as at 31st March, 2009:
Sources of Funds `
Authorized Capital
50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ` 100 each 10,00,000
15,00,000
Issued subscribed and paid up
5,000 Redeemable 8% Preference shares of ` 100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
Profit & Loss A/c 1,80,000
2500,9% Debentures of ` 100 each 2,50,000
Sundry Creditors 1,70,000
Total 26,50,000
Application of Funds
Fixed Assets (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Sundry Debtors 6,20,000
Cash & Bank balance 2,80,000
Preliminary expenses 1,40,000
Total 26,50,000
In Annual General Meeting held on 20th June, 2009 the company passed the following
resolutions:
(i) To split equity share of ` 10 each into 5 equity shares or ` 2 each from 1st July, 09.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To redeem 9% Debentures by making offer to debenture holders to convert their
holdings into equity shares at ` 10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares
held on record date.
148
On 10th July, 2009 investments were sold for ` 5,55,000 and preference shares were
redeemed.
40% of Debenture holders exercised their option to accept cash and their claims were
settled on 1st August, 2009.
The company fixed 5th September, 2009 as record date and bonus issue was concluded
by 12th September, 2009.
You are requested to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30th September, 2009. All working notes should form part
of your answer.
(12 Marks - Nov. 2010 IPCC.)
Question 17
Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31st March, 2011:
Sources of Funds In `
Authorised Capital:
50,000, 10% preference share of ` 10 each 5,00,000
2,00,000 equity shares of ` 10 each 20,00,000
Issued and Subscribed Capital:
40,000; 10% preference shares of ` 10 each fully paid 4,00,000
1,80,000; equity shares of ` 10 each, of which ` 7.50 paid up 13,50,000
Reserve and Surplus :
Capital Reserve 1,50,000
Profit and Loss Account 3,00,000
On 1st April, 2011, the company has made a final call @ ` 2.50 each on 1,80,000 equity
shares. The call money was received by 30th April, 2011. There after the company decided
to capitalize its reserves by issuing bonus shares at the rate of one share for every three
shares held. Securities premium of ` 50,000 includes a premium of ` 20,000 for shares
issued to vendor for purchase of a special machinery. Capital reserve includes ` 60,000
being profit on exchange of plant and machinery.
Show necessary Journal Entries in the books of the company and prepare the extract of
the Balance Sheet after bonus issue. Necessary assumption, if any should form part of
your answer. (8 Marks - Nov. 2011 IPCC.)
149
Question 18
The following notes pertain to Brite Ltd.’s Balance sheet as on 31st March, 2012:
(` in Lakhs)
(1) Share Capital
Authorised:
20 crore shares of ` 10 each 20,000
Issued and Subscribed
10 crore Equity Shares of ` 10 each 10,000
2 crore 11% Cumulative Preference Shares of ` 10 each 2,000
12,000
Called and paid up:
10 crore Equity Shares of ` 10 each, ` 8 per share called and paid
up 8,000
2 crore 11% Cumulative Preference Shares of ` 10 each, fully
called and paid up 2,000
10,000
(2) Reserves and Surplus:
Capital Reserve 485
Capital Redemption Reserve 1,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss (Appropriation) A/c 273
4,798
On 2nd April, 2012 the company made the final call on equity shares @ ` 2 per share.
The entire money was received in the month of April, 2012.
On 1st June, 2012 the company decided to issue to equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it decided to utilize the
capital reserves to the maximum possible extent.
Pass journal entries for all the above mentioned transactions. Also prepare the notes on
Share Capital and Reserves and Surplus relevant to the Balance Sheet of the company
immediately after the issue of bonus shares.
(8 Marks - Nov. 2012 IPCC)
150
Question 19
Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014:
Particulars `
4,500 Equity Shares of ` 100 each 4,50,000
Capital Reserve (including ` 40,000 being profit on sale of Plant) 90,000
Profit and Loss Account (Cr. Balance) 65,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share
for every 3 shares held. Company decided that there should be the minimum reduction in
free reserves. Pass necessary Journal Entries in the books Saral Ltd.
(4 Marks - May 2014 IPCC)
Question 20
Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of ` 100 each, fully paid
up. The company had to redeem these shares at premium of 10%.
It was decided by the company to issue the following:
(i) 40,000 Equity Shares of ` 10 each at par
(ii) 2,000, 12% Debentures of ` 100 each.
The issue was fully subscribed and all accounts were received in full. The payment was
duly made. The company had sufficient profits. Show journal entries in the books of the
company. (10 Marks Inter C.A. - May 2018)
Question 21
Following are the balances appear in the trial balance of Arya Ltd. as at 31st March,
2018.
`
Issued and Subscribed Capital:
10,000; 10% Preference Shares of ` 10 each fully paid 1,00,000
1,00,000 Equity Shares of ` 10 each, ` 8 paid up 8,00,000
Reserves and Surplus:
Securities Premium (collected in cash) 25,000
151
On 1st April, 2018 the company has made final call @ ` 2 each on 1,00,000 Equity Shares.
The call money was received by 15th April, 2018. Thereafter the company decided to
issue bonus shares to equity shareholders at the rate of 1 share for every 5 shares held
and for this purpose, it decided that there should be minimum reduction in free reserves.
Pass Journal entries. (5 Marks Inter C.A. - May 2018)
Question 22
Pass Journal Entries in the following circumstances:
(i) A Limited company with subscribed capital of ` 5,00,000 consisting of 50,000 Equity
shares of ` 10 each; called up capital ` 7.50 per share. A bonus of ` 1,25,000
declared out of General Reserve to be applied in making the existing shares fully
paid up. (2 Marks)
(ii) A Limited company having fully paid up capital of ` 50,00,000 consisting of Equity
shares of ` 10 each, had General Reserve of ` 9,00,000. It was resolved to capitalize
` 5,00,000 out of General Reserve by issuing 50,000 fully paid bonus shares of ` 10
each, each shareholder to get one such share for every ten shares held by him in the
company. (2 Marks - Nov. 2018 IPCC)
Question 23
The Summarized Balance Sheet of Clean Ltd. as on 31st March, 2019 is as follows:
Particulars `
EQUITY AND LIABILITIES:
1. Shareholder’s funds:
(a) Share Capital 5,80,000
(b) Reserves and Surplus 96,000
2. Current Liabilities:
Trade Payables 1,13,000
Total 7,89,000
ASSETS:
1. Non – Current Assets
(a) Property, Plant and Equipment Tangible Assets 6,90,000
(b) Non – Current Investments 37,000
2. Current Assets
Cash and cash equivalents (Bank) 62,000
Total 7,89,000
152
The Share Capital of the company consists of ` 50 each Equity shares of ` 4,50,000 and `
100 each 8% Redeemable Preference Shares of ` 1,30,000 (issued on 1.4.2017). Reserves
and Surplus comprises statement of profit and loss only.
In order to facilitate the redemption of preference shares at a premium of 10%, the
Company decided:
(a) to sell all the investments for ` 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank
balance of ` 24,000.
(c) to issue minimum equity share of ` 50 each at a premium of ` 10 per share to raise
the balance of funds required.
You are required to
(1) Pass Journal Entries to record the above transactions.
(2) Prepare Balance Sheet after completion of the above transactions.
(10 Marks – Inter C.A. May 19)
Question 24
Following items appear in the Trial Balance of Satish Limited as on 31st March, 2018:
Particulars Amount
Capital Reserves (including ` 80,000 being profit on sale of plant) 1,80,000
Profit and Loss Account (Cr. Balance) 1,30,000
The company decided to issue bonus shares to equity shareholders at the rate of 1 share
for every 3 shares held. Company decided that there should be the minimum reduction in
free reserves. Pass necessary Journal Entries in the books of Satish Ltd.
(4 Marks – I.P.C.C. May 2019)
Question 25
Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2018 :
`
Authorized capital:
3,00,000 equity shares of ` 10 each 30,00,000
25,000,10% preference shares of ` 10 each 2,50,000
32,50,000
153
Issued and subscribed capital:

2,70,000 equity shares of ` 10 each fully paid up 27,00,000
24,000, 10% preference shares of ` 10 each fully paid up 2,40,000
29,40,000
Reserves and surplus:
General reserve 3,60,000
Capital redemption reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and loss account 6,00,000
11,55,000
On 1st April, 2018, the company decided to capitalize its reserves by way of bonus at the
rate of two shares for every five shares held.
Show necessary journal entries in the books of the company and prepare the extract of
the balance sheet after bonus issue. (5 Marks – Nov 19 – Inter)
Question 26
The books of Arpit Ltd. shows the following Balances as on 31st December, 2019
Amount(`)
30,000, 10% Preference shares of ` 100 each ` 80 paid up 24,00,000
Capital Redemption Reserve 18,00,000
Under the terms of issues, the preference shares are redeemable on 31st March, 2020 at
a Premium of 10%. in order to finance the redemption, the Board of Directors decided to
make a fresh issue of 1,50,000 Equity shares of ` 10 each at a premium of 20%, ` 2 being
payable on application, ` 7 (including Premium) on allotment and the balance on 1st
January, 2021. The issue was fully subscribed and allotment made on 1st March, 2020.
The money due on allotment was received by 20th March, 2020. The preference shares
were redeemed after fulfilling the necessary conditions of section 55 of the Companies
Act, 2013.
You are required to pass necessary journal entries and show how the relevant items will
appear in the balance sheet of the company after the redemption carried out on 31st
March, 2020. (12 Marks – Nov 2020 – Inter)
154
Question 27
Following is the extract of the Balance sheet of Sindhu Limited as at 31st March, 2020.
All amounts in `
50,000 Equity shares of ` 10 each, ` 8 paid up 4,00,000
General Reserve 80,000
Revaluation Reserve 20,000
Surplus i.e. credit in Profit & Loss Account 1,60,000
On 1st April, 2020 the company made a final call of ` 2 each on 50,000 Equity shares.
The call money was received on 15th April, 2020. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every five shares
held. Additionally, the company passed the board resolution to use securities premium,
general reserve and balance if any from the surplus in the profit and loss account. Pass
necessary entries in the books of Sindhu Limited.
(4 Marks – Nov 2020 – I.P.C.C.)
155
REDEMPTION OF
3 DEBENTURES
ADEQUACY OF DEBENTURE REDEMPTION RESERVE (DRR)

As per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment Rules,
2019, the company shall comply with the requirements with regard to Debenture
Redemption Reserve (DRR) and investment or deposit of sum in respect of debentures
maturing during the year ending on the 31st day of March of next year, in accordance
with the conditions given below
a. the Debenture Redemption Reserve shall be created out of the profits of the company
available for payment of dividend;
b. the limits with respect to adequacy of DRR and investment or deposits, as the case
may be, shall be as under:
Sr. No. Debentures issued by Adequacy of Debenture Redemption Re-

serve (DRR)
1 All India Financial Institutions (AIFIs) No DRR is required
regulated by Reserve Bank of India and
Banking Companies for both public as
well as privately placed debentures
2 Other Financial Institutions (FIs) within DRR will be as applicable to NBFCs
the meaning of clause (72) of section 2 registered with RBI (as per (3) below)
of the Companies Act, 2013
3 For listed companies (other than AIFIs and Banking Companies as specified in
Sr. No.1 above):
156
(a) All listed NBFCs (registered with No DRR is required

RBI under section 45 – IA of the
RBI Act,) and listed HFCs (Housing
Financial Companies registered
with National Housing Bank) for
both public as well as privately
placed debentures
(b) Other listed companies for both No DRR is required
public as well as privately placed
debentures.
4 For unlisted companies (other than
AIFIs and Banking Companies as
specified in Sr. No. 1 above)
(a) All unlisted NBFCs (registered with No DRR is required
RBI under section 45 – IA of the
RBI (Amendment) Act, 1997)
and unlisted HFCs (Housing
Finance Companies registered
with National Housing Bank) for
privately placed debentures
(b) Other unlisted companies DRR shall be 10% of the value of the
outstanding debentures issued
INVESTMENT OF DEBENTURE REDEMPTION RESERVE (DRR) AMOUNT

Further, as per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment
Rules, 2019, following companies
(a) All listed NBFCs
(b) All listed HFCs
(c) All other listed companies (other than AIFIs, Banking Companies and Other FIs); and
(d) All unlisted companies which are not NBFCs and HFCs
shall on or before the 30th day of April in each year, in respect of debentures issued,
deposit or invest, as the case may be, a sum which should not be less than 15% of
the amount of its debentures maturing during the year ending on the 31st day of
157
March of next year, in any one or more of the following methods, namely:
(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any State

Government;
(c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of Section
20 of the Indian Trusts Act, 1882;
(d) in unencumbered bonds issued by any other company which is notified under
clause (f) of Section 20 of the Indian Trusts Act, 1882.
The amount deposited or invested, as the case may be, above should not be utilised
for any purpose other than for the redemption of debentures maturing during the
year referred to above.
Provided that the amount remaining deposited or invested, as the case may be,
shall not at any time fall below 15% of the amount of debentures maturing during
the 31st day of March of that year.
In case of partly convertible debentures, DRR shall be created in respect of nonconvertible

portion of debenture issue in accordance with this sub-rule.
The amount credited to DRR shall not be utilised by the company except for the
purpose of redemption of debentures.
Note:
It should be noted that appropriation to DRR can be made any time before redemption
and Investments in specified securities as mentioned above can be done before 30th April
for the debentures maturing that year, however, for the sake of simplicity and ease, it
is advisable to make the appropriation and investment immediately after the debentures are
allotted assuming that the company has sufficient amount of profits (issued if allotment
date is not given in the question). Also, in some cases, the date of allotment could be missing,
in such cases the appropriation and investments should be done on the first day of that year for
which ledgers accounts are to be drafted.
158
Debentures issued by
1) All India F.I. Other Unlisted co.’s

2) Other F.I.
3) Listed Cos. – Public Issue
4) Listed NBFC’S
5) Listed Housing Finance Co. DRR DRRI
6) Other Listed Co.’s 10% 15% of
7) Unlisted NBFC of Amt of Deb Amt of
8) Unlisted HFC Outstanding Deb o/s
DRR Not Req. for all DRRI Required for

(a) Listed NBFC / HFC & Listed
co.’s i.e. point No. 3, 4, 5,
6 above
(b) 15% of the amount of
debentures outstanding
JOURNAL ENTRIES
The necessary journal entries passed in the books of a company are given below:
1 After allotment of debentures
(a) For setting aside the fixed amount of profit for redemption
Profit and Loss A/c Dr.
To Debenture Redemption Reserve A/c
(b) For investing the amount set aside for redemption
Debenture Redemption Reserve Investment A/c Dr.
To Bank
(c) For receipt of interest on Debenture Redemption Reserve
Investments
Bank A/c Dr.
To Interest on Debenture Redemption Reserve Investment A/c
(d) For transfer of interest on Debenture Redemption Reserve
Investments (DRRI)
159
Interest on Debenture Redemption Reserve Investment A/c Dr.

To Profit and loss A/c*
 Considering the fact that interest is received each year through cash/bank
account and it is not re-invested. In the illustrations given in the chapter, the
same has been considered and hence interest on DRR investment is not credited
to DRR A/c but taken to P&L A/c.
2 At the time of redemption of debentures
(a) For encashment of Debenture Redemption Reserve Investments
Bank A/c Dr.
To Debenture Redemption Reserve Investment A/c
(b) For amount due to debenture holders on redemption
Debentures A/c Dr.
Premium on Redemption A/c Dr.
To Debenture holders A/c
(c) For payment to debenture holders
Debenture holders A/c Dr.
To Bank A/c
(d) After redemption of debentures, DRR should be transferred to general reserve
Debenture Redemption Reserve A/c Dr.
To General Reserve A/c
(e) W/off Premium on Redemption (POR)
Profit & Loss A/c Dr.
To Premium on Redemption A/c
Note :
In absence of Information assume
(a) Profit or Loss on Debenture Redemption Reserve Investment must be transferred to
Profit & Loss A/c
(b) Loss on cancellation of own debentures must be transferred to Profit & Loss A/c
(c) Profit on cancelation of own debentures must be transferred to Capital Reserve A/c
(d) Premium on Redemption must be written off by using Profit & Loss A/c
Purchase of own Debentures for immediate cancellation

Method I:
(a) Purchase & immediate cancellation
____% Debentures A/c Dr.
F.V.
160
Loss on cancellation A/c Dr.

Loss
OR To Bank A/c ----
EIP
To Profit on cancellation ---- Profit
(b) Payment of Debenture Interest

Debentures Interest A/c Dr.
X ----
To Bank A/c ----
X
Method 2 :
If question says prepare own Debenture A/c
(a) Purchase of own Debentures
Own Debentures A/c Dr. EIP ----
Deb. Int. A/c Dr.
Int.
----
To Bank A/c ----
CIP
(b) For cancellation

____%Debentures A/c Dr.
FV
Loss on cancellation A/c Dr. Loss
OR To own Debenture A/c EIP

To Profit on cancellation Profit
161
Question 1
On January 1, Rama Ltd., had 500 Debentures of ` 100 each outstanding in its books
carrying interest at 6% per annum. In accordance with the powers in the deed, the directors
acquired debentures from the open market for immediate cancellation as follows:
March 1 ` 5,000 at ` 98.00 (cum interest)
Aug. 1 ` 10,000 at ` 100.25 (cum interest)
Dec. 15 ` 2,500 at ` 98.50 (ex-interest)
Debenture interest is payable half-yearly, on 30th June and 31st Dec.
Show ledger accounts of Debentures and Debenture interest for the first year, ignoring
income-tax.
Question 2
Sencom Limited issued ` 1,50,000 5% Debentures on 30th September 2010 on which
interest is payable half yearly on 31st March and 30th September. The company has
power to purchase debentures in the open market for cancellation thereof. The following
purchases were made during the year ended 31st December, 2012 and the cancellation
were made on the same date. On 31st December 2010, investments made for the purpose
of redemption were ` 22,500.
1st March 2012 - ` 25,000 nominal value purchased for ` 24,725 ex-interest.
1st September 2012 - ` 20,000 nominal value purchased for ` 20,125 cum-interest.
You are required to draw up the following accounts up to the date of cancellation:
(i) Debentures Account; and
(ii) Own Debenture (Investment) Account.
Ignore taxation. Assume Accounting year to be calendar year.
Question 3
YZ Ltd (an unlisted company other than AIFI, Banking company, NBFC and HFC) had
16,000, 12% debentures of ` 100 each outstanding as on 1st April, 2011, redeemable on
31st March, 2012.
On 1 April 2011, the following balances appeared in the books of accounts Investment in
2,000 9% secured Govt. bonds of ` 100 each. DRR is ` 1,00,000. Interest on investments
is received yearly at the end of financial year.
2,000 own debentures were purchased on 31st March 2012 at an average price of ` 99
and cancelled on the same date.
162
On 31st March, 2012, the investments were realised at par and the debentures were
redeemed. You are required to write up the following accounts for the year ended 31st
March 2012:
(1) 12% Debentures Account
(2) Debenture Redemption Reserve Account
(3) Debenture Redemption Investments Account.
Assume Interest on 12% Debenture is paid on 31-03-2012.
Question 4
On 1st April, 2011, in MK Ltd.’s (unlisted company other than AIFI, Banking company,
NBFC and HFC) ledger, 9% debentures appeared with an opening balance of ` 50,00,000
divided into 50,000 fully paid debentures of ` 100 each issued at par.
Interest on debentures was paid half-yearly on 30th of September and 31st March every
year.
On 31.5.2011, the company purchased 8,000 debentures of its own @ ` 98 (ex-interest)
per debenture.
On same day, it cancelled the debentures acquired.
You are required to prepare necessary ledger accounts (excluding bank A/c).
Question 5
The following balances appeared in the books of a company (unlisted company other than
AIFI, Banking company, NBFC and HFC) as on December 31, 2011: 6% Mortgage 10,000
debentures of ` 100 each; Debenture Redemption Reserve (for redemption of debentures)
` 50,000; Investments in deposits with a scheduled bank, free from any charge or lien `
1,50,000 at interest 4% p.a. receivable on 31st December every year. Bank balance with
the company is ` 9,00,000.
The Interest on debentures had been paid up to December 31, 2011.
On February 28, 2012, the investments were realised at par and the debentures were
paid off at 101, together with accrued interest.
Write up the concerned ledger accounts (including bank transactions). Ignore taxation.
Question 6
The following balances appeared in the books of Paradise Ltd (unlisted company other
than AIFI, Banking company, NBFC and HFC) as on 1-4-2011:
(i) 12 % Debentures ` 7,50,000
(ii) Balance of DRR ` 25,000
163
(iii) DRR Investment ` 1,12,500 represented by 10% 1,125 Secured Bonds of the
Government of India of ` 100 each.
On 31-3-2012, balance at bank was ` 7,50,000 before receipt of interest. The investment
were realised at par, for redemption of debentures at a premium of 10% on the above
date.
You are required to prepare the following accounts for the year ended 31st March, 2012.
Assume Debenture Interest upto 31-3-12 to be already paid.
(1) Debentures Account
(2) DRR Account
(3) DRR Investment Account
(4) Bank Account
(5) Debenture Holders Account
Question 7
The Summarized Balance Sheet of BEE Co. Ltd. (unlisted company other than AIFI, Banking
company, NBFC and HFC) as on 31st March, 2011 is as under:
Share Capital: Freehold Property 1,15,000
Authorised: Stock 1,35,000
30,000 Equity Shares of `10 each 3,00,000 Trade Receivables 75,000
Issued and Subscribed: Cash 30,000
20,000 Equity Shares of `10 each Balance at Bank 2,00,000
fully paid 2,00,000
12% Debentures 1,20,000
5,55,000 5,55,000
At the Annual General Meeting, it was resolved:

(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for every
four shares (held prior to the bonus distribution). This option was taken up by all the
shareholders.
(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%.
Give the necessary journal entries and the company’s Balance Sheet after these
transactions are completed.
164
Question 8
A company had issued 20,000, 13% debentures of ` 100 each on 1st April, 2011. The
debentures are due for redemption on 1st July, 2012. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
debenture holders to convert 20% of their holding into equity shares (Nominal value ` 10)
at a price of ` 15 per share. Debenture holders holding 2,500 debentures did not exercise
the option. Calculate the number of equity shares to be allotted to the debenture holders
exercising the option to the maximum.
Question 9
The summarised Balance Sheet of Convertible Limited (unlisted company other than AIFI,
Banking company, NBFC and HFC), as on 30th June, 2011, stood as follows:
Liabilities `
Share Capital: 5,00,000 equity shares of ` 10 each fully paid 50,00,000
Profit And loss A/c 10,00,000
Debenture Redemption Reserve 10,00,000
1,00,000 13.5% Convertible Debentures, 1,00,00,000
Other loans 65,00,000
Current Liabilities and Provisions 1,25,00,000
4,50,00,000
Assets : `
Fixed Assets (at cost less depreciation) 1,60,00,000
Debenture Redemption Reserve Investments 15,00,000
Cash and bank Balances 75,00,000
Other Current Assets 2,00,00,000
4,50,00,000
The debentures are due for redemption on 1st July, 2011. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
debenture holders to convert 20% of their holdings into equity shares at a predetermined
price of ` 15.75 per share and the payment in cash.
Assuming that:
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of
them exercised the option for maximum conversion.
165
(ii) the investments were realised at par on sale; and

(iii) all the transactions are put through, without any lag, on 1st July, 2011.
Redraft the balance sheet of the company as on 1st July, 2011 after giving effect to
the redemption. Show your calculations in respect of the number of equity shares to be
allotted and the necessary cash payment.
Question 10
Libra Limited recently made a public issue in respect of which the following information
is available:
(a) No. of partly convertible debentures issued - 2,00,000; face value and issue price -
` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months
from the date of closing of issue.
(c) Date of closure of subscription lists- 1.5.2011, date of allotment - 1.6.2011, rate
of interest on debenture - 15% payable from the date of allotment, value of equity
share for the purpose of conversion - ` 60 (Face Value ` 10).
(d) Underwriting Commission - 2%.
(e) No. of debentures applied for - 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2012 (including cash and bank entries).
166
PAST EXAM PROBLEMS
Question 11
A company had issued 40,000, 12% debentures of ` 100 each on 1st April, 2015. The
debentures are due for redemption on 1st March, 2019. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to
the debenture holders to convert 20% of their holding into equity shares (nominal value
` 10) at a predetermined price of ` 15 per share and the payment in cash. 50 debentures
holders holding totally 5,000 debentures did not exercise the option. Calculate the number
of equity shares to be allotted to the debenture holders and the amount to be paid in
cash on redemption.
(5 Marks – Nov 2019 – Inter)
Question 12
Sumit Ltd. (an unlisted company other than AIFI, Banking company, NBFC and HFC) had
8,000, 9% debentures of ` 100 each outstanding as on 1st April, 2019, redeemable on
31st March, 2020.
On 1st April, 2019, the following balances appeared in the books of accounts:
• Investment in 1,000, 7% secured Govt. bonds of `100 each, `1,00,000.
• Debenture Redemption Reserve is `50,000
Interest on investments is received yearly at the end of financial year. 1,000 own
debentures were purchased on 30th March, 2020 at an average price of `96.50 and
cancelled on the same date.
On 31st March, 2020, the investments were realized at par and the debentures were
redeemed. You are required to write up the following. Accounts for the year ended 31st
March, 2020:
(1) 12% Debentures Accounts
(2) Debenture Redemption Reserve Account.
(3) DRR Investment Account.
(4) Own Debentures Account.
167
COMPANY FINAL
4 ACCOUNTS
(IV) FORMAT OF FINAL ACCOUNTS (Schedule III)

........................ Ltd.
Balance Sheet as at.............
Particulars Note CY PY
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital
(b) Reserve and surplus
(c) Money received against share warrants
(2) Share application money pending allotment
(3) Non-current liabilities
(a) Long - term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long - term liabilities
(d) Long - term provisions
(4) Current liabilities
(a) Short - term borrowings
(b) Trade payables
(c) Other Current liabilities
(d) Short - term provisions
TOTAL
II. ASSETS
(1) Non-current assets
168
(a) Property, Plant & Equipment

(i) Tangible assets
(ii) Intangible assets
(iii) Capital Work – in – progress
(iv) Intangible assets under development
(b) Non - current investments
(c) Deferred tax assets (net)
(d) Long - term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short - term loans and advances
(f) Other current assets
TOTAL
Contingent liabilities and commitments
............. Ltd.
Profit and Loss Statement for the year ended...................
Particulars Note CY PY
I. Revenue from operations
II. Other incomes
III. Total Revenue (A)
IV. Expenses:
Cost of materials consumed
Purchases of Stock - in – Trade
Changes in inventories of finished goods, Work
- in – progress and Stock-in-Trade
Employee benefits expenses
Finance Cost
Depreciation and amortization expenses
Other expenses
Total expenses (B)
169
V. Profit before exceptional and extraordinary

items and tax (A-B)
VI. Exceptional items
VII. Profit before extraordinary items and tax
VIII Extraordinary Items
IX. Profit before tax
X. Tax expense:
(1) Current tax
(2) Deferred tax
(3) (Excess) / Short Income Tax Provision of
earlier year
XI. Profit / (Loss) for the period from Continuing
operations
XII. Profit / (loss) from discontinuing Operations
(Before tax)
XIII. Tax expense of discontinuing Operations
XIV. Profit / (loss) from Discontinuing Operations
(After tax)
XV. Profit / (Loss) for the period
Notes to Accounts
Note 1: Share Capital
Authorised
.............Preference Shares of `.. each xx
....... Equity Shares of `.. each xx xx
Issued, Subscribed and paid up
..........Preference Shares of `.. each, fully paid xx
/ called
......... Equity Shares of `.. each fully paid /
called up xx
xx
Less : Call in Arrears (including due from
directors / officers) xx xx
Share Forfeiture A/c xx
Notes : xx
(i) Shares issued for consideration other than
cash
(ii) Shares issued as Bonus
(iii) No. of shares bought back
170
Notes to Accounts
Note 2: Reserves and Surplus
(a) Capital Reserves xx
(b) Capital Redemption Reserve xx
(c) Securities Premium Reserve xx
(d) Debenture Redemption Reserve xx
(e) Revaluation Reserve xx
(f) Other Reserve xx
(g) Surplus (Profit & Loss A/c)
Surplus as at the beginning of the year xx
Add : Profit / (Loss) for the period xx
Less : Interim Dividend (xx)
Less : Transfer to Reserves (xx)
Add : Transfer from Reserves Xx xx
xx
Note 3: Long term borrowings

(A) Secured: Debentures, Bank Loan, loan from
financial institutions, etc. (Security information
also needs to be disclosed)
(B) Unsecured: Directors loan, loan from related
parties / subsidiaries, public deposits taken, etc.
Note 4: Long term Provisions

Provision for Gratuity/ Provident fund/ pension.
Note 5: Short term borrowings

Bank O/D, Cash credit, Loans payable on demand
(Security information also needs to be disclosed)
Note 6: Trade Payables

Creditors, Bills Payable
Note 7: Other Current Liabilities

O/s expenses, calls in advance, Advance from
customers, unclaimed dividend, TDS on expense,
Income Tax payable, dividend payable etc.
171
Note 8: Short term provision

Provisions for Tax, etc.
Note 9: Tangible Assets

Land & Building, Furniture, machinery, motor
vehicle, office equipment, etc. (information of cost &
Accumulated Depreciation to be disclosed)
Note10: Intangible Assets

Goodwill, Patents, Trade-marks, copyrights, Computer
software etc. (information of cost & Amortisation to
be disclosed)
Note11: Non - Current Investments

Investments in Shares, Bonds, Govt. securities,
Property, Gold, etc. (market value of Investment must
be disclosed)
Note12: Long term Loan and Advances

Loan to subsidiaries/ related parties, housing loan
to employees, security deposit given, Deposit with
Government Authorities, Telephone deposit etc.
Note13: Inventories
Closing stock of RM/ WIP/FG
Stock in Trade. Loose Tools, Stores & spares, Goods in
transit etc.
Note14: Trade Receivables

(i) Bills receivables x
(ii) Sundry Debtors
- O/s for more than 6 months x
- Other debts. x x
172
Note 15: Cash & Cash Equivalents

Cash in hand, Cash at Bank
Note 16: Short term Loans and Advances

Advance to staff, prepaid expenses, Advance Tax,
TDS on Income, Income Tax refund receivable, etc.
Note 17: Other Current Assets

Income Receivables
Note18: Contingent Liabilities and Commitments

- Claims against Co. not acknowledged as debts
- Bills discounted but not matured .
- Guarantee given by co.
- Uncalled amount on partly paid shares held as
investments.
- Capital expenditure commitments
- Arrears of cumulative preference share Dividend.
Note 19: Other Incomes

Rent / Interest / Dividend / Commission Received
Note20: Change in Inventory of FG, WIP & Stock in Trade

Opening Stock x
Less: Closing Stock (x) x
Note21: Employee Benefit Cost

Salary, Wages, Bonus allowance to staff, Staff welfare
expenses
Note22: Finance Cost

Interest on all borrowings
173
Note23: Other Expenses

- All Administration expenses
- All selling and distribution expenses
- Bad debts
- Auditors, Remuneration for Audit fees, Tax work,
co. law matter, consultancy fee, other matters etc.
- Reimbursement of employee expenses
Note24: Exception Items

Profit / Loss on Sale of FA / Investments
Note25: Extra Ordinary Items

Loss due to earthquake and other natural calamities
Adjustment in Final Accounts:

(1) Provision for Tax :
(a) Profit and loss a/c (Current Tax)
(b) Balance Sheet (Short term Provisions)
(The Provision for tax should be calculated as a specific percentage of PBT)
(2) Transfer to Reserves :

(a) Profit and Loss a/c in Reserves & Surplus (Less from Profit)
(b) Balance sheet (Add to concerned Reserves).
(3) Transfer from Reserves :

(a) Profit and Loss a/c in Reserves & Surplus (Add to Profit)
(b) Balance Sheet (Less from Concerned Reserve)
(4) Dividend Declared :

(a) Profit and Loss in Reserve & Surplus (Less From Profit)
(b) Balance Sheet (Other Current Liability)
Note :
(i) The amount of dividend should be calculated as a specific percentage of
paid-up share capital i.e. Called up capital less Calls in Arrears.
(ii) At the time of providing equity dividend, the preference dividend also should
be provided for. (Hidden Adjustment)
174
(5) Outstanding Debenture Interest :

(a) Profit and Loss A/c - (Finance Cost)
(b) Balance Sheet - (Other Current Liabilities)
(6) TDS on Income :

(a) Profit and Loss A/c (add to income)
(b) Balance Sheet (Short term loan and Advances)
(It is similar to Advance Tax)
(7) TDS on Expenses :

(a) Profit and Loss A/c (add to expenses)
(b) Balance Sheet (Other Current Liabilities)
(Money is payable to I.T. Department)
(8) Completion of Income Tax Assessment of Last Year :

When last years assessment is completed during the current year then the Gross
Demand is to be compared with Advance tax and provision fot tax.
(a) Compare GD with Advance Tax (b) Compare GD with Provision for tax
GD > Advance - IT Payable (Other GD > Provision - Short IT Provision
Current Liability) (P & L A/c)
GD < Advance - IT Refundable (Short GD < Provision - Excess IT Provision
term Loans & Advances) (P & L A/c)
Note:
(i) If the assessment is completed without any dispute or modification or change, then
the gross demand will be taken same as 'provision for tax'.
(ii) If the assessment is completed without any further liability or demand, then the
gross demand taken same as 'Advance Tax'.
(iii) If any Income tax appeal is filed, the disputed amount is shown as contingent
liability.
Calculation of Managerial Remunerations (Sec. 197)

This aspect covers any remunerations (salary, commission, perks or any other
remuneration excluding directors fees) paid to managerial staff (managing directors,
directors and managers appointed under the companies Act, 2013).
175
Ceiling for Maximum Remuneration

(I) In event of Profits (Schedule I)
(1) Remuneration of a Managing Director (M.D.) Max. 5% of net profit
or a whole time director (W.T.D.) or manager
(2) Remuneration of more than one M.D./ W.T.D. Max. 10% of net profit
altogether
(3) Remuneration of part time director
(a) When there is no M.D./ W.T.D. Max. 3% of net profit
(b) When there is M.D./ W.T.D. Max. 1% of net profit
(4) Overall managerial remuneration Max. 11% of net profit
Calculation of net profit for managerial Remuneration (Sec. 198)
Gross Profit xxx
Add :
(1) Any other Revenue type income xxx
(2) Subsidies received from government xxx
(3) Revenue Profit on Sale of Fixed Assets xxx xxx
xxx
Do not Add
(1) Premium on issue of shares & debentures
(2) Profit on reissue of forfeited shares
(3) Capital Profit on sale of fixed assets
Less :
(1)
All working charges xxx
(2) Donations to charitable funds (Sec. 181) xxx
(3) Compensation for breach of contract xxx
(4)
Bad Debts xxx
(5)
Directors Fees xxx
(6)
Business Related taxes xxx
(7) Depreciation as per Schedule II (Sec. 123) xxx
(8)
Brought forward losses xxx (xxx)
Net Profit for Director's Remuneration xxx
Do not Less
1. All non - working charges
2. RDD, RFDD or any other adhoc provision
3. Director's Remuneration
176
4. Provision for Income - tax

5. Depreciation as per Books. (If it is not as per sec. 123)
6. Transfer to Reserves
(II) In event of losses or inadequate profits (Schedule V Part II) :

If the company has incurred losses or if the profits are insufficient, then the remuneration
can be paid to managerial staff on the basis of effective capital of the company as under.
Effective Capital Maximum Yearly Remuneration
(1) Negative or less than ` 5 crore ` 60,00,000
(2) ` 5 Crore and above but less than ` 100 ` 84,00,000
Crores
(3) ` 100 Crores and above but less than 250 ` 1,20,00,000
crores
(4) ` 250 Crores and above. ` 1,20,00,000 + 0.01% of
effective capital in excess of
250 Crore
Note: Effective Capital is determined as under :

Paid-up share capital
(Excluding Share application money when allotment is not yet done) xx
Add : All reserve & Surplus
(Excluding Revaluation Reserve) xx
Add : All long term Borrowings
(Outstanding Period > 1 year) xx
Less : miscellaneous expenditure not w/off / accumulated losses (xx)
Less : Investment held by a non-investment company (xx)
xx
Rules for payment of dividend

Normally, Dividend is paid out of current year profits. But if the Current year's Profits are
insufficient then it can be paid out of Divisible Profits lying with the company provided
following 3 conditions are satisfied:
(1) Dividend Rate cannot exceed average rate of Dividend of last 3 years.
(2) Divisible profits utilised should not exceed 10% of paid up share capital and divisible
Profits.
(3) Divisible profits left over after such utilisation should not fall below 15% of paid up
capital.
177
Question 1
The following is the Trial Balance of Subhash Limited as on 31.3.2017:
(Figures in ` '000)
Debit ` Credit `
Land at Cost 110 Equity Capital (Shares of `10 each) 150
Plant & Machinery 385 10% Debentures 100
Debtors 48 General Reserve 65
Capital W.I.P 43 Profit & Loss A/c 36
Bank 10 Share Premium 20
Purchases 160 Sales 350
Factory Expenses 30 Creditors 26
Administration Expenses 15 Provision for Depreciation 86
Selling Expenses 15 Suspense Account 2
Opening Stock 10
Interim Dividend Paid 9
835 835
(a) During the year, the company issued bonus shares to the shareholders on 1 : 3 basis.
No entry relating to this has yet been made.
(b) The authorised share capital of the company is 25,000 shares of ` 10 each.
(c) The company on the advice of independent valuer wish to revalue the land at `
1,80,000.
(d) Declared dividend 10% after providing for tax at 40%.
(e) Suspense account of ` 2,000 represents cash received for the sale of some of the
machinery on 1.4.2016. The cost of the machinery was ` 5,000 and the accumulated
depreciation thereon being ` 4,000.
(f) Depreciation is to be provided on plant and machinery at 10% on cost.
(g) Closing stock `30,000.
You are required to prepare Subhash Limited's profit and loss account for the year ended
31.3.2017 and a balance sheet on that date as per the provisions of Schedule III of the
Companies Act, 2013.
178
Question 2
Ring Ltd. was registered with a nominal capital of ` 10, 00,000 divided into shares of `
100 each. The following Trial Balance is extracted from the books on 31st March, 2012:
Particulars ` Particulars `
Buildings 5,80,000 Sales 10,40,000
Machinery 2,00,000 Outstanding Expenses 4,000
Closing Stock 1,80,000 Provision for Doubtful Debts
Loose Tools 46,000 (01.04.11) 6,000
Purchases (Adjusted) 4,20,000 Equity Share Capital 4,00,000
Salaries 1,20,000 General Reserve 80,000
Directors’ Fees 20,000 Profit and Loss A/c (1-4-2011) 50,000
Rent 52,000 Creditors 1,84,000
Depreciation 40,000 Provision for depreciation
Bad Debts 12,000 On Building 1,00,000
Investment 2,40,000 On Machinery 1,10,000 2,10,000
Interest accrued on 14% Debentures 4,00,000
investment 4,000 Interest on Debentures
Debenture Interest 56,000 accrued but not due 28,000
Advance Tax 1,20,000 Interest on Investments 24,000
Sundry expenses 36,000 Unclaimed dividend 10,000
Debtors 2,50,000
Bank 60,000
24,36,000 24,36,000
You are required to prepare statement of Profit and Loss for the year ending 31st March,
2012 and Balance sheet as at that date after taking into consideration the following
information:
(a) Closing stock is more than opening stock by ` 1, 60,000;
(b) Provide to doubtful debts @ 4% on Debtors
(c) Make a provision for income tax @30%.
(d) Depreciation expense included depreciation of ` 16,000 on Building and that of `
24,000 on Machinery.
(e) The directors declared a dividend @ 25% and transfer to General Reserve @ 10%
(f) Bills Discounted but not yet matured ` 20,000.
179
Question 3
The trial balance of Complex Ltd. as at 31st March, 2015 shows the following items:
Dr. (`) Cr. (`)

Advance payment of income-tax 2,20,000 ---
Provision for income-tax for the year ended 31.03.2014 --- 1,20,000
The following further information’s are given :

(i) Advance payment of income-tax includes `1,40,000 for 2013-14.
(ii) Actual tax liability for 2013-14 amounts to `1,52,000 and no effect for the same
has so far been given in accounts.
(iii) Provision for income-tax has to be made for 2014-15 for `1,60,000.
You are required to prepare (a) provision for income - tax account, (b) advance payment
of income - tax account, (c) liabilities for taxation account.
Question 4
The Articles of Association of S Ltd. provide the following:
(i) That 20% of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied:
(a) In paying 14% on cumulative preference shares
(b) In paying 20% dividend on equity shares.
(c) One-third of the balance available as additional dividend on preference shares
and two third as additional equity dividend.
A further condition was imposed by the article viz. that the balance carried forward shall
be equal to 12% on preference shares after making provisions (i), (ii) and (iii) mentioned
above. The company has issued 13,000, 14% cumulative participating preference shares
of ` 100 each fully paid 70,000 equity shares of ` 10 each fully paid.
The profit for the year 2012 was `10,00,000 and balance brought from previous year
` 80,000 provide ` 31,000 for depreciation and ` 80,000 for taxation before making other
appropriations.
Calculate Additional Dividend on preference shares and Equity Shares.
Question 5
Due to inadequacy of profits during the year ended 31st march 2015, XYZ Ltd proposes to
declare 10% dividend out of general reserves. From the following particulars ascertain
180
the amount that can be utilized from general reserves according to the companies
(declaration of dividend out of reserves) Rules 2014-
`
17,500 9% preference shares of ` 100each fully paid up 17,50,000
General Reserves as on 1.4.2014 25,00,000
Capital Reserves as on 1.4.2014 3,00,000
Revaluation reserves as on 1.4.2014 3,50,000
Net profit for year ended 31.3.2015 3,00,000
Average rate of dividend during last 3 years 12%
Question 6
The following is the Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 2015.
` `
To Administrative, Selling and By Gross Profit 40,25,365
distribution expenses 8,22,542 By Profit on forfeiture of shares 5,72,350
To Donation to charitable funds 25,500 By Subsidies received from
To Directors fees 66,750 Govt. 2,32,560
To Interest on debentures 31,240 By Interest on Investments 15,643
To Compensation for breach of By Share Transfer fees 722
contract 42,530 By Profit on sale of Machinery
To Managerial remuneration 2,85,350 Amount realised 55,000
To Depreciation on fixed assets 5,22,543 Written down value 30,000 25,000
To Bad Debts 12,42,500
To R.D.D. 4,00,000
To Provision for Tax 12,500
To Net profit c/d 14,20,185
48,71,640 48,71,640
(1) Original Cost of the Machinery sold was ` 40,000.
(2) Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was `
575,345.
You are required to comment on the managerial remuneration in the following situations:
181
(a) there is only one whole time director ;

(b) there are two whole time directors ;
(c) there are two whole time directors, a part time director and a manager.
Question 7
From the following particulars of Ganga Limited, you are required to calculate the
managerial remuneration in the following situation.
(i) There is only one whole time director.
(ii) There are two whole time directors.
(iii) There are two whole time directors, a part time director and Manager:
`
Net profit before provision for income-tax and manager remuneration,
but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10,000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule II 2,60,000
Actual expenditure incurred on repairs during the year 15,000
Question 8
The following extract of Balance sheet of X Ltd. was obtained :
Balance sheet (Extract) as on 31st March, 2015
Liabilities `
Authorised capital:
4,20,000 14% Pref. Share of ` 100 each 4,20,00,000
2,00,000 Equity Share of ` 100 each. 2,00,00,000
6,20,00,000
4,15,000, 14% preference shares of ` 100 each fully paid 4,15,00,000
1,20,000 Equity shares of ` 100 each, ` 80 paid - up 96,00,000
Share suspense account 20,00,000
Capital reserves (60% is revaluation reserve) 2,50,000
Securities premium 50,000
Public deposits 3,70,000
Cash credit loan from SBI 4,65,000
Sundry creditors 3,45,000
182
Assets : `
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account 15,25,000
Preliminary expenses not written off 55,000
Share suspense account represents application money received on shares the allotment
of which is not yet made.
X Ltd. has been sustaining loss for the past few years. X Ltd. has only one whole-time
director. Find out how much remuneration X Ltd. can pay to its managerial person as per
the provisions of Part II of Schedule V. Would your answer differ if X Ltd. is an investment
company?
Question 9
Company offers new shares of `100 each at 25% premium to existing shareholders on
one for four bases. The cum-right market price of a share is `150. Calculate the value of
a right. What should be the ex-right market price of a share?
Question 10
A company has decided to increase its existing share capital by making rights issue to its
existing shareholders. The company is offering one new share for every two shares held
by the shareholder. The market value of the share is ` 240 and the company is offering
one share at `120 each. Calculate the value of a right. What should be the ex-right
market price of a share?
183
Question 11
The following items were extracted from the Balance Sheet of Xansa Ltd. as on 1st April,
2014:
`
13½% Preference Share capital 4,00,000
Equity Share Capital fully paid up 10,00,000
Profit before interest on debentures and before payment of tax @ 30% is `

11,50,000 for the year ended 31st March, 2014.
The company also decided to transfer creation of general reserve @ 5% of net profit (i.e.
` 7,00,000).
Pass the necessary Journal entries to incorporate the Board’s recommendations and
show how the items concerned would be shown on the liabilities side of the Balance
Sheet of Xansa Ltd. as on 31st March, 2015.
Question 12
On 31st March, 2015 Bose and Sen Ltd. provides to you the following ledger balances
after preparing its Profit and Loss Account for the year ended 31st March, 2015:
Credit Balances: `
Equity shares capital, fully paid shares of `10 each 70,00,000
Loan from State Finance Corporation 10,50,000
Secured by hypothecation of Plant & Machinery
(Repayable within one year ` 2,00,000)
Loans : Unsecured (Long term) 8,40,000
Sundry Creditors for goods & expenses 14,00,000
Calls in Advance 7,000
Profit & Loss Account 7,00,000
Provision of Taxation 3,25,500
Dividend Payable 4,20,000
Provision for Dividend Distribution Tax 71,400
1,33,63,000
184
Debit Balances: `
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture & Fixture 3,50,000
Stocks : Finished goods 14,00,000
Raw Materials 3,50,000
Advances : Short-term 2,98,900
Cash in hand 2,10,000
Balance with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trade marks 4,00,000
1,33,63,000
The following additional information is also provided :
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ` 28,00,000
Cost of Plant & Machinery ` 49,00,000
Cost of Furniture & Fixture ` 4,37,500
(iii) Sundry Debtors for ` 3,80,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes `18,000 with a bank which is not a
scheduled Bank and the deposit of 5 lakhs are for a period of 9 months.
(v) Unsecured loan includes ` 2,00,000 from a Bank and ` 1,00,000 from related parties.
You are not required to give previous year figures. You are required to prepare the Balance
Sheet of the Company as on 31st March, 2015 as required under Revised Schedule III of
the Companies Act, 2013.
Question 13
Kumar Ltd., a non-investment company has been incurring losses for the past few years.
The company provides the following information for the current year:
185
(` in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserves (including Revaluation reserve ` 10 lakhs) 150
Securities premium 40
Long term loans 20
Deposits repayable after one year 720
Application money pending allotment 20
Accumulated losses not written off 180
Investments 180
Kumar Ltd. has only one whole-time director, Mr. X. You are required to calculate the
amount of maximum remuneration that can be paid to him as per provisions of Part II of
Schedule XIII, if no special resolution is passed at the general meeting of the company in
respect of payment of remuneration for a period not exceeding three years.
Question 14
You are required to prepare Balance sheet and statement of Profit and Loss from the
following trial balance of Haria Chemicals Ltd. for the year ended 31st March, 2011.
Trial Balance of Haria Chemicals Ltd. as at 31st March, 2011

Inventory 6,80,000 Equity Shares
Furniture 2,00,000 Capital (Shares of ` 10 each) 25,00,000
Discount 40,000 11% Debentures 5,00,000
Loan to Directors 80,000 Bank loans 6,45,000
Advertisement 20,000 Trade payables 2,81,000
Bad debts 35,000 Sales 42,68,000
Commission 1,20,000 Rent received 46,000
Purchases 23,19,000 Transfer fees 10,000
Plant and Machinery 8,60,000 Profit & Loss account 1,39,000
Rentals 25,000 Depreciation provision
Machinery 1,46,000
186
Current account 45,000

Cash 8,000
Interest on bank loans 1,16,000
Preliminary expenses 10,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000
Tools & Equipment’s 2,45,000
Goodwill 2,65,000
Trade receivables 4,40,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 37,000
Distribution freight 54,000
Debenture interest 55,000
85,35,000 85,35,000
Additional information: Closing Inventory on 31-3-2011: ` 8, 23,000.
187
Question 15
Calculate the maximum remuneration payable to the Managing Director based on
effective capital of a non-investment company for the year, from the information given
below: (Nov. 2011)
(` in '000)
(i) Profit for the year (calculated as per Section
349, 350 AND 351 of the Companies Act, 2013) 3,000
(ii) Paid up Capital 18,000
(iii) Reserves & Surplus 7,200
(iv) Securities Premium 1,200
(v) Long term Loans 6,000
(vi) Investments 3,600
(vii) Preliminary expenses not written off 3,000
(viii) Remuneration paid to the Managing Director during the year 600
Question 16
The Articles of Association of Samson Ltd. provide the following:
(i) That 25 % of the net profit of each year shall be transferred to reserve fund,
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied:
(1) In paying 15% on cumulative preference shares.
(2) In paying 20% dividend on equity shares.
(3) one-third of the balance available as additional dividend on preference shares
and two-third as additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward
shall be equal to 14% on preference shares after making provision (i), (ii) and (iii)
mentioned above. The company has issued 12,000, 15% cumulative participating
preference shares of ` 100 each fully paid and 75,000 equity shares of ` 10 each fully
paid up.
The profit for the year 2013-2014 was ` 10,00,000 and balance brought from previous
year ` 1,50,000. Provide ` 37,500 for depreciation and ` 1,20,000 for taxation before
making other appropriations.
Show net balance of Profit and Loss Account after making above adjustments.
(May 2017 IPCC)
188
Question 17
From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as
on 31st March 2014 as required by Part I, revised, Schedule III of the Companies Act.
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
Loan from State Financial Corporation 7,50,000
Stock:
Raw Materials 2,50,000
Finished Goods 10,00,000
Provision for Taxation 3,40,000
Advances 2,13,500
Dividend Payable 3,00,000
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Preliminary expenses 66,500
Unsecured Loan 6,05,000
Sundry Creditors (for Goods and Expenses) 10,00,000
The following additional information is also provided:
(i) Preliminary expenses included ` 25,000 Audit Fees and ` 3,500 for out of pocket
expenses paid to the Auditors.
(ii) 10000 Equity shares were issued for consideration other than cash.
(iii) Debtors of ` 2,60,000 are due for more than 6 months.
(iv) The cost of the Assets were:
Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500
(v) The balance of ` 7,50,000 in the Loan Account with State Finance Corporation
is inclusive of ` 37,500 for Interest Accrued but not Due. The loan is secured by
hypothecation of Plant & Machinery.
(vi) Balance at Bank includes ` 10,000 with Global Bank Ltd., which is not a Scheduled
Bank. (May 2017 IPCC)
189
Question 18
On 31st March, 2018, SR Ltd. provides the following ledger balances after preparing
its Profit & Loss Account for the year ended 31st March, 2018.
Particulars AAmount (`)
Debit Credit
Equity Share Capital, fully paid shares of ` 50 each 80,00,000
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
Plant & Machinery 24,00,000
Furniture & Fixture 13,00,000
Loan from Public Finance Corporation (Secured by
Hypothecation of Land) 26,30,000
Other Long Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories : Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Provision for Taxation 3,80,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
Total 1,76,24,000 1,76,24,000
The following additional information was also provided in respect of the above balances:
(1) 50,000 fully paid equity shares were allotted as considered for land.
(2) The cost of assets were:
Building ` 32,00,000
Plant and Machinery ` 30,00,000
Furniture and Fixture ` 16,50,000
(3) Trade Receivables for ` 4,86,000 due for more than 6 months.
(4) Balances with banks include ` 56,000 with Naya bank, which is not a scheduled
bank.
190
(5) Loan from Public Finance Corporation repayable after 3 years.

(6) The balance of ` 26,30,000 in the loan account with Public Finance Corporation
is inclusive of ` 1,34,000 for interest accrued but not due. The loan is secured by
hypothecation of land.
(7) Other long term loans (unsecured) include:
Loan taken from Nixes Bank ` 13,80,000
(Amount repayable within one year ` 4,80,000)
Loan taken from Directors ` 8,50,000.
(8) Bills Receivable for ` 1,60,000 maturing on 15th June, 2018 has been discounted.
(9) Short term borrowings include:
Loan from Naya bank ` 1,16,000 (Secured)
Loan from directors ` 48,000
(10) Transfer of ` 35,000 to general reserve has been proposed by the Board of directors
out of the profits for the year.
(11) Inventory of finished goods includes loose tools costing ` 5 lakhs (which do not meet
definition of property, plant & equipment as per AS-10)
You are required to prepare the Balance Sheet of the Company as on March 31st,
2018 as required under Part-I of Schedule III of the Companies Acts 2013.
You are not required to give previous year figures. (May 2018 - Group 1)

Question 19
Following is the trial balance of ABC Limited as on 31.3.2018. (Figures in ` 000)
Particulars Debit Particulars Credit
Land at cost 800 Equity capital (shares of ` 10 500
Calls in arrears 5 each)
Cash in hand 2 10% Debentures 300
Plant & Machinery at cost 824 General reserve 150
Trade receivables 120 Profit & Loss A/c (F.Y. 2016-17) 75
Inventories (31-3-18) 96 Securities premium 40
Cash at Bank 28 Sales 1200
Adjusted Purchases 400 Trade payables 30
Factory expenses 80 Provision for depreciation 150
Administrative expenses 45 Suspense Account 10
Selling expenses 25
Debenture Interest 30
2455 2455
191
(i) The authorized share capital of the company is 80,000 shares of ` 10 each.
(ii) The company revalued the land at ` 9,60,000.
(iii) Equity capital includes shares of ` 50,000 issued for consideration other than cash.
(iv) Suspense account of ` 10,000 represents cash received from the sale of some of the
machinery on 1.4.2017. The cost of the machinery was ` 24,000 and the accumulated
depreciation thereon being ` 20,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
(vi) Balance at bank includes ` 5,000 with Abhay Bank Ltd., which is not a Scheduled
Bank.
You are required to prepare ABC Limited's Balance Sheet as on 31.3.2018 and
Statement of Profit and Loss with notes to accounts for the year ended 31.3.2018 as
per Schedule III. Ignore previous year's figures & taxation.
(16 Marks – May 2019 – IPCC)
Question 20
From the following particulars furnished by the Prashant Ltd., prepare the Balance
Sheet as at 31st March, 2019 as required by Schedule III of the Companies Act,2013:
Particulars Debit ` Credit `
Equity share capital (face value of ` 10 each) 15,00,000
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000
General reserve 2,70,000
Loan from State Financial Corporation 2,10,000
Inventories 3,15,000
Provision for taxation 72,000
Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800
Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 1,65,000
Trade payables 2,67,000
Total 25,90,800 25,90,800
192
The following additional information is also provided :

(1) 10,000 equity shares were issued for consideration other than cash.
(2) Trade receivables of ` 55,000 are due for more than six months.
(3) The cost of building and plant & machinery is ` 5,50,000 and ` 6,25,000 respectively.
(4) The loan from State Financial Corporation is secured by hypothecation of plant &
machinery. The balance of ` 2,10,000 in this account is inclusive of ` 10,000 for
interest accrued but not due.
(5) Balance at Bank included ` 15,000 with Aakash Bank Ltd., which is not a scheduled
bank. (10 Marks – Nov 2019 – Inter)
Question 21
The following extract of Balance Sheet of Prabhat Ltd. (Non investment Company) was
obtained:
Balance Sheet (Extract) as on 31st March, 2019
Liabilities `
30,000, 12% preference shares of ` 100 each (fully paid) 30,00,000
24,00,000 equity shares of `10 each, ` 8 paid up 1,92,00,000
Share suspense account 40,00,000
Reserves and Surplus:
Securities premium 1,00,000
Capital reserves (` 3,00,000 is revaluation reserve) 3,90,000
Secured loans:
12% debentures 1,30,00,000
Unsecured loans:
Public deposits 7,40,000
Current liabilities:
Trade payables 6,90,000
Cash credit from SBI (short term) 9,30,000
Assets
Investments in shares, debentures etc. 1,50,00,000
Profit & loss account (Dr. balance) 30,50,000
Share suspense account represents application money received on shares, the

allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V.
Would your answer differ if Prabhat Ltd. is an investment company?
193
Question 22
XYZ Ltd. proposes to declare 10% dividend out of General Reserves due to inadequacy
of profits in the year ending 31-03-2019.
From the following particulars ascertain the amount that can be utilized from general
reserves, according to the Companies Rules, 2014:
8,00,000 Equity Shares of ` 10 each fully paid up 80,00,000
General Reserves
25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.
(4 Marks – Nov 2019 – IPCC)
Question 23
What are the qualitative characteristics of the Financial Statements which improve the
usefulness of the information furnished therein? (5 Marks – Nov 2020 – Inter)
Question 24
Following is the draft Profit & Loss Account of X Ltd. for the year ended 31st March, 2020:
Amount (`) Amount (`)
To Administrative Expenses 5,96,400 By Balance b/d 7,25,300
To Advertisement Expenses 1,10,500 By Balance from Trading A/c 42,53,650
To Sales Commission 1,05,550 By Subsidies received from
Government 3,50,000
To Director’s fees 1,48,900
To Interest on Debentures 56,000
To managerial Remuneration 3,05,580
To Depreciation on fixed Assets 5,78,530
To provision for taxation 12,50,600
To General reserve. 5,50,000
To Investment Revaluation
Reserve 25,800
To Balance c/d 16,01,090
53,28,950 53,28,950
Depreciation on fixed Assets as per Schedule II of the companies Act, 2013 was `6,51,750.
You are required to calculate the maximum limits of the managerial remuneration as
per companies Act, 2013. (5 Marks – Nov 2020 – Inter)
194
5 CASH FLOW STATEMENT
1. Cash Flow Statement shows relationship between Profitability and Cash generating
ability and hence the "quality of profits" of the reporting entity.
2. It is mandatory for listed companies and entities with a turnover exceeding ` 50

crores.
3. Cash comprises cash on hand & demand deposits with bank.

Cash equivalents are short term highly liquid investments that are readily convertible
into known amounts of cash & which are subject to an insignificant risk.
4. Classification of Activities : According to the revised Accounting Standard 3, the cash

flow statement should show cash flows during the period classified by operating,
investing & financing activities.
(a)
Operating Activities : These are principle revenue producing activities of an
enterprise other activities which are not investing or financing activities. Cash
flows from operating activities generally result from the transactions & other
events that determine the net profit or loss of the business. e.g. of cash flows
from Opening activities are :
(i) Cash receipts from sale of goods & rendering of services.
(ii) Cash Receipts from commission, fees, royalties etc.
(iii) Cash payments suppliers of goods & services.
(iv) Cash payments of operating expenses such as salaries & wages, rent,
electricity etc.
(v) Cash payments or refund of income tax.
(b)
Investing Activities : These are acquisition & disposal of Long-term assets
such as land, building, plant, furniture, goodwill, trademarks, copyrights and
investments not included in cash equivalents e.g.
195
(i) Cash payments to acquire fixed assets.

(ii) Cash payments relating to capatalisation research & development cost.
(iii) Cash received on disposal of fixed assets.
(iv) Loans made to third parties.
(v) Cash received from repayments of loans made to third parties.
(vi) Interest received on investments / Income from investment.
(c) Financing Activities: These are activities that result in changes in the size and
composition of owners capital including preference share capital & borrowings
of a business e.g.
(i) Cash receipts from issue of shares, debts, bonds, loans & other borrowings.
(ii) Cash repayment of loans taken.
(iii) Cash payment to redeem preference shares.
(iv) Interest and dividend paid.
5. Net basis reporting is allowed in following situations.

(a) Cash Flows reflecting activities of customers rather than those of the reporting
entity (e.g. deposits and withdrawals by a bank's customers).
(b) Cash Flows in respect of items in which the taken over is quick and amounts are
large and maturities are short (e.g. principal amounts relating to credit card
customers).
196
The AS-3 (Revised) "Cash Flow Statement" has prescribed two formats for the presentation
of Cash Flow Statement. These formats are given in Tables.
CASH FLOW STATEMENT [PARAGRAPH 18 (A)] (DIRECT METHOD)
Cash flows from Operating Activities
Cash receipts from Customers *****
Cash paid to suppliers and employees (*****)
Cash generated from operations *****
Income Tax paid (*****)
Cash flow before extraordinary item *****
± Extraordinary Items *****
Net cash from Operating Activities *****
Cash flows from Investing Activities
Purchase of fixed assets (*****)
Proceed from sale of equipment *****
Interest received *****
Dividend received *****
Net cash from investing activities *****
Cash flows from Financing Activities
Proceeds from issuance of share capital *****
Proceeds from long-term borrowings/short - term borrowings *****
Repayments of long - term borrowings (*****)
Interest paid (*****)
Dividend paid (*****)
Net cash from financing activities *****
Net increase in cash and cash equivalents *****
Cash and cash equivalents at beginnings of period *****
Cash and cash equivalents at end of period *****
197
CASH FLOW STATEMENT [PARAGRAPH 18 (B)] (INDIRECT METHOD)
Cash flows from Operating Activities

Net profits before taxation and extraordinary item *****
Adjustment for :
Depreciation *****
Interest Income *****
Dividend Income *****
Interest expense *****
Operating profit before working capital changes *****
Increase in sundry debtors (*****)
Decrease in inventories *****
Decrease in sundry creditors *****
Cash generated from operations *****
Income tax paid (*****)
Cash flow before extraordinary items *****
± Extraordinary items *****
Net cash from operating activities *****
Cash flow from Investing Activities
Purchase of fixed assets (*****)
Proceeds from sale of equipment *****
lnterest received *****
Dividend received *****
Net cash from operating activities *****
Cash flow from Financing Activities
Proceeds from issuance of share capital *****
Proceeds from long – term borrowings / short – term *****
borrowings
Repayment of long - term borrowings (*****)
Interest paid (*****)
Dividend paid (*****)
Net cash from financing activities *****
Net increase in cash and cash equivalents *****
Cash and cash equivalents at beginning of period *****
Cash and cash equivalents at end of period *****
198
Question 1
From the following information, calculate cash flow from operating activities:
Summary of Cash Account
for the year ended March 31, 20X1
To Balance b/d 1,00,000 By Cash Purchases 1,20,000
To Cash sales 1,40,000 By Trade payables 1,57,000
To Trade receivables 1,75,000 By Office & Selling Expenses 75,000
By Income Tax 30,000
To Trade Commission 50,000 By Investment 25,000
To Sale of Investment 30,000 By Repayment of Loan 75,000
To Loan from Bank 1,00,000 By Interest on loan 10,000
To Interest & Dividend 1,000 By Balance c/d 1,04,000
5,96,000 5,96,000
Question 2
Prepare cash flow statement of M/s MNT Ltd. for the year ended 31 st March, 20X1 with
the help of the following information:
(1) Company sold goods for cash only.
(2) Gross Profit Ratio was 30% for the year, gross profit amounts to ` 3,82,500.
(3) Opening inventory was lesser than closing inventory by ` 35,000.
(4) Wages paid during the year ` 4,92,500.
(5) Office and selling expenses paid during the year ` 75,000.
(6) Dividend paid during the year ` 30,000.
(7) Bank loan repaid during the year ` 2,15,000 (included interest ` 15,000).
(8) Trade payables on 31st March, 20X0 exceed the balance on 31st March, 20X1 by `
25,000.
(9) Amount paid to trade payables during the year ` 4,60,000.
(10) Tax paid during the year amounts to ` 65,000 (Provision for taxation as on 31.03.20X1`
45,000).
(11) Investments of ` 7,00,000 sold during the year at a profit of ` 20,000.
(12) Depreciation on fixed assets amounts to ` 85,000.
(13) Plant and machinery purchased on 15th November, 20X0 for ` 2,50,000.
199
(14) Cash and Cash Equivalents on 31st March, 20X0` 2,00,000.

(15) Cash and Cash Equivalents on 31st March, 20X1` 6,07,500.
Question 3
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.20X1 from the following
information:
(1) Sales for the year amounted to ` 135 crores out of which 60% was cash sales.
(2) Purchases for the year amounted to ` 55 crores out of which credit purchase was
80%.
(3) Administrative and selling expenses amounted to ` 18 crores and salary paid
amounted to ` 22 crores.
(4) The Company redeemed debentures of ` 20 crores at a premium of 10%. Debenture
holders were issued equity shares of ` 15 crores towards redemption and the balance
was paid in cash. Debenture interest paid during the year was` 1.5 crores.
(5) Dividend paid during the year amounted to ` 11.7 crores.
(6) Investment costing ` 12 crores were sold at a profit of ` 2.4 crores.
(7) ` 8 crores was paid towards income tax during the year.
(8) A new plant costing ` 21 crores was purchased in part exchange of an old plant.
The book value of the old plant was ` 12 crores but the vendor took over the old
plant at a value of ` 10 crores only. The balance was paid in cash to the vendor.
(9) The following balances are also provided:
` in crores 1.4.20X0 ` in crores 31.3.20X1

Debtors 45 50
Creditors 21 23
Bank 6 18.2
Question 4
Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited
for year ended 31.3.2019.
Particulars Amount (`)
Machinery acquired by issue of shares at face value 2,00,000
Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000
Interest on loan received from associate company 70,000
Pre-acquisition dividend received on investment made 52,600
200
Debenture interest paid 1,45,200

Term loan repaid 4,50,000
Interest received on investment (TDS of ` 8,200 was deducted on the 73,800
above interest)
Purchased debentures of X Ltd., on. 1st December, 2018 which are 3,00,000
redeemable within 3 months
Book value of plant & machinery sold (loss incurred ` 90,000
9,600)
Question 5
The following data were provided by the accounting records of Ryan Ltd. at year-end,
March 31, 2013:
Income Statement
`
Sales 6,98,000
Cost of Goods Sold 5,20,000
Gross Margin 1,78,000
Operating Expenses (including Depreciation Exp. of ` 37,000) (1,47,000)
31,000
Other Income (Expenses)
Interest Expense paid (23,000)
Interest Income received 6,000
Gain on Sale of Investments 12,000
Loss on Sale of Plant (3,000) (8,000)
23,000
Income tax (7,000)
16,000
Comparative Balance Sheets

` `
31st March 31st March
2013 2012
Assets
Plant Assets 7,15,000 5,05,000
Less: Accumulated Depreciation (1,03,000) (68,000)
6,12,000 4,37,000
Investments (Long - term) 1,15,000 1,27,000
Current Assets
201
Inventory 1,44,000 1,10,000

Accounts Receivable 47,000 55,000
Cash 46,000 15,000
Prepaid Expenses 1,000 5,000
9,65,000 7,49,000
Liabilities
Share Capital 4,65,000 3,15,000
Reserves & Surplus 1,40,000 1,32,000
Bonds 2,95,000 2,45,000
Current Liabilities:
Accounts Payable 50,000 43,000
Accrued Liabilities 12,000 9,000
Income Taxes Payable 3,000 5,000
9,65,000 7,49,000
Analysis of selected accounts and transactions during 2012-2013 :

1. Purchased investments for ` 78,000.
2. Sold investments costing ` 90,000.
3. Purchased plant assets for ` 1,20,000
4. Sold plant assets that cost ` 10,000 with accumulated depreciation of ` 2,000 for
` 5,000.
5. Issued ` 1,00,000 of bonds at face value in a exchange for plant assets on 31st
March, 2013.
6. Repaid ` 50,000 of bonds at face value at maturity.
7. Issued 15,000 shares of `10 each.
Prepare Cash Flow Statement as per AS-3 (Revised), using indirect and direct method.
Question 6
The following are the summarised balance sheets of Sound Ltd. as on March 31, for the
two consecutive years 1 and 2 (` in thousand)
Year 2 Year 1
Assets :
Plant and machinery 1,980 1,010
Land and buildings 1,000 1,000
Long - term investments 550 550
Short - term investments 470 85
Sundry debtors 2,195 2,500
Inventories 1,400 1,300
Interest receivable 100 65
Cash in hand 300 500
Cash in bank 405 300
202
8,400 7,310
Liabilities:
Share Capital 2,600 2,150
Reserve and surplus 1,460 900
15% Debentures 2,000 1,800
Sundry creditors 440 650
Wages outstanding 40 20
Income - tax payable 400 450
Accumulated depreciation:
Plant and machinery 910 840
Land and buildings 550 500
8,400 7,310
Income statement for the period ending March 31, year 2 (` in thousand)
Sales revenue 45,300

Less : cost of sales 39,000
Gross profit 6,300
Less : depreciation (540)
Selling and administration expenses (2,960)
Interest paid (300)
Add : interest income 65
Dividend income (gross) 95
Net profit before extraordinary items 2,660
Add : insurance settlement received 10
2,670
Less : provision for income - taxes 550
Net profit after taxes 2,120
Additional information (` in thousand):

(1) 15% Debentures of ` 300 was redeemed during year 2.
(2) Tax deducted at source on dividends received (included in provision for taxes) amounts
to ` 15.
(3) A plant costing ` 500, having accumulated depreciation of ` 420 was sold for
` 80.
(4) During year 2, interim dividend of ` 760 was paid; final dividend paid was ` 800.
203
(5) All sales and purchases are made on credit basis.

You are required to prepare Cash Flow statement as per ICAI's Accounting Standard 3 (revised).
Question 7
Ms. Jyothi of Star Oils Limited has collected the following information for the preparation
of cash flow statement for the year ended 31st March, 2013:
(` in lakhs)
Net profit 25,000
Dividend and corporate dividend tax thereon paid 8,535
Provision for income-tax 5,000
Income-tax paid during the year 4,248
Loss on sale of fixed assets (net) 40
Book value of the fixed assets sold 185
Depreciation charged to Profit & Loss Account 20,000
Amortisation of capital grant 6
Profit on sale of investments 100
Carrying amount of investments sold 27,765
Interest income on investments 2,506
Interest expenses 10,000
Interest paid during the year 10,520
Increase in working capital (excluding cash and bank balances) 56,075
Purchase of fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction, work-in-progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from short-term borrowings 20,575
Opening cash and Bank balances 5,003
Closing cash and bank balances 6,988
Required:
Prepare the cash flow statement in accordance with AS-3, Cash Flow Statements issued
by the Institute of Chartered Accountants of India. Make necessary assumptions.
204
Question 8
From the following, calculate the Net Profit before tax.
Particulars 31st March 31st March
2012 2013
Equity Share Capital 2,50,000 5,00,000
Securities premium ---- 25,000
General Reserve 75,000 1,00,000
Profit and Loss A/c 1,00,000 3,00,000
10% Debentures 2,00,000 2,00,000
Sundry Creditors 10,000 35,000
Provision for Tax 25,000 45,000
During the year, Dividend paid for the year end 31st March, 2012 was ` 25,000
Question 9
From the following Balance sheet of Grow More Ltd., prepare Cash Flow Statement for
the year ended 31st March, 20X1 :
Particulars Notes 31st March, 31st March,

20X1 20X0
Equity and Liabilities
1 Shareholders’ funds
A Share capital 10,00,000 8,00,000
B Reserves and Surplus 1 3,00,000 2,10,000
2 Non-current liabilities
Long term borrowings 2 2,00,000 -
3 Current liabilities
A Trade Payables 7,00,000 8,20,000
B Other current liabilities 3 - 1,00,000
C Short term provision 1,00,000 70,000
(provision for tax)
Total 23,00,000 20,00,000
Assets
1 Non-current assets
A Property, plant and. 4 13,00,000 9,00,000
Equipment
B Non-Current Investments 1,00,000 -
2 Current assets
205
A Inventories 4,00,000 2,00,000

B Trade receivables 5,00,000 7,00,000
Cash and Cash equivalents - 2,00,000
C Total 23,00,000 20,00,000
Notes to accounts
No. Particulars 31st March, 31st March,
20X1 20X0
1 Reserves and Surplus
Revenue reserve 2,00,000 1,50,000
Profit and Loss account 1,00,000 60,000
Total 3,00,000 2,10,000
2 Long term borrowings
Debentures 2,00,000 --
3. Other current liabilities
Dividend payable - 1,00,000
4 Property, plant and equipment
Plant and machinery 7,00,000 5,00,000
Land and building 6,00,000 4,00,000
Net carrying value 13,00,000 9,00,000
(i) Depreciation @ 25% was charged on the opening value of Plant and Machinery.
(ii) At the year end, one old machine costing ` 50,000 (WDV ` 20,000) was sold for `
35,000. Purchase was also made at the year end.
(iii) ` 50,000 was paid towards Income tax during the year.
(iv) Construction of the building got completed on 31.03.20X1 and hence no depreciation
may be charged on the same.
Prepare Cash flow Statement.
Question 10
From the following Balance Sheets and information, prepare Cash Flow Statement of
Ryan Ltd. by Indirect method for the year ended 31st March, 20X1:
Particulars Notes 31st March 31st March
20X1 ` 20X0 `
A Share capital 1 6,00,000 7,00,000
206

Long term borrowings 3 2,00,000 -
A Trade Payables 1,15,000 1,10,000
B Other current liabilities 4 30,000 80,000
C Short term provision (provision
for tax) 95,000 60,000
Total 14,60,000 12,50,000
Assets
A Property, plant and Equipment 5 9,15,000 7,00,000
B Non-Current Investments 50,000 80,000
2 Current assets
A Inventories 95,000 90,000
C Cash and Cash equivalents 50,000 90,000
D Other Current assets 1,00,000 65,000
Total 14,60,000 12,50,000
Notes to accounts
No. 31st March, 31st March,
20X1 20X0
1. Share capital
Equity share capital 6,00,000 5,00,000
10% Redeemable Preference share capital -- 2,00,000
Total 6,00,000 7,00,000
Capital redemption reserve 1,00,000 -
Capital reserve 70,000 -
General reserve 1,50,000 2,50,000
Profit and Loss account 1,00,000 50,000
Total 4,20,000 3,00,000
9% Debentures 2,00,000 --
Dividend payable - 60,000
Liabilities for expenses 30,000 20,000
207
Total 30,000 80,000

Land and building 1,50,000 2,00,000
(i) A piece of land has been sold out for `1,50,000 (Cost – `1,20,000) and the balance
land was revalued. Capital Reserve consisted of profit on revaluation of land.
(ii) On 1st April, 20X0 a plant was sold for `90,000 (Original Cost – `70,000 and W.D.V.
– ` 50,000) and Debentures worth `1 lakh were issued at par as part consideration
for plant of `4.5 lakhs acquired.
(iii) Part of the investments (Cost – `50,000) was sold for `70,000.
(iv) Pre-acquisition dividend received `5,000 was adjusted against cost of investment.
(v) Interim dividend was declared and paid @ 15% during the current year.
(vi) Income-tax liability for the current year was estimated at `1,35,000.
(vii) Depreciation @ 15% has been charged on Plant and Machinery but no depreciation
has been charged on Building.
Question 11
The Balance Sheet of New Light Ltd. as at 31st March, 20X1 and 20X0 (for the years
ended) are as follows:
Notes ` `
20X0 20X1
A Share capital 1 16,00,000 18,80,000
Long term borrowings 3 4,00,000 2,80,000
A Other current liabilities 4 6,00,000 5,20,000
B Short term provision (provision for 3,60,000 3,40,000
tax)
Total 38,00,000 41,20,000
Assets
208
B Non-Current Investments 4,00,000 3,20,000
2 Current assets
A Cash and Cash equivalents 10,000 10,000
B Other Current assets 11,10,000 11,50,000
Total 38,00,000 41,20,000
Notes to accounts
No. 31st March, 31st March,
20X0 20X1
1. Share capital
Equity share capital 12,00,000 16,00,000
10% Preference share capital 4,00,000 2,80,000
Total 16,00,000 18,80,000
General reserve 6,00,000 7,60,000
Profit and Loss account 2,40,000 3,40,000
Total 8,40,000 11,00,000
9% Debentures 4,00,000 2,80,000
Total 4,00,000 2,80,000
Dividend payable 1,20,000 -
Current Liabilities 4,80,000 5,20,000
Total 6,00,000 5,20,000
Property, plant and equipment 32,00,000 38,00,000
Less: Depreciation (9,20,000) (11,60,000)
(i) The company sold one property, plant and equipment for ` 1,00,000, the cost of
which was ` 2,00,000 and the depreciation provided on it was `80,000.
(ii) The company also decided to write off another item of property, plant and equipment
costing ` 56,000 on which depreciation amounting to ` 40,000 has been provided.
(iii) Depreciation on property, plant and equipment provided ` 3,60,000.
209
(iv) Company sold some investment at a profit of ` 40,000.

(v) Debentures and preference share capital redeemed at 5% premium.
(vi) Company decided to value inventory at cost, whereas previously the practice was
to value inventory at cost less 10%. The inventory according to books on 31.3.20X0
was ` 2,16,000. The inventory on 31.3.20X1 was correctly valued at ` 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.
Question 12
Given below are the relevant extracts of the Balance Sheet and the Statement of Profit
and Loss of ABC Ltd. along with additional information:
Extract of Balance sheet
Particulars Notes 31.3.20X1 31.3.20X0
(` in lakhs) (` in lakhs)
(a) Trade Payables 250 230
(b) Short term Provisions 1 200 180
(c) Other current liabilities 2 70 50
Assets
1 Current assets
(a) Inventories 200 180
(b) Trade Receivables 400 250
(c) Other current assets 3 195 180
Statement of Profit and Loss of ABC Ltd. for the year ended 31st March, 20X1
Particulars Notes ` in lakhs
I Revenue from operations 4,150
II Other income 4 100
III Total Revenue (I + II) 4,250
Expenses:
Purchases of Stock-in-Trade 2,400
Change in inventories of finished goods (20)
Employee benefits expense 800
Depreciation expense 100
Finance cost 5 60
Other expenses 200
IV Total expenses 3,540
210
V Profit before tax (III – IV) 710

VI Tax expense: Current tax 200
VII Profit for the year from continuing operations 510
Appropriations
Balance of Profit and Loss account brought forward 50
Transfer to general reserve 200
Dividend paid 330
Notes to accounts:
20X1 20X0
(` in lakhs) (` in lakhs)
1 Short term Provisions:
Provision for Tax 200 180
2 Other current liabilities:
Outstanding wages 50 40
Outstanding expenses 20 10
Total 70 50
3 Other current assets:
Advance tax 195 180
4 Other income:
Interest and dividend 100
5 Finance cost:
Interest 60
Compute cash flow from operating activities using both direct and indirect method.
Question 13
Following information was extracted from the books of S Ltd. for the year ended 31st
March,2020 :
(1) Net profit before talking into account income tax and after talking into account the
following items was `30 lakhs;
(i) Depreciation on Property, Plant & Equipment `7,00,000
(ii) Discount on issue of debentures written off `45,000.
(iii) Interest on debentures paid `4,35,000
(iv) Investment of Book value `3,50,000 sold for `3,75,000.
211
(v) Interest received on Investments `70,000

(2) Income tax paid during the year ` 12,80,000
(3) Company issued 60,000 Equity Shares of `10 each at a premium of 20% on 10th
April,2019.
(4) 20,000,9% Preference Shares of `100 each were redeemed on 31st March, 2020 at
a premium of 5%
(5) Dividend paid during the year amounted to `11 Lakhs (including dividend distribution
tax)
(6) A new Plant costing `7 Lakhs was purchased in part exchange of an old plant on
1st January,2020. The book value of the old plant was `8 Lakhs but the vendor took
over the old plant at a value of `6 Lakhs only. The balance amount was paid to
vendor through cheque on 30th March,2020.
(7) Company decided to value inventory at cost, whereas previously the practice was to
value inventory at cost less 10%. The inventory according to books on 31.03.2020
was ` 14,76,000.
The inventory on 31.03.2019 was correctly valued at ` 13,50,000.
(8) Current Assets and Current Liabilities in the beginning and at the end of year 2019-
2020 were as:
As on 1st As on 31st
April,2019 (`) March,2020 (`)
Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash &Bank Balances 2,40,700 3,70,500
Trade Payables 2,84,700 2,87,300
Outstanding Expenses 97,000 1,01,400
You are required to prepare a Cash Flow Statement for the year ended 31st March, 2020
as per AS 3 (revised).
212
PART C : HOMEWORK & PAST PAPER SECTION

Question 14
Classify the following activities as (a) Operating activities, (b) Investing activities (c)
Financing activities (d) Cash equivalents with reference to AS 3 (Revised).
(a) Brokerage paid on purchase of investments
(b) Underwriting commission paid
(c) Trading commission received
(d) Proceeds from sale of investment
(e) Purchase of goodwill
(f) Redemption of preference shares
(g) Rent received from property held as investment
(h) Interest paid on long-term borrowings
(i) Marketable securities
(j) Refund of income tax received (5 Marks – May 2019 – IPCC)
Question 15
Prepare cash flow for ABC Ltd., using Direct Method for the year 10 ending 31-03-2019
from the following information:
(1) Sales for the year amounted to ` 270 Lakh out of which 50% was cash sales.
(2) Purchases for the year amounted to ` 60 lakh out of which credit purchases were
80%.
(3) Administrative expenses amounted to ` 18 lakh. Salary of ` 16 lakh was charged to
profit and loss account for the year. Salary of ` 4 lakh was outstanding as on 31-
03-2019. (Salary does not form part of Administrative expenses)
(4) The company has 15% debentures of ` 10 lakh, which it redeemed during the year
at a premium of 10% by issue of equity shares of ` 9 lakh towards redemption and
the balance was paid in cash. Debenture Interest was also paid during the year.
(5) Dividend paid during the year amounted to ` 12 lakh (including dividend distribution
tax).
(6) Investment costing ` 10 lakh were sold at a profit of ` 2.50 lakh.
(7) Income tax payable for the year was ` 80,000.
(8) Depreciation of 25% is charged by the company on opening balance of Plant and
Machinery. At the year end one old plant costing ` 5,00,000 (WDV ` 2,00,000) was
sold for ` 3,50,000. The purchases were also made at year end.
(9) The following balances are also provided:
213

` in Lakh ` in Lakh
31-03-2018 31-03-2019
Debtors 40 45
Creditors 20 23
Bank 5 -
Plant & Machinery 50 70
Provision for tax 1 0.7
Question 16
The following figures have been extracted from the books of Manan limited for the year
ended on 31.3.2020. You are required to prepare the cash flow statement as per AS 3
using indirect method.
(i) Net profit before taking into account tax and income from law suits but after taking
into account the following items was `30 lakhs:
(a) Depreciation on Property, Plant & Equipment `7.50 lakhs.
(b) Discount on issue of Debentures written off `45,000.
(c) Interest on Debentures paid `5,25,000.
(d) Book value of investment `4.50 lakhs (Sale of investments for `4,80,000).
(e) Interest received on investments `90,000.
(ii) Compensation received `1,35,000 by the company in a suit filed.
(iii) Income tax paid during the year `15,75,000
(iv) 22,500, 10% preference shares of ` 100 each were redeemed on 02-04-2019 at
a premium of 5%.
(v) Further the company issued 75,000 equity shares of `10 each at a premium of 20%
on 30.3.2020 (Out of 75,000 equity shares, 25,000 equity shares were issued to a
supplier of machinery)
(vi) Dividend for FY 2018-19 on preference shares were paid at the time of redemption.
(vii) Dividend on Equity shares paid on 31.01.2020 for the year 2018-2019 `7.50 lakhs
(including dividend distribution tax ) and interim dividend paid `2.50 lakhs for the
year 2019-2020.
(viii) Land was purchased on 02.4.2019 for `3,00,000 for which the company issued
22,000 equity shares of ` 10 each at a premium of 20% to the land owner and
balance in cash as consideration.
(ix) Current assets and current liabilities in the beginning and at the end of the years
were as detailed below:
214

As on As on
01.04.2019 31.3.2020
(`) (`)
Inventory 18,00,000 19,77,000
Trade receivables 3,87,000 3,79,650
Cash in hand 3,94,450 16,950
Trade payable 3,16,500 3,16,950
Outstanding expenses 1,12,500 1,22,700
Question 17
From the following summary cash account of K Ltd., prepare cash flow statement for the
year ended 31st March, 2020, in accordance with AS 3 (Revised) using the direct method.
The company does not have any cash equivalents.
Summary Cash Account for the year ended 31-03-2020
Particulars Amount in Particulars Amount in (`)
(`) ‘000 ‘000
Balance as on 01.04.2019 100 Payment to suppliers 4,000
Issue of Equity Share 600 Purchase of Fixed Assets 400
Receipts from Customers 5,600 Overhead Expenses 400
Sale of Fixed Assets 200 Wages and Salaries 200
Taxation 500
Dividend 100
Repayment of bank loan 600
Balance as on 31.03.2020 300
6,500 6,500
Question 18
Following are extracts of the Balance Sheets of Ajay Ltd.:
Particulars Notes 31.3.20X1 31.3.20X2
` `
Shareholder’s funds
(a) Share capital 1 5,00,000 5,00,000
215
(b) Reserve & surplus 2 50,000 90,000

Non-current liabilities
(a) Long-term borrowings 3 5,00,000 7,50,000
Current liabilities
(a) Other current liabilities 4 --- 5,000
Assets
Non-current assets
(a) Intangible assets 5 2,05,000 1,80,000
Notes to accounts
31.3.20X1 31.3.20X2
` `
1 Share Capital
50,000 Equity Shares of `10 each 5,00,000 5,00,000
2 Reserve & surplus
Profit & Loss A/c 50,000 90,000
3 Long-term borrowings
10% Debentures 5,00,000 7,50,000
4 Other current liabilities
Unpaid interest --- 5,000
5 Intangible assets
Goodwill 2,05,000 1,80,000
You are required to show related items in cash flow statement
216
Question 19
ABC Ltd. gives you the Balance sheets as at 31st March 20X0 and 31st March 20X1. You
are required to prepare Cash Flow Statement by using indirect method as per AS 3 for the
year ended 31st March 20X1:
Particulars Notes ` `
20X0 20X1
1 Equity and Liabilities Shareholders’
funds
A Share capital 50,00,000 50,00,000
2 B Reserves and Surplus 26,50,000 36,90,000
Non-current liabilities
3 Long term borrowings 1 - 9,00,000
Current liabilities
A Short-term borrowings 1,50,000 3,00,000
(Bank loan)
B Trade payables 8,80,000 8,20,000
C Other current liabilities 2 4,80,000 2,70,000
Total 91,60,000 1,09,80,000
Assets
2 Current assets
A Current Investments Inventory 11,80,000 15,00,000
C Cash and Cash equivalents 4 22,40,000 26,40,000
D Other Current assets (Prepaid expenses) 15,20,000 15,20,000
E 90,000 1,20,000
Total 91,60,000 1,09,80,000
217
Notes to accounts
No. `20X0 20X1

9% Debentures - 9,00,000
Total - 9,00,000

Dividend payable 1,50,000 -
Liabilities for expenses 3,30,000 2,70,000
Total 4,80,000 2,70,000

Less: Depreciation (6,10,000) (7,90,000)
4 Trade receivables
Gross amount 23,90,000 28,30,000
Less: Provision for doubtful debts (1,50,000) (1,90,000)
Total 22,40,000 26,40,000
(i) Net profit for the year ended 31st March, 20X1, after charging depreciation
` 1,80,000 is ` 10,40,000.
(ii) Trade receivables of ` 2,30,000 were determined to be worthless and were written
off against the provisions for doubtful debts account during the year.
Question 20
The following information was provided by PQR Ltd. for the year ended 31st March, 2019 :
(1) Gross Profit Ratio was 25% for the year, which amounts to ` 3,75,000.
(2) Company sold goods for cash only.
(3) Opening inventory was lesser than closing inventory by ` 25,000.
(4) Wages paid during the year ` 5,55,000.
(5) Office expenses paid during the year ` 35,000.
(6) Selling expenses paid during the year ` 15,000.
218
(7) Dividend paid during the year ` 40,000 (including dividend distribution tax).
(8) Bank Loan repaid during the year ` 2,05,000 (included interest ` 5,000)
(9) Trade Payables on 31st March, 2018 were ` 50,000 and on 31st March, 2019 were `
35,000.
(10) Amount paid to Trade payables during the year ` 6,10,000
(11) Income Tax paid during the year amounts to ` 55,000 (Provision for taxation as on
31st March, 2019 ` 30,000)·
(12) Investments of ` 8,20,000 sold during the year at a profit of ` 20,000.
(13) Depreciation on furniture amounts to ` 40,000.
(14) Depreciation on other tangible assets amounts to ` 20,000.
(15) Plant and Machinery purchased on 15th November, 2018 for ` 3,50,000.
(16) On 31st March, 2019 ` 2,00,000, 7% Debentures were issued at face value in an
exchange for a plant.
(17) Cash and Cash equivalents on 31st March, 2018 ` 2,25,000.
A) Prepare cash flow statement using direct method

B) Calculate cash flow from operating activities, using indirect method.
219
PROFIT PRIOR TO
6 INCORPORATION
When business of a non-corporate entity is taken over by a newly formed limited company
and if the certificate of incorporation is received at some later date, the first accounting
year of the company is bifurcated in following two parts:
(1) Pre - incorporation period (A period before getting certificate of Incorporation)
(2) Post-incorporation period (A period after getting certificate of Incorporation)
As per the companies Act, the profit earned by the company in pre - incorporation period
should be transferred to capital reserve (If there is a loss it should be debited to goodwill
a/c) and profits of post incorporation period are treated as revenue profits.
The profit and loss account of the first accounting year should be prepared in a columnar
from and all incomes and expenses should be allocated between pre and post on some
appropriate basis as under:
Items Basis of Apportionment between pre and
post incorporation period
(1) Gross Profit or Gross Loss On the basis of turnover in the respective
periods.
Or
On the basis of cost of goods sold in the
respective periods in the absence of any
information regarding turnover.
Or
On the basis of time in the respective periods
in absence of any information regarding
turnover and cost of goods sold.
220
(2) Variable expenses linked with On the basis of Turnover in the pre and post
Turnover [e.g. Carriage / Cartage incorporation.
outward, Selling and distribution
expenses, Commission to selling
agents / travelling agents,
advertisement expenses, Bad
debts (if actual bad debts for
the two periods are not given),
Brokerage, Sales Promotion.]
(3) Fixed Common charges On the basis of Time in the pre and post
[e.g. Salaries, Office and incorporation periods.
Administration Expenses, Rent,
Rates and Taxes, Printing and
Stationery, Telephone, Telegram
and Postage, Depreciation,
Miscellaneous Expenses]
(4) Expenses exclusively relating to Charge to pre-incorporation period.
pre-Incorporation period [e.g.
Interest on Vendor’s Capital,
Salary to partner/vendor]
(5) Expenses exclusively relating to Charge to Post-incorporation period
post-incorporation period
[e.g. Formation expenses,
interest on debentures, director’s
fees, Directors’ remuneration,
Preliminary Expenses, Share
issue Expenses, Underwriting
commission, Discount on issue of
securities.]
(6) Audit Fees
(i) For Company’s Audit under the Charge to Post-incorporation period
Companies Act, 2013.
(ii) For Tax Audit under section On the basis of turnover in the respective
44AB of the Income tax Act, 1961 periods.
(iii) Audit fees Time Ratio assume it is for full year
221
(7) Interest on purchase consideration

to vendor:
(i) For the period from the date Charge to Pre-incorporation period
of acquisition of business to
date of incorporation.
(ii) From the period from the Charge to Post-incorporation period
date of incorporation upto
date of final accounts or
Date of settlement whichever
is earlier.
(8) Discount Received Purchase Ratio
(9) Bad Debts Recovered (i) If date of Recovery is given then Actual
basis
(ii) If Date of Recovery not given then
assume Pre-Incorporation period
(10) Profit / Loss on sale of Asset / On Actual Basis according to Date of sale
Investment
(11) Interest Received on Investment (i) On Actual basis if purchase / sale date
of Investment given or
(ii) If no dates are given then Time Ratio.
(12) RDD (Provision for doubtful debts) Post Period only (assuming RDD is calculated
on latest debtors balance only)
222
Question 1
ABC Ltd. was incorporated on 1.5.2016 to take over the business of DEF and Co. from
1.1.2016. The summarised Profit and Loss Account as given by ABC Ltd. for the year
ending 31.12.2016 is as under:
Summarised Profit and Loss Account
` `
To Rent and Taxes 90,000 By Gross Profit 10,64,000
To Salaries including manager’s By Interest on
salary of ` 85,000 3,31,000 Investments 36,000
To Carriage Outwards 14,000
To Printing and Stationery 18,000
To Sales Commission 30,800
To Bad Debts (related to sales) 91,000
To Underwriting Commission 26,000
To Preliminary Expenses 28,000
To Audit Fees 45,000
To Loss on Sale of Investments 11,200
To Net Profit 3,90,000
11,00,000 11,00,000
Prepare a Statement showing allocation of expenses and calculations of pre-incorporation

and post-incorporation profits after considering the following information:
(i) G.P. ratio was constant throughout the year.
(ii) Sales for January and October were 1½ times the average monthly sales while sales
for December were twice the average monthly sales.
(iii) Bad Debts are shown after adjusting a recovery of ` 7,000 of Bad Debt for a sale
made in July, 2013.
(iv) Manager’s salary was increased by ` 2,000 p.m. from 1.5.2016.
(v) All investments were sold in April, 2016.
(vi) The entire audit fees relates to company.
223
Question 2
Enar Pvt. Ltd. was registered on 1st June, 2016 took over the business of Arti Agencies
effective from 1st January, 2016.
The consideration agreed is ` 4,80,000. Interest @ 6% p.a. is payable.
The company issued for cash consideration 30,000 Equity Shares of ` 10 @ ` 11 and 7%
Debentures for ` 2,00,000 on 30th June, 2016. The consideration was settled on same
date.
In addition to the items arising from above data the following items of income and
expenses appeared in the account for the year ended 31st December, 2016.
Sales ` 2,70,000
Cost of Sales ` 1,62,000
Salaries ` 30,000 (Including Salary to Naru)
Depreciation ` 1,500
Sales Commission @ 5% on Sales
Directors Meeting Fee ` 1,200
Provision for Income Tax ` 8,000
Rent ` 6,000
Preliminary expenses ` 1,800 (to be written off)
Dividend declared ` 4,500
Notes:
(1) Sales for each month of July to Dec. 2016, was twice the monthly sales of January
to June, 2016.
(2) Mr. Naru was a working Partner in Firm entitled to remuneration @ ` 1,500 per
month. From 1st June 2016, he was made Managing Director of Company entitled
to Salary @ ` 2,500 per month. The remaining salary is to clerks employed during
period 1st April to 31st August.
(3) Mr. Ravi owns premises. He charged rent @ ` 300 per month upto 1st July, 2016 and
@ ` 700 per month thereafter.
Prepare an account showing amount to be treated as Capital Reserve and Revenue Profit.
224
Question 3
The partners of Maitri Agencies decided to convert the partnership into a private limited
company called MA(P) Ltd. with effect from 1st January, 2016. The consideration was
agreed at ` 1,17,00,000 based on the firm's Balance Sheet as at 31st December, 2015.
However, due to some procedural difficulties, the company could be incorporated only on
1st April, 2016. Meanwhile, the business was continued on behalf of the company and
the consideration was settled on that day with interest at 12% per annum. The same
books of accounts were continued by the company which closed its account for the first
time on 31st March, 2017 and prepared following summarised profit and loss account:
Sales 2,34,00,000
Cost of Sales 1,63,80,000
Salaries 11,70,000
Depreciation 1,80,000
Advertisements 7,02,000
Discounts 11,70,000
Managing Directors remuneration 90,000
Miscellaneous office expenses 1,20,000
Office cum show room rent 7,20,000
Interest 9,51,000
2,14,83,000
Profit 19,17,000
The company's only borrowal was a loan of ` 50,00,000 at 12% p.a. to pay the purchase
consideration due to the firm.
The company was able to double the average monthly sales of the firm, from 1st April,
2016 but the salaries trebled from that date. It has to occupy additional space from 1st
July, 2016 for which rent was ` 30,000 per month.
Prepare a profit and loss account in columnar form apportioning costs and revenue
between pre-incorporation and post incorporation periods. Also, suggest how the pre-
incorporation profits are to be dealt with.
225
Question 4
New Ventures Ltd. was incorporated on 1st July, 2016 with an authorised capital
consisting of 5,000 equity shares of ` 10 each to take over the running business of Rundown
Brothers as from 1st April, 2016.
The following is the summarised Profit and Loss Account for the year ended 31st March,
2017.
` `
Sales
1st April, 2016 to 30th June, 2016 6,000
1st July, 2016 to 31st March, 2017 19,000 25,000
Expenses
Cost of Sales for the year 16,000
Administrative expenses 1,768
Selling commission 875
Goodwill written off 200
Interest on P.C. paid on 1.12.2016 373
Distribution expenses
(60 per cent variable) 1,250
Preliminary expenses written off 330
Debenture interest 320
Depreciation 444
Directors' fees 100 21,660
Net Profit 3,340
The company deals in one type of product. The unit cost of sales was reduced by 10 per
cent in the post incorporation period as compared to the pre-incorporation period in
the year.
You are required to apportion the net profit amount between pre-incorporation and
post-incorporation periods showing the basis of apportionment.
226
Question 5
The Kalpana Ltd. was registered on 1st July, 2016 to take over the business of Natu
Brothers from 1st April, 2016. The company was granted certificate to commence busi-
ness on 31st October, 2016. From the following information, calculate the profit earned
by the company in 'pre' and 'post' incorporation periods.
(1) Sales during the period April - March, 2017 amounted to ` 72,000. The trend of the
sales was as under:
April and May half the average sale in each month.
August, September and October average sales in each month.
January twice the average sales
February and March half the average sale in each month.
(2) Cost of goods sold ` 18,000
(3) Rent and rates ` 4,000
(4) Salaries ` 1,800
(There were three employees in the pre-incorporation period and four employees in
the post - incorporation period)
(5) Bad debts ` 720
(6) Interest on purchase price (upto 31st October, 2016) ` 630
(7) Expenses exclusively related to the company ` 2,000.
(8) Partner's salaries ` 1,500
(9) Commission on sales ` 480
(10) Manager's salary ` 10,500 (The manager whose salary was ` 6,000 p.a. was replaced
on 1st July, 2016 and his successor is being paid `12,000 per year)
(11) Provision for income-tax ` 1,000.
(12) Donation to a political party given by the company ` 5,000.
227
Question 6
Inder and Vishnu, working in partnership registered a joint stock company under the
name of Fellow Travellers Ltd. on May 31, 2011 to take over their existing business. It
was agreed that they would take over the assets of the partnership from January 1st,
2011 for a sum of ` 3, 00,000 and that until the amount was discharged they would pay
interest on the amount at the rate of 6% per annum. The amount was paid on June 30,
2011. To discharge the purchase consideration, the company issued 20,000 equity shares
of ` 10 each at a premium of ` 1 each and allotted 7% Debentures of the face value of `
1, 50,000 to the vendors at par.
The summarised Profit and Loss Account of the “Fellow Travellers Ltd.” for the year ended
31st December, 2011 was as follows:
` `
To Purchase, including By Sales
Inventory 1,40,000 1st January to 31st May 2011 60,000
To Freight and carriage 5,000 1st June to 31st Dec., 2011 1,20,000
To Gross Profit c/d 60,000 By Inventory in hand 25,000
2,05,000 2,05,000
To Salaries and wages 10,000 By Gross profit b/d 60,000
To Debentures Interest 5,250
To Depreciation 1,000
To Interest on purchase 9,000
Consideration (up to 30-6-11)
To Selling commission 9,000
To Director’s Fee 600
To Preliminary expenses 900
To Provision for taxes (entirely
related with company) 6,000
To Dividend paid on equity
shares @ 5% 5,000
To Balance c/ 13,250
60,000 60,000
Prepare statement apportioning the expenses and calculate profits / losses for the ‘post’
and ‘pre-incorporation’ periods and also show how these figures would appear in the
Balance Sheet of the company.
228
Question 7
(Sales Ltd – I.P.C.C. – Nov 15 – Its in Past Paper Section)
Question 8
Rama Udyog Limited was incorporated on August 1, 2011. It had acquired a running
business of Rama & Co. with effect from April 1, 2011. During the year 2011-12, the total
sales were ` 36, 00,000. The sales per month in the first half year were half of what they
were in the later half year. The net profit of the company, ` 2,00,000 was worked out
after charging the following expenses:
(i) Depreciation ` 1,23,000,
(ii) Directors’ fees ` 50,000,
(iii) Preliminary expenses ` 12,000,
(iv) Office expenses ` 78,000,
(v) Selling expenses ` 72,000
(vi) Interest to vendors upto August 31, 2011 ` 5,000.
You are required to ascertain pre-incorporation and post-incorporation profit for the
year ended 31st March, 2012.
Question 9
Glorious Ltd – I.P.C.C. May 13 – Its in Past Paper Section)
Question 10
ABC Ltd. took over a running business with effect from 1st April, 2011. The company was
incorporated on 1st August, 2011. The following summarised Profit and Loss Account has
been prepared for the year ended 31.3.2012:
To Salaries 48,000 By Gross Profit 3,20,000
To Stationery 4,800
To Travelling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade
expenses 37,800
To Rent (office buildings) 26,400
To Electricity charges 4,200
To Director’s fee 11,200
229
To Bad debts 3,200

To Commission to selling
agents 16,000
To Tax Audit fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
To Depreciation on fixed
assets 9,600
To Net profit 87,600
3,20,000 3,20,000
(a) Total sales for the year, which amounted to ` 19, 20,000 arose evenly up to the date
of 30.9.2011. Thereafter they recorded an increase of two-third during the rest of
the year.
(b) Rent of office building was paid @ ` 2,000 per month up to September, 2011 and
thereafter it was increased by ` 400 per month.
(c) Travelling expenses include ` 4,800 towards sales promotion.
(d) Depreciation include ` 600 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30th September, 2011 by
issuing equity shares of ` 10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre
and post incorporation periods.
Question 11
The promoters of Shiva Ltd. took over on behalf of the company a running business with
effect from 1st April 2017. The company got incorporated on 1st August 2017. The an-
nual accounts were made up to 31st March, 2018 which revealed that the sales for the
whole year totalled ` 2400 lakhs out of which sales till 31st July, 2017 were for ` 600
lakhs. Gross profit ratio was 20%.
The expenses from 1st April 2017, till 31st March, 2018 were as follows:
Particulars ` in Lakhs
Salaries 75
Rent, Rates and Insurance 30
Sundry Office Expenses 72
230
Traveller’s Commission 20
Discounted allowed 16
Bad Debts 8
Directors’ Fees 30
Tax Audit Fee 16
Depreciation on Tangible Assets 15
Prepare a statement showing the calculation of profits for the pre – incorporation and
Post incorporation periods.
231
Question 12
The partners of Shri Enterprises decided to convert the partnership firm into a private
limited Company Shreya (P) Ltd. with effect from 1st January, 2008. However company
could be incorporated only on 1st June, 2008. The business was continued on behalf of
the company and the consideration of ` 6,00,000 was settled on that day along with
interest @ 12% per annum. The Company availed loan of ` 9,00,000 @ 10% per annum
on 1st June,2008 to pay purchase consideration and for working capital. The company
closed its accounts for the first time on 31st March, 2009 and presents you the following
summarized profit and loss account:
` `
Sales 19,80,000
Cost of goods sold 11,88,000
Discount to dealers 46,200
Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office Expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses (to be return off in first year itself) 15,000 18,07,200
Profit 1,72,800
Sales from June, 2008 to December, 2008 were 2 ½ times of the average sales, which
further increased to 3½ times in January to March quarter, 2009. The company recruited
additional work force to expand the business. The salaries from July, 2008 doubled. The
company also acquired additional showroom at monthly rent of ` 10,000 from July,
2008.
You are required to prepare a profit and loss statement showing apportionment of cost
and revenue between pre-incorporation and post-incorporation periods. Also suggest
how the pre-incorporation Profit/losses are to be dealt with.
(10 Marks – I.P.C.C. Nov 10)
232
Question 13
A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets itself incorporated
as a company on 1st November, 2010. The first accounts are drawn up to March 31,
2011. The gross profit for the period is ` 56,000. The general expenses are ` 14,220;
Director's fees ` 12,000 p.a.; incorporation expenses ` 1,500. Rent up to 31st December
was ` 1,200 p.a., after which it is increased to ` 3,000 p.a., Salary of the manager, who
upon Incorporation of the company was made a director, is ` 6,000 p.a. His remuneration
thereafter is included in the above figure of fees to the directors.
Give Profit and Loss statement showing pre and post incorporation profit. The net sales
are ` 8,20,000, the monthly average of which for the first four months is onehalf of that
of the remaining period. The company earned a uniform profit. Interest and tax may be
ignored. (6 Marks - Nov 2011 – IPCC)
Question 14
The promoters of M/s. Glorious Ltd. took over on behalf of the company a running business
with effect from 1st April, 2012. The company got incorporated on 1st August, 2012. The
annual accounts were made up to 31st March, 2013 which revealed that the sales for
the whole year totalled ` 1,600 lakh out of which sales till 31st July, 2012 were for ` 400
lakh. Gross profit ratio was 25%.
The expenses from 1st April, 2012 till 31st March, 2013 were as follows:
(` in lakhs)
Salaries 69
Travellers’ Commission 16
Discount Allowed 12
Bad Debts 4
Director’s Fee 25
Audit Fee 9
Prepare a statement showing the calculation of Profits for the pre-incorporation and
post-incorporation periods.
(8 Marks - May 2013 IPCC)
233
Question 15
Sneha Ltd. was incorporated on 1st July. 2013 to acquire a running business of Atul
Sons with effect from 1st April, 2013. During the year 2013-14, the total sales were
` 24,00,000 of which ` 4,80,000 were for the first six months. The Gross profit of the
company ` 3,90,800. The expenses debited to the Profit & Loss Account included:
(i) Directors fees ` 30,000
(ii) Bad debts ` 7,200
(iii) Advertising ` 24,000 (under a contract amounting to ` 2,000 per month)
(iv) Salaries and General Expenses ` 1,28,000
(v) Preliminary Expenses written off ` 10,000
(vi) Donation to a political party given by the company ` 10,000.
Prepare a statement showing pre-incorporation and post incorporation profit for the
(8 Marks - May 2014 – IPCC)
Question 16
The partners Kamal and Vimal decided to convert their existing partnership business into
a Private Limited Company called M/s. KV Trading Private Ltd. with effect from 1/7/2014.
The same books of accounts were continued by the company which closed its account for
first term on 31/3/2015
The summarized Profit and Loss Account for the year ended 31/3/2015 is below:
(`) in Lakhs (`) in Lakhs
Turnover 240.00
Interest on Investment 6.00
246.00
Less: Cost of goods sold 102.00
Advertisement 3.00
Sales Commission 6.00
Salary 18.00
Managing directors remuneration 6.00
Interest on Debentures 2.00
Rent 5.50
Bed Debts 1.00
Underwriting Commission 2.00
Audit fees 2.00
Loss on sale of investment 1.00
234
Depreciation 4.00 152.50

93.50
The following additional information was provided:

(i) The average monthly sales doubled from 1/7/2014. GP ratio was constant
(ii) All investments were sold on 31/5/2014.
(iii) Average monthly salary doubled from 1/10/2014.
(iv) The company occupied additional space from 1/7/2014 for which rent of ` 20,000
per month was incurred.
(v) Bad debts recovered amounting to ` 50,000 for a sale made in 2012, has been
deducted from bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation
periods and calculate the Profit/Loss for such periods. Also suggest how the pre-
incorporation profits are to be dealt with. (10 Marks – I.P.C.C. May 2015)
Question 17
SALE Limited was incorporated on 01.08.2011 to take-over the business of a partnership
firm w.e.f. 01.04.2011. The following is the extract of Profit and Loss Account for the year
ended 31.03.2012:
Particulars Amount ` Particulars Amount `
To Salaries 1,20,000 By Gross Profit 6,00,000
To Rent, Rate & Taxes 80,000
To Commission on Sales 21,000
To Director Fees 12,000
To Advertisement 36,000
To Net Profit for the Year 2,74,000
6,00,000 6,00,000
(i) SALE Limited initiated an advertising campaign which resulted in increase in monthly
average sales by 25% post incorporation period.
(ii) The Gross profit ratio in post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and
post-incorporation, also explain how pre-incorporation profit is treated in the accounts.
(8 Marks - I.P.C.C. – Nov 15)
235
Question 18
What are the purposes for which Pre-incorporation Profit & Pre-incorporation Losses can
be used for? (Nov. 2016 – Group I)
Question 19
Roshani & Reshma working in partnership, registered a joint stock company under the
name of Happy Ltd. on May 31st 2016 to take over their existing business. The summarized
Profit & Loss A/C as given by Happy Ltd. for the year ending 31st March, 2017 is as under:
Happy Ltd.
Profit & Loss A/c. for the year ending March 31, 2017
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Rent 38,400
To Audit Fees 12,000
To Net Profit 1,33,350
Total 4,50,000 Total 4,50,000
Prepare a Statement showing allocation of expenses & calculation of pre incorporation &
post-incorporation profits after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ` 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ` 14,000 for a sale made in 2013-14 has been
(iv) Total sales were ` 18,00,000 of which ` 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2016 for which rent was `
2,400 per month. (8 Marks - I.P.C.C. - May 2017)
Question 20
The promoters of Shiva Ltd. took over on behalf of the company a running business
with effect from 1st April 2017. The company got incorporated on 1st August 2017. The
annual accounts were made up to 31st March, 2018 which revealed that the sales for the
whole year totalled ` 2400 lakhs out of which sales till 31st July, 2017 were for ` 600
lakhs. Gross profit ratio was 20%.
236
The expenses from 1st April 2017, till 31st March, 2018 were as follows:
Particulars ` In lakhs
Salaries 75
Traveller’s Commission 20
Discount Allowed 16
Bad Debts 8
Director’s Fee 30
Tax Audit Fee 16
Prepare a statement showing the calculation of profits for the pre-incorporation and
Post incorporation periods. (10 Marks - May 2018 – Inter C.A.)
Question 21
A partnership firm M/s. Nice Sons was carrying on business from 1st May, 2017. The
partners of the firm decided to convert the partnership firm into a private company called
Zenith (P) Ltd. with effect from 1st September, 2017. The annual accounts were drawn up
to 31st March, 2018. The summarised Profit and Loss Account from 1 st May, 2017 to 31st
March, 2018 is as follows:
Particulars Amount (`) Amount (`)
Turnover 55,20,000
Interest on Investment 60,000
Profit on Sale of Investment 42,000
56,22,000
Less:
Cost of goods sold 34,50,000
Printing & Stationery 77,000
Manager’s Salary 82,000
Audit Fees 41,000
Rent 1,33,000
Bad Debts 33,000
Underwriting Commission 56,000
Depreciation 71,500
Interest on Debentures 8,900
237
Advertising campaign expenses 69,800

Sundry office expenses 1,06,700
Interest on borrowings 1,25,000 42,53,900
Net Profit 13,68,100
Additional Information Provided:

(1) The company's only borrowing was a loan of ` 15,00,000 at 9% p.a., to pay the
purchase consideration due to the firm and for working capital requirements. The
loan was taken on 1st September, 2017.
(2) The company occupied additional space from 1st September, 2017 for which rent of
` 8,000 per month was incurred.
(3) Audit fee pertains to the company.
(4) Bad debts recovered amounting to ` 36,000 for a sale made in June 2017, has been
(5) All investments were sold in August 2017.
(6) Zenith (P) Ltd. initiated an advertising campaign on 1st September, 2017, which
resulted in increase in monthly average sales by 40%.
(7) The salary of Manager was increased by ` 3,000 p.m. from 1st July, 2017.
Prepare a statement showing pre-incorporation and post-incorporation profit for the
year ended 31st March 2018. (8 Marks - May 2018 – IPCC)
Question 22
Sun Limited took over the running business of a partnership firm M/s A & N Brothers with
effect from 1st April, 2017. The company was incorporated on 1 st September, 2017. The
following profit and loss account has been prepared for the year ended 31st March, 2018.
To salaries 1,33,000 By Gross Profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000
To commission on sales 48,000
To printing and stationery 24,000
To electricity charges 30,000
To depreciation 80,000
238
To advertising expenses 24,000

To preliminary expenses 9,000
To Managing Director's 8,000
remuneration
To Net Profit c/d 1,45,000
Total 7,50,000 Total 7,50,000
1. Trend of sales during April, 2017 to March, 2018 was as under:
April, May ` 85,000 per month
June, July ` 1,05,000 per month
August, September ` 1,20,000 per month
October, November ` 1,40,000 per month
December onwards ` 1,50,000 per month
2. Sun Limited took over a machine worth ` 7,20,000 from A&N Brothers and purchased
a new machine on 1st February, 2018 for ` 4,80,000. The company decides to provide
depreciation @ 10% p.a.
3. The company occupied additional space from 1st October, 2017 @ rent of ` 6,000
per month.
4. Out of travelling expenses, ` 30,000 were incurred by office staff while remaining
expenses were incurred by salesmen.
5. Audit fees pertains to the company.
6. Salaries were doubled from the date of incorporation.
You are required to prepare a statement apportioning the expenses between pre and post
incorporation periods and calculate the profit / (loss) for such periods.
(Nov. 2018 – IPCC group I)
Question 23
Tarun Ltd. was incorporated on 1st July, 2018 to acquire a running business of Vinay
Sons with effect from 1st April, 2018. During the year 2018-19, the total sales were `
12,00,000 of which ` 2,40,000 were for the first six months. The gross profit for the year
is ` 4,15,000. The expenses debited to the profit and loss account included:
(i) Director’s fees ` 25,000
(ii) Bad Debts ` 6,500
(iii) Advertising ` 18,000 (Under a contract amounting to `1,500 per month)
(iv) Company Audit Fees ` 15,000
(v) Tax Audit Fees ` 10,000
239
1. Prepare a statement showing pre-incorporation and post-corporation profit for the

2. Explain how profits are to be treated.
(5 Marks - May 2019 –Inter C.A.)
Question 24
M/S new venture was carrying on business from 1st June, 2017 gets itself incorporated as
a company on 1st October, 2017. The first account are drawn upto 31st March 2018, the
Gross profit for the periods is ` 1,20,000 Following information is given:
(a) General Expenses are ` 24,000
(b) Director’s Fees is ` 24,000 p.a.
(c) Incorporation Expenses ` 4,000.
(d) Rent upto 31st December, 2017 was ` 6,000 p.a. after which it is increased to `
8,000 p.a.
(e) Salary of the Manager, who upon incorporation of the company was made a director,
is ` 12,000 p.a. His remuneration as director is included in the above figure of fees to
the directors.
(f) Advertisement Expenses ` 5,000 pertains to the Incorporated Company.
(g) Bad debts ` 4,000 Give statement showing pre and post incorporation profit. The
net sales are ` 20,00,000., the monthly average of which for the first four months
is one-half of that of the remaining period. The company earned a uniform profit.
Interest and tax may be ignored.
(8 Marks - I.P.C.C. – May 2019)
Question 25
The partners of C & G decided to convert their existing partnership business into a private
limited called CG trading Pvt. Ltd. with effect from 1.7.2018. The same books of accounts
were continued by the company which closed its accounts for the first term on 31.3.2019.
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on Investment 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
240
Interest on Debentures 2.00

Rent 5.50
Bad Debt 1.15
Underwriting Commission 1.00
Audit Fees 3.00
Loss on Sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided:
(i) The Average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The Company occupied additional space from 1.7.2018 for which rent of 20,000 per
month was incurred.
(v) Bad Debts recovered amounting to ` 60,000 for a sale made in 2016-17 has been
(vi) Audits fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post Incorporation
periods and calculate the profits /loss for such periods.
(10 Marks - Nov 2019 Inter C.A.)
Question 26
Moon Ltd. was incorporated on 1st August, 2019 to take over the running business of a
partnership firm w.e.f. 1st April, 2019. The summarized profit & loss Account for the year
ended 31st March, 2020 is as under
Amount (`)
Gross Profit 6,30,000
Less: Salaries 1,56,000
Rent, Rates & Taxes 72,000
Commission on Sales 40,600
Depreciation 60,000
Interest on Debentures 36,000
Director’s Fees 24,000
Advertisement 48,000 4,36,000
Net Profit for the Year 1,93,400
241
Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales
by 25% post incorporation. You are required to prepare a statement showing the profit
for the year between pre-incorporation and post incorporation. Also, explain how profits
are to be treated in the accounts?
(6 Marks – Nov 2020 - Inter C.A.)
242
7 INVESTMENT ACCOUNTS
(I) Investment in fixed interest securities

Accounting Procedure
1. When the given transaction is at ex-interest price, the price itself is cost and
additionally, the interest should be recorded in interest column.
2. When the transaction is given at cum-interest price, the given price should be
bifurcated into cost and interest for accounting purpose.
3. Record the entry for receiving half yearly interest on all the securities in hand on
each interest date (hidden adjustment).
4. When the investments are sold, the profit or loss on sale should be calculated
immediately (taking weighted average) and should be transferred to profit and loss
Account.
5. If no specification is given, the price should be concluded as Ex-Interest Price.
6. At the time of recording closing balance accrued interest on closing balance should
be credited to interest column and at the time of recording opening balance, accrued
should be debited to interest column (hidden adjustment).
(II) Treatment of Convertible Debentures:

When a company converts its debenture into shares, for a debenture holder, it is a sort of
barter exchange where he surrenders debentures and receives equity shares in return.
Entry :
Investment in equity shares of ______ Ltd. A/c Dr. xx
To Investment in Debentures of ______ Ltd. A/c xx
Note: 1. The cost of debentures surrendered will be considered as cost of equity shares
acquired and there will be no profit or loss on conversion. The profit or loss will arise
in future when these equity shares will be sold.
2. At the time of surrender of debentures, the debentureholder will receive interest
243
on debentures surrendered upto the date of surrender because now a fixed interest
security is getting converted into variable interest security (hidden adjustment).
(II) Investment Account of Equity Shares: When the equity shares are purchased the
payment itself is considered as cost because this is a variable interest security and
accrued dividend therein cannot be estimated.
Important Adjustments:
1. Treatment of Bonus Shares: When bonus shares are received it is technically not
a financial transaction because the cost involved is NIL but still in investment
a/c, the entry should be passed in quantity column as bonus shares received
will reduce average cost of investment.
2. Treatment of Right Issue: When the right shares are offered the shareholders has
following two options :
(a) Subscribe for shares: this is like a normal purchase of investment
(b) Renounce the right: the consideration received on transfer of right in favour
of some other person is considered as a sundry income to be credited to
profit / loss account.
3. Treatment of Final Dividend: When the dividend is received, it is to be bifurcated
into two parts :
(a) pre-acquisition period dividend - it is to be considered as a capital receipt
which should be credited to cost column so as to reduce the cost of
investment.
Bank A/c Dr. xx
To Investment A/c xx
(b) post-acquisition period dividend - it is a routine revenue income to be
credited in dividend column.
Bank A/c Dr. xx
To Dividend A/c xx
Note :
1. If purchase date of investment is not given then full dividend received is post
acquisition.
Eg: On 1st April 2020 Mr. A had 25,000 equity shares of X Ltd. face value ` 10
at ` 15 per share. On 20th June 2020 he purchased another 5,000 shares of the
company at ` 16 per share. He received dividend for the year ended 31st Match 2020
at the rate of 20% on 31st October 2020. Discuss treatment of Dividend received.
244
Ans. (a) 1st April 2020 opening balance FV ` 2,50,000 x 20% = ` 50,000 (post).
(b) 20.6.2020 Purchase FV ` 50,000 x 20% = ` 10,000(pre).
2. On 1st April 2020 Mr. B had 50,000 equity shares of X Ltd. FV ` 10 purchased at `
20 per share on 1st October 2019. On 20th June 2020 he purchased another 5,000
shares @ ` 25 per share. On 16th August 2020 he received bonus of 5,000 shares.
On 31st August 2020 he received rights offer of 5,000 shares @ ` 15 per share. He
purchased all the shares. He received dividend for the year ended 31st March 2020
@ 20% on 31st October 2020. Discuss treatment of Dividend received.
Ans. (a) 1st April 2020 opening balance FV ` 2,50,000 x 20% = ` 50,000.
Pre Post (1.10.2019 to

31.3.2020)
6 months
1:1 6 months
(balancing figure)
` 25,000 ` 25,000

b) 20.6.2020 Purchase FV 50,000 x 20% = 1,000 (Pre)

(c) 16.8.2020 Bonus No Dividend for the year
(d) 31.8.2020 Rights ended 31.3.2020
4. Treatment of Interim Dividend: To be treated as revenue income and should be credited

to Dividend column
5. Sale of Investment: Calculate profit / loss on sale on weighted average cost basis.
245
Question 1
Mr. A has made investment in 12% Debentures of X Ltd. (Interest dates March 31 and
September 30). From the following details prepare Investment account in the books of
Mr. A for the year 2012.
1.1.2012 Purchased 300 Debentures @ ` 96 Ex - interest
1.3.2012 Purchased 200 Debentures @ ` 99 Cum - interest
1.8.2012 Sold 100 Debentures @ ` 98 Ex - interest
1.12.2012 Purchased 200 Debentures @ ` 97.
Question 2
Calcutta Investments hold 400, 12% Debentures of ` 100 each in Acme Ltd. as on 1st
April, 2010 at a cost of ` 50,000. Interest is payable on 30th June and 31st December
each year. On 1st June, 2010, 200 debentures are purchased cum interest at ` 21,400.
On 1st November, 2010, 200 debentures are purchased ex-interest at ` 19,200. On 31st
December, 2010, 300 debentures are sold cum-interest for ` 32,250.
Prepare Investment account valuing closing stock as on 31st March, 2011 at cost or
market price whichever is lower. The debentures were quoted at ` 98 on 31st March,
2011. (use FIFO method)
Question 3
A purchased on 1st March, 2011 ` 24,000 5% Bharat Debenture Stock at ` 90 cum-
interest, interest being payable on 31st March and 30th September each year. Stamp
and expenses on purchase amounted to ` 20 and brokerage at 2% was charged. Interest
for the half year was received on the due date. On 1st September, ` 10,000 of the stock
was sold at 92 ex-interest less brokerage at 2%. On 30th September, ` 8,000 stock was
purchased at 91 ex-interest plus brokerage at 2% and charges ` 10. On 1st December,
` 6,000 stock was sold at ` 94 cum interest less brokerage 2%. The market price of
stock on 31st December was ` 92. Show the Investment Account for the year ended 31st
December, 2011.
Question 4
Bharat Finance Ltd. purchased on 1st May, 2010 13.5% convertible debentures in Glance
Ltd. of the face value of ` 1,00,000 @ ` 105. Interest on debentures is payable each
year on 31st March and 30th September. The following were the other transactions with
246
regard to these debentures carried by Bharat Finance Ltd. in 2010.

Aug.1 Purchased ` 50,000 Debentures @ ` 107 cum-interest.
Oct. 31 Sold ` 40,000 Debentures @ ` 103
Nov. 30 Receipt of 2,200 Equity Shares in Glance Ltd. of ` 10 each in
conversion of 20% of the Debentures held.
Dec.15 Purchased 1000 Equity Shares in Glance Ltd. @ ` 16.
The market value of the Debentures and Equity Shares in Glance Ltd. at the end of 2010
was respectively ` 96 and ` 15.
The accounting year of the Bharat Ltd. is the Calendar year. Prepare Investment Accounts
in the books of Bharat Ltd. on Weighted Average Cost Basis.
Question 5
On 1.1.2010, sunder had 25,000 equity shares of "X" Ltd. a book value of ` 15 per share
(Purchased on 1.10.2009). On 20.6.2010, he purchased another 5,000 shares of the
company at ` 16 per share. The directors of "X" Ltd. announced a bonus and right issue.
The terms of the issue are as follows:
Bonus basis 1 : 6 (Date 16.8.2010)
Rights basis 3 : 7 (Date 31.8.2010) Price ` 15 per share.
Due date for payment 30.9.2010.
Shareholders can transfer their rights in full or in part. Accordingly Sundar Sold 33-
1/3% of his entitlement to Shekhar for a consideration of ` 2 per share.
Dividends: Dividends for the year ended 31.3.2010 at the rate of 20% were declared by X
Ltd. and received by Sundar on 31.10.2010.
On 15.11.2010, Sunder sold 25,000 equity shares at a premium of ` 5 per share.
You are required to prepare Investment Account.
For your exercise, assume that the books are closed on 31.12.2010 and shares are valued
at average cost.
Question 6
Smart Investments made the following investments in the year 2013-14:
12% State Government Bonds having face value ` 100
Date Particulars
01/04/2013 Opening Balance (1200 bonds) book value of ` 1,26,000
02/05/2013 Purchased 2,000 bonds @ ` 100 cum interest
30/09/2013 Sold 1,500 bonds at ` 105 ex interest
247
Interest on the bonds is received on 30th June and 31st December each year.
Equity shares of X Ltd.
Date Particulars
15/04/2013 Purchased 5,000 equity shares @ ` 200 on cum right basis Brokerage
of 1% was paid in addition (Face Value of shares ` 10)
03/06/2013 The company announced a bonus issue of 2 shares for every 5 shares
held.
16/08/2013 The company made a rights issue of 1 share for every 7 shares held
at ` 250 per share
The entire money was payable by 31/08/2013
22/08/2013 A right to the extent of 20% was sold @ ` 60. The remaining rights
were subscribed.
02/09/2013 Dividend @ 15% for the year ended 31-03-2013 was received on
16.09.2013
15/12/2013 Sold 3,000 shares @ ` 300. Brokerage of 1 % was incurred extra
15/01/2014 Received interim dividend @ 10% for the year 2013-14
31/03/2014 The shares were quoted in the stock exchange @ ` 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average
cost method is followed.
248
Question 7
On 1st April, 2011, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per
share (nominal value ` 10 each). He provides you the further information:
(1) On 20th June, 2011 he purchased another 10,000 shares of P Ltd. at ` 16 per share.
(2) On 1st August, 2011, P Ltd. issued one equity bonus share for every six shares held
by the shareholders.
(3) On 31st October, 2011, the directors of P Ltd. announced a right issue which entitles
the holders to subscribe three shares for every seven shares at ` 15 per share.
Shareholders can transfer their rights in full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of ` 2 per share and
subscribed the rest on 5th November, 2011.
You are required to prepare Investment A/c in the books of Rajat for the year ending
31st March, 2012.
Question 8
A Limited purchased 5,000 equity shares (nominal value ` 100 each) of Allianz Limited
for ` 105 each on 1st April, 2011. The shares were quoted cum dividend. On 15th May,
2011, Allianz Limited declared & paid dividend of 2% for year ended 31st March, 2011.
On 30th June, 2011 Allianz Limited issued bonus shares in ratio of 1:5. On 1st October,
2011 Allianz Limited issued rights share in the ratio of 1:12 @ 45 per share. A Limited
subscribed to half of the rights issue and the balance was sold at ` 5 per right entitlement.
The company declared interim dividend of 1% on 30th November, 2011. Right shares
were not entitled to dividend. The company sold 3,000 shares on 31st December, 2011 at
` 95 per share. The company A Ltd. incurred 2% as brokerage while buying and selling
shares.
You are required to prepare Investment Account in books of A Ltd for the year ended 31st
March, 2012.
Question 9
Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (`
100 each) of P Ltd., held as Current assets:
249
1.4.2011 Opening balance – Nominal value ` 1, 20,000, Cost ` 1,18,000

1.7.2011 100 Debentures purchased ex-interest at ` 98
1.10.2011 Sold 200 Debentures ex-interest at ` 100
1.1.2012 Purchased 50 Debentures at ` 98 cum-interest
1.2.2012 Sold 200 Debentures ex-interest at ` 99
Due dates of interest are 30th September and 31st March.

Mr. Purohit closes his books on 31.3.2012. Brokerage at 1% is to be paid for each
transaction. Show Investment account as it would appear in his books. Assume FIFO
method. Market value of 8% Debentures of P Limited on 31.3.2012 is ` 99.
Question 10
On 1.4.2011, Mr. Krishna Murty purchased 1,000 equity shares of ` 100 each in TELCO
Ltd. @ ` 120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per `
100 as cost of shares transfer stamps. On 31.1.2012, Bonus was declared in the ratio of
1: 2. Before and after the record date of bonus shares, the shares were quoted at ` 175
per share and ` 90 per share respectively. On 31.3.2012, Mr. Krishna Murty sold bonus
shares to a Broker, who charged 2% brokerage.
Show the Investment Account in the books of Mr. Krishna Murty, who held the shares as
Current assets and closing value of investments shall be made at Cost or Market value
whichever is lower.
Question 11
The following transactions of Nidhi took place during the year ended 31st March 2012:
1st April Purchased ` 12,00,000, 8% bonds at ` 80.50 cum-interest. Interest
is payable on 1st November and 1st May.
12th April Purchased 1,00,000 equity shares of ` 10 each in X Ltd. for `40,00,000
1st May Received half-year’s interest on 8% bonds.
15th May X Ltd. made a bonus issue of three equity shares for every two held.
Nidhi sold 1,25,000 bonus shares for ` 20 each.
1st October Sold ` 3,00,000, 8% bonds at ` 81 ex-interest.
1st November Received half-year’s bond interest.
1st December Received 18% dividend on equity shares in X Ltd.
Prepare the relevant investment account in the books of Nidhi for the year ended 31st
March, 2012.
250
Question 12
In 2011, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each, interest being
payable half yearly on 30th September and 31st March of every accounting year.
On 1st December, 2012, M/s. Bull & Bear purchased 10,000 of these debentures at `101
cum-interest price, also paying brokerage @ 1% of cum-interest amount of the purchase.
On 1st March, 2013 the firm sold all of these debentures at ` 106 cum-interest price,
again paying brokerage @ 1 % of cum-interest amount. Prepare Investment Account in
the books of M/s. Bull & Bear for the period 1st December, 2012 to 1st March, 2013.
Question 13
On 1st January 2011, Singh had 20,000 equity shares in X Ltd. Nominal value of the
shares was ` 10 each but their book value was ` 16 per share. On 1st June 2011, Singh
purchased 5,000 more equity shares in the company at a premium of ` 4 per share.
On 30th June, 2011, the directors of X Ltd. announced a bonus and rights issue. Bonus
was declared at the rate of one equity share for every five shares held and these shares
were received on 2nd August, 2011.
The terms of the rights issue were:
(a) Rights shares to be issued to the existing holders on 10th August, 2011.
(b) Rights issue would entitle the holders to subscribe to additional equity shares in the
Company at the rate of one share per every three held at ` 15 per share-the whole
sum being payable by 30th September, 2011.
(c) Existing shareholders were entitled to transfer their rights to outsiders, either wholly
or in part.
(d) Singh exercised his option under the issue for 50% of his entitlements and the
balance of rights he sold to Ananth for a consideration of ` 1.50 per share.
(e) Dividends for the year ended 31st March, 2011, at the rate of 15% were declared by
the Company and received by Singh on 20th October, 2011.
(f) On 1st November, 2011, Singh sold 20,000 equity shares at a premium of ` 3 per
share.
The market price of share on 31-12-2011 was ` 14. Show the Investment Account
as it would appear in Singh’s books on 31-12-2011 and the value of shares held on
that date.
Question 14
Mr. Brown has made following transactions during the financial year 2011-12:
251
Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest.
Interest is payable on 30th September and 31st March every year.
15.06.2011 Purchased 1,50,000 equity shares of ` 10 each in Alpha Limited for
` 25 each through a broker, who charged brokerage @ 2%.
10.07.2011 Purchased 60,000 equity shares of ` 10 each in Beeta Limited for
` 44 each through a broker, who charged brokerage @ 2%.
14.10.2011 Alpha Limited made a bonus issue of two shares for every three
shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for ` 22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.
15.01.2012 Beeta Limited made a right issue of one equity share for every four
shares held at ` 5 per share. Mr. Brown exercised his option for 40%
of his entitlements and sold the balance rights in the market at
` 2.25 per share.
01.03.2012 Sold 15,000 12% Bonds at ` 90 ex-interest.
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.
Interest on 12% Bonds was duly received on due dates.
Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited
and Equity Shares of Beeta Limited in the books of Mr. Brown for the year ended on 31st
March, 2012.
252
Question 15
Mr. X purchased 1,000, 6% Government Bonds of ` 100 each on 31st January, 2009 at
` 95 each. Interest is payable on 30th June and 31st December. The price quoted is cum
interest. Journalise the transaction. (2 Marks May 2010 IPCC)
Question 16
Gamma Investment Company hold 1,000, 15% debentures of Rs.100 each in Beta
Industries Ltd. as on April 1, 2009 at a cost of Rs.1,05,000. Interest is payable on June,
30 and December, 31 each year.
On May 1, 2009, 500 debentures are purchased cum-interest at ` 53,500. On November
1, 2009, 600 debentures are sold ex-interest at ` 57,300, on November 30, 2009, 400
debentures are purchased ex- interest at ` 38,400 on December 31, 2009, 400 debentures
are sold cum-interest for ` 55,000.
Prepare the investment account showing value of holding on March 31, 2010 at cost,
using FIFO method. (5 Marks – May 2010 – I.P.C.C.)
Question 17
On 1st April, 2010 Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per
share (face value ` 10 each). He provides you the further information:
(1) On 20th June, 2010 he purchased another 10,000 shares of P Ltd. of ` 16 per share.
(2) On 1st August, 2010, P ltd. issue one equity bonus share for every six shares held by
the shareholders.
(3) On 31st October, 2010 the directions of P Ltd. announced a right issue which
entitle the holders to subscribe three shares for every seven shares at ` 15 per
share. Shareholder can transfer their rights in full or in part. Rajat sold 1/3rd of
entitlement to Umang for a consideration of ` 2 per share and subscribe the rest on
5th November, 2010.
You are required to prepare investment A/c in the books of Rajat for the year ending 31st
March, 2011. (5 Marks – May 2011 – I.P.C.C.)
Question 18
Mr. Brown has made following transactions during the financial year 2011-12:
253
Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest.
Interest is payable on 30th September and 31st March every year.
15.06.2011 Purchased 1,50,000 equity share of ` 10 each in Alpha Limited for
` 25 each through a broker, who charged brokerage @2%.
10.07.2011 Purchased 60,000 equity shares of ` 10 each in Beeta Limited for `
44 each through a broker, who charged brokerage @2%.
14.10.2011 Alpha Limited made a bonus issue of two shares for every three
shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for ` 22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited
15.1.2012 Beeta Limited made a right issue of one equity share for every four
shares held at ` 5 per share. Mr. Brown exercised his option for 40%
of his entitlements and sold the balance rights in the market at
` 2.25 per share.
01.03.2012 Sold 15,000 12% Bonds at ` 90 ex-interest
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.
Interest on 12% Bonds was duly received on due dates.
Prepare separate investment account for 12% Bonds, Equity shares of Alfa Limited and
equity shares of Beeta Limited in the books of Mr. Brown for the year ended on 31st
March, 2012. (8 Marks – May 2012 – I.P.C.C.)
Question 19
On 01-04-2011, Mr. T. shekharan purchased 5,000 equity shares of ` 100 each in V. Ltd.
@ ` 120 each from a broker, who charged 2% brokerage. He incurred 50 paisa per ` 100
as cost of shares transfer stamps. On 31.1.1012 bonus was declared in the ratio of 1:2.
Before and after the record date of bonus shares, the shares were quoted at ` 175 per
share and ` 90 per share respectively. On 31.3.2012 Mr. T. Shekharan sold bonus shares
to a broker, who charged 2% brokerage. Show the investment Account in the books of T.
Shekharan who held the shares as Current Assets and closing value of investment shall
be made at cost or market value whichever is lower. (8 Marks – Nov 2012 – I.P.C.C.)
Question 20
In 2011, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each interest being
payable half on 30th September and 31st March of every accounting year. On 1st
254
December, 2012, M/s. Bull & Bear purchased 10,000 of these debentures at ` 101 cum-
interest price, also paying brokerage @1% of cum-interest amount of the purchase.
On 1st March, 2013 the firm sold all of these debentures at ` 106 cuminterest price,
again paying brokerage @1% of cum-interest amount. Prepare Investment Account in
the books of M/s. Bull &Bear for the period 1st December, 2012 to 1st March, 2013.
(5 Marks – May 2013 - I.P.C.C.)
Question 21
On 01-05-2012, Mr. Mishra purchased 800 equity shares of ` 10 each in Fillco Ltd. @
` 50 each from a broker who charged 5%. He incurred 20 paisa per ` 100 as cost of
shares transfer stamps. On 31-10-2012, bonus was declared in the ratio 1 : 4. The
shares were quoted at ` 110 and ` 60 per share before and after the record date of bonus
shares respectively. On 30-11-2012, Mr. Mishra sold the bonus shares to a broker who
charged 5%. You are required to prepare Investment Account in the books of Mr. Mishra
for the year ending 31-12-2012 and closing value of Investment shall be made at cost
or market value whichever is lower (4 Marks Nov 2013 IPCC)
Question 22
Smart Investments made the following investment in the year 2013-14:
12% State Government Bonds having face value ` 100
Date Particulars
01.04.2013 Opening Balance (1200 bonds) book value of ` 1,26,000
02.05.2013 Purchased 2,000 bonds @ ` 100 cum interest
30.09.2013 Sold 1,500 bonds at ` 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year.
Equity shares of X Ltd.

Date Particulars
15/04/2013 Purchased 5,000 equity shares @ ` 200 on cum right basis Brokerage
of 1% was paid in addition (Face Value of shares ` 10)
03/06/2013 The company announced a bonus issue of 2 shares for every 5 shares
held.
16/08/2013 The company made a rights issue of 1 share for every 7 shares held
at ` 250 per share
The entire money was payable by 31/08/2013
255
22/08/2013 A right to the extent of 20% was sold @ ` 60. The remaining rights
were subscribed.
02/09/2013 Dividend @ 15% for the year ended 31-03-2013 was received on
16.09.2013
15/12/2013 Sold 3,000 shares @ ` 300. Brokerage of 1 % was incurred extra
15/01/2014 Received interim dividend @ 10% for the year 2013-14
31/03/2014 The shares were quoted in the stock exchange @ ` 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average
cost method is followed.
Question 23
On 1st April 2014, Hasan has 20,000 equity shares of Vayu Ltd., at a book value of ` 20
per share (face value of ` 10 each). He provides the following information:
(i) On 10th June 2014, he purchased another 5,000 shares in Vayu Ltd., @ ` 15 per
share.
(ii) On 1st August 2014, Vayu Ltd. issued one bonus share for every five shares held by
the shareholders.
(iii) On 31st August 2014, the directors of Vayu Ltd. announced a rights issue which
entitle the shareholders to subscribe two shares for every six shares held @ of ` 15
per share. The shareholders can transfer their rights in full or in part.
Hasan sold 1/4th of his right shares holding to Harsh for a consideration of ` 3 per share
and subscribed the rest on 31st of October 2014.
Prepare Investment A/c in the books of Hasan as on 31st October 2014.
(8 Marks Nov 2014 IPCC)
Question 24
Mr. Chatur had 12% Debentures of Face value `100 of M/s. Unnati Ltd. as current
investment. He provides the following details relating to the investment
Date Particulars
1-4-2014 Opening balance 4000 debentures costing ` 98 each
1-6-2014 Purchased 2000 debentures @ ` 120 cum interest
1-9-2014 Sold 3000 debentures @ ` 110 cum interest
1-12-2014 Sold 2000 debentures @ ` 105 ex interest
31-1-2015 Purchased 3000 debentures @ ` 100 ex interest
31-3-2015 Market value of the investments ` 105 each
256
Interest due dates are 30th June and 31st December.

Mr. Chatur closes his books on 31-3-2015. He incurred 2% brokerage for all his
transactions.
Show investment account in the books of Mr. Chatur assuming FIFO method is followed.
(8 Marks – May 2015 – I.P.C.C.)
Question 25
A Limited purchased 5000 equity shares (face value 100 each) of Allianz Limited for ` 105
each on 1st April, 2014. The shares were quoted cum dividend. On 15th May, 2014 Allianz
Limited declared & paid dividend of 2% for year ended 31st March, 2014. On 30th May
2014 Allianz Limited issued bonus shares in ratio of 1:5. On 1st October, 2014 Allianz
Limited issued rights share in the ratio of 1:12 @ : 45 per share. A limited subscribed
to half of the rights issue and the balance was sold at ` 5 per right entitlement. The
company declared interim dividend of 1% on 30th November, 2014. Right shares were
not entitled to dividend. The company sold 3000 shares on 31st December, 2014 at 95
per share. The company A Ltd. incurred 2% as brokerage while buying and selling shares.
You are required to prepare Investment Account in books of A Ltd.
(10 Marks - Nov 2015 I.P.C.C.)
Question 26
A Ltd. purchased on 1st April, 2015 8% convertible debenture in C Ltd. of face value of
` 2,00,000 @ ` 108. On 1st July, 2015 A Ltd. purchased another `1,00,000 debenture
@ ` 112 cum interest. On 1st October, 2015 ` 80,000 debenture was sold @ ` 105. On
1st December, 2015, C Ltd. gives option for convention of 8% convertible debentures into
equity share of ` 10 each. A Ltd. receive 5000 equity share in C Ltd. in conversion of 25%
debenture held on that date. The market price of debenture and equity share in C Ltd. at
the end of year 2015 is ` 110 and ` 15 respectively.
Interest on debenture is payable each year on 31st March, and 30th September.
The accounting year of A Ltd. is calendar year.
Prepare investment account in the books of A Ltd. on average cost basis.
(8 Marks May 2016 IPCC)
Question 27
On 1st December 2015, M/s. Blue & Black purchased, 20,000 12% fully paid debentures
of ` 100 each at ` 105 cum interest price, also paying brokerage @ 1 % of cum interest
amount of the purchase. On 1st March, 2016, the firm sold all these debentures at
257
` 110 cum-interest price, again paying brokerage @ 1% of cum interest amount. Prepare
Investment Account in the books of M/s. Blue & Black for the period 1st Dec, 2015 to 1st
March 2016. Interest being payable half yearly on 30th September and 31st March of
every accounting year. (4 Marks Nov 2016 IPCC)
Question 28
Akash Ltd. had 4,000 equity share of X Limited, at a book value of ` 15 per share (face
value of ` 10 each) on 1st April 2016. On 1st September 2016, Akash Ltd. acquired 1,000
equity shares of X Limited at a premium of ` 4 per share. X Limited announced a bonus
and right issue for existing shareholders.
The terms of bonus and right issue were –
(1) Bonus was declared, at the rate of two equity shares for every five equity shares
held on 30th September, 2016.
(2) Right shares are to be issued to the existing shareholders on 1st December 2016.
The company issued two right shares for every seven shares held at 25% premium.
No dividend was payable on these shares. The whole sum being payable by 31st
December, 2016.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly
or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold
the remaining rights for ` 8 per share.
(5) Dividend for the year ended 31st March 2016, at the rate of 20% was declared by
the company and received by Akash Ltd. on 20th January 2017.
(6) On 1st February 2017, Akash Ltd. sold half of its share holdings at a premium of `
4 per share.
(7) The market price of share on 31.03.2017 was ` 13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended
31st March, 2017 and determine the value of share held on that date assuming the
investment as current investment. (8 Marks May 2017 IPCC)
Question 29
Mr. Vijay entered into the following transactions of purchase and sale of equity shares of
JP Power Ltd. The shares have paid up value of ` 10 per share.
Date No. of Shares Terms
01.01.2016 600 Buy @ ` 20 per share
15.03.2016 900 Buy @ ` 25 per share
258
20.05.2016 1000 Buy @ ` 23 per share

25.07.2016 2500 Bonus Shares received
20.12.2016 1500 Sale @ ` 22 per share
01.02.2017 1000 Sale @ ` 24 per share
(1) On 15.09.2016 dividend @ ` 3 per share was received for the year ended 31.03.2016.
(2) On 12.11.2016 company made a right issue of equity shares in the ratio of one
share for five shares held on payment of ` 20 per share. He subscribed to 60% of
the shares and renounced the remaining shares on receipt of the premium of ` 3 per
share.
(3) Shares are to be valued on weighted average cost basis.
You are required to prepare Investment Account for the year ended 31.03.2016 and
31.03.2017. (10 Marks May 2018 INTER C.A.)
Question 30
Following transactions of Nisha took place during the financial year 2017-18:
Date Particulars
1 st April, 2017 Purchased 9,000 8% bonds of ` 100 each at ` 80.50 cum
interests. Interest is payable on 1st November and 1st May.
1 st May, 2017 Received half year's interest on 8% bonds.
10th July, 2017 Purchased 12,000 equity shares of ` 10 each in Moon Limited
for ` 44 each through a broker, who charged brokerage @ 2%.
1 st October, 2017 Sold 2,250 8% bonds at ` 81 Ex-interest.
1 st November, 2017 Received half year's interest on 8% bonds.
15th January, 2018 Moon Limited made a rights issue of one equity share for every
four Equity shares held at ` 5 per share. Nisha exercised the
option for 40% of her entitlements and sold the balance rights
in the market at ` 2.25 per share.
15th March, 2018 Received 18% interim dividend on equity shares of Moon
Limited.
Prepare separate investment account for 8% bonds and equity shares of Moon Limited
in the books of Nisha for the year ended on 31st March, 2018. Assume that the average
cost method is followed. (10 Marks Nov 2018 Inter C.A.)
259
Question 31
On 1st April, 2017, Mr. Vijay had 30,000 Equity shares in X Ltd. (the company) at a book
value of ` 4,50,000 (Face Value ` 10 per share). On 22nd June, 2017, he purchased
another 5000 shares of the same company for ` 80,000.
The Directors of X Ltd. announced a bonus of equity shares in the ratio of one share for
seven shares held on 10th August, 2017.
On 31st August, 2017 the Company made a right issue in the ratio of three shares for
every eight shares held, on payment of ` 15 per share. Due date for the payment was
30th September, 2017, Mr. Vijay subscribed to 2/3rd of the right shares and sold the
remaining of his entitlement to Viru for a consideration of ` 2 per share.
On 31st October, 2017, Vijay received dividends from X. Ltd. @ 20% for the year ended
31st March, 2017. Dividend for the shares acquired by him on 22nd June, 2017 to be
adjusted against the cost of purchase. On 15th November, 2017 Vijay sold 20,000 Equity
shares at a premium of ` 5 per share.
You are required to prepare Investment Account in the books of Mr. Vijay for the year
ended 31st March, 2018 assuming the shares are being valued at average cost.
(8 Marks – I.P.C.C. - Nov 2018)
Question 32
Mr. Ashok had 12% debentures of face value of ` 100 each of M/s XYZ Ltd. as current
investments. He provides the following details relating to the investments:
Date Particulars
1.4.2017 Opening balance 18,000 debentures costing at ` 98 each.
1.06.2017 Purchased 9,000 debentures @ ` 120 each cum interest.
1.09.2017 Sold 13,500 debentures @ ` 110 each cum interest.
01.12.2017 Sold 9,000 debentures @ ` 105 each ex interest.
31.01.2018 Purchased 13,500 debentures @ ` 100 each ex –interest
31.03.2018 Market value of the investment @ ` 105 each.
Interest due dates are 30th June and 31st December.

Mr. Ashok closes his book on 31.3.2018, show investment account in the books of Mr.
Ashok assuming FIFO method is followed. (8 Marks – I.P.C.C. May’ 2019)
Question 33
Mr. Harsh provides the following details relating to his holding in 10% debentures (face
value of ` 100 each) of Exe Ltd. held as current assets:
260
Date Particulars
1.4.2018 Opening Balance – 12,500 debentures, cost ` 12,25,000
1.6.2018 Purchased 9,000 debentures @ ` 98 each ex-interest
1.11.2018 Purchased 12,000 debentures @ ` 115 each cum-interest
31.1.2019 Sold 13,500 debentures @ ` 110 each cum-interest
31.3.2019 Market value of debentures @ ` 115 each
Due dates of interest are 30th June and 31st December. Brokerage at 1% is to be paid for
each transaction. Mr. Harsh closes his books on 31.3.2019. Show investment account as
it would appear in his books assuming FIFO method is followed.
(10 Marks – Inter - November 2019)
Question 34
XYZ Limited held on 1st April, 2018. 1000 9% Government securities at ` 90,000 (Face
value of security ` 100 each). Three month’s interest had accrued on the above date. On
1st May, the company purchased the same Government securities of the face value of
` 80,000 at ` 95 cum-interest. On 1st June, ` 60,000 face value of the security was sold
at ` 94 cum-interest. Interest on the securities was paid each year on 30th June and 31st
December and was credited by the bank on the same date. On 30th September ` 40,000
face value of the Govt. securities were sold at ` 97 cum-interest. On 1st December, the
company purchased the same security ` 10,000 at par ex-interest. On 1st March, the
company sold `10,000 face value of the government securities at ` 95 ex-interest.
You are required to draw up the 9% Government securities Account in the books of XYZ
limited. FIFO method shall be followed calculation shall be made to the nearest rupee
or multiple thereof.
(8 Marks- I.P.C.C. November 2019)
Question 35
Mr. PK Purchased 1000 equity shares of ` 100 each in Savera Co.Ltd. for ` 1,25,000 inclusive
of brokerage and stamp duty. Some years later the company resolved to capitalize its
profits and to issue to the holders of equity shares, one equity bonus share for every
share held by them. Prior to capitalization, the shares of Savera Co Ltd. were quoted at
` 175 per share. After the capitalization, the shares were quoted at ` 92.50 per share.
Mr.PK sold the bonus shares and received `90 per share. Prepare the investment Account
in PK’s books on average cost basis.
(4 Marks – Nov 2020 – I.P.C.C.)
261
Question 36
On 1st April, 2019 Mr. H had 30,000 equity shares of ABC Ltd. at a book value of ` 18
per share (Nominal value ` 10 per share). On 10th June, 2019, H purchased another
10,000 equity shares of the ABC Ltd. at ` 16 per share through a broker who charged
1.5% brokerage.
The directors of ABC Ltd. announced a bonus and a right issue. The terms of the issues
were as follows:
(i) Bonus shares were declared at the rate of one equity share for every four shares
held on 15th July, 2019.
(ii) Right shares were to be issued to the existing equity shareholders on 31st August,
2019. The Company decides to issue one right share for every five equity share held
at 20% premium and the due date for payment will be 30th September, 2019.
Shareholders were entitled to transfer their rights in full or in part.
(iii) No dividend was payable on these issues. Mr. H subscribed 60% of the rights
entitlements and sold the remaining rights for consideration of ` 5 per share.
Dividends for the year ending 31st March, 2019 was declared by ABC Ltd. at the rate of
20% and received by Mr. H on 31st October, 2019
On 15th January, 2020 Mr. H sold half of this shareholdings at ` 17.50 per share and
brokerage was charged @ 1%
You are required to prepare Investment account in the books of Mr.H for the year ending
31st March, 2020, assuming the shares are valued at average cost.
262
8 FIRE INSURANCE CLAIM
LOSS OF STOCK
1. Memorandum trading A/c

(From beginning of the year upto Date of Fire)
To Opening Stock x By Sales x
To Purchases x Less: Sales Return (x) x
Less: Purchase Return (x) x
To Carriage Inwards x
To Wages x By Stock on Fire Date x
To Gross Profit x
(___% of Net sales)
x x
2. Statement of Loss `
Stock on fire Date (SOFD) x
Less: Salvage (-x)
Loss of stock x
3. Statement of claim
Policy ` ________ SOFD ` ________
If Equal / Over Insurance, then claim = Loss
If under insurance then Average Clause is applicable

= `x
Add: Fire fighting expenses `+x
Amount claim xxx
263
Important Points:
a. Opening Stock :
i. Opening stock must be of goods only if any other item is included then it
must be removed.
ii. Opening stock must be always valued at cost if it is under / over valued
then it must be adjusted and brought to cost.
Eg.1 Stock is valued at 90,000 (It is undervalued by 10%)
Ans. Cost 100 Valued at 90

1,00,000 90,000
Eg.2 Stock valued at 1,10,000 and it is overvalued by 10%.

Ans. Cost 100 Valued at 110
1,00,000 1,10,000
b. Purchases :
i. Purchase means purchase of goods only if any other item is included then
it must be removed.
ii. Purchase means physical purchase i.e. Actual incoming of goods inside the
godown.
∴ Purchase as per purchase books x

Add: Goods received but not recorded x
Less: Goods recorded but not received x
Physical purchase for Memorandum Trading A/c x
c. Expenses : All normal expenses of trading A/c must be taken. If any item of P/L
is given then it must be ignored.
d. Sales :
i. sales means sale of goods only if any other item is included then it must
be removed.
ii. Sales means physical sales i.e. actual goods going out of the business.

∴ Sales as per Sales book x
Add: Goods delivered but not recorded +x
264
Less: Goods recorded but not delivered -x

Physical sales for Memorandum Trading A/c x
e. Outgoing of goods from Business.

Eg. i. Goods withdrawn for personal use.
ii. Goods distributed as free samples
iii. Goods lost by theft
iv. Goods sent to agent
v. Goods sent to consignment
vi. Goods sent on approval
vii. Goods sent on Sales / Return
Rules:
1. If amount is normal selling price then add it to sales.
2. If amount is cost then write it as separate item on Credit side of Memorandum
Trading A/c.
Notes: Alternatively Goods sold can be added to sales at SP and unsold Goods
at cost show separately.
f. Gross Profit: Gross Profit should be always related to Net Sales. There can be
following possibilities :
A. Question. Gives Gross Profit % on Net Sales
Answer. Apply Gross Profit % on Net Sales in Memorandum Trading A/c
B. Question. Gives Gross Profit Amount & Net Sales amount of L.Y.
Answer. i. Find Gross Profit % of L.Y. =
ii. Apply the Gross Profit % on Net Sales.
C. Question. Gives Gross Profit % of Last 3 to 4 years

Year I II III IV V
1 25% 40% 20% 30% 40%
2 25% 20% 30% 25% 30%
3 25% 50% 40% 20% 20%
4 25% 30% 50% 15% 10%
265
Constant Fluctuating ↑ in trend ↓ in trend ↓ in trend

∴ in MT A/c ∴ take ∴ take Avg. ∴ in M.T. A/c coming down
take 25% Avg. in M.T. in M.T. A/c follow the to 0
A/c take take 35% trend if not ∴ in M.T. A/c
35% coming to take between
zero 0 & 10 say 5%
D. Question. Given details of Trading A/c of L.Y.
Answer. Prepare L.Y. Trading A/c. Find Gross Profit amount and Gross
Profit %.
E. Question. Gives on gross Profit on Cost

Answer. Convert gross Profit on Cost – to Gross Profit on Sales
of cost = of sales
G. Salvage : It means goods saves from fire salvage must be taken at cost or
market price whichever is less.
H. Fire fighting expense : Paid must be added to the amount of claim, in case of
under insurance, but maximum claim will be not more than policy amount
NORMAL & ABNORMAL GOODS

1. Normal goods are those on which normal Gross Profit is earned.
2. Abnormal goods are those goods on which normal Gross Profit is not earned.
Abnormal goods can be sold at:
 Higher selling price
 Lower selling price
 At No Profit No Loss
 At Loss
3. Effect of abnormal goods must be removed from Last Year trading A/c as well as
Memorandum trading A/c. Rules to be followed:
Items of M.T. A/c Rule for Removal
a. Opening and Closing stock Valued figure of stock
b. Purchases Cost price of Abnormal goods
c. Sales Selling price of Abnormal goods
266
4. If Abnormal goods are included in Sales / Closing Stock then they must be included
either in Opening stock / Purchases.
5. Maintain record of Abnormal goods in the statement of loss at cost.
LOSS OF PROFIT
Important terms:
1. Indemnity Period : It is period covered by Insurance Company in its policy.
2. Dislocation Period : It is the period affected due to fire.
3. Standing charges : These are fixed expenses which are normally incurred by any
organisation. These expenses may be insured / uninsured.
4. Gross Profit : In this topic Gross Profit means operating Net Profit + insured standing
charges.
5. Additional expenses or extra cost of working : If insured has incurred some expense
to increase actual sales during indemnity period Eg. Rent paid for an alternative
premise during the period of dislocation. Such expenses will also be compensated
by the insurance company.
6. Annual Turnover : It is the turnover of 12 months preceding the date of fire.
7. Standard turnover : It is the turnover of last year corresponding to the period of

dislocation.
8. Financial Turnover : It is the turnover of last financial year / accounting year.
9. Actual turnover : It is the turnover during the period of dislocation.

10. Short Sales : Loss of Turnover also called as Sales that could have happened but did
not happen.
267
FORMAT :
Step 1 : Find Gross Profit %
Gross Profit % =
* Note : If the trend for Gross Profit is given then it must be adjusted.
∴ Adjusted Gross Profit = Gross Profit Ratio + Trend.
Step 2 : Find Short Sales

Short Sales = Adjusted standard Turnover- Actual Turnover

Step 3 : Find Loss of Profit
Loss of Profit = Short Sales × Gross Profit %
Step 4 : Calculate claim for Additional expenses

a. Actual Additional expenses xx
OR
b. Gross Profit on Additional Sales
Additional Sales × Gross Profit % xx
Note: If additional sales is not given then assume
Additional Sales = Actual Sales
OR
c.
Proportionate Amount

Adjusted Annual Turnover = Annual turnover + Trend
For claim a/b/c/ whichever is less
Step 5 : Calculate Saving in cost
Step 6 : Statement of gross Claim

Loss of profit (Step 3) x
Add: Additional Expenses (Step 4) +x
Less: Saving on cost (Step 5) (- x)
Gross claim _____
268
Step 7 : If Average Clause is applicable

Gross Profit on Adjusted Annual turnover > Policy Amount
269
LOSS OF STOCK
Question 1
Fire occurred in the godown of M/s. SUN BEAM LTD., on 4th May, 2017. All the stock was
destroyed with the exception of goods ` 13,000. Following particulars are available from
the Books of Accounts of the Firm :
`
Stock on 1st January, 2016 36,000
Stock on 31st December, 2016 66,000
Purchase during 2016 4,80,000
Sales during 2016 6,00,000
Purchases during 2017 upto the date of fire 2,30,000
Sales during 2017 upto the date of fire 3,00,000
On 20th December, 2016 also fire broke out and destroyed stock at genuine cost `
10,000. There was a practice in the firm to value stock at cost less 10%. But all of a
sudden they changed this practice and valued stock on 31st Dec. 2016 at cost plus 10%.
The amount of the policy was ` 40,000 and claim was subject to an average clause.
Question 2
The following information is available from the books of a company whose premises were
destroyed by a fire on 31st May, 2017:
`
Stock 1.1.2016 90,000
Purchases 1.1.2016 to 31.12.2016 4,24,000
Sales 1.1.2016 to 31.12.2016 5,00,000
Stock 31.12.2016 1,32,000
The stock on 1st January, 2016 was valued at 90% of cost. However this practice was
changed and the stock on 31st December, 2016 was valued at 110% of cost. After the
accounts of 2016 were audited it was found that purchase of office equipment of ` 4,000
was wrongly included in the figure of purchases given above.
The information for the period of 1st January, 2017 to 31st May, 2017 is as follows:
Purchases 3,00,000
Sales (excluding goods sent on sale or return basis) 4,00,000
270
During January to May 2017 goods of the cost price of ` 40,000 were sent to customers on
sale or return basis. On the date of fire customers had approved half the value of goods
sent. The Gross Profit margin charged on the above is the normal margin. The salvage was
` 10,000. Calculate the amount of the claim to be submitted to the Insurance Company.
Question 3
A fire had broken in the factory of M TRADERS on 17th October, 2016 and destroyed the
stock of goods in their godown. The following figures are available:
`
Opening stock on 1. 1. 2015 31,570
Sales during the year of 2015 3,50,000
Purchases during the year of 2015 1,83,200
Purchase from 1. 1. 2016 to 17.10.2016 1,63,300
Sales from 1. 1. 2016 to 17.10.2016 2,69,350
Closing stock on 31.12.2015 40,590
Other details are as follows:

(a) A theft took place in September, 2016 and goods of sales value of ` 19,040 were
stolen and lost but were not recorded in the books.
(b) Goods costing ` 5,205 were given away as free samples in 2016 but no entries
were passed.
(c) The goods saved from fire were subsequently sold by the firm for ` 17,600 at a loss
of ` 1,200.
(d) The stock of goods was insured by the firm for ` 38,100 and there was an average
clause in the policy.
(e) The firm as a practice valued the stock of goods at 10% above cost.
Calculate the amount of claim.
Question 4
A fire occurred in the premises of M/s. Fire proof Co. on 31st August, 2016. From the
following particulars relating to the period from 1st April, 2016 to 31st August, 2016, you
are requested to ascertain the amount of claim to be filed with the insurance company
for the loss of stock. The concern had taken an insurance policy for ` 60,000 which is
subject to an average clause.
271
`
(i) Stock as per Balance Sheet at 31-03-2016 99,000
(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine ` 3,000) 50,000
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignee on 16th August, 2016, lying unsold 16,500
with them
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 2016, ` 1,000 were written off in respect of a slow
moving item. The cost of which was ` 5,000. A portion of these goods were sold at a loss
of ` 500 on the original cost of ` 2,500. The remainder of the stock is now estimated to
be worth the original cost. The value of goods salvaged was estimated at ` 20,000. The
average rate of gross profit was 20% throughout.
Question 5
On 30th March, 2012 fire occurred in the premises of M/s Suraj Brothers. The concern had
taken an insurance policy of ` 60,000 which was subject to the average clause.
From the books of accounts, the following particulars are available relating to the period
1st January to 30th March 2012.
(1) Stock as per Balance Sheet at 31st December, 2011, ` 95,600.
(2) Purchases (including purchase of machinery costing ` 30,000) ` 1,70,000
(3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000.
(4) Sales (including goods sold on approval basis amounting to 49,500) ` 2,75,000.
No approval has been received in respect of 2/3rd of the goods sold on approval.
(5) The average rate of gross profit is 20% of sales.
(6) The value of the salvaged goods was ` 12,300.
You are required to compute the amount of the claim to be lodged to the insurance
company.
272
Question 6
On 1st April, 2016 the stock of Mr. Hariprasad was destroyed by fire but sufficient records
were saved from which following-particulars were ascertained:
Stock at cost 1st Jan. 2015 1,47,000
Stock at cost 31st Dec. 2015 1,59,200
Purchases year ended 31st Dec.2015 7,96,000
Sales year ended 31st Dec. 2015 9,74,000
Purchases 1/1/2016 to 31/3/2016 3,24,000
Sales 1/1/2016 to 31/3/2016 4,62,400
In valuing the stock for the Balance Sheet at 31st Dec. 2015 ` 4,600 had been written
off on certain stock which was a poor selling line having the cost ` 13,800. A portion of
these goods were sold in March 2016 at a loss of ` 500 on original cost of ` 6,900. The
remainder of this stock was now estimated to be worth its original cost. Subject to the
above exception gross profit had remained at a uniform rate throughout the year.
The value of stock salvaged was ` 11,600, The policy was for ` 1,00,000 and was subject
to average clause.
Work out the amount of the claim of loss by fire. (Nov. 2016 – Group I)
Question 7
A fire occurred in the godown of Maruti Ltd. on 31.3.2017 destroying the major portion of
the stock. The following particulars were, however, available.
`
Stock on 1. 1. 2016 31,400
Stock on 31.12.2016 35,600
Sales for the year 2016 1,00,500
Sales from 1.1.2017 to 31.3.2017 40,250
Purchases for the year 2016 80,000
Purchases from 1.1.2017 to 31.3.2017 12,600
Included in the stock of 31.12.2015 were some shop-soiled goods which originally cost `
2,000 but were valued at ` 1,400. Half of this stock was sold for ` 500 in the year 2016
and the remaining stock was valued at ` 600 on 31.12.2016. Half of this was sold for `
250 in March, 2017.
The unsold portion was considered to be worth 80% of the original cost. Subject to this
rate of gross profit was uniform.
273
The sum insured was ` 15,000 and there was an average clause in the policy. The stock
salvaged worth ` 1,200.
Find out the amount of claim to be lodged with the insurance company for loss of stock.
Question 8
M/s. Inflammable Ltd. suffered loss of stock due to fire on October 31st, 2016. From the
following records calculate claim to be made by the shop.
`
(1) Stock on December 31st 2014 (including stock purchased during the 1,00,000
year at ` 8,000 valued at ` 4,000 because of poor selling line)
(2) Wages paid for 2015 (including paid for capital expenditure ` 2,000, 30,000
wages outstanding 1,500)
(3) Freight for 2015 5,000
(4) Purchase for 2015 (including purchase of furniture ` 1,500) 1,20,000
(5) Sales for 2015 (including sale of 1/4th of the stock for ` 1,000 which 2,46,000
had a poor selling line and which was valued at ` 4,000 on 31st
December, 2014)
(6) Stock on December 31st 2015 (including remaining stock which had a 42,000
poor selling line at the same Basis)
(7) Purchase upto 31st October, 2016 1,42,800
(8) Sales upto 31st October, 2016 (including sale of 1/3rd remaining stock 1,42,900
which had a poor selling line at ` 800)
The abnormal goods were to be valued at 80% of the original cost.
274
LOSS OF PROFIT
Question 9
A fire occurred on 1st July, 2016, in the premises of Arolite Ltd., and business was
practically disorganised upto 30th November, 2016. From the books of account, the
following information was extracted :
`
1. Actual turnover from 1st July, 2016, to 30th Nov. 2016 60,000
2. Turnover from 1st July, 2015 to 30th Nov. 2015 2,00,000
3. Net profit for the last financial year 90,000
4. Insured standing charges for the last financial year 60,000
5. Turnover for the last financial year 5,00,000
6. Turnover for the year ending 30th June, 2016 5,50,000
7. Total standing charges for the year 72,000
The company incurred additional expenses amounting to ` 9,000 which reduced the loss
in turnover. There was also a saving during the indemnity period of ` 2,486.
The company holds a "Loss of profit" policy for ` 1,65,000 having an indemnity period for
6 months. There had been a considerable increase in trade and it had been agreed that
an adjustment of 20% be made in respect of upward trend in turnover.
Compute claim under "Loss of Profit insurance.
Question 10
The premises of a company were partly destroyed by fire which took place on 1st March,
2017 and as a result of which the business was disorganised from 1st March to 31st July,
2017. Accounts are closed on 31st December every year. The company is insured under
a Loss of Profits policy for ` 7,50,000. The period of indemnity specified in the policy is
6 months. From the following information, you are required to compute the amount of
claim under the Loss of profits policy:
`
Turnover for the year 2016 40,00,000
Net Profits for the year 2016 2,40,000
Insured standing charges 4,80,000
Uninsured standing charges 80,000
Turnover during the period of dislocation i.e. from 1.3.2017 to 31.7.2017 8,00,000
Standard turnover for the corresponding period in the preceding year i.e.
1.3.2016 to 31.7.2016 20,00,000
275
Annual turnover for the year immediately preceding the fire i.e. from
1.3.2016 to 29.2.2017 44,00,000
Increased cost of working 1,50,000
Saving in insured standing charges 30,000
Reduction in turnover avoided through increase in working cost 4,00,000
Owing to reasons acceptable to the insurer, the "special circumstances clause" stipulates
for:
(a) Increase of turnover (standard and annual) by 10% and
(b) Increase of rate of gross profit by 2%.
Question 11
A Loss of profit policy was taken for ` 80,000. Fire occurred on 15th March, 2017. Indemnity
period was for three months. Net profit for 2016 year ending on 31st December was `
56,000 and standing charges (all insured) amounted ` 49,600. Determine claim from the
following details available from quarterly sales tax returns:
Sales 2014 2015 2016 2017
` ` ` `
From 1st January to 31st March 1,20,000 1,30,000 1,42,000 1,30,000
From 1st April to 30th June 80,000 90,000 1,00,000 40,000
From 1st July to 30th Sept. 1,00,000 1,10,000 1,20,000 1,00,000
From 1st Oct. to 31st Dec. 1,36,000 1,50,000 1,66,000 1,60,000
Sales from 16.3.2016 to 31.3.2016 were 28,000

Sales from 16.3.2017 to 31.3.2017 were Nil
276
Question 12
S & M Ltd. give the following Trading and Profit and Loss Account for year ended 31st
December, 2016:
Trading and Profit and Loss Account for the year ended 31st December, 2016
` `
To Opening Stock 50,000 By Sales 8,00,000
To Purchases 3,00,000 By Closing stock 70,000
To Wages (` 20,000 for skilled
labour)
1,60,000
To Manufacturing expenses 1,20,000
To Gross Profit 2,40,000
8,70,000 8,70,000
To Office Administrative By Gross profit 2,40,000
Expenses 60,000
To Advertising 20,000
To Selling expenses (Fixed) 40,000
To Commission on sales 48,000
To Carriage outward 16,000
2,40,000 2,40,000
The company had taken out policies both against loss of stock and against loss of profit,
the amounts being ` 80,000 and ` 1,72,000. A fire occurred on 1st May, 2017 and as a
result of which sales were seriously affected for a period of 4 months. You are given the
following further information:
(a) Purchases, wages and other manufacturing expenses for the first 4 months of 2017
were ` 1,00,000, ` 50,000 and ` 36,000 respectively.
(b) Sales for the same period were ` 2,40,000.
(c) Other sales figures were as follows :
`
From 1st January 2016 to 30th April, 2016 3,00,000
From 1st May 2016 to 31st August, 2016 3,60,000
From 1st May, 2017 to 31st August, 2017 60,000
(d) Due to rise in wages, gross profit during 2017 was expected to decline by 2% on
sales.
277
(e) Additional expenses incurred during the period after fire amounted to ` 1,40,000.
The amount of the policy included ` 1,20,000 for expenses leaving ` 20,000
uncovered. Ascertain the claim for stock and for loss of profit.
All workings should form part of your answers.
Question 13
CCL wants to take up a loss of profit policy. Turnover during the current year is expected
to increase by 20%. The company will avail overdraft facilities from its bank @ 15%
interest to boost up the sales. The average daily overdraft balance will be around ` 3
lakhs. All other fixed expenses will remain same. The following further details are also
available from the previous year’s account.
`
Total variable expenses 24,00,000
Fixed expenses
Salaries 3,30,000
Rent, Rates, and Taxes 30,000
Travelling expenses 50,000
Postage, Telegram, Telephone 60,000
Director’s fees 10,000
Audit fees 20,000
Miscellaneous income 70,000
Net Profit 4,20,000
Determine the amount of policy to be taken for the current year.
278

Question 14
On 20th October, 2011, the godown and business premises of Aman Ltd. were affected by
fire. From the salvaged accounting records, the following information is available:
`
Stock of goods @ 10% lower than cost as on 31st March, 2011 2,16,000
Purchases less returns (1.4.2011 to 20.10.2011) 2,80,000
Sales less returns (1.4.2011 to 20.10.2011) 6,20,000
(1) Sales upto 20th October, 2011 includes ` 80,000 for which goods had not been
dispatched.
(2) Purchases upto 20th October, 2011 did not include ` 40,000 for which purchase
invoices had not been received from suppliers, though goods have been received in
Godown.
(3) Past records show the gross profit rate of 25%.
(4) The value of goods salvaged from fire ` 31,000.
(5) Aman Ltd. has insured their stock for ` 1, 00,000.
Compute the amount of claim to be lodged to the insurance company.
Question 15
The premises of XY Limited were partially destroyed by fire on 1st March, 2012 and as a
result, the business was practically disorganized upto 31st August, 2012. The company
is insured under a loss of profits policy for ` 1, 65,000 having an indemnity period of 6
months.
From the following information, prepare a claim under the policy:
(i) Actual turnover during the period of dislocation `
(1-3-2012 to 31-8-2012) 80,000
(ii) Turnover for the corresponding period (dislocation)
in the 12 months immediately before the fire
(1-3-2011 to 31-8-2011) 2, 40,000
(iii) Turnover for the 12 months immediately preceding
the fire (1-3-2011 to 28-2-2012) 6,00,000
(iv) Net profit for the last financial year 90,000
(v) Insured standing charges for the last financial year 60,000
(vi) Uninsured standing charges 5,000
279
(vii) Turnover for the last financial year 5, 00,000

Due to substantial increase in trade, before and up to the time of the fire, it was agreed
that an adjustment of 10% should be made in respect of the upward trend in turnover.
The company incurred additional expenses amounting to ` 9,300 immediately after the
fire and but for this expenditure, the turnover during the period of dislocation would have
been only ` 55,000. There was also a saving during the indemnity period of ` 2,700 in
insured standing charges as a result of the fire.
Question 16
On 29th August, 2012, the godown of a trader caught fire and a large part of the stock
of goods was destroyed. However, goods costing ` 1, 08,000 could be salvaged incurring
fire fighting expenses amounting to ` 4,700.
The trader provides you the following additional information:
`
Cost of stock on 1st April, 2011 7,10,500
Cost of stock on 31st March, 2012 7,90,100
Purchases during the year ended 31st March, 2012 56,79,600
Purchases from 1st April, 2012 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from 1st April, 2012 41,000
to the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2012 to 2,000
the date of fire
Sales for the year ended 31st March, 2012 80,00,000
Sales from 1st April, 2012 to the date of fire 45,36,000
The insurance company also admitted fire fighting expenses. The trader had taken the fire
insurance policy for ` 9, 00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
Question 17
On account of a fire on 15th June, 2012 in the business house of a company, the working
remained disturbed upto 15th December 2012 as a result of which it was not possible to
affect any sales. The company had taken out an insurance policy with an average clause
against consequential losses for ` 1, 40,000 and a period of 7 months has been agreed
upon as indemnity period. An increase of 25% was marked in the current year’s sales as
compared to the last year. The company incurred an additional expenditure of ` 12,000
to make sales possible and made a saving of ` 2,000 in the insured standing charges.
280
`
Actual sales from 15th June, 2012 to 15th Dec, 2012 70,000
Sales from 15th June 2011 to 15th Dec 2011 2,40,000
Net profit for last financial year 80,000
Insured standing charges for the last financial year 70,000
Total standing charges for the last financial year 1,20,000
Turnover for the last financial year 6,00,000
Turnover for one year : 16th June 2011 to 15th June 2012 5,60,000
Question 18
The premises of Emarbee Ltd. were engulfed by fire on 16th November, 2016 whereby
substantial stock was severely destroyed. The records available with the company yield
the following information.
a. For year ended 31st March, 2016 :

` `
To Stocks 1,50,000 By Sales 30,00,000
To Purchases 12,30,000 By Stock 1,80,000
To Freight & Direct Expenses 3,00,000
To Wages 6,00,000
31,80,000 31,80,000
b. For half year ended 30th September, 2016

Sales ` 14,00,000
Purchases ` 8,24,000
c. For period from 1st October to date of fire sales and purchases were at same monthly
rate as for period 1st April, 2016 to 30th September, 2016.
d. The Freight, Wages and Direct Expenses during period 1st April, 2016 to date of fire
were at the same rate per month as in the last year.
e. Salvage value is 10% of Cost of Stocks.
f. The sum insured is ` 2,00,000 and policy contains Average Clause.
281
Question 19
Wye Ltd. had taken out a loss of profit policy for ` 3,00,000 being ` 1,30,000 for net profit
and ` 1,70,000 for fixed expenses. Expenses to the extent of ` 30,000 were not insured.
During 2015 the company earned a profit of ` 90,000 after charging ` 2,00,000,
standing charges on a sale of ` 32,50,000. On 1st June, 2016 there was a fire as a result
of which sales suffered a great deal for a period of six months.
The details of sales are as under:
2015 2016 2015 2016
January 2,00,000 2,20,000 June 3,60,000 50,000
February 2,00,000 2,20,000 July 4,00,000 50,000
March 2,50,000 2,75,000 August 3,40,000 60,000
April 2,50,000 2,75,000 September 3,00,000 80,000
May 3,00,000 3,30,000 October 2,50,000 1,10,000
November 2,50,000 1,50,000
December 1,50,000 1,80,000
The indemnity period according to the policy was 4 months. ` 2,000 was spent on putting
the fire out and additional expenses as a consequence of fire were ` 16,028 but a saving
of `3,000 was affected. Towards the end of 2015 a machine was installed which would
have resulted in a net saving equal to 2% of sales.
Question 20
Sony Ltd.’s. Trading and profit and loss account for the year ended 31st December, 2011
were as follows:
Trading and Profit and Loss Account for the year ended 31.12.2011
` `
To Opening stock 20,000 By Sales 10,00,000
To Purchases 6,50,000 By Closing stock 90,000
To Manufacturing expenses 1,70,000
10,90,000 10,90,000
To Administrative expenses 80,000 By Gross profit 2,50,000
To Selling expenses 20,000
To Finance charges 1,00,000
2,50,000 2,50,000
282
The company had taken out a fire policy for ` 3,00,000 and a loss of profits policy for
` 1,00,000 having an indemnity period of 6 months. A fire occurred on 1.4.2012 at the
premises and the entire stock was gutted with nil salvage value. The next quarter sale
i.e. 1.4.2012 to 30.6.2012 was severely affected. The following are the other information:
Sales during the period 1.1.12 to 31.3.12 2,50,000

Purchases during the period 1.1.12 to 31.3.12 3,00,000
Manufacturing expenses 1.1.12 to 31.3.12 70,000
Sales during the period 1.4.12 to 30.6.12 87,500
Standing charges insured 50,000
Actual expense incurred after fire 60,000
The general trend of the industry shows an increase of sales by 15% and decrease in
Gross profit by 5% due to increased cost. Ascertain the claim for stock and loss of profit.
Question 21
From the following particulars, you are required to calculate the amount of claim for
Buildwell Ltd., whose business premises was partly destroyed by fire:
Sum insured (from 31st December 2011) ` 4,00,000
Period of indemnity 12 months
Date of damage 1st January, 2012
Date on which disruption of business ceased 31st October, 2012
The subject matter of the policy was gross profit but only net profit and insured standing
charges are included.
The books of account revealed:
(a) The gross profit for the financial year 2011 was ` 3,60,000.
(b) The actual turnover for financial year 2011 was ` 12,00,000 which was also the
turnover in this case.
(c) The turnover for the period 1st January to 31st October, in the year preceding the
loss, was ` 10,00,000.
During dislocation of the position, it was learnt that in November-December 2011, there
has been an upward trend in business done (compared with the figure of the previous
years) and it was stated that had the loss not occurred, the trading results for 2012
would have been better than those of the previous years.
The Insurance company official appointed to assess the loss accepted this view and
283
adjustments were made to the pre-damaged figures to bring them up to the estimated
amounts which would have resulted in 2012.
The pre-damaged figures together with agreed adjustments were:
Period Pre- Adjustment Post
damaged to be added Adjusted
figures Figures
` ` `
January 90,000 10,000 1,00,000
Feb. to October 9,10,000 50,000 9,60,000
November to December 2,00,000 10,000 2,10,000
12,00,000 70,000 12,70,000
Gross Profit 3,60,000 46,400 4,06,400
Rate of Gross Profit 30% (actual for 2011), 32% (adjusted for 2012).
Increased cost of working amounted to ` 1,80,000.
There was a clause in the policy relating to savings in insured standard charges during
the indemnity period and this amounted to ` 28,000.
Standing Charges not covered by insurance amounted to ` 20,000 p.a. The actual turnover
for January was nil and for the period February to October 2012 ` 8,00,000.
Question 22
The store house of TOP MANUFACTURER caught fire on 31st March, 2017 and due to fire
a great part of stock was burnt to ashes. The stock was covered by insurance policy of
` 1,00,000 and claim was subject to an average clause From the following information
prepare statement showing claim which Top Manufacturer will get from the insurance
company.
(i) They used to :
(a) Sell goods to wholesalers on one month credit at wholesale price which is a
catalogue price less 15%.
Further cash discount of 5% on wholesale price is allowed to those wholesalers
who made immediate payment.
(b) Sell goods to retailers at retailer’s price which is a catalogue price less 10%.
Terms cash payment only.
(c) Sales to Direct consumers at catalogue price which is cost plus 100%.
(ii) Figure for the goods sold or despatched were:
(a) Credit sale upto 31st March, 2017 to wholesalers at wholesale price ` 3,40,000
284
worth.
(b) Net Cash sales (after deducting cash discount) upto 31st March, 2017 wholesalers
` 3,23,000 worth.
(c) Cash sales to retailers upto 31st March, 2017 ` 90,000 worth.
(d) Sales to direct consumers upto 31st March, 2017 ` 3,00,000
(iii) Stock on 1st January, 2017 was ` 2,50,000 at catalogue price. Purchases at catalogue
price from 1st Jan., 2017 to 31st March, 2017 were ` 12,50,000.
(iv) Stock salvaged ` 45,000 at cost price.
285
Question 23
Closing stock for the year ending on 31.3.2010 is ` 50,000 which includes stock damaged
in a fire in 2008-09. On 31.3.2009 the estimated net realisable value of the damaged
stock was ` 12,000. The revised estimate of net realisable value included in closing stock
of 2009-10 is ` 4,000.
Find the value of closing stock to be shown in Profit and Loss account for the year 2009-
2010. (May 2010)
Question 24
In January, 2010 a firm took an insurance policy for ` 60 lakhs to insure goods in its
godown against fire subject to average clause. On 7th March, 2010 a fire broke out
destroying goods costing ` 44 lakhs. Stock in the godown was estimated at ` 80 lakhs.
Compute the amount of insurance claim. (May 2010 - IPCC)
Question 25
A trader intends to take a loss of profit policy with indemnity period of 6 months, however,
he could not decide the policy amount. From the following details, suggest the policy
amount:
`
Turnover in last financial year 4,50,000
Standing charges in last financial year 90,000
Net profit earned in last year was 10% of turnover and the same trend expected in
subsequent year.
Increase in turnover expected 25 %
To achieve additional sales, trader has to incur additional expenditure of ` 31,250.
(Nov. 2010 – IPCC)
Question 26
On 30th March, 2011 fire occurred in the premises M/s Suraj Brothers. The concern had
taken an insurance policy of ` 60,000 which was subject to the average clause. From
the books of accounts, the following particulars are available relating to the period 1st
January to 30th March, 2011.
(1) Stock as per Balance sheet at 31st December, 2010, ` 95,600.
(2) Purchases (including purchase of machinery costing ` 30,000) ` 1,70,000,
286
(3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000.

(4) Sales (including goods sold on approval basis amounting to ` 49,500) ` 2,75,000.
(5) The average rate of gross profit is 20% of sales.
(6) The value of the salvaged goods was ` 12,300.
You are required to compute the amount of the claim to be lodged to the Insurance
Company. (May 2011 – Accounting)
Question 27
A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2010. From the
following particulars relating to the period from 1st April, 2010 to 31st August, 2010 you
are requested ascertain the amount of claim to be filed with the insurance company for
the loss of stock. The concern had taken an insurance policy for ` 60,000 which is subject
to average clause.
`
(i) Stock as per Balance Sheet at 31-03-2010 99,000
(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine ` 3,000) 50,000
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignees on 16th August, 2010, lying
unsold with them 16,500
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 2010, ` 1,000 were written off in respect of a slow
moving item. The cost of which was ` 5,000. A portion of these goods were sold at a loss
of ` 500 on the original cost of ` 2,500). The remainder of the stock is now estimated to
be worth the original cost. The value of goods salvaged was estimated at ` 20,000. The
average rate of gross profit was 20% throughout. (Nov. 2011)
287
Question 28
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock
and loss of profit, for ` 2,10,000 and ` 3,20,000 respectively. A fire occurred on 1 July,
2011 and as a result of which sales were seriously affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011
is given below:
To Opening Stock 96,000 By Sales 12,00,000
To Purchases 7,56,000 By Closing Stock 1,85,000
To Wages 1,58,000
To Manufacturing Expenses 75,000
To Gross Profit c/d 3,00,000
Total 13,85,000 Total 13,85,000
To Administrative Expenses 83,600 By Gross Profit b/d 3,00,000
To Selling Expenses (Fixed) 72,400
To Commission on Sales 34,200
To Carriage Outward 49,800
To Net Profit 60,000
Total 3,00,000 Total 3,00,000
Further detail provided is as below:

(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 01.04.2011 to
30.06.2011 were ` 3,36,000, ` 2,14,000, ` 51,000 and ` 12,000 respectively.
(b) Other Sales figure were as follows:
`
From 01.04.2010 to 30.06.2010 3,00,000
From 01.07.2010 to 30.09.2010 3,20,000
From 01.07.2011 to 30.09.2011 48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to
increase by 5% on sales.
(d) ` 1,98,000 were additionally incurred during the period after fire. The amount of
policy included ` 1,56,000 for expenses leaving ` 42,000 uncovered. Compute the
claim for stock, loss of profit and additional expenses. (May 2012)
288
Question 29
On 29th August, 2012 the godown of a trader caught fire and a large part of the stock of
goods was destroyed. However, goods costing ` 1,08,000 could be salvaged incurring fire
fighting expenses amounting to ` 4,700.
The trader provides you the following additional information:
`
Cost of stock on 1st April, 2011 7,10,500
Cost of stock on 31st March, 2012 7,90,100
Purchases during the year ended 31st March, 2012 56,79,600
Purchases from 1st April, 2012 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from 1st April,
2012 to the date of fire 41,000
Cost of goods withdrawn by trader for personal use from 1st April,
2012 to the date of fire 2,000
Sales for the year ended 31st March, 2012 80,00,000
Sales from 1st April, 2012 to the date of fire 45,36,000
The insurance company also admitted fire fighting expenses. The trader had taken the fire
insurance policy for ` 9,00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
(Nov. 2012)
Question 30
From the following information ascertain the value of stock as on 31st March 2012:
`
Stock as on 01-04-2011 28,500
Purchases 1,52,500
Manufacturing Expenses 30,000
Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31st March, 2011 a sum of ` 3,500 was written off
on a particular item, which was originally purchased for ` 10,000 and was sold during
the year of ` 9,000. Barring the transaction relating to this item, the gross profit earned
during the year was 20% on sales. (Nov. 2012)
289
Question 31
On 15th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the
stocks were destroyed. Cost of stock salvaged being ` 1,40,000.
From the books of account, the following particulars were available:
(i) Stock at the close of account on 31st March, 2012 was valued at ` 9,40,000.
(ii) Purchases from 01-04-2012 to 15-12-2012 amounted to ` 13,20,000 and the sales
during that period amounted to ` 20,25,000.
On the basis of his accounts for the past three years, it appears that average gross profit
ratio is 20% on sales.
Compute the amount of the claim, if the stock were insured for ` 4,00,000.
(May 2013)
Question 32
Monalisa & Co. runs plastic goods shop. Following details are available from quarterly
sales tax return filed.
Sales 2009 2010 2011 2012
` ` ` `
From 1st April to 30th June 1,28,000 1,86,000 1,93,000 2,21,000
From 1st July to 30th September 1,53,000 2,10,000 2,31,000 1,75,000
From 1st October to 31st December 1,59,000 1,47,000 1,90,000 1,48,000
Total 6,20,000 7,13,000 8,19,950 7,06,000
Period `
Sales from 16-09-2011 to 30-09-2011 34,000
Sales from 16-09-2012 to 30-09-2012 NIL
Sales from 16-12-2011 to 31-12-2011 60,000
Sales from 16-12-2012 to 31-12-2012 20,000
A loss of profit policy was taken for ` 1,00,000. Fire occurred on 15th September, 2012.
Indemnity period was for 3 months. Net Profit was ` 1,20,000 and standing charges (all
insured) amounted to ` 43,990 for year ending 2011.
Determine the Insurance Claim? (Nov. 2013 – Group I)
290
Question 33
A fire occurred in the premises of M/s Kailash & Co. on 30th September 2013. From the
following particulars relating to the period from 1st April 2013 to 30th September 2013,
you are required to ascertain the amount of claim to be filed with the Insurance Company
for the loss of stock. The company has taken an Insurance policy for ` 75,000 which is
subject to average clause. The value of goods salvaged was estimated at ` 27,000. The
average rate of Gross Profit was 20% throughout the period.
Particulars Amount
in `
i Opening Stock 1,20,000
ii Purchases made 2,40,000
Iii Wages paid (including wages for the installation of a machine
` 5,000) 75,000
iv Sales 3,10,000
v Goods taken by the Proprietor (Sale Value) 25,000
vi Cost of goods sent to Consignee on 20th September 2013, lying
unsold with them 18,000
vii Free Samples distributed - Cost 2,500
(Nov. 2014 – Group I)
Question 34
M/s. Platinum Jewellers wants to take up a "Loss of Profit Policy" for the year 2015. The
extract of the Profit and Loss Account of the previous year ended 31/12/2014 provided
below:
Particulars Amount
in `
Variable Expenses
Cost of Materials 18,60,000
Fixed Expenses
Wages for skilled craftsmen 1,60,000
Salaries 2,80,000
Audit Fees 40,000
Rent 64,000
Bank Charges 18,000
Interest income 44,000
Net Profit 6,72,000
291
Turnover is expected to grow by 25% next year,

To meet the growing working capital needs the partners have decided to avail overdraft
facilities from their bankers @ 12% p.a. interest.
The average daily overdraft balance will be around ` 2 lakhs.
The wages for the skilled craftsmen will increase by 20% and salaries by 10% in the
current year. All other expenses will remain the same.
Determine the amount of policy to be taken up for the current year by M/s. Platinum
Jewellers. (May 2015 – Group I)
Question 35
A trader intends to take a loss of profit policy with indemnity period of 6 months. However,
he could not decide the policy amount. From the following details, suggest the policy
amount:
Period `
Turnover in last financial year 6,75,000
Standing charges in the last financial year 1,14,750
Net profit earned in last year was 10% of turnover and the same trend expected in
subsequent year.
Increase in turnover expected 30%
To achieve sales, trader has to incur additional expenditure of ` 42,500.
(Nov. 2015 – Group I)

Question 36
A firm has decided to take out a loss of profit policy for the year 2016 and given the
following information for the last accounting year 2015. Variable manufacturing expenses
` 14,20,000, Standing charges ` 1,50,000, Net profits ` 80,000, Non-operating income `
2,500, Sales ` 18,00,000.
Compute the sum to be insured in each of the following alternative cases showing the
anticipation for the year 2016:
(i) If sales will increase by 15%.
(ii) If sales will increase by 15% and only 50% of the present standing charges are to be
insured.
(iii) If sales and variable expenses will increase by 15% and standing charges will
increase by 10%.
(iv) If sales will increase by 15% and variable expenses will decrease by 5%.
292
(v) If sales will increase by 10% and standing charges will increase by 15%.
(vi) If the turnover and standing charges will increase by 15% and variable expenses will
decrease by 10% but only 50% of the present standing charges are to be insured.
(May 2016 – Group I)
Question 37
What are Consequential loss policy and what items are generally covered by such
policy? (May 2017 – Group I)
Question 38
On 27th July, 2016, a fire occurred in the godown of M/s. Vijay Exports and most of the
stocks were destroyed. However goods costing ` 5,000 could be salvaged. Their fire-
fighting expenses were amounting to ` 1,300. From the salvaged accounting records, the
following information is available relating to the period from 1/4/2016 to 27/7/2016:
1. Stock as per balance sheet as on 31.3.2016 ` 63,000
2. Purchases (including purchase of machinery costing ` 10,000) ` 2,92,000
3. Wages (including wages paid for installation of machinery ` 3,000) ` 53,000
4. Sales (including goods sold on approval basis amounting to `
40,000). No approval has been received in respect of 1/4th of the
goods sold on approval. ` 4,12,300
5. Cost of goods distributed as free sample. ` 2,000
Other Information:
(i) While valuing the stock on 31.3.2016, ` 1,000 had been written off in respect of
certain slow moving items costing ` 4,000. A portion of these goods were sold in
June, 2016 at a loss of ` 700 on original cost of ` 3,000. The remainder of these
stocks is now estimated to be worth its original cost.
(ii) Past record shows the normal gross profit rate is 20%.
(iii) The insurance company also admitted firefighting expenses. The Company had taken
the fire insurance policy of ` 55,000 with the average clause,
Compute the amount of claim of stock destroyed by fire, to be lodged to the Insurance
Company. Also prepare Memorandum Trading Account to be for the period 1.4.2016
to 27.7.2016 for normal and abnormal items. (Nov. 2017 – Group I)
293
Question 39
On 30th March, 2018 fire occurred in the premises of M/s Alok & Co.
The concern had taken an insurance policy of ` 1,20,000 which was subject to the average
clause. From the books of accounts, the following particulars are available relating to
the period 1st January to 30th March, 2018.
(i) Stock as per Balance Sheet at 31st December, 2017 ` 1,91,200
(ii) Purchases (including purchase of machinery costing ` 60,000) ` 3,40,000
(iii) Wages (including wages ` 6,000 for installation of machinery) ` 1,00,000
(iv) Sales (including goods sold on approval basis amounting to ` 99,000) ` 5,50,000
(v) The average rate of gross profit is 20% of sales.
(vi) The value of the salvaged goods was ` 24,600
You are required to compute the amount of the claim to be lodged to the Insurance
Company. (May 2018 – Group I)
Question 40
A fire occurred in the premises of M/s. Raxby & Co. on 30-06-2017. From the salvaged
accounting records, the following particulars were ascertained:
`
Stock at cost as on 01/04/2016 1,20,000
Stock at cost as on 31/03/2017 1,30,000
Purchases less return during 2016 – 17 5,25,000
Sales less return during 2016 – 17 6,00,000
Purchases from 01/04/2017 to 30/06/2017 97,000
Purchases up to 30-06-2017 did not include ` 35,000 for which purchase invoices had
not been received from suppliers, though goods have been received in godown.
Sales from 01/04/2017 to 30/06/2017 1,66,000
In valuing the stock for the Balance Sheet at 31st March, 2017, ` 5,000 had been written
off on certain stock which a poor was selling line having the cost of ` 8,000. A portion of
these goods were sold in May, 2017 at a loss of ` 1,000 on original cost of ` 7,000. The
remainder of the stock was now estimated to be worth its original cost. Subject to that
exception, gross profit had remained at a uniform rate throughout the year.
The value of the salvaged stock was ` 10,000. M/s. Raxby & Co. had insured their stock
for ` 1,00,000 subject to average clause.
Compute the amount of claim to be lodged to the insurance company.
(May 2018 – Group I)
294
Question 41
A fire engulfed the premises of a business of M/S Kite Ltd. in the morning, of 1st October,
2017. The entire stock was destroyed except, stock salvaged of ` 50,000. Insurance Policy
was for ` 5,00,000 with average clause.
The following information was obtained from the records saved for the period from 1st
April to 31st September, 2017:
`
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
Stock in hand on 31st March, 2017 3,50,000
(1) Sales up to 30th September, 2017, include ` 75,000 for which goods had not been
dispatched.
(2) On 1st June, 2017, goods worth ` 1,98,000 sold to Hari on approval basis which was
included in sales but no approval has been received in respect of 2/3rd of the goods
sold to him till 30th September, 2017.
(3) Purchases up to 30th September, 2017 did not include ` 1,00,000 for which purchase
invoices had not been received from suppliers, through goods have been received in
godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for submission
to the Insurance Company. (Nov. 2018 – Inter)
Question 42
Unfortunate Ltd. has a godown, a shop and a manufacturing unit. Godown is used to
store goods purchased for manufacture as well as to store finished goods. Goods are
transferred from godown everyday in the morning to manufacturing unit and shop.
Inventory in godown is insured for ` 20 lakhs, that of manufacturing unit for ` 30 lakhs
and of the shop for ` 5 lakhs.
As on 31.12.17 inventory in godown at cost was ` 26 lakhs, inventory in manufacturing
unit at cost was ` 12 lakhs and inventory in shop at cost was ` 5 lakhs.
Following transactions took place during the period mentioned:
295
(` in lakhs)
Particulars Jan. '18 Feb. '18 March '18 1st Apr. - 28th Apr.
Purchases 20 15 16 8
Returns to suppliers ---- ---- 4 ----
Stock transfer to shop 26 20 25 10
Returns from shop 1 ---- 1 1
Sales in shop @ GP:
10% 10 12 8 4
12% 18 12 15 5
Fire occurred in shop in the midnight of 27th April – 28th April, 2018 and the entire stock
was engulfed in fire. Good costing ` 40,000 could be salvaged intact and balance goods
were recovered in damaged condition.
Expenses of fire fighting/salvage operation amounted to ` 20,000. Goods recovered in
damaged condition could be sold @ 40% of cost. The insurance policy had average clause.
Compute the claim to be lodged with Insurance Co.
(Nov. 2018 – IPCC Group I)
Question 43
A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire, sales
were adversely affected up to 30th September, 2017. The firm had taken Loss of profit
policy (with an average clause) for ` 3,50,000 having indemnity period of 5 months. There
is an upward trend of 10% in sales.
The firm incurred an additional expenditure of ` 30,000 to maintain the sales. There was
a saving of ` 5,000 in the insured standing charges.
Actual turnover from 25th May, 2017 to 30th September, 2017 ` 1,75,000
Turnover from 25th May, 2016 to 30th September, 2016 ` 6,00,000
Net profit for last financial year ` 2,00,000
Insured standing charges for the last financial year ` 1,75,000
Total standing charges for the last financial year ` 3,00,000
Turnover for the last financial year `15,00,000
Turnover for one year from 25th May, 2016 to 24th May, 2017 ` 14,00,000
You are required to calculate the loss of profit claim amount, assuming that entire sales
during the interrupted period was due to additional expenses.
(10 Marks – May 2019 – Inter)
296
Question 44
A fire occurred in the premises of M/s Garden Springs & Co., on 30th September 2017. From
the following particulars relating to the period from 1st April 2017 to 30th September
2017, you are required to ascertain the amount of claim to be filed with the insurance
company for the loss of stock. The company has taken an insurance policy for ` 97,500
which is subject to average clause. The value of goods salvaged was estimated at `
35,100. The average rate of gross profit was 20% throughout the period.
Particulars Amount in
(` )
(i) Opening stock 1,56,000
(ii) Purchases made 3,12,000
(iii) Wages paid (including wages for the installation of a machine -` 97,500
6,500)
(iv) Sales 4,03,000
(v) Goods taken by the Proprietor (sales value) 32,500
(vi) Cost of goods sent to consignee on 20th September, 2017, lying 23,400
unsold with them
(vii) Free Samples distributed – Cost 3,250
Question 45
A fire occurred in the premises of M/s Kirti & Co. on 15th December, 2018. The working
remained disturbed upto 15th March, 2019 as a result of which sales got adversely
affected. The firm had taken out an insurance policy with an average clause against
consequential losses for ` 2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed:

Sales 2015-16 2016-17 2017-18 2018-19
(`) (`) (`) (`)
From 1st April to 30th June 3,80,000 3,15,000 4,11,900 3,24,000
From 1st July to 30th September 1,86,000 3,92,000 3,86,000 4,42,000
From 1st October to 31st December 3,86,000 4,00,000 4,62,000 3,50,000
Total 12,40,000 14,26,000 16,39,900 14,12,000
297
A period of 3 months (i.e. from 16-12-2018 to 15-3-2019) has been agreed upon as
indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000
Sales from 16-12-2018 to 31-12-2018 Nil
Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16~03-2019 to 31-03-2019 40,000
Net profit was ` 2,50,000 and standing charges (all insured) amounted to ` 77,980 for
the year ending 31st March, 2018.
You are required to calculate the loss of profit claim amount.
Question 46
ABC Ltd. has insured itself under a loss of profit policy for ` 3,30,000 with indemnity
period of 8 months under average clause. A fire occurred in the factory on 01-01-2019
and normal business was affected up to 30-04-2019.
From the following information, prepare a Statement of Claim under the policy:
Actual Turnover over the period of dislocation (01-01-2019 to
30-4-2019) 50,000
Turnover for 12 months immediately preceding the date of fire
(01-01-2018 to 31-12-2018) 10,00,000
Turnover for corresponding period in 12 months immediately
preceding the date of fire (01-01-2018 to 30-04-2018) 4,50,000
Turnover for last financial year 12,00,000
Net Profit for last financial year 3,00,000
Uninsured Standing charges 18,000
Insured Standing charges for the last financial year 60,000
Following increases are approved in the policy:
(i) Increase in G.P. rate by 2%
(ii) Increase in turnover by 10%
There was an additional cost of working of ` 20,000 during dislocation period. Due to
this additional cost there was a saving of ` 5,000 in insured standing charges during
the indemnity period and but for this additional cost the turnover during the period of
dislocation would have been only ` 35,000.
298
Question 47
A fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had taken
an insurance policy for `1,20,000 which was subject to an average clause. Following
particulars were ascertained from the available records for the period from 1st April,
2018 to 30th September, 2019:
Amount
(`)
Stock at cost on 01-04-2018 2,11,000
Stock at cost on 31-03-2019 2,52,000
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
Purchases from 01-04-2019 to 30-09-2019
(including purchase of machinery costing `58,000) 4,48,000
Wages from 01-04-2019 to 30-09-2019
(including wages for installation of machinery costing `7,000) 85,000
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sales value of goods drawn by partners (1-4-19 to 30-9-19) 52,000
Cost of goods sent to consignee on 18th September, 2019 lying unsold with
them 44,800
Cost of goods distributed as free samples 8,500
While valuing the stock at 31st March, 2019, `8,000 were written off in respect of a slow
moving item, cost of which was `12,000. A portion of these goods were sold at a loss of
`4,000 on the original cost of `9,000. The remainder of the stock is estimated to be worth
the original cost. The value of goods salvaged was estimated at `35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance
Company for the loss of stock. (10 Marks – Nov 2020 – Inter)
299
Question 48
A fire occurred on 1st February, 2019, in the premises of Omkar Limited, a retail store
and business was partially disorganized up to 30th June, 2019. The Company was
insured under a loss of Profits for ` 2,50,000 with a six months period indemnity. From
the following information, compute the amount of claim under the loss of profit policy
assuming entire sales during interrupted period was due to additional expenses.
Particulars Amount in `
Actual sales from 1st February 2019 to 30th June, 2019 1,60,000
Sales from 1st February, 2018 to 30th June, 2018 4,00,000
Sales from 1st February, 2018 to 31st January, 2019 9,00,000
Net Profit for last financial year 1,40,000
Insured standing charges for last financial year 1,12,000
Total standing charges for last financial year 1,28,000
Sales for last financial year 8,40,000
The company incurred additional expenses amounting to ` 13,400 which reduced the loss
in turnover. There was also a saving during the indemnity period ` 4,900 in the insured
standing charges as a result of fire.
There had been a considerable increase in trade since the date of the last annual accounts
and it has been agreed that an adjustment of 15% be made in respect of the upward
trend in turnover. (8 Marks – Nov 2020 – IPCC)
300
HIRE PURCHASE
9 INSTALLMENT SELLING
Definition:
Under hire purchase H.P. vendor provides delivery of the goods to H.P. buyer without
receiving entire sale price. H.P. buyer takes the delivery on making an immediate payment
/ spot payment / Down payment. The balance price is paid in installments including
interest.
Clear title / ownership is transferred by H.P. vendor to H.P. buyer on receipt of entire
selling Price. If H.P. buyer makes a default then H.P. vendor will repossess the goods
without returning the price already received.
Important Terms:
1. Cash Price: It is prevailing market price of the goods on the date of purchase
agreement. In other words, it is a price at which asset can be bought on out right
basis.
It will never include interest.
2. Hire Purchase Price (H.P.P.): It is the price payable by H.P. buyer to H.P. vendor under
H.P. agreement. It will consist of cash price + total Interest.
3. Down payment / Spot payment / Deposit: It is the portion of cash price paid by H.P.
buyer to H.P. vendor at the time of taking delivery of the goods. It will never include
interest.
4. Installments: These are periodic payments made by H.P. buyer to H.P. vendor under
H.P. agreement. It will consist of portion of cash price and interest on outstanding
cash price.
5. Default: When H.P. buyer does not pay the installment on due date then it is called
as default.
6. Repossession: When H.P. vendor takes back the goods due to default made by H.P.
buyer then it is called as repossession.
301
Accounting Treatment
Full Cash price method (Credit Purchase and Credit Sales method)
Sr. No. Particulars Hire Purchase Buyer Hire Purchase Vendor
1) For Delivery of Asset Asset A/c Dr. H.P. Buyer A/c Dr.
To H.P. Vendor A/c To Sales A/c
(At cash price) (At cash price)
2) For down payment H.P. Vendor A/c Dr. Cash/Bank A/c Dr.
To Cash/Bank A/c To H.P. Buyer A/c
3) For Interest Interest A/c Dr. H.P. Buyer A/c
To H.P. Vendor A/c To Interest A/c
4) For Installments Paid H.P. Vendor A/c Dr. Cash/Bank A/c Dr.
To Cash / Bank A/c To H.P. Buyer A/c
5) For Depreciation Depreciation A/c Dr. ---
To Asset A/c
6) For Transfer P & L A/c Dr. Interest A/c Dr.
To Depreciation A/c To P & L A/c
To Interest A/c
Accounting treatment for Repossession :

In the books of H.P. Buyer
Complete repossession Partial Repossession
(a) For HP Vendor A/c Dr. HP Vendor A/c Dr.
Repossession To Asset A/c To Asset A/c
(For balance in HP Vendor (At Agreed Repossession
A/c Value decided by HP Vendor)
(b) For Loss on Profit / Loss A/c Dr. Profit / Loss A/c Dr.
Repossession To Asset A/c To Asset A/c
(WDV of Asset repossessed –
agreed value)
302
In the books of H.P. Vendor
1) For Repossession: Goods Repossessed A/c Dr. {At A.R.V}

To HP Buyer A/c
(At Agreed Value)
Note :
If COMPLETE REPOSSESSION, then after passing the above
entry if there is balance in HP Buyer A/c, then the same
should be transferred to PROFIT / LOSS A/C.
2) For expenses incurred Goods Repossessed A/c. Dr.
on Repossessed goods To Cash Bank A/c
3) For Sale of Cash / Bank A/c Dr.

repossessed To Goods Repossessed A/c
goods:
4) For profit on sale: Goods Repossessed A/c Dr.
To Profit / Loss A/c
5) For loss on sale: Profit / Loss A/c Dr.
To Goods Repossessed A/c
INTEREST SUSPENSE METHOD

Under normal accounting method, interest is debited to H. P. Customer A/c as and when
it becomes due. However, under interest suspense method the total interest is Debited to
H. P. Customer A/c at the time delivery of the asset. This is done with the help of a special
account called as Interest suspense A/c.
In the books of HP Vendor

Entry for Sales :
HP Buyer a/c Dr.
To Sales a/c
To Interest Suspense a/c
(Then year after year interest of respective year is transferred to Interest a/c)
Entry for Interest :

Interest suspense a/c Dr.
To Interest a/c
303
Note: In the last year interest suspense account balance will become NIL
In the Books of HP Buyer

Entry for purchase :
Asset A/c or
Interest suspense A/c Dr.
To HP Vendor A/c
(Then year after year interest of respective year is transferred to Interest a/c)
Entry for Interest :

Interest A/c Dr.
To Interest suspense A/c
Note : In the last year interest suspense account balance will become NIL
304
Question 1
From the following particulars prepare necessary accounts in the books of the H.P. Vendor.
`
(1) Cash Price 1,49,000
(2) Down Payment 40,000
(3) Instalments 40,000/- each
3 annual instalments.
(4) Rate of Interest 5% p.a.
Question 2
From the following particulars calculate interest payable in each year by H.P. Customer.
`
(1) Cash Price 1,49,000
(3) Instalments 40,000 each
Question 3
`
(2) Instalments 40,000 each
Question 4
(1) Payment to made as ` 60,000 each for 5 years
(2)
Annuity Value Present value ` 1 for 5 years = `4.33
Prepare necessary Accounts in the books of vendor under interest suspense method.
305
Question 5
G.D. Miling Industries Auraiya purchased an asset on hire-purchase system. They pay `
1,524 down and ` 5,400 in 3 instalments of ` 1,800 each at the interval of two years.
Hire- vendor charges interest at 10 percent per annum on yearly rests. Calculate interest
payable each year.
Question 6
M/s India Motors Ltd., sells scooters on the hire-purchase system. The terms of payment
for the sale of scooter are ` 1,000 on delivery, ` 1,040 at the end of the first year, ` 960
at the end of the second year, and ` 880 at the end of the third year inclusive of finance
charges (or interest), Calculate amount of interest included in each instalment, assuming
cash price is uniform in each instalments.
Question 7
Dobsons Ltd. had purchased a machinery on hire purchases system from Hind Machinery
Ltd. The terms are that they would pay ` 20,000 down on 1.4.2006 and 5 annual
instalments of ` 11,000 each commencing from 31.3.2007. They charged depreciation on
machinery at the rate of 15% per annum under diminishing balance system.
Hind Machinery Ltd. had charged interest at the rate of 10% p.a.
Show necessary Accounts to record the above transaction in the books of Dobson’s Ltd.
till the instalments are paid off.
Dobson’s accounting year ended on 31st March in each year.
Question 8
On October 1, 2009, Eastern Printers purchased a printing machine on a hire purchase
basis, payments to be made ` 10,000 on the said date and the balance in three half
yearly instalment of ` 8,200, ` 7,440 and ` 6,300 commencing from March 31st, 2010.
The vendor charged interest at 10% p.a. calculated on half-yearly rests.
The H. P. vendor closes their books annually on March 31.
Determine the cash price of the machine and show the necessary ledger accounts in the
books of the H. P. Vendor.
306
Question 9
A firm acquired two tractors under hire purchase agreements, details of which were as
follows:
Date of purchase Tractor A Tractor B
1st July, 2009 1st Jan. 2010
` `
Cash price 14,000 19,000
Deposit 2,000 2,680
Interest (deemed to accrue evenly over the 2,400 2,880
period of the agreement)
Both agreements provided for payment to be made in 24 monthly instalments, commencing

on the last day of the month of purchase, all instalments being paid on due date.
On 30th September 2010 Tractor B was completely destroyed by fire. In full settlement
on 10th October, 2010 the insurance company paid ` 15,000 under a comprehensive
policy out of which ` 12,000 was paid to the hire purchase company in termination of
the agreement. Any balance on the hire purchase company's account in respect of these
transactions was to be written off.
The firm prepared accounts annually to 31st March and provided depreciation on tractors
on a straight line basis at a rate of 20% p.a. rounded off to nearest ten rupees, apportioned
as from the date of purchase and up to the date of disposal.
You required to record these transactions in the following accounts, carrying down the
balances on 31st March, 2010 and 31st March, 2011.
(a) Tractors on hire purchase.
(b) Provision for depreciation of tractors.
(c) Disposal of tractors.
(d) Hire purchase company.
Question 10
A Ltd. purchases a plant on hire purchase basis for `1,00,000 and makes the payment in
the following order:
Down payment ` 20,000,
the 1st instalment after one year ` 40,000;
the 2nd instalment after two years ` 20,000
and the last instalment after three years.
The cash price of the plant is ` 86,000.
307
You are required to calculate:

(i) the total interest and
(ii) the interest included in each instalment.
Question 11
Bombay Roadways Ltd. purchased three trucks costing `1,00,000 each from Hindustan
Auto Ltd. on 1st April, 2008 on the hire purchase system. The terms are:
Payment on delivery ` 25,000 for each truck and balance of the principal amount by 3
equal instalments plus interest at 15% per annum to be paid at the end of each year.
Bombay Roadways Ltd. writes off 25% depreciation each year on the diminishing balance
method.
Bombay Roadways Ltd. paid the instalments due on 31st March, 2009 and 31st March,
2010 but could not pay the final instalment.
Hindustan Auto Ltd. re-possess one Truck adjusting its value against the amount due.
The repossession was done on 1st April, 2011 on the basis of 40% depreciation on the
diminishing balance method.
Write up the ledger accounts in the books of Bombay Roadways Ltd. showing the above
transactions upto 01.04.2011.
Question 12
M/s Mahmud Mumtaz purchased from Ashok Ltd. 3 machines costing ` 50,000 each on
the hire-purchase system. Payment was to be made ` 30,000 down and the remainder
in 3 equal instalments together with interest @ 9% M/s Mahmud Mumtaz had written
off depreciation @ 20% on diminishing balance. It paid the instalment due at the end of
the first year but could not pay the next. Ashok Ltd. agreed to leave one machine with
the purchaser, adjusting the value of the other two machines against the amount due.
The machine taken back were valued on the basis 30% depreciation annually. Show the
necessary accounts in the books of M/s Mahmud Mumtaz for three years assuming that
final dues were paid in the third year.
Question 13
On 1st April, 2010, Ashok acquired furniture on the hire purchase system from Real Aids
Ltd. agreeing to pay four semi-annual instalments of ` 800 each, commencing on 30th
September, 2010. The cash price of the items was ` 3,010 and an interest of 5% per
annum was chargeable.
On 31st December, 2010, Ashok expresses his inability to continue and Real Aids seized
308
the property. It was agreed that Ashok would pay the due proportion of the instalment
upto the date of seizure and also a further sum of ` 200 towards penalty. At the time of
re-possession, Real Aids valued the furniture at ` 1,500.
The company after incurring ` 200 towards repairs of the furniture sold the items for
` 1,800 on 15th January, 2011.
Show the ledger accounts as they would appear in the books of Real Aids, working out
the profit or loss on the transaction, assuming that the Company passes hire - purchase
transactions through its books as sales.
309
PART C : HOME WORK SECTION
Question 14
Om Ltd. purchased a machine on hire purchase basis from Kumar Machinery Co. Ltd. on
the following terms:
(a) Cash price ` 80,000
(b) Down payment at the time of signing the agreement on 1.1.2011 ` 21,622.
(c) 5 annual instalments of ` 15,400, the first to commence at the end of twelve months
from the date of down payment.
(d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in each instalment.
Question 15
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2011 from
Ganesh Enterprises. The terms were as follows:

Hire Purchase Price 180,000
Down Payment 30,000
1st instalment payable after 1 year 50,000
2nd instalment after 2 years 50,000
3rd instalment after 3 years 30,000
4th instalment after 4 years 20,000
Cash price of van ` 1,50,000 You are required to calculate Total Interest and Interest
included in each instalment.
Question 16
Lucky bought 2 tractors from Happy on 1-10-2011 on the following terms:
Down payment 5,00,000
1st installment at the end of first year 2,65,000
2nd installment at the end of 2nd year 2,45,000
3rd installment at the end of 3rd year 2,75,000
Interest is charged at 10% p.a.
310
Lucky provides depreciation @ 20% on the diminishing balances.

On 30-9-2014 Lucky failed to pay the 3rd installment upon which Happy repossessed
1 tractor. Happy agreed to leave one tractor with Lucky and adjusted the value of the
tractor against the amount due. The tractor taken over was valued on the basis of 30%
depreciation annually on written down basis. The balance amount remaining in the
vendor's account after the above adjustment was paid by Lucky after 3 months with
interest @ 18% p.a.

(1) Calculate the cash price of the tractors and the interest paid with each installment.
(2) Prepare Tractor Account and Happy Account in the books of Lucky assuming that
books are closed on September 30 every year. Figures may be rounded off to the
nearest rupee.
Question 17
X Ltd. purchased 3 milk vans from Super Motors costing ` 75,000 each on hire purchase
system. Payment was to be made: ` 45,000 down and the remainder in 3 equal instalments
together with interest @ 9%. X Ltd. writes off depreciation @ 20% on the diminishing
balance. It paid the instalment at the end of the 1st year but could not pay the next.
Super Motor agreed to leave one milk van with the purchaser, adjusting the value of the
other two milk vans against the amount due. The milk vans were valued on the basis of
30% depreciation annually on written down value basis. X Ltd. settled the seller’s dues
after three months.
You are required to give necessary journal entries and the relevant accounts in the books
of X Ltd.
311
Question 18
Girish Transport Ltd. Purchased from NCR Motors 3 electric rickshaws costing ` 60,000
each on the hire purchase system on 1/1/2013. Payment was to be made ` 30,000
down and the remainder in 3 equal installments payable on 31.12.2013, 31.12.2014
and 31.12.2015 together with interest @ 10% p.a. Girish Transport Ltd. writes off
depreciation @ 20% p.a. on the reducing balance. It paid the installment due at the end
of 1st year i.e. 31.12.2013 but could not pay next on 31.12.2014. NCR Motors agreed to
leave one e-rickshaw with the purchaser on 31.12.2014 adjusting the value of the other
two e-rickshaws against the amount due on 31.12.2014. The e-rickshaws were valued
on the basis of 30% depreciation annually on WDV basis.
Show the necessary Ledger accounts in the books of Girish Transport Ltd. for the year
2013, 2014 and 2015. (May 2016 – Group 2)
Question 19
Srikumar bought 2 cars from ‘Fair Value Motors Pvt. Ltd. On 1/4/2012 on the following
terms:
`
Down payment 6,00,000
1st installment at the end of the first year 4,20,000
2nd installment at the end of the second year 4,90,000
3rd installment at the end of the third year 5,50,000
Interest is charged at 10% p.a
Srikumar provides depreciation @ 25% on the diminishing balances.

On 31-3-15 Srikumar failed to pay the 3rd installment upon which 'Fair Value Motors Pvt.
Ltd.' repossessed 1 car. Srikumar agreed to leave one car with Fair Value Motors Pvt. Ltd.
and adjusted the value of the car against the amount due. The car taken over was valued
on the basis of 40% depreciation annually on written down basis. The balance amount
remaining in the vendor's account after the above adjustment was paid by Srikumar after
3 months with interest @ 20% p.a.

(i) Calculate the cash price of the cars and the interest paid with each installment.
(ii) Prepare Car Account and Fair Value Motors Pvt. Ltd. Account in the books of Srikumar
312
assuming books are closed on March 31, every year. Figures may be rounded off to
the nearest rupee. (Nov. 2016 – Group 1)
Question 20
Distinguish between Hire Purchase system and Installment system.
Question 21
M/s Kodam Enterprise purchased a generator on hire purchase from M/s Sanctum Ltd. on
1st April, 2017. The hire purchase price was ` 48,000. Down payment was ` 12,000 and
the balance is payable in 3 annual installments of ` 12,000 each payable at the end of
each financial year. Interest is payable @ 8% p.a. and is included in the annual payment
of ` 12,000.
Depreciation at 10% p.a. is to be written off using the straight line method.
(i) Calculate the cash price of the generator and the interest paid on each installment.
(ii) Pass relevant journal entries in the books of M/s Kodam enterprise from 1st April,
2017 to 31st March, 2018 following the interest suspense method.
(May 2018 – Group 1)
Question 22
From the following, calculate the cash price of the asset: (May 2010)
`
Hire purchase price of the asset 50,000
Down payment 10,000
Four annual installments at the end of each year 10,000
Rate of interest 5% p.a.
Question 23
On 1st April, 2009 a car company sold to Arya Bros., a motor car on hire purchase basis.
The total hire purchase price was ` 4,60,000 with down payment of ` 1,60,000. Balance
amount was to be paid in 3 annual installments of ` 1,00,000 each. The first installment
payable on 31st March, 2010. The cash price of the car was ` 4,00,000.
How will Arya Bros. account for interest over three accounting years assuming books of
accounts are closed on 31st March every year. (May 2010 – IPCC)
313
Question 24
On 1st April, 2012 Fastrack Motors Co. sells a truck on hire purchase basis to Teja
Transport Co. for a total hire purchase price of ` 9,00,000 payable as to ` 2,40,000 as
down payment and the balance in three equal annual installments of ` 2,20,000 each
payable on 31st March, 2013, 2014 and 2015.
The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations
may be made to the nearest rupee. (Nov 2012)
Question 25
On 1st April, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash
price was ` 9,00,000 to M/s. Singh & Singh, a firm of transporters. The terms of the
contract were that the transporter were to pay ` 3,00,000 down and six four – monthly
installments of ` 1,00,000 plus interest on outstanding amount of cash price for the
intervening four months. The installments were payable on 31st July, 30th November and
31st march in each one of the two accounting years. Interest was calculated @ 12% per
annum.
M/s. Singh & Singh duly paid the installments on 31st July, 2012 but failed to pay
the installment on 30th November, 2012. M/s Power motors, after legal formalities,
repossessed the truck valuing it at ` 7,00,000.
M/s. Power motors spent ` 80,000 on repairs and repainting of the truck and on 7th
January, 2013 sold it for ` 7,50,000 cash.
You are required to prepare the account of M/s Singh & Singh and Goods Repossessed
Account in the books of M/s. Power Motors. (May 2013)
Question 26
M/s Amar bought six Scooters from M/s Bhanu on 1st April, 2015 on the following terms:
Down payment `3,00,000
1st instalment payable at the end of 1st year `1,59,000
2nd instalment payable at the end of 2nd year `1,47,000
3rd instalment payable at the end of 3rd year `1,65,000
Interest is charged at the rate of 10% per annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.
On 31st March, 2018 M/s Amar failed to pay the 3rd instalment upon which M/s Bhanu
repossessed two Scooters. M/s Bhanu agreed to leave the other four Scooters with M/s
Amar and adjusted the value of the repossessed Scooters against the amount due. The
314
Scooters taken over were valued on the basis of 30% depreciation per annum on written
down value. The balance amount remaining in the vendor's account after the above
adjustment was paid by M/s Amar after 5 months with interest@ 15% per annum.
M/s Bhanu incurred repairing expenses of ` 15,000 on repossessed scooters and sold
scooters for ` 1,05,000 on 25th April, 2018.
(1) Calculate the cash price of the Scooters and the interest paid with each instalment.
(2) Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar.
(3) Prepare Goods Repossessed Account in the books of M/s Bhanu.
Question 27
Leena Transport Limited purchased from Ethnic Motors, 4 tempos costing ` 2,75,000 each
on the hire purchase system on 1.1.2016. Payment was to be made ` 2,00,000 down
and the balance in 3 equal annual instalments payable on 31.12.2016, 31.12.2017 and
31.12.2018 together with interest @ 12% p.a.
Leena Transport Ltd. change depreciation at the rate of 10% p.a. on the diminishing
balance. It paid the instalment due at the end of the first year, i.e., 31.12.2016, but could
not pay the next on 31.12.2017. Ethnic Motors decided to takeover 2 tempos and to leave
the other 2 tempos with the purchaser on 1.1.2018, adjusting the value of the 2 tempos
(taken over) against the amount due on 31.12.2017. The tempos taken over were valued
on the basis of 15% depreciation annually. Show the necessary accounts in the books of
Leena Transport Ltd. for the years 2016, 2017 and 2018.
(8 Marks – May 2019 – IPCC)
Question 28
On 1st January 2016 M/s KMR acquired a machine on hire purchase from M/s PQR on the
following terms:
(1) Cash price of the machine was ` 2,40,000.
(2) The down payment at the time of signing the contract was ` 96,000.
(3) The balance amount is to be paid in 3 equal annual instalments plus interest.
(4) Interest is chargeable @ 8% p.a.
On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR in
the books of the purchaser.
315
Question 29
On 1st April, 2017, Mr. Nilesh acquired a tractor on Hire purchase from Raj Ltd. The terms
of contract were as follows:
(i) The cash price of the Tractor was `11,50,000.
(ii) `2,50,000 were to be paid as down payment on the date of purchase.
(iii) The Balance was to be paid in annual installments of `3,00,000 plus interest at the
end of the year.
(iv) Interest chargeable on the outstanding balance was 8% p.a.
(v) Depreciation @10% p.a is to be written off using straight line method.
Mr. Nilesh adopted the interest suspense method for recording his Hire purchase transaction.
Prepare the Tractor account, Interest Suspense account and Raj Ltd.s’ account in the
books of Mr. Nilesh. (8 Marks – Nov 2020 – Inter)
Question 30
The following particulars relate to hire purchase transactions :
(i) R (hire purchaser) purchased three machineries from S on hire purchase system. The
cash price of each machinery being ` 3,00,000.
(ii) The hire purchaser charged depreciation @ 20% on written down value method.
(iii) Two machineries were seized by hire vendor when second installment was not
paid at the end of the second year. The hire vendor valued the two machineries at
cash price less 30% depreciation charge for each of the years under written down
value method.
(iv) The hire vendor spends 15,000 on repairs of the machineries and then sold them for
a total amount of ` 2,55,000.
You are required to compute :
(1) Agreed value of two machineries taken back by the hire vendor.
(2) Book value of one machine left with the Hire purchaser.
(3) Profit or loss to hire purchaser on two machineries taken back by the hire vendor.
(4) Profit or loss on machineries repossessed, when sold by the hire vendor.
Question 31
Identify four differences between Hire Purchase and Installment Payment agreement.
316
DEPARTMENTAL
10 ACCOUNTS
If a business is divided into different divisions known as departments - it becomes desirable

to know the profit or loss for each department separately. This merely involves making
out separate Trading and Profit or Loss Account in columnar form. To facilitate this,
subsidiary books will be provided with suitable columns to disclose purchases and sale
of each department. Similarly even the stock registers are prepared in columnar form so
that stocks of each department can be known.
Allocation of Expenses:
Some expenses are incurred directly for each department. But common expenses are to
be allocated to various departments on suitable basis. Various common expenses should
be allocated as under :
1. Rent, Rates, Taxes, Insurance, etc of Building: These should be allocated in the ratio of
space occupied by each department.
2. Lighting : This should be allocated in the ratio of number of Electric points in each
department.
3. Staff related Expenses: This should be allocated in the ratio of number of employees
of each department.
5. Sale Related Expenses: (Carriage Outward, Bad Debts, Discount Allowed, Sales
Commission etc) should be allocated on the basis of sale of various department.
For this purpose inter departmental transfers should be excluded.
6. Purchase Related Items: (Discount received, carriage inwards, commission to purchase
manager etc) should be allocated in purchase ratio.
Expenses for which neither specific ratio nor suitable basis is available should be debited
in general Profit and Loss Account.
Inter - Departmental Transfers: At times one department uses goods traded by the other
department. The transfer may be at cost at fixed margin of profit or at selling price. The
317
accounting entry for inter departmental transfer is as follows :

Receiving Department A/c Dr. xx
To Giving department A/c xx
(If the transfer has been made at cost then no further adjustments are required).
Inter departmental transfers at other than cost :

In order to find out the real profitability / efficiency, one department may transfer goods
to another department at selling price. At year end if such transferred goods remain
unsold then, they must be at cost to receiving department.
Such unsold goods include profit of sending department from owners’ point of view. Thus,
it is necessary to find out true profit and therefore following accounting entry should be
passed at year end.
General Profit & Loss A/c Dr.
To stock reserve A/c
(Note : In the next year the above entry shall be reversed).
Steps for calculating stock reserve :

(i) Find out closing stock of receiving department.
(ii) Find out transferred goods included in the above closing stock.
(iii) Find out gross profit ratio of sending department.
Gross Profit = x 100

Note:
There is no need to calculate Gross Profit ratio if goods are transferred at cost +
profit prescribed in question itself.
(iv) Stock Reserve = Gross Profit Margin x Transferred goods.
318
Question 1
M/s Omega is a departmental store having three departments X, Y and Z. The information
regarding three departments for the year ended 31st March, 2011 are given below:
X Y Z
(`) (`) (`)
Opening Stock 36,000 24,000 20,000
Purchases 1,32,000 88,000 44,000
Debtors at end 15,000 10,000 10,000
Sales 1,80,000 1,35,000 90,000
Closing stock 45,000 17,500 21,000
Value of furniture in each department 20,000 20,000 10,000
Floor space occupied by each department (in sq. ft.) 3,000 2,500 2,000
Number of employees in each Department 25 20 15
Electricity consumed by each department (in units) 300 200 100
The balances of other revenue items in the books for the year are given below:
Amount (`)
Carriage inwards 3,000
Carriage outwards 2,700
Salaries 48,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity expenses 3,000
Labour welfare expenses 2,400
You are required to prepare Departmental Trading and Profit and Loss Account for the
year ended 31st March, 2011 after providing provision for Bad Debts at 5%.
Question 2
A firm had two departments, cloth and ready-made clothes. The clothes were made by
319
the firm itself out of cloth supplied by the cloth department at its selling price. From the
following figures prepare Departmental Trading and Profit Loss Accounts for the year
2010-2011.
Particulars Cloth Department Ready - made
Clothes
` `
Opening Stock on 1.4.2010 3,00,000 50,000
Purchases 20,00,000 ----
Sales 22,00,000 4,50,000
Transfer to Ready-made cloth Department 3,00,000 3,00,000
Expenses - Manufacturing ---- 75,000
Selling Expenses 20,000 6,000
Stock on 31.3.2011 2,00,000 60,000
The stocks in the ready-made clothes department may be considered as consisting of

75% cloth and 25% other expenses. The cloth department earned gross profit at the rate
of 15% in 2009-2010. General expenses of the business as a whole came to ` 1,10,000.
Question 3
X Ltd. has two departments A and B. From the following particulars prepare Departmental
Trading Account and Consolidated Trading Account for the year ending 31st March, 2011.
Dept. A Dept. B
Opening Stock at Cost 40,000 24,000
Purchases 1,84,000 1,36,000
Carriage Inward 4,000 4,000
Wages 24,000 16,000
Sales 2,80,000 2,24,000
Purchased goods transferred:
by Deptt. B to Dept. A 20,000
by Deptt. A to Dept. B 16,000
Finished goods transferred:
by Dept. B to Dept. A 70,000
by Dept. A to Dept. B 80,000
Return of Finished Goods:
by Dept. B to Dept. A 20,000
by Dept. A to Dept. B 14,000
Closing Stock:
320
Purchased goods 9,000 12,000

Finished goods 48,000 28,000

Purchased goods have been transferred mutually at their respective departmental
purchases cost and finished goods at departmental market price and the 20% of the
finished stock (closing) at each department represented finished goods received from the
other department.
Question 4
The following balances were extracted from the books of Vijay Shankar. You are required
to prepare Department Trading and Profit & Loss A/c for the year ended 31st December,
2007 after adjusting the unrealised department profits, if any.
Particulars Dept. A (`) Dept. B (`)

Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
General expenses incurred for both the departments were ` 1,25,000 and you are also
supplied with the following information:
(i) Closing Stock Department A ` 1,00,000 including goods from Department B for
` 20,000 at cost to Department A.
(ii) Closing Stock of Department B `2,00,000 including goods from Department A for
` 30,000 at cost to Department B.
(iii) Opening Stock of Department A and Department B include goods of the value
of `10,000 and `15,000 taken from Department B and A respectively at cost to
transferee departments.
(iv) The Gross Profit is uniform from year to year.
Question 5
Department X sells goods to Department Y at a profit of 25% on cost & to Department
Z at a profit of 10% on cost. Department Y sells goods to X & Z at a profit of 15% & 20%
on sales, respectively. Department Z charges 20% & 25% profit on cost to Department X
& Y, respectively.
Department Managers are entitled to 10% Commission on Net Profit subject to Unrealised
Profits on Departmental sales being eliminated.
321
Departmental profits after charging manager's commission, but before adjustment of

unrealised profits are : X = ` 36,000 ; Y = ` 27,000 ; Z = ` 18,000.
Stocks lying at different departments at the year - end are as under:
Particulars X Y Z
Transfer from Department X ---- 15,000 11,000
Transfer from Department Y 14,000 ---- 12,000
Transfer from Department Z 6,000 5,000 ----
Find out the correct Departmental Profits after charging Manager's Commission.
Question 6
Complex Ltd. has three departments A B & C. The following information is provided:
Particulars A B C
` ` `
Opening Stock 3,000 4,000 6,000
Consumption of Direct Materials 8,000 12,000 ----
Wages 5,000 10,000 ----
Closing Stock 4,000 14,000 8,000
Sales 34,000
Stock of each department are valued at cost to the department concerned. Stocks of
A department are transferred to B at a margin of 50% above the departmental cost.
Stocks of B department are transferred to C department at a margin of 10% above
departmental cost.
Other Expenses:
Salaries ` 2,000
Printing and Stationary ` 1,000
Rent ` 6,000
Interest Paid ` 4,000
Depreciation ` 3,000
Allocate expenses in the ratio of departmental gross profits. Opening figures of reserves
for unrealised profits on Departmental Stocks were:
Department B ` 1,000
Department C ` 2,000
Prepare Departmental Trading and Profit and Loss Account.
322
Question 7
The following purchases were made during the year 2010-2011 by a business house
having three departments.
Department A 1,000 Units
Department B 2,000 Units at total cost of ` 1,00,000
Department C 2,400 Units
Stock on 1st April, 2010 were:

Department A 120 units
Department B 80 units
Department C 152 units
The sale during 2010-2011 were:

Department A 1,020 units at ` 20 each
Department B 1,920 units at ` 22.50 each
Department C 2,496 units at ` 25 each
The rate of gross profit is the same in each case. Prepare Departmental Trading Account
for the year 2010-2011.
Question 8
A Ltd. has a factory which has two manufacturing Departments X and Y. Part of the
output of X department is transferred to Y department for further processing and
the balance is directly transferred to the selling department. The entire production of
Y department is transferred to the selling department. Inter departmental stock transfers
are made as follows :
X department to department Y at 33 1/3% over departmental cost.
X department to selling at 50% over departmental cost.
Y department to selling department at 25% over departmental cost.
The following information is given for the year ending 31st March, 2011.
Department X Department Y Selling Department

M.T. ` M.T. ` M.T. `
Opening Stock 60 60,000 20 40,000 50 1,45,000
Raw Material
consumption 90 1,00,000 20 20,000 - -
323
Labour Charges - 50,000 - 80,000 - -

Closing Stock 30 ? 50 ? 60 ?
Sales - - - - ? 5,00,000
Out of the total production in X department 30 M.T. were for transfer to the selling
department. Apart from these stocks which were transferred during the year, the balance
output and the entire opening and closing stock of X department were for transfer to
Y department. The per tonne material and labour consumption in X department on
production to be transferred directly to the selling department is 300 percent of the
labour and material consumption on production for Y department.
Administration expenses were ` 1,65,000.
Prepare Departmental Trading A/c ignoring material wastage, on weighted average cost
basis. Also prepare General profit and loss account
324
Question 9
From the following Trial Balance, prepare the Departmental Trading and Profit and Loss
accounts for the year ending March 31, 2011 and Balance Sheet on that date in the books
of Mr. P.
Dr. Cr.
(`) (`)
Stock A Dept 5,400
B Dept 4,900
Purchases A Dept 9,800
B Dept 7,350
Sales A Dept 16,900
B Dept 13,520
A Dept 1,340
Wages B Dept 240
Rent 1,870
Salaries 1,320
Lighting and Heating 420
Discount Allowed 441
Discount Received 133
Advertising 738
Carriage Inwards 469
Furniture and Fittings 600
Plant and Machinery 4,200
Sundry Debtors 1,820
Capital 9,530
Drawings 900
Cash in hand 32
Cash at Bank 1,980
43,820 43,820
The following information is also provided :

(a) Rent and Lighting and Heating are to be allocated between Factory and Office in the
ratio of 3 : 2.
325
(b) Rent, Lighting and heating, Salaries and Depreciation are to be apportioned to A
and B Depts. as 2 : 1.
(c) Other Expenses and income are to be apportioned to A and B Depts. on a suitable
basis.
(d) The following adjustments are to be made :
Rent Prepaid ` 370; Lighting and heating outstanding `180; and Depreciation on
Furniture and Fittings at 10% p.a.
(e) The stock on March 31, 2011: A Dept. ` 2,478: B Dept. ` 2,401.
(f) Transfer from Dept. A to Dept. B `1,200 at cost.
Question 10
M/s X has two departments, A and B. From the following particulars prepare the
consolidated Trading Account and Departmental Trading Account for the year ending
31st December, 2011:
A B
(`) (`)
Opening Stock [consisting of purchased goods -at cost)] 20,000 12,000
Purchases 92,000 68,000
Sales 1,40,000 1,1,2000
Wages 12,000 8,000
Carriage 2,000 2,000
Closing Stock:
(i) Purchased goods 4,500 6,000
(ii) Finished goods 24,000 14,000
Purchased goods transferred:
by B to A 10,000
by A to B 8,000
Finished goods transferred
by A to B 35,000
by B to A 40,000
Return of finished goods:
by A to B 10,000
by B to A 7,000
You are informed that purchased goods have been transferred mutually at their respective
departmental purchase cost and finished goods at departmental market price and
326
that 20% of the finished stock (closing) at each department represented finished goods
received from the other department.
Question 11
Department P sells goods to Department S at a profit of 25% on cost and to Department
Q at a profit of 15% on cost. Department S sells goods to P and Q at a profit of 20% and
30% on sales respectively. Department Q sells goods to P and S at 20% and 10% profit
on cost respectively.
Departmental Managers are entitled to 10% commission on net profit subject to unrealised
profit on departmental sales being eliminated. Departmental profits after charging
Manager's commission, but before adjustment of unrealised profits are as below:
(`)
Department P 90,000
Department S 60,000
Department Q 45,000
Stock lying at different Departments at the end of the year are as below:
Figure in (V)
DEPARTMENTS
P S Q
Transfer from P 18,000 14,000
Transfer from S 48,000 ..---- 38,000
Transfer from Q 12,000 8,000 ----
Find out correct Departmental Profits after charging Managers' Commission.
Question 12
M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are
made by the Firm itself out of leather supplied by Leather Department at its usual
selling price. From the following figures, prepare Departmental Trading and Profit & Loss
Account for the year ended 31st March, 2013:
327
Finished Leather Shoes Department

Department (`) (`)
Opening Stock (As on 01.04.2012) 30,20,000 4,30,000
Purchases 1,50,00,000 2,60,000
Sales 1,80,00,000 45,20,000
Transfer to Shoes Department- 30,00,000 ----
Manufacturing Expenses ---- 5,00,000
Selling Expenses 1,50,000 60,000
Rent and Warehousing 5,00,000 3,00,000
Stock on 31.03.2013 12,20,000 5,00,000
The following further information is available for necessary consideration:

(i) The stock in Shoes Department may be considered as consisting of 75% of Leather
and 25% of other expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% in 2011-12.
(iii) General expenses of the business as a whole amount to ` 8, 50,000.
Question 13
FGH Ltd. has three departments I, J and K. The following information is provided for the
year ended 31.3.2012:
I J K
(`) (`) (`)
Opening stock 5,000 8,000 19,000
Opening reserve for unrealised profit ---- 2,000 3,000
Materials consumed 16,000 20,000 ----
Direct labour 9,000 10,000 ----
Closing stock 5,000 20,000 5,000
Sales ---- ---- 80,000
Area occupied (sq. mtr.) 2,500 1,500 1,000
No. of employees 30 20 10
Stocks of each department are valued at costs to the department concerned. Stocks of
I are transferred to J at cost plus 20% and stocks of J are transferred to K at a gross
328
profit of 20% on sales. Other common expenses are salaries and staff welfare ` 18,000,
rent ` 6,000. Prepare Departmental Trading, Profit and Loss Account for the year ending
31.3.2012.
Question 14
Sona Ltd. has three departments – P, Q and R. From the following particulars given
below, compute:
(i) The departmental results;
(ii) The value of stock as on 31st December, 2014:
Particulars P Q R
Stock as on 01.01.2014 30,000 45,000 15,000
Purchases 1,60,000 1,30,000 60,000
Actual Sales 1,88,000 1,66,000 93,000
Gross Profit on normal sales price 25% 331/3 % 40%
During the year 2014 some items were sold at discount and these discounts were reflected
in the above sales value. The details are given below:
Particulars P Q R
Sales at normal price 15,000 8,000 6,000
Sales at actual price 11,000 6,000 4,000
Question 15
Brahma Limited has three departments and submits the following information for the
year ending on 31st March, 2011:
Particulars A B C Total (`)

Purchases (units) 5,000 10,000 15,000
Purchases (Amount) 8,40,000
Sales (units) 5,200 9,800 15,300
Selling price (` per unit) 40 45 50
Closing Stock (Units) 400 600 700
You are required to prepare departmental trading account of Brahma Limited assuming
that the rate of profit on sales is uniform in each case.
329
Question 16
Department R sells goods to Department S at a profit of 25% on cost and Department T
at 10% profit on cost. Department S sells goods to R and T at a profit of 15% and 20%
on sales respectively. Department T charges 20% and 25% profit on cost to Department
R and S respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised
Manager's commission, but before adjustment of unrealized profit are as under:
`
Department R 54,000
Department S 40,500
Department T 27,000
Stock lying at different departments at the end of the year are as under:
Dept. R Dept. S Dept. T
` ` `
Transfer from Department R - 22,500 16,500
Transfer from Department S 21,000 - 18,000
Transfer from Department T 9,000 7,500 -
Find out the correct departmental profits after charging Manager's commission.
(Nov. 2010)

Question 17
Brahma Limited has three departments and submits the following information for the
year ending on 31st March, 2011.
Particulars A B C Total (`)
Purchases (units) 5,000 10,000 15,000
Purchases (Amount) 8,40,000
Sales (units) 5,200 9,800 15,300
Selling price (` per unit) 40 45 50
Closing Stock (Units) 400 600 700
You are required to prepare departmental trading account of Brahma Limited assuming
330
that the rate of profit on sales is uniform in each case. (May 2011)
Question 18
M/s. AM Enterprise had two departments, cloth and Readymade Clothes. The Readymade
clothes were made by the firm itself out of the cloth supplied by the Cloth Department at
its usual selling price. From the following figures, prepare Department Trading and Profit
and Loss Account for the year ended 31st March, 2011:
Cloth Readymade
Department ` Clothes Department `
Opening Stock on 1st April, 2010 31,50,000 5,32,000
Purchases 2,10,00,000 1,68,000
Sales 2,31,00,000 47,25,000
Transfer to Readymade Clothes 31,50,000 -
Department
Manufacturing Expenses - 6,30,000
Selling Expenses 2,10,000 73,500
Rent & Warehousing 8,40,000 5,60,000
Stock on 31st March, 2011 21,00,000 6,72,000
In addition to the above, the following information is made available for necessary
consideration:
The stock in the Readymade Clothes Department may be considered as consisting of
75% cloth and 25% other expenses. The Cloth Department earned a gross profit at the
rate of 15% in 2009 – 2010. General expenses of the business as a whole amount to
` 10,85,000. (Nov. 2011)
Q. 19.
Department A sells goods to Department B at a profit of 50% on cost and to Department
C at 20% on cost. Department B sells goods to A and C at a profit of 25% and 15%
respectively on sales. Department C charges 30% and 40% profit on cost to Department
A and B respectively.
Stock lying at different departments at the end of the year are as under:
Department A Department B Department C
` ` `
331
Transfer from Department A - 45,000 42,000

Transfer from Department B 40,000 - 72,000
Transfer from Department C 39,000 42,000 -
Calculate the unrealized profit of each department and also total unrealized profit.
(May 2013)
Question 20
State the basis on which the following common expense, the benefit of which is shared
by all the departments is distributed among the departments:
(i) Rent, rates and taxes, insurance of building;
(ii) Selling expenses such as discount, bad debts, selling commission and other such
selling expenses;
(iii) Carriage Inward;
(iv) Depreciation;
(v) Interest on loan;
(vi) Profit or loss on sale of investment;
(vii) Wages;
(viii) Lighting and Heating Expenses (Nov. 2013)
Question 21
Department P sells goods to Department S at a profit of 25% on cost and to Department
Q at a profit of 15% on cost. Department S sells goods to P and Q at a profit of 20% and
30% on sales respectively. Department Q sells goods to P and S at 20% and 10% profit
on cost respectively.
Departmental Managers are entitled to 10% commission on net profit subject to unrealized
Manager's commission, but before adjustment of unrealized profits are as below:
`
Department P 90,000
Department S 60,000
Department Q 45,000
Stock lying at different Departments at the end of the year are as below:
Figures in `
DEPARTMENTS
P S Q
332
Transfer from P - 18,000 14,000

Transfer from S 48,000 - 38,000
Transfer from Q 12,000 8,000 -
Find out correct Departmental Profits after charging Managers' Commission.
Question 22
Mega Ltd. has two departments, A and B. From the following particulars, prepare
departmental Trading A/c and General Profit & Loss Account for the year ended 31st
March, 2014.
Department A Department B
Opening stock as on 01.04.2013 (at cost) 70,000 54,000
Purchases 3,92,000 2,98,000
Wages 54,000 36,000
Sales 5,72,000 4,60,000
Purchased Goods Transferred:
By Department B to A 50,000
By Department A to B 36,000
Finished Goods Transferred:
By Department B to A 1,50,000
By Department A to B 1,75,000
By Department B to A 45,000
By Department A to B 32,000
Closing Stock:
Purchased Goods 24,000 30,000
Finished Goods 1,02,000 62,000

purchase cost and finished goods at departmental market price and that 30% of the
closing finished stock with each department represents finished goods received from the
other department. (Nov. 2014 – Group 2)
Question 23
There is transfer / sale among the three departments as below:
333
Department X sells goods to Department Y at a profit of 25% on cost and to Department

Z at 20% profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised
Managers' commission, but before adjustment of unrealised profit are as under:
`
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Stocks lying at different Departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z

` ` `
Transfer from Department X - 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 -
Find out the correct departmental profits after charging Managers commission.
Question 24
M/s Delta is a Departmental Store having three departments X, Y and Z. The information
regarding three departments for the year ended 31st March, 2018 are given below:
Particulars Dept. X Dept. Y Dept. Z
` ` `
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in sq. ft) 1,500 1,250 1,000
Number of employees in each Department 25 20 15
Electricity consumed by each Department (in units) 300 200 100
334
Amount (`)
Carriage inwards 1,500
Carriage outwards 2,700
Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labour welfare expenses 2,400
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March,
2018 after providing provision for Bad Debts at 5%.
Question 25
Ram, Sham and Mahaan sons of Prabhu Dyal are running Punya Hotel in Chennai. Ram is
heading Room division (A), Sham is heading banquet division (B) and Mahaan is heading
Restaurant division (C). Each of the three brothers would receive 60% of the profits, if
any, of the department of which he was incharge and remaining combined profits would
be shared in 2 : 2 : 1 ratio. The following is the Trading and Profit and Loss Account of
the firm for the year ended March 31, 2018:
(`) (`) (`) (`)
To Opening Stock: By Sales :
Room (A) 25,650 Room (A) 2,70,000
Banquet (B) 18,000 Banquet (B) 1,65,000
Restaurant (C) 19,500 63,150 Restaurant (C) 86,700 5,21,700
To Purchases: By Discount 1,650
Room (A) 2,35,000 received
Banquet (B) 1,56,000 By Closing Stock:
Restaurant (C) 84,200 4,75,200 Room (A) 55,300
Banquet (B) 31,800
Restaurant (C) 42,500 1,29,600
335
To Salaries 34,400
To Royalties 8,000
To Parking fee &
car washing charges 9,600
To Discount allowed 2,500
To Misc. Exp. 7,000
To Depreciation 1,160 62,660
To Net Profit 51,940

Total 6,52,950 6,52,950
Prepare:
(I) Departmental Trading and Profit and Loss Account and
(II) Profit and Loss Appropriation Account after incorporating the following information:
(i) Closing stock of Dept. B includes goods amounting ` 3,500 being transferred from
Dept. A
(ii) Stock value ` 9,300 and other goods of the value of ` 1,500 were transferred at
selling price by Departments A and C respectively to Department B.
(iii) The details of salaries were as follows:

(1) Admin Office 60%, Pantry 40%
(2) Allocate Admin Office in the proportion of 3 : 2 : 1 among the Departments A,
B, C
(3) Distribute Pantry expenses equally among the Department A and B.
(iv) The parking fee is ` 500 per month which is to be divided equally between Departments
A, B & C.
(v) All other expenses are to be allocated in ratio of 2 : 2 : 1.
(vi) Discounts received are to be credited to the three Departments as follows:

A : ` 650; B : ` 600; C : ` 400.
336
(vii) The opening stock of Department B does not include any goods transferred from
other departments and closing stock of Department B does not include any stock
transferred from Department C.
(Nov. 2018 – IPCC Group 2)
Question 26
Axe Limited has four departments A, B, C and D. Departments A sells goods to other
departments at a profit of 25% on cost. Department B sells goods to other department
at a profit of 30% on sales. Department C sells goods to other departments at a profit of
10% on cost. Department D sells goods to other departments at a profit of 15% on sales.
Stock lying at different departments at the year-end was as follows:
Dept. A Dept. B Dept. C Dept. D

` ` ` `
Transfer from Department A - 45,000 50,000 60,000
Transfer from Department B 50,000 - - 75,000
Transfer from Department C 33,000 22,000 - -
Transfer from Department D 40,000 10,000 65,000 -
Departmental managers are entitled to 10% commission on net profit subject to

unrealized profit on departmental sales being eliminated.
Departmental profits after charging manager’s commission, but before adjustment of
unrealized profit are as under:
Amount (`)
Department A 2,25,000
Department B 3,37,500
Department C 1,80,000
Department D 4,50,000
Calculate the correct departmental profits after charging Manager’s commission.
(Nov. 2018 – IPCC Group 1)
Question 27
M/s P have 2 Departments - X and Y. From the following information, prepare departmental
Trading A/c and General Profit & Loss Account for the year ended on 31st March 2018.
337

Department X Department Y
Opening stock as on 01/04/2017 (at cost) 2,45,000 2,43,000
Purchases 13,72,000 13,41,000
Wages 1,89,000 1,62,000
Sales 20,02,000 20,70,000
Purchased Goods Transferred:
By Department Y to X 2,25,000
By Department X to Y 1,26,000
Finished Goods Transferred:
Closing Stock:
Purchased Goods 84,000 1,35,000
Finished Goods 3,57,000 2,79,000
purchase cost and finished goods at departmental market price and 30% of the closing
finished stock with each department represents finished goods received from the: other
department. (May 2018 – Group 2)
Question 28
Give the basis of allocation of the following common expenditure among different
departments:
(i) Insurance of Building
(ii) Discount and bad debts
(iii) Discount received
(iv) Repairs and maintenance of capital assets
(v) Advertisement expenses
(vi) Labour welfare expenses
(vii) PF/ESI contributions
(viii)
Carriage inward (May 2016 – group 2)
338
Question 29
Department A sells goods to Department B at a Profit of 20% on cost and to Department
C at 50% on cost. Department B sells goods to Department A and Department C at a
profit of 15% and 10% on sales respectively. Department C sells goods to Department A
and Department B at a profit of 10% and 5% on cost respectively.
Stock lying at different departments at the end of the year are as follows:
Department A Department B Department C
(`) (`) (`)
Transfer from Department A 1,14,000 60,000
Transfer from Department B 55,000 15,200
Transfer from Department C 52,800 1,11,300
Calculate Department wise unrealised profit on stock.

Question 30
Deepa Ltd. has three departments A, B and C, details of which are given below:
Particulars A (`) B (`) C (`)
Stock as on 1-1-2018 35,000 45,000 20,000
Purchases 1,80,000 1,40,000 75,000
Actual Sales 1,95,000 1,72,000 99,000
Gross Profit on Sales price 18% 25% 35%
During the year 2018, some items were sold at discount and these discounts were
reflected in the above sales value. The details are given below:
Particulars A (`) B (`) C (`)
Sales at normal price 18,000 14,000 4,500
Sales at actual price 14,000 13,000 2,500
Compute:
(1) Departmental Results.
(2) The value of stock as on 31st December, 2018
(10 Marks – Nov 2019 – IPCC – Adv. Accounting)
Question 31
M/s. Bombay Cotton has 2 Departments Y and Z. The following information is provided
for the year ended 31st March, 2019:
339
Particulars Department Y Department Z

(`) (`)
Purchases 1,20,000 3,05,400
Wages 70,000 32,000
Sales 3,10,300 3,72,700
Closing Stock 23,700 40,700
Other Expenses are:
Particulars Amount in (`)

Salaries 30,000
Rent 9,000
Advertisement 24,000
General Expenses 3,000
Depreciation 18,000
Expenses are to be allocated between the Departments in the ratio of their Gross Profit.
Department Y sells goods to Department Z at a profit of 25% on sales. Department Z
sells goods to Department Y at a profit of 28% on cost.
Each Department Manager is entitled to 10% Commission on Net Profit subject to
unrealized profit on departmental sales being eliminated.
Stock Transfer during the year from Department Y to Department Z was ` 40,000 and
from Department Z to Department Y was ` 50,000.
Closing Stock includes transfer from Department Y to Department Z `12,000 and from
Department Z to Department Y ` 21,200. Opening stocks do not include any inter
department transfer.
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March,
2019. (8 Marks – May 2019 – IPCC – Adv. Accounting)
340
11 BRANCH ACCOUNTS
 Head office: Main place of business.
 Branch: Business unit situated away from Head Office.

Branch
Dependent Branch Independent Branch
Debtors system Stock & Debtors Local Branch Foreign Branch

of accounting system of accounting
DEBTORS METHOD
Under this method, Head Office will maintain only one Account that is Branch Account.
Only those transactions shall be recorded which takes place between:
a) Head Office & Branch
b) Branch & Head Office
c) Head Office & 3rd parties in relation to Branch.
In other words, transactions between Branch & 3rd party shall not be recorded. (Eg.
Credit Sales, Bad debts, Sales Return, Discount allowed etc.)
Accounting Entries:
1 For goods sent to Branch Branch A/c Dr.
To Goods sent to Branch A/c
2 For goods returned by branch Goods sent to Branch A/c Dr.
To Branch A/c
341
3 For cash remitted to Branch for exps. Branch A/c Dr.

or Direct payment of Branch expenses To Cash / Bank A/c
4 For remittance made by Branch to Cash / Bank A/c Dr.
H.O. To Branch A/c
5 For Branch assets at the end of the Branch Assets A/c Dr.
year To Branch A/c
6 For Branch liabilities at the end of the Branch A/c Dr.
year To Branch Liabilities A/c
Note: The above two entries shall Be reversed at the beginning of the next
year.
7 For transfer of balance in goods sent Goods sent to Branch A/c Dr.
to Branch A/c To Trading A/c.
8 For branch profit Branch A/c Dr.
To general Profit & Loss A/c
9 For branch loss General Profit & Loss A/c Dr.
To Branch A/c
Whenever goods are sent at Invoice Price, the following additional points should be
considered:-
1) Record goods sent to Branch at Invoice Price on the debit side of Branch A/c
2) Reverse the loading element by passing the following entry:
Goods sent to Branch A/c Dr.
To Branch A/c.
3) Record Closing Stock on Credit side of Branch A/c at Invoice Price.
4) Create appropriate Stock Reserve on Closing Stock by passing the following entry.
Branch A/c Dr.
To Stock Reserves A/c
STOCK AND DEBTORS METHOD
The following accounts shall be prepared normally in the books of Head Office :-
1) Branch Stock Accounts (At Invoice Price)
2) Branch Stock Adjustment Accounts (For Loading Element)
3) Branch Profit & Loss Accounts
4) Branch Debtors Accounts
5) Goods sent to Branch Accounts
342
Accounting Entries :-
1) For Goods sent to Branch
a) Branch Stock A/c Dr.
To Goods sent to branch A/c. (At Invoice Price)
b) Goods sent to Branch A/c Dr.
To Branch Stock Adjustment A/c. (For Loading)
2) For Goods returned by the Branch

Reversal of 1(a) & 1 (b)
3) For Sales made by the branch

a) For cash sales
Cash /bank A/c Dr.
To Branch Stock A/c.
b) For Credit Sales
Branch Debtors A/c Dr.
To Branch Stock A/c.
4) For Sales Returns
Branch Stock A/c Dr.
To Cash / Bank A/c. (For Cash Sales returns)
To branch Debtors A/c. (For Credit Sales returns)
Note : No reversal of loading in case of Sales or Sales Returns.
5) Collection from Debtors

Cash/Bank a/c Dr.
To Branch Debtors a/c
6) For discount allowed and Bad Debts

a) Discount Allowed A/c Dr.
Bad Debts A/c Dr.
To Branch Debtors A/c.
b) Branch Profit & Loss A/c Dr.
To Discount Allowed A/c.
To Bad Debts A/c.
343
7) For expenses incurred and paid by the Branch

a) Branch Exps. A/c. Dr.
To Cash / Bank A/c.
b) Branch Profit & Loss A/c. Dr.
To Branch Exps. A/c.
8) For remittance made by Branch to head Office

Cash / bank A/c Dr.
To Branch Cash / Bank A/c.
9) For remittance made by head Office to branch

Branch Cash / Bank A/c. Dr.
To cash / Bank Ac/.

10) For Stock Reserve on Closing Stock
Branch Stock Adjustment A/c Dr.
To stock Reserve A/c.
Note : In the beginning of next year, the above entry shall be reversed.
11) For balance in goods sent to Branch A/c

Goods sent to Branch A/c. Dr.
To trading A/c
12) For balance in branch Stock Adjustment A/c

Branch Stock Adjustment A/c. Dr.
To branch Profit & Loss A/c.
(This is gross profit realized )
13) For net profit

Branch Profit & Loss A/c. Dr.
To General profit & Loss A/c.
14) For net Loss

General Profit & Loss A/c. Dr.
To Branch profit & Loss A/c.
344
SPECIAL TRANSACTIONS
1) Shortage of Stock / Abnormal Loss

Branch Profit & Loss A/c Dr. (Cost)
Branch Stock Adjustment A/c Dr. (Loading)
To Branch Stock A/c (Invoice Price)
2) Normal Loss
Branch Stock Adjustment A/c. Dr. (Invoice Price)
To Branch Stock A/c. (Invoice Price)
Note : Unless otherwise specified all losses be treated as abnormal loss.
3) For Excess of Selling Price above Invoice Price

Branch Stock A/c Dr.
To Branch Stock Adjustment A/c
4) For decrease in Selling Price below Invoice Price (Markdown)

Branch Stock Adjustment A/c Dr.
To Branch Stock A/c
Note:
If Branch stock account shows difference then
(1)
Balancing Figure on Debit side
Excess of selling Price over Invoice Price
(2) Balancing Figure on Credit Price
Shortage of Goods
Notes:
1. Abnormal Loss: Unexpected Loss
Abnormal loss should not reduce Gross Profit but it should reduce Net Profit.
Hence Abnormal Loss is recorded in trading A/c – Credit side & P&L A/c – Debit
side. Hence Abnormal Loss is a charge on NET PROFIT.
2. Normal Loss: Expected Loss

Normal Loss should reduce Gross Profit. hence it is not recorded in Trading A/c
– Credit side. Hence Normal Loss is a charge on GROSS PROFIT.
Loading of every item will be recorded in Branch Stock Adjustment A/c except the
345
following three items:

1. Cash Sales
2. Credit Sales
3. Sales Return
NOTE:
BRANCH STOCK ACCOUNTS

 Credit Side short
1. Closing stock (By balance c/d);
2. Shortage of stock;
3. Apparent Loss:
(Actual selling price < Normal selling price)
 Debit Side Short

1. Apparent Profit
(Actual Selling Price > Normal Selling price)
2. Surplus of stock
NOTE:
Apparent Profit – 1. Branch stock – Dr.
2. Branch stock adjustment – Cr.
With full amount
INDEPENDENT BRANCH (LOCAL)
When Branch maintains its own books of Accounts & prepares its own Trial Balance at
the end of the year then such type of Branch is called as Independent Branch. Head Office
will also prepare its own Trial Balance at the end of the year. From the point of view of an
outsider, Head Office & Branch are one & the same. Therefore we are required to prepare
consolidated Final Accounts for the entire organization (i.e. Head Office & Branch). Before
we start with consolidation, the following adjustments have to be considered.
I. Reconciliation of Head Office Account & Branch Accounts

Usual transactions like goods sent to Branch and Cash remitted to Head Office shall
take place between Head Office & Branch throughout the year. Such transactions
346
shall be recorded in the books of Head Office through Branch Accounts & in the
books of Branch through Head Office Accounts. If there is difference in Head Office
Accounts & Branch Account then that difference could be because of following two
reasons:-
i) Goods in Transit
ii) Cash in Transit
The above difference should be reconciled by passing a reconciliation entry either in
books of Head Office or in the books of Branch but never in both the books.
Books of H.O. Books of Branch
(i) Goods in Transit
No Entry Goods in Transit A/c Dr.
To Head office A/c
(ii) Cash in transit
Cash in transit A/c Dr. No Entry
To Branch A/c
II. ADJUSTMENT ENTRIES

1. Expenses paid by Head office chargeable to Branch.
Branch A/c Dr. Expense A/c Dr.
To Expense A/c To Head office A/c
2. Expenses paid by branch chargeable to H.O.

Expense A/c Dr. Head Office A/c Dr.
To Branch A/c To Expenses A/c
3. Depreciation of Branch Assets whose accounts is maintained by Head office.

Branch A/c Dr. Depreciation A/c Dr.
To Asset A/c To Head office A/c
III INCORPORATION ENTRIES IN H.O. BOOKS

1. Incorporating Trading A/c – Debit side items [except Gross Profit]
Branch Trading A/c Dr.
To Branch A/c
347
2. Incorporating Trading A/c – Credit side items [except Gross Loss]

Branch A/c Dr.
To Branch Trading A/c
3. Incorporating Branch Gross Profit

Branch Trading A/c Dr.
To Branch P&L A/c
(In case of Gross Loss the above entry will be reversed)
4. Incorporating P&L A/c – Debit side items [except Gross Loss & Net Profit]
Branch P&L A/c Dr.
To Branch A/c
5. Incorporating P&L A/c – Credit side items [except Gross Profit & Net Loss]
Branch A/c Dr.
To Branch P&L A/c
6. Incorporating Branch Net Profit

Branch P&L A/c Dr.
To H.O. P&L A/c
(In case of Net Loss the above entry will be reversed)
NOTE: Instead of passing entries number 1 to 6, a combined entry can be
passed.
Branch A/c Dr.
To H.O. P&L A/c
(For Net Profit)
In case of Net Loss the above entry is reversed
NOTE: Whenever, the details of Trading and P&L are available pass the entries
number 1 to 6
When the details are not known and only the figure of Net profit is given pass
the above entry.
348
7. Incorporating Branch Assets

Branch Assets A/c Dr.
To Branch A/c
8. Incorporating Branch Liabilities

Branch A/c Dr.
To Branch Liabilities A/c
NOTE: If all entries are passed, Branch A/c will tally and details of branch Assets &
Branch Liabilities can be shown in H.O. Balance sheet.
FOREIGN BRANCH
The Accounting at the Foreign Branch would be in terms of foreign currency. The Accounting
at the head office would be in terms of reporting currency i.e. currency in which the
financial statements of the enterprise are being reported. The foreign branch trial balance
has to be converted into reporting currency on the basis as specified under Accounting
Standard 11 (revised). The conversion should be done in the following manner
(1) Integral Foreign Operations:

Particulars Basis
(i) Opening Stock Opening Rate i.e. rate prevailing at the
Commencement of the accounting year
(ii) Closing Stock Closing Rate i.e. rate prevailing at the end of the
accounting year.
(iii) Purchases & Sales Average Rate
(iv) Expenses & Income Average Rate
(v) Fixed Assets / Original Rate (i.e. rate prevailing on date of
Investments purchase)
(vi) Depreciation Original Rate
(vii) Provision for depreciation Original Rate
(viii) Secured / Unsecured Loans Closing Rate
(ix) Goods received from head Equivalent amount at which goods sent to
office branch appears in head office books.
(x) Head Office Equivalent amount at which branch account
appears in head office books.
(xi) All current Assets &
Current Liabilities Closing rate
349
The difference in the converted trial balance represents either an exchange gain or
loss which is reflected in the profit & loss account.
(2) Non Integral Foreign Operations (NFOs):

Here even Fixed Asset , Investments & Depreciation will be converted at closing rate
and the exchange difference is transferred to "Foreign Currency Translation Reserve".
350
Question 1
Modi Sales Ltd. Modi nagar has branch at Delhi. Goods are supplied to branch at a profit
of 20% on sale price. Account are kept at head office from where all expenses are paid.
Petty cash expenses are paid by the branch which is allowed to maintain petty cash. From
the following balance as shown by books. Prepare Branch Account.
`
Balance as on 1st April 2010
Petty cash in hand at Branch 500
Stock in hand at Branch at Invoice price 20,000
Sundry Debtors at Branch 4,000
Sundry Creditors at Branch 1,200
Furniture at Branch 10,000
Rent prepaid (up to 30th June 2010) 400
Transactions for the year ended 31st March, 2011 were follows:
Goods sent to Branch 1,05,000
Cash Sales at Branch 80,000
Credit sales at Branch 45,000
Allowances to Debtors 500
Cash received from Debtors 40,000
Bad debts written off 200
Cash paid by branch to creditors 8,000
Creditors as on 31.3.2011 3,000
Payments made by H.O
Rent for one year (Paid on 1st July 2010)- 2,000
Salaries 3,000
Insurance paid for the year ending 30th June 2011 800
Payment made by Branch Petty Expenses 300
Balance on 31st March, 2011
Stock at cost 30,000
Petty Cash in Hand 700
Write off Depreciation @ 10% p.a on furniture.
351
Question 2
Indian Soap Mills Ltd. has two branches, at Agra and at Kanpur. Goods are invoiced to
branches at cost plus 50%. Branches remit all cash received to the head office and all
expenses are met by the H.O. From the following particulars prepare Branch Accounts to
show the profit earned at the branches:
Particulars Agra ` Kanpur `
Stock on 1st April, 2010 (Invoice Price) 9,300 15,600
Debtors on 1st April, 2010 6,800 8,700
Goods invoiced to Branches (cost) 34,000 36,000
Sales at branches :
Cash Sales 25,010 35,000
Credit Sales 31,000 30,100
Cash collected from Debtors 30,400 29,800
Goods Returned by Debtors 1,200 1,500
Goods Returned by Branch to H.O. 1,500 ----
Goods transferred from Kanpur to Agra 2,100 2,100
Surplus in Stock ---- 300
Shortage in Stock 450 ----
Discount allowed to customers 200 350
Expenses at Branches 5,400 6,700
Question 3
Pawan, of Delhi has a branch at Jaipur. Goods are invoiced to the branch at cost plus
25%.The branch is instructed to deposit the receipts every day in the head office account
with the bank. All the expenses are paid through cheque by the head office except petty
cash expenses which are paid by the Branch.
From the following information, you are required to prepare Branch Account in the books
of Head office:
Particulars Kanpur `
Stock at invoice price on 1.4.2012 1,64,000
Stock at invoice price on 31.3.2013 1,92,000
Debtors as on 1.4.2012 63,400
Debtors as on 31.3.2013 84,300
Furniture & fixtures as on 1.4.2012 46,800
Cash sales 8,02,600
352
Credit sales 7,44,200

Goods invoiced to branch by head office 12,56,000
Expenses paid by head office 2,64,000
Petty expenses paid by the branch 20,900
Furniture acquired by the branch on 1.10.2012 (payment was made by
the branch from cash sales and collection from debtors) 5,000
Depreciation to be provided on branch furniture & fixtures @ 10% p.a. on WDV basis.
Question 4
Widespread Ltd. invoices goods to its branch at cost plus 20%. The branch sells goods for
cash as well as on credit. The branch meets its expenses out of cash collected from its
debtors and cash sales and remits the balance of cash to head office after withholding
` 10,000 necessary for meeting immediate requirements for cash. On 31st March, 2010
the assets at the branch were as follows:
` ('000')
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500
During the accounting year ended 31st March, 2011 the invoice price of goods dispatched
by the head office to the branch amounted to ` 1 crore 32 lakh. Out of the goods received
by it, the branch sent back to head office goods invoiced at ` 72,000. Other transactions
at the branch during the year were as follows:
` ('000')
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842
On 1st January, 2011 the branch purchased new furniture for ` 11 lakh for which
payment was made by head office through a cheque.
On 31st March, 2011 branch expenses amounting to ` 6,000 were outstanding and cash
in hand was again `10,000. Furniture is subject to depreciation @ 16% per annum on
diminishing balances method.
353
Prepare Branch Account in the books of head office for the year ended 31st March, 2011.
Question 5
HLL Ltd. has two Branches, one at Calcutta and the Madras. Goods are invoiced to Branches
at invoice price. Branches remit all cash received to the Head Office and all expenses are
met by Head Office. From the following particular prepare the necessary accounts under
the Stock and Debtors System.
Calcutta Madras
` `
Stock (on 1.4.2010 at invoice price) 93,000 1,56,000
Debtors (on 1.4.2010) 68,000 87,000
Goods invoiced to Branches (at cost price) 3,40,000 3,60,000
Sales at Branches
Cash Sales 2,00,100 3,50,000
Credit Sales 3,10,000 3,01,000
Cash collection from Debtors 3,04,000 2,98,000
Goods returned by Branch (at invoice price) 15,000 ----
Goods returned by Debtors 12,000 15,000
Goods transferred from Madras to Calcutta (cost) 20,000 20,000
Surplus of Stock (at invoice price) ---- 3,000
Shortage of Stock (at invoice price) 4,500 ----
Discount allowed to Debtors 2,000 3,500
Expenses at Branches 54,000 67,000
The goods are invoiced to Calcutta branch at cost plus 25% and Madras branch at cost
plus 50%.
Question 6
MADRAS Ltd. invoices goods to its branch at cost plus 33 & 1/3%. From the following
particulars prepare the Branch Stock Account and the Branch Stock Adjustment Account
as they would appear in the books of the Head Office.
`
Stock at commencement of Branch at invoice price 1,50,000
Stock at close of Branch at invoice price 1,20,000
Goods sent to branch during the year at invoice price (including goods
invoiced at ` 20,000 to branch on 31.3.2011 but not received by
branch before close of the year) 10,00,000
Return of goods to Head Office (invoice price) 50,000
354
Cash Sales at Branch 9,00,000

Credit Sales at Branch 50,000
Invoice value of Goods pilfered 10,000
Normal loss at branch due to wastage & deterioration of Stock (at 15,000
invoice price)
MADRAS LTD. closes its books on 31st March 2011.
Question 7
Webb and Co. is retail organisation with a number of branch shops. All accounts are kept
at the head office and goods sent to branches are recorded at cost plus the expected
mark up of 33 & 1/3%. The accounting system is designed to give the head office as much
control as possible over the branch stocks.
At the Hull branch at 1st April 2010, goods costing ` 1,200 in stock, but some of these,
costing ` 150, had been reduced in selling price to ` 160. The balances of the Hull debtors
accounts totalled ` 920 at the same date.
The following information relates to the Hull branch for the year to 31st March 2011 or
at the end of that year:
`
Goods sent to branch (cost) 18,600
Cash sales (including all the goods marked down at the beginning of the 16,060
year and others costing `1,800 sold for half of the normal selling price)
Cash received from debtors 6,280
Goods returned by branch debtors direct to head Office (Selling Price) 80
Bad debts written off 30
Closing Stock of goods at Invoice price 2,400
Closing total of debtors balances 830
Prepare the relevant accounts for the Hull branch, and calculate the branch profit for the year.
Question 8
Atlantic Paper Products send goods to Bhopal Branch at cost plus 25%. You are given the
following particulars:
`
Opening stock at branch at its cost 5,000
Goods sent to branch at invoice price 20,000
Loss-in-transit at invoice price 2,500
Theft at invoice price 1,000
355
Loss-in-weight (normal) at invoice price 500

Sales 25,500
Expenses 8,000
Closing stock at branch at cost to branch 6,000
Claim received from the insurance company for loss in transit 2,000
You are required to prepare in the Head Office books :
(a) Branch Stock Account
(b) Branch Adjustment Account
(c) Branch Profit & Loss Account
Show your working.
Question 9
Dara Store Ltd., with its head office at Delhi, invoiced goods to its branch at Ghaziabad at
20% less than the list price which is cost plus 100% with instruction that cash sales were
to be made at invoice price and credit sales at catalogue price (i.e. list price).
From the following particulars available from the branch, prepare branch stock account,
branch adjustment account, branch profit and loss account and branch debtors account
for the year ending March 31, 2011. You are also required to verify the gross profit and
net profit so calculated by preparing branch trading account and branch P&L account.
`
Stock on 1st April, 2010 (invoice price) 6,000
Debtors on 1st April, 2010 5,000
Goods received from head office (invoice price) 66,000
Sales:
Cash 23,000
Credit 50,000 73,000
Expenses at branch 8,683
Remittances to head office 60,000
Debtors on March 31, 2011 12,183
Stock on March 31, 2011 8,800
Question 10
Southern Store Ltd. is a retail store operating two departments. The company maintains
a memorandum stock account and memorandum mark up account for each of the
departments. Supplies issued to the departments are debited to memorandum stock
356
account of the department at cost plus the mark up and departmental sales are credited
to this account. The mark up on supplies issued to a department is credited to the mark
up account for the department. When it is necessary to reduce the selling price below the
normal selling price, i.e. cost plus mark up the reduction (mark down) is entered in the
memorandum stock account and in the mark up account. Department Y has a mark of
33&1/3% on cost and Department Z 50% on the cost.
The following information has been extracted from the records of Southern Store Ltd. for
the year ended 31st March, 2011:
Particulars Dept. Y Dept. Z
Stock, 1st April, 2010 at cost 24,000 36,000
Purchases 1,62,000 1,90,000
Sales 2,10,000 2,85,000
(1) The stock of department Y at 1st April, 2010 includes goods on which the selling
price has been marked down by ` 510. These goods were sold in April, 2010 at the
reduced price.
(2) Certain goods purchased in 2010-2011 for ` 2,700 for department Y, were
transferred during the year to department Z, and sold for ` 4,050. Purchase and
sale are recorded in the purchases of department Y and the sales of department Z
respectively, but no entries in respect of the transfer have been made.
(3) Goods purchased in 2010 - 2011 were marked down as follows:
Dept. Y Dept. Z
` `
Cost 8,000 21,000
Mark Down 800 4,100
At the end of the year there were some items in the stock of department Z, which
had been marked down to ` 2,300. With this exception all goods marked down in
2010-2011 were sold during the year at the reduced prices.
(4) During stock taking at 31st March, 2011 goods which had cost ` 240 were found to
be missing in department Y. It was determined that the loss should be regarded as
irrecoverable.
(5) The closing stock in both departments are to be valued at cost for the purpose of the
annual accounts.
You are requested to prepare for each department for the year ended 31st March, 2011.
(a) A Memorandum Stock Account.
(b) A Memorandum Mark - up Account.
(c) A trading Account.
357
Question 11
You are required to prepare the trading and profit and loss accounts and consolidated
balance sheet of Eve Ltd in Calcutta and its branch at Delhi. Give journal entries for
incorporation of Delhi branch accounts in the head office and branch also prepare Branch
A/C in the books of H.O.
Trial Balance on 31-3-2011
Particulars H.O. Branch H.O. Branch
Dr. Dr. Cr. Cr.
Manufacturing Expenses 30,000 10,000 ---- ----
Salaries 30,000 10,000 ---- ----
Wages 1,00,000 40,000 ---- ----
Cash in hand 10,000 2,000 ---- ----
Purchases 1,50,000 80,000 ---- ----
Capital ---- ---- 2,00,000
Goods received from H.O. ---- 15,000 ---- ----
Rent 8,000 4,000 ---- ----
General Expenses 20,000 5,000 ---- ----
Sales ---- ---- 4,50,000 1,50,000
Goods sent to branch ---- ---- 15,000 ----
Purchases returns ---- ---- 5,000 1,000
Opening Stock 50,000 30,000 ---- ----
Discount earned ---- ---- 2,000 1,000
Machinery (H.O.) 1,50,000 ---- ---- ----
Machinery (Branch) 50,000 ---- ---- ----
Furniture (H.O.) 7,000 ---- ---- ----
Furniture (Branch) 3,000 ---- ---- ----
Debtors 40,000 15,000 ---- ----
Creditors ---- ---- 30,000 5,000
H.O. Account ---- ---- ---- 54,000
Branch Account 54,000 ---- ---- ----
7,02,000 2,11,000 7,02,000 2,11,000
Closing stock at head office was ` 40,000 and at branch ` 30,000. Depreciation is to
be provided on machinery @ 20% and furniture @ 15%. Rent outstanding is ` 500 (for
branch).General Expense of Branch includes ` 1,000 paid for H.O.
358
Question 12
The head office of a business and its branch keep their own books and prepare own profit
and loss account. The following are the balance appearing in the two sets of the books
as on 31st March, 2011 after ascertainment of profits.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Capital ---- 1,00,000 ---- ----
Fixed Assets 36,000 ---- 16,000 ----
Stock 34,200 ---- 10,740 ----
Debtors & Creditors 7,820 3,960 4,840 1,920
Cash 10,740 ---- 1,420 ----
Profit & Loss ---- 14,660 ---- 3,060
Branch Account 29,860 ---- ----
Head Office A/c ---- ---- ---- 28,020
1,18,620 1,18,620 33,000 33,000
Set out the Balance Sheet of the business as on 31st March, 2011 after considering
following adjustments.
(a) On 31st March, the branch had sent a cheque for ` 1,000 to the head office, not
received by them nor credited to the branch till next month.
(b) Goods valued at ` 440 had been forwarded by the head office to the branch and
invoiced on 30th March, but were not received by the branch nor dealt with in their
books till next month.
(c) Branch paid salary to H.O. inspector 5,000 debited to salary a/c.
(d) It was agreed that the branch should be charged with ` 300 for administration
service, rendered by the head office during the year.
(f) Stock stolen from the head office meant for the branch and charged to the branch by
the head office but not credited to the head office in the branch books as the branch
manager declined to admit any liability ` 400 (not covered by insurance).
(e) Depreciation of branch assets of which accounts are maintained by the head office
not provided for ` 250.
Incorporate branch Trial balance in the H.O. Books and also pass entries in the
books of the branch.
Question 13
M/s Shah commenced business on 1.4.2012 with Head Office at Mumbai and a Branch at
359
Chennai. Purchases were made exclusively by the Head Office, where the goods were
processed before sale. There was no loss or wastage in processing.
Only the processed goods received from Head Office were handled by the Branch.
The goods were sent to branch at processed cost plus 10%.
All sales, whether by Head Office or by the Branch, were at uniform gross profit of
25% on their respective cost.
Following is the Trial Balance as on 31.3.2013.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Capital ---- 3,10,000 ---- ----
Drawings 55,000 ---- ---- ----
Purchases 19,69,500 ---- ---- ----
Cost of processing 50,500 ---- ---- ----
Sales ---- 12,80,000 ---- 8,20,000
Goods sent to Branch ---- 9,24,000 ---- ----
Administrative expenses 1,39,000 ---- 15,000 ----
Selling expenses 50,000 ---- 6,200 ----
Debtors 3,09,600 ---- 1,13,600 ----
Branch Current account 3,89,800 ---- ---- ----
Creditors ---- 6,01,400 ---- 10,800
Bank Balance 1,52,000 ---- 77,500 ----
Head Office Current account ---- ---- ---- 2,61,500
Goods received from H.O. ---- ---- 8,80,000 ----
31,15,400 31,15,400 10,92,300 10,92,300
Following further information is provided:
(i) Goods sent by Head Office to the Branch in March, 2013 of ` 44,000 were not
received by the Branch till 2.4.2013.
(ii) A remittance of ` 84,300 sent by the Branch to Head Office was also similarly
not received upto 31.3.2013.
(iii) Stock taking at the Branch disclosed a shortage of ` 20,000 (at selling price to
the branch).
(iv) Cost of unprocessed goods at Head Office on 31.3.2013 was ` 1,00,000.
Prepare Trading and Profit and Loss account in columnar form and Balance
Sheet of the business as a whole as at 31.3.2013.
360
Question 14
XY & Co. with Head Office at Calicut and a Branch at Trichur presents you following:
All goods were purchased by Head Office and normally packed immediately but on
31.3.2011, goods costing ` 5,000 remained unpacked.
Only packed goods were sent to the Branch which was charged at selling price less 10%.
Following information is furnished to you as on 31st March, 2011 from the Head Office
and Branch Office books.
Head Office Branch
` `
Capital amount 40,000 ----
Drawing by Proprietor 10,000 ----
Purchases 4,00,000 ----
Packing material bought 6,000 ----
Stock Reserve (1.4.2010) 600 ----
Sales 3,20,000 1,00,000
Despatch of goods to Branch 1,13,400 ----
Profit & Loss Account (Cr.) 24,800 ----
Selling expenses 16,000 800
Clerk's salary, wages etc. 20,000 3,000
Sundry Debtors 28,000 4,200
Current Accounts:
Head Office (Credit balance) ---- 12,000
Branch Office (Debit balance) 19,000 ----
Bank Balance 1,000 1,000
Goods received from Head Office ---- 1,08,000
You are further informed that:

(a) Sales by Head Office were at a uniform gross profit after charging packing materials
of 20% on the fixed selling price.
(b) Sales at branches were at fixed selling price :
(c) Goods invoiced and despatched by Head Office to Branch in March, 2011 for `
5,400 were received in the Branch only on 10th April, 2011.
(d) Stock of packing materials on Hand as on 31 March, 2011 was valued at ` 1,000.
(e) Remittance of `1,600 from the Branch to the Head Office was in transit on 31-
3-2011;
361
(f) ` 2,000 worth of stock at selling price was damaged at the Branches. For valuing
stock, this was reduced by `1,090 below the invoice cost to the branch. It was decided
that the Head Office and the Branch Would share equally the loss occasioned by this
and also the deficit in stock, ascertained on actual stock taking at the Branch of
Goods at selling price of ` 500.
Prepare the Profit and Loss Accounts of the Tiruchur and Calicut Offices and also a
Balance Sheet as at 31-3-2011 of the business.
Question 15
Give Journal Entries in the books of Head Office to rectify or adjust the following:
(i) Goods sent to Branch ` 12,000 stolen during transit. Branch manager refused to
accept any liability.
(ii) Branch paid ` 15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March, 2012, the H.O. dispatched goods to the Branch invoiced at ` 25,000
which was not received by Branch till 31st March, 2012.
(iv) A remittance of ` 10,000 sent by the branch on 30th March, 2012, received by the
Head Office on 1st April, 2012.
(v) Head Office made payment of ` 25,000 for purchase of goods by Branch and wrongly
debited its own purchase account.
Question 16
Give Journal Entries in the books of Branch A to rectify or adjust the following:
(i) Head Office expenses ` 3,500 allocated to the Branch, but not recorded in the Branch
Books.
(ii) Depreciation of branch assets, whose accounts are kept by the Head Office not
provided earlier for ` 1,500.
(iii) Branch paid ` 2,000 as salary to a H.O. Inspector, but the amount paid has been
debited by the Branch to Salaries account.
(iv) H.O. collected ` 10,000 directly from a customer on behalf of the Branch, but no
intimation to this effect has been received by the Branch.
(v) A remittance of ` 15,000 sent by the Branch has not yet been received by the Head Office.
(vi) Branch A incurred advertisement expenses of ` 3,000 on behalf of Branch B.
Question 17
Head office passes adjustment entry at the end of each month to adjust the position
arising out of inter-branch transactions during the month. From the following inter-
362
branch transactions in March 2011, make the entry in the books of Head Office:
(a) Bombay Branch
(1) Received Goods ` 6,000 from Calcutta Branch, ` 4,000 from Patna Branch.
(2) Send Goods to :` 10,000 to Patna, ` 8,000 Calcutta.
(3) Received B/R. : ` 6,000 from Patna
(4) Sent Acceptance : ` 4,000 to Calcutta, ` 2,000 to Patna
(b) Madras Branch (Apart from the above)
(5) Received Goods : `10,000 from Calcutta, ` 4,000 from Bombay.
(6) Cash Sent : ` 4,000 to Calcutta, ` 6,000 to Bombay.
(c) Calcutta Branch (Apart from the above)
(7) Sent Goods to Patna : ` 6,000.
(8) Paid B/P : ` 5,000 of Patna, ` 4,000 cash to Patna.
Question 18
DM Ltd. Delhi has a branch in London. London branch is an integral foreign operation of
DM Ltd. At the end of the year 31st March, 2009, the branch furnishes the following trial
balance in U. K. Pound:
£ £
Particulars
Dr. Cr.
Fixed assets (Acquired on 1st April, 2005) 24,000 ----
Stock as on 1st April, 2008 11,200 ----
Goods from head office 64,000 ----
Expenses 4,800 ----
Debtors 4,800 ----
Creditors ---- 3,200
Cash at Bank 1,200 ----
Head office account ---- 22,800
Purchases 12,000 ----
Sales ----- 96,000
1,22,000 1,22,000
In head office books, the branch account stood as shown below:
London Branch A/c
To Balance b/d 20,10,000 By Bank A/c 52,16,000
To Goods sent to branch 49,26,000 By Balance c/d 17,20,000
69,36,000 69,36,000
363
The following further information are given:

(a) Fixed assets are to be depreciated @ 10% p.a. on straight line basis.
(b) On 31st March, 2009 :
Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchange:
1st April, 2005 - ` 70 to £ 1
1st April, 2008 - ` 76 to £ 1
31st March, 2009 - ` 77 to £ 1
Average - ` 75 to £ 1
You are required to prepare :
(i) Trial balance, incorporating adjustments of outstanding and prepaid expenses,
converting U.K. pound into Indian rupees.
(ii) Trading and Profit and Loss Account for the year ended 31st March, 2009 and the
Balance Sheet as on that date of London Branch as would appear in the books of
Delhi head office of DM Ltd.
Question 19
Omega has a branch at Washington. Its Trial Balance as at 30th September, 2012 is as
follows: (The Branch is non-integral foreign operations)
Dr. Cr.
US $ US $
Plant and Machinery 1,20,000 ----
Furniture and Fixtures 8,000 ----
Stock, Oct. 1, 2011 56,000 ----
Purchases 2,40,000 ----
Sales ---- 4,16,000
Goods from Omega (H.O.) 80,000 ----
Wages 2,000 ----
Carriage inward 1,000 ----
Salaries 6,000 ----
Rent, rates and taxes 2,000 ----
Insurance 1,000 ----
Trade expenses 1,000 ----
Head Office A/c ---- 1,14,000
364
Trade debtors 24,000 ----

Trade creditors ---- 17,000
Cash at bank 5,000 ----
Cash in hand 1,000 ----
5,47,000 5,47,000
The following further information is given:
(1) Wages outstanding – $ 1,000.
(2) Depreciate Plant and Machinery and Furniture and Fixtures @ 10 % p.a.
(3) The Head Office sent goods to Branch for ` 39,40,000.
(4) The Head Office shows an amount of ` 43,00,000 due from Branch.
(5) Stock on 30th September, 2012 – $ 52,000.
(6) There were no in transit items either at the start or at the end of the year.
(7) On September 1, 2010, when the fixed assets were purchased, the rate of exchange
was ` 38 to one $.
On October 1, 2011, the rate was ` 39 to one $.
On September 30, 2012, the rate was ` 41 to one $.
Average rate during the year was ` 40 to one $.
You are asked to prepare:

(a) Trial balance incorporating adjustments given under 1 to 4 above, converting dollars
into rupees.
(b) Trading and Profit and Loss Account for the year ended 30th September, 2012 and
Balance Sheet as on that date depicting the profitability and net position of the
Branch as would appear in India for the purpose of incorporating in the main Balance
Sheet.
365
Question 20
The Washington branch of XYZ Mumbai sent the following trial balance as on 31st
December, 2012:
$ $
Head Office A/c ---- 22,800
Sales ---- 84,000
Debtors and Creditors 4,800 3,400
Machinery 24,000 ----
Cash at Bank 1,200 ----
Stock, 1 January, 2012 11,200 ----
Goods from H.O. 64,000 ----
Expenses 5,000 ----
1,10,200 1,10,200
In the books of head office, the Branch A/c stood as follows:
Washington Branch A/c

To Balance b/d 8,10,000 By Cash 28,76,000
37,36,000 37,36,000
Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice price
plus 25%. Machinery was acquired on 31st January, 2007, when $ 1.00 = ` 40.
Rates of exchange were :
1st January, 2012 $ 1.00 = ` 46
31st December, 2012 $ 1.00 = ` 48
Average $ 1.00 = ` 47
Machinery is depreciated @ 10% and the branch manager is entitled to a commission of

5% on the profits of the branch.
You are required to :
(i) Prepare the Branch Trading and Profit & Loss A/c in dollars.
(ii) Convert the Trial Balance of branch into Indian currency.
(iii) Prepare Branch Trading and Profit and Loss A/c in rupees.
(iv) The Branch A/c in the books of head office after incorporating assets & liabilities.
366
Question 21
Buckingham Bros, Bombay have a branch at Nagpur. They send goods at cost to their
branch at Nagpur. However, direct purchases are also made by the branch for which
payments are made at head office. All the daily collections are transferred from the
branch to the head office.
From the following, prepare Nagpur branch account in the books of head office by Debtors
method:
` `
Opening balance (1-1-2011) Bad Debts 1,000
Imprest Cash 2,000 Discount to Customers 2,000
Sundry Debtors 25,000 Remittances to H.O. (recd. by
Stock: H.O.) 1,65,000
Transferred from H.O. 24,000 Remittances to H.O. (not
Direct Purchases 16,000 recd. by H.O. so far) 5,000
Cash Sales 45,000 Branch Exp. directly paid by
Credit Sales 1,30,000 H.O. 30,000
Direct Purchases 45,000 Closing Balance (31-12-2011)
Returns from Customers 3,000 Stock:
Goods sent to branch from Direct Purchase 10,000
H.O. 60,000 Transfer from H.O. 15,000
Transfer from H.O. for Petty Debtors ?
Cash expenses 4,000 Imprest Cash ?
Petty Cash expenses 4,000
Question 22
Harrison of Chennai has a branch at New Delhi to which goods are sent @ 20% above
cost. The branch makes both cash and credit sales. Branch expenses are met partly from
H.O. and partly by the branch. The statement of expenses incurred by the branch every
month is sent to head office for recording.
Following further details are given for the year ended 31st December, 2011:
`
Cost of goods sent to Branch at cost 2,00,000
Goods received by Branch till 31-12-2011 at invoice price 2,20,000
Credit Sales for the year @ invoice price 1,65,000
367
Cash Sales for the year @ invoice price 59,000

Cash Remitted to head office 2,22,500
Expenses paid by H.O. 12,000
Bad Debts written off 750
Balances as on 1-1-2011 ` 31-12-2011 `

Stock 25,000 (Cost) 28,000 (invoice price)
Debtors 35,750 26,000
Cash in hand 5,000 2,500
Show necessary ledger accounts in the books of the head office and determine the Profit
and Loss of the Branch for the year ended 31st December, 2011.
Question 23
Hindustan Industries Mumbai has a branch in Cochin to which office goods are invoiced
at cost plus 25%. The branch sells both for cash and on credit. Branch Expenses are paid
direct from head office, and the Branch has to remit all cash received into the Head Office
Bank Account.
From the following details, relating to calendar year 2011, prepare the accounts in the
Head Office Ledger and ascertain the Branch Profit. Branch does not maintain any books
of account, but sends weekly returns to the Head Office:
`
Goods received from Head Office at invoice price 6,00,000
Returns to Head Office at invoice price 12,000
Stock at Cochin as on 1st Jan., 2011 60,000
Sales in the year
Cash 2,00,000
Credit 3,60,000
Sundry Debtors at Cochin as on 1st Jan. 2011 72,000
Cash received from Debtors 3,20,000
Discount allowed to Debtors 6,000
Bad debts in the year 4,000
Sales returns at Cochin Branch 8,000
Rent, Rates, Taxes at Branch 18,000
Salaries, Wages, Bonus at Branch 60,000
Office Expenses 6,000
Stock at Branch on 31st Dec. 2011 at invoice price 1,20,000
368
Prepare Branch accounts in books of head office by Stock and debtors method.
Question 24
Show adjustment journal entry in the books of head office at the end of April, 2011
for incorporation of inter-branch transactions assuming that only head office maintains
different branch accounts in its books.
A. Delhi branch:
(1) Received goods from Mumbai – ` 35,000 and ` 15,000 from Kolkata.
(2) Sent goods to Chennai – ` 25,000, Kolkata – ` 20,000.
(3) Bill Receivable received – ` 20,000 from Chennai.
(4) Acceptances sent to Mumbai – ` 25,000, Kolkata – ` 10,000.
B. Mumbai Branch (apart from the above):
(5) Received goods from Kolkata – ` 15,000, Delhi – ` 20,000.
(6) Cash sent to Delhi – ` 15,000, Kolkata – ` 7,000.
C. Chennai Branch (apart from the above):
(7) Received goods from Kolkata – ` 30,000.
(8) Acceptances and Cash sent to Kolkata – ` 20,000 and ` 10,000 respectively.
D. Kolkata Branch (apart from the above):
(9) Sent goods to Chennai – ` 35,000.
(10) Paid cash to Chennai – ` 15,000.
(11) Acceptances sent to Chennai – ` 15,000.
Question 25
S & M Ltd., Bombay, have a branch in Sydney, Australia. Sydney branch is an integral
foreign operation of S & M Ltd.
At the end of 31st March, 2012, the following ledger balances have been extracted from
the books of the Bombay Office and the Sydney Office:
Bombay Sydney
(` thousand) (Australian dollars in
thousands)
Debit Credit Debit Credit
Share Capital ---- 2,000 ---- ----
Land 500 ---- ---- ----
Buildings (Cost) 1,000 ---- ---- ----
Buildings Dep. Reserve ---- 200 ----
Plant & Machinery (Cost) 2,500 ---- 200 ----
369
Plant & Machinery Dep. Reserve ---- 600 ---- 130

Debtors / Creditors 280 200 60 30
Stock (1.4.2011) 100 ---- 20 ----
Branch Stock Reserve ---- 4 ----
Cash & Bank Balances 10 ---- 10 ----
Purchases / Sales 240 520 20 123
Goods sent to Branch ---- 100 5 ----
Managing Director’s salary 30 ---- ---- ----
Wages & Salaries 75 ---- 45 ----
Rent ---- ---- 12 ----
Office Expenses 25 ---- 18 ----
Commission Receipts ---- 256 ---- 100
Branch / H.O. Current A/c 120 ---- ---- 7
4,880 4,880 390 390
The following information is also available:
(1) Stock as at 31.3.2012:
Bombay ` 1, 50,000
Sydney A $ 3,125
You are required to convert the Sydney Branch Trial Balance into rupees;
(use the following rates of exchange :
Opening rate A $ = ` 20
Closing rate A $ = ` 24
Average rate A $ = ` 22
For Fixed Assets A $ = ` 18).
Question 26
Following is the information of the Jammu branch of Best New Delhi for the year ending
31st March, 2012 from the following:
(1) Goods are invoiced to the branch at cost plus 20%.
(2) The sale price is cost plus 50%.
(3) Other information:
`
Stock as on 01.04.2011 (invoice price) 2, 20,000
Goods sent during the year (invoice price) 11, 00,000
Sales during the year 12, 00,000
Expenses incurred at the branch 45,000
370
Ascertain
(i) The profit earned by the branch during the year.
(ii) Branch stock reserve in respect of unrealized profit.
Question 27
The Bombay Traders invoiced goods to its Delhi branch at cost. Head Office paid all the
branch expenses from its bank account, except petty cash expenses which were met by
the Branch. All the cash collected by the branch was banked on the same day to the
credit of the Head Office. The following is a summary of the transactions entered into at
the branch during the year ended December 31, 2011.
` `
Balances as on 1.1.2011: Bad Debts 600
Stock 7,000 Goods returned by
Debtor 12,600 customers 500
Petty Cash, 200 Salaries & Wages 6,200
Goods sent from H.O. 26,000 Rent & Rates 1,200
Goods returned to H.O. 1,000 Sundry Expenses 800
Cash Sales 17,500 Cash received from Sundry
Credit Sales 28,400 Debtors 28,500
Allowances to customers 200 Balances as on 31.12.2011:
Discount to customers 1,400 Stock 6,500
Debtors 9,800
Petty Cash 100
Prepare: (a) Branch Account (Debtors Method), (b) Branch Stock Account, Branch Profit &
Loss Account, Branch Debtors and Branch Expenses Account by adopting the Stock and
Debtors Method and (c) Branch Trading and Profit & Loss Account to prove the results as
disclosed by the Branch Account.
371
Question 28
Ram Limited of Chennai has a branch at Nagpur to which office, goods invoiced at cost
plus 25%. The branch makes sales both for cash and on credit. Branch expenses are paid
direct from-Head Office and the branch has to remit all cash received into the Head
Office bank Account at Nagpur.
From the following details, relating to the year 2009, prepare the accounts in Head Office
Ledger and ascertain Branch Profit. Branch does not maintain any books of accounts, but
sends weekly returns to Head Office:
`
Goods received from Head office at invoice price 1,20,000
Returns of Head Office at invoice price 2,400
Stock at Nagpur Branch as on 1.1.2009 at invoice price 12,000
Sales during the year – Cash 40,000
Credit 72,000
Debtors at Nagpur Branch as on 1.1.2009 14,400
Cash received from Debtors 64,000
Discounts allowed to Debtors 1,200
Bad Debts during the year 800
Sales Returns at Nagpur Branch 1,600
Salaries and Wages at Branch 12,000
Rent, Rates and Taxes at Branch 3,600
Office expenses at Nagpur Branch 1,200
Stock at Branch on 31.12.2009 at invoice price 24,000
Question 29
Following is the information of the Jammu branch of Best Ltd., New Delhi for the year
ending 31st March 2010 from the following:
(2) The sale price is cost plus 50%.
(3) Other information’s:
Stock as on 01-04-2009 2,20,000
Goods sent during the year 11,00,000
Sales during the year 12,00,000
372
Ascertain (i) the profit earned by the branch during the year (ii) branch stock reserve in
respect of unrealized profit. (Nov. 2010)
Question 30
XYZ Company is having its Branch at Kolkata. Goods are invoiced to the branch at 20%
profit on sale. Brunch has been instructed to send all cash daily to head office. All
expenses are paid by head office except petty expenses which are met by the Branch
Manager. From the following particulars prepare branch account in the books of Head
Office. (May 2011)
` `
Stock on 1st April 2010 (@ IP) 30,000 Discount allowed to debtor 160
Sundry Debtors on 1st April, Expenses paid by head Office:
2010 18,000 Rent 1,800
Cash in hand as on 1st April, Salary 3,200
2010 800 Stationery & Printing 800
Office furniture on 1st April, Petty exp. Paid by the Branch 600
2010. 3,000 Depreciation to be provided
Goods invoiced from the on branch furniture at 10% pa
head office (@ IP) 1,60,000 Stock on 31st March, 2011
Goods return to Head Office 2,000 (@ IP) 28,000
Goods return by debtors 960
Cash Sales 1,00,000
Credit sales 60,000
Question 31
Global Limited has a branch which closes its books of account every year on 31st March.
This is an independent branch which maintains comprehensive books of account for
recording their transaction.
You are required to show journal entries in the books of branch on 31st March. 2011 to
rectify or adjust the following
(i) Head Office allocates ` 1,35,000 to the branch as head office expense which have
not yet been recorded by branch
(ii) Depreciation of branch fixed assets, whose accounts arc kept by head office in its
books, not yet recorded in the branch books, ` 1,15,000.
373
(iii) Branch paid ` 1,40,000 as salary to an official from head office on visit to branch
and debited the amount to its Salaries Account.
(iv) Head Office collected ` 1,30,000 directly from a branch customer on behalf of the
branch, but no intimation was received earlier by the branch. Now the branch learns
about it,
(v) It is learnt that a remittance of ` 1,50,000 sent by the branch has not been received
by head office till date. (Nov. 2011)
Question 32
An Indian Company Moon Star Limited has a branch at Verginia (USA). The Branch is a
non-integral foreign operation of the Indian Company. The trial balance of the Branch as
at 31st March, 2012 is as follows:
US $
Dr. Cr.
Office equipment 48,000
Furniture and Fixtures 3,200
Stock (April 1, 2011) 22,400
Purchases 96,000
Sales - 1,66,400
Goods sent from H.O. 32,000
Salaries 3,200
Carriage inward 400
Rent, Rates &. Taxes 800
Insurance 400
Trade Expenses 400
Head Office Account - 45,600
Sundry Debtors 9,600
Sundry Creditors - 6,800
Cash at Bank 2,000
Cash in Hand 400
Total 2,18,800 2,18,800
The following further information’s are given:
(1) Salaries outstanding $ 400.
(2) Depreciate office equipment and Furniture & Fixtures @ 10% p.a. at written down
value.
(3) The Head Office sent goods to Branch for ` 15,80,000.
374
(4) The Head Office shown an amount of ` 20,50,000 due from Branch
(5) Stock on 31st March, 2012 - $ 21,500.
(6) There were no transit items either at the start or at the end of the year.
(7) On April 1, 2010 when the fixed assets were purchased the rate of exchange was `
43 to one $. On April 1, 2011, the rate was ` 47 per $. On March 31, 2012, the rate
was ` 50 per $. Average Rate during the year was ` 45 to one $.
Prepare:
(a) Trial balance incorporating adjustments given converting dollars into rupees
(b) Trading, Profit and Loss Account for the year ended 31st March, 2012 and Balance
Sheet as on date depiciting the profitability and net position of the Branch as would
appear in the nooks of Indian Company for the purpose of incorporating in the main
Balance Sheet. (May 2012)
Question 33
Give Journal Entries in the books of Head Office to rectify or adjust the following:
(i) Goods sent to Branch ` 12,000 stolen during transit. Branch manager refused to
accept liability.
(ii) Branch paid ` 15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March. 2012, the H.O. dispatched goods to the Branch invoiced at ` 25,000
which was not received by Branch till 31st March. 2012.
(iv) A remittance of ` 10,000 sent by the branch on 30th March, 2012 received by the
Head Office on 1st April. 2012
(v) Head Office made payment of ` 25,000 for purchase of goods by Branch and wrongly
debited its own purchase account. (Nov. 2012)
Question 34
ABCD Ltd., Delhi has a branch in New York, USA, which is an integral foreign operation of
the company. At the end of 31st March, 2013, the following ledger balances have been
extracted from the books of the Delhi office and the New York Branch:
Delhi New York
(` in thousand) ($ in thousand)
Dr. Cr. Dr. Cr.
Share Capital 1,250
Reserves and Surplus 940
Land 475
Building (cost) 1,000
375
Buildings Depreciation Reserve 200

Plant & Machinery (cost) 2,000 100
Plant & Machinery Depreciation Reserve 500 20
Trade receivables/payables 500 270 60 20
Stock (01-04-2012) 250 25
Branch Stock Reserve 65
Cash & Bank Balances 125 4
Purchases/Sales 275 600 25 125
Goods sent to Branch 1,500 30
Managing Director's salary 50
Wages & Salaries 100 18
Rent 6
Office Expenses 25 12
Commission receipts 275 100
Branch/H.O. Current A/c 800 15
Total 5,600 5,600 280 280
(1) Stock as at 31-03-2013
Delhi - ` 12,00,000
New York - $ 10 (all stock received from Delhi)
(2) Head Office always sent goods to the Branch at cost plus 25%.
(3) Provision is to be made for doubtful debts at 5%.
(4) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at
20% on written down values.
You are required:
(a) To convert the Branch Trial Balance into rupees, using the following rates of exchange:
Opening rate 1 $ = ` 50
Closing rate 1 $ = ` 55
Average rate 1 $ = ` 52
For fixed assets 1 $ = ` 45
(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March, 2013,
showing to the extent possible, Head Office results and Branch results separately.
(May 2013)
376
Question 35
Pass necessary Journal entries in the books of an independent Branch of a Company,
wherever required, to rectify or adjust the following:
(i) Income of ` 2,800 allocated to the Branch by Head Office but not recorded in the
Branch books.
(ii) Provision for doubtful debts, whose accounts are kept by the Head Office not provided
earlier for ` 1,000.
(iii) Branch paid ` 3,000 as salary to a Head Office Manager, but the amount paid has
been debited by the Branch to Salaries Account.
(iv) Branch incurred travelling expenses of ` 5,000 on behalf of other Branches, but not
recorded in the books of Branch.
(v) A remittance of ` 1,50,000 sent by the Branch has not received by Head Office on the
date of reconciliation of Accounts.
(vi) Head Office allocates ` 75,000 to the Blanch as Head Office expenses, which has not
yet been recorded by the Branch.
(vii) Head Office collected ` 30,000 directly from a Branch Customer. The intimation of
the fact has been received by the Branch only now.
(viii) Goods dispatched by the Head office amounting to ` 10,000, but not received by the
Branch till date of reconciliation. The Goods have been received subsequently.
Question 36
LMN is having branch at Mumbai. Goods are invoiced to the branch at 25% profit on sale.
Branch has been instructed to send all cash daily to head office. All expenses are paid
by head office except petty expenses, which are met by the Branch. From the following
particulars, prepare branch account in the books of head office:
Stock as on 1st April, 2013 Cash sales 1,20,000
(Invoice Price) 40,000 Credit sales 70,000
Sundry Debtors as on 1st Discount allowed to debtors 300
April, 2013 25,000 Expenses paid by head office:
Cash in hand as on 1st April, Salary 4,000
2013 1,000 Staff Welfare 750
Office furniture as on 1st Telephone Expenses 1,200
April, 2013 4,000 Other Misc. Expenses paid by
Goods invoiced from the branch 700
377
head office (invoice price) 1,80,000 Stock as on 31st March, 2014

Goods return to head office 6,000 (at invoice price) 35,000
Goods return by debtors 1,250 Depreciation to be provided
Cash received from Debtors 65,000 on branch furniture 10%p.a.
(Nov. 2014 – Group 2)
Question 37
M/s. Sandeep, having Head Office at Delhi has a Branch at Kolkata. The Head Office does
wholesale trade only at cost plus 80%. The Goods are sent to Branch at the wholesale
price viz. cost plus 80%. The Branch at Kolkata wholly engaged in retail trade and the
goods are sold at cost to Head Office plus 100%.
Following details are furnished for the year ended 31st March, 2014 :
Head Office (`) Kolkata
Branch(`)
Opening Stock (As on 01.04.2013) 1,25,000 -
Purchases 21,50,000 -
Goods sent to Branch (cost to H.O. plus 80%) 7,38,000 -
Sales 23,79,600 7,30,000
Office Expenses 50,000 4,500
Selling Expenses 32,000 3,300
Staff Salary 45,000 8,000
You are required to prepare Trading and Profit & Loss Account of the Head Office and
Branch for the Year ended 31st March, 2014. (May 2015 – Group 2)
Question 38
Raju Industries, Kolkata has a branch in Delhi to which office goods are invoiced at cost
plus 25%. The branch sells both for cash and on credit. Branch expenses are paid direct
from head office, and branch has to remit all cash received to the Head office Bank
Account.
From the following details, relating to calendar year 20l4, prepare the accounts in the
of account, but sends weekly returns to the Head Office.
Goods received from Head Office at Invoice Price 6,00,000
Returns to Head Office at Invoice Price 12,000
Stock at Delhi as on 1st Jan., 2014 60,000
378
Sales during the year - Cash 1,80,000

- Credit 3,80,000
Sundry Debtors at Delhi as on 1st Jan., 2014 72,000
Discount allowed to debtors 8,000
Bad Debts in the year 6,000
Sales returns at Delhi Branch 6,000
Rent, Rates, Taxes at Branch 16,000
Salaries, Wages, Bonus at Branch 62,000
Stock at Branch on 31st December, 2014 1,20,000
(Nov. 2015 – Group 2)
Question 39
Pass necessary Journal Entries (with narration) in the books of branch to rectify or adjust
the following:
(i) Branch Paid ` 24,000 as salary to HO Supervisor and the amount was debited to
Salaries Account by the branch.
(ii) Head Office Expenses allocated to branch were ` 22,500, but these expenditure were
not recorded by the branch.
(iii) HO collected ` 50,000 directly from the customer on branch's behalf.
(iv) Branch has sent remittance of ` 1,20,000 but the same has not yet been received by
HO.
Question 40
M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India).
Bangalore branch is an integral foreign operation of M/s ABC & Co.
Bangalore branch furnishes you with its trial balance as on 31st March, 2015 and the
additional information given thereafter:
Dr. Cr.
(Rupee in thousands)
Stock on 1st April, 2014 300 -
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
379
Bills of Exchange 120 240

Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Computers 240 -
Bank Balance 420 -
New York Office A/c - 1,620
3,360 3,360
(a) Computers were acquired from a remittance of US $ 6,000 received from New York
head office and paid to the suppliers.
Depreciate computers at 60% for the year.
(b) Unsold stock of Bangalore branch was worth ` 4,20,000 on 31st March, 2015.
(c) The rates of exchange may be taken as follows:
- On 01.04.2014 @ ` 55 per US $
- On 31.03.2015 @ ` 60 per US $
- Average exchange rate for the year @ ` 58 per US $
- Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st
March, 2015 and the balance sheet as on that date of Bangalore branch as would appear
in the books of New York head office of ABC & Co. You are informed that Bangalore branch
account showed a debit balance of US $ 29845.35 on 31.3.2015 in New York books and
there were no items pending reconciliation.
Question 41
Mr. Chena Swami of Chennai trades in Refined Oil and Ghee. It has a branch at Salem. He
despatches 30 tins of Refined Oil @ ` 1500 per tin and 20 tins of Ghee @ ` 5,000 per tin
on 1st of every month. The Branch has incurred expenditure of ` 45,890 which is met out
of its collections; this is in addition to expenditure directly paid by Head Office.
Following are the other details :
Chennai H.O. Salem B.O.
Purchases;
Refined Oil 27,50,000
Ghee 48,28,000
380
Direct Expenses 6,35,800

Expenses paid by H.O. 76,800
Sales:
Refined Oil 24,10,000 5,95,000
Ghee 38,40,500 14,50,000
Collection during the year (including Cash Sales) 20,15,000
Remittance by Branch to Head Office 19,50,000
Chennai H.O.
1/4/2015 31/3/2016
Balance as on
Stock:
Refined Oil 44,000 8,90,000
Ghee 10,65,000 15,70,000
Building 5,10,800 7,14,780
Furniture & Fixtures 88,600 79,740
Salem Branch Office

1/4/2015 31/3/2016
Balance as on
Stock:
Refined Oil 22,500 19,500
Ghee 40,000 90,000
Sundry Debtors 1,80,000 ?
Cash in Hand 25,690 ?
Furniture & Fixtures 23,800 21,420
(i) Addition to Building on 01-04-2015 ` 2,41,600 by H.O.
(ii) Rate of depreciation: Furniture & Fixtures @ 10% and Building 5% (already adjusted
to the above figure)
(iii) The Branch Manager is entitled to 10% commission on overall organisational profit
after charging such commission.
(iv) The General Manager is entitled to a salary of ` 20,000 per month.
(v) General expenses incurred by Head Office is ` 1,86,000.
You are requested to prepare Branch Account in the Head Office books and also
prepare Chena Swami's Trading and Profit & Loss Account (excluding branch
transactions) for the year ended 31st March, 2016. (Nov. 2016 – Group 2)
381
Question 42
Show Adjustment Journal Entry along with working notes in the books of head office at
the end of April, 2017 for incorporation of inter branch transactions assuming that only
head office maintains different branch account in its books :
(A) Delhi Branch:
(i) Received goods from Mumbai ` 1,40,000 and ` 60,000 from Kolkata.
(ii) Sent goods to Chennai ` 1,00,000, Kolkata ` 80,000
(iii) Bill receivable received ` 80,000 from Chennai
(iv) Acceptances sent to Mumbai ` 1,00,000, Kolkata ` 40,000
(B) Mumbai Branch (Apart from the above):
(i) Received goods from Kolkata ` 60,000, Delhi ` 80,000
(ii) Cash sent to Delhi ` 60,000, Kolkata ` 28,000
(C) Chennai Branch (Apart from the above):
(i) Received goods from Kolkata ` 1,20,000
(ii) Acceptances and cash sent to Kolkata ` 80,000 and ` 40,000 respectively.
(D) Kolkata Branch (Apart from the above)
(i) Sent goods to Chennai ` 1,40,000
(ii) Paid cash to Chennai ` 60,000
(iii) Acceptances sent to Chennai ` 60,000
Question 43
M & S Co. of Lucknow has a branch in Canberra, Australia. At the end of 31st March 2017,
the following ledger balances have been extracted from the books of the Lucknow office
and the Canberra. (Nov 2017 – Group 2)
(` in thousand) (Aust. Dollar in
thousand)
Dr. Cr. Dr. Cr.
Capital - 2,000 - -
Reserves & Surplus - 1,000 - -
Land 500 - - -
Buildings (Cost) 1,000 - - -
Buildings Dep. Reserves - 200 - -
Plant and Machinery (Cost) 2,500 - 200 -
382
Plant and Machinery Dep.

Reserves - 600 - 130
Debtors/Creditors 280 200 60 30
Stock as on 1/4/2016 100 - 20 -
Branch Stock Reserve - 4 - -
Cash & Bank Balances 10 - 10 -
Purchases/Sales 240 520 20 123
Goods sent to Branch - 100 5 -
Managing Partner's Salary 30 - - -
Wages and Salary 75 - 45 -
Rent - - 12 -
Office Expenses 25 - 18 -
Commission Receipts - 256 - 100
Branch/HO Current Account 120 - - 7
Total 4,880 4,880 390 390
(i) Stock as at 31st March 2017
Lucknow ` 1,50,000
Canberra A $3125 (all stock are out of purchases made at Abroad)
(ii) Head Office always sent goods to the Branch at cost plus 25%
(iii) Provision is to be made for doubtful debts at 5%
(iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at
20% on written down value.
(1) Convert the Branch Trial Balance into rupees by using the following exchange rates:
Opening rate 1 A$ = ` 50
Closing rate 1 A$ = ` 53
Average rate 1 A$ = ` 51.00
For Fixed Assets 1 A$ = ` 46.00
(2) Prepare Trading and Profit and Loss Account for the year ended 31st March 2017
showing to the extent possible H.O. results and Branch results separately.
Question 44
Ayan Ltd. invoices goods to its branch at cost plus 3 & 1/3%. From the following particulars
prepare Branch Stock Account, Branch Stock Adjustment Account and Branch Profit and
Loss Account as they would appear in the books of head office.
383
`
Stock at commencement at Branch at invoice Price 3,60,000
Stock at close at Branch at Invoice Price 2,88,000
Goods sent to Branch during the year at invoice price 24,00,000
(Including goods invoiced at ` 48,000 to Branch on 31.03.2018 but
not received by Branch before close of the year).
Return of goods to head office (invoice Price) 1,20,000
Credit Sales at Branch 1,20,000
Invoice value of goods pilfered 24,000
Normal loss at Branch due to wastage and deterioration of stock (at 36,000
invoice price)
Cash Sales at Branch 21,60,000
Ayan closes its books on 31st March, 2018. (May 2018 – Group 1 – CA Inter)
Question 45
M/s Marena Limited, Delhi has a branch at Bangalore to which office goods are invoiced
at cost plus 25%. The branch sells both for cash and on credit. Branch Expenses are paid
direct from head office and the Branch has to remit all cash received into the Head Office
Bank Account.
From the following details, relating to calendar year 2017, prepare the accounts in the
of account, but sends weekly returns to the Head Office.
`
Goods received from Head Office at invoice price 45,00,000
Returns to Heads Office at invoice price 90,000
Stock at Bangalore as on 1st January, 2017 4,50,000
Sales during the year – Cash 15,00,000
Credit 27,00,000
Sundry Debtors at Bangalore as on 1st January, 2017 5,40,000
Bad Debts in the year 30,000
Sales returns at Bangalore Branch 60,000
Rent, Rates and Taxes at Branch 1,35,000
Salaries, Wages and Bonus at Branch 4,50,000
Stock at Branch on 31st December, 2017 at invoice price 9,00,000
(May 2018 – Group 2 – IPCC)
384
Question 46
From the following details of Western Branch Office of M/s. XYZ Corp. for the year ending
31st March, 2018, ascertain branch stock reserve in respect of unrealized profit in opening
stock and closing stock:
(i) Goods are sent to the branch at invoice price and branch also maintains stock at the
same price.
(ii) Sale price is cost plus 40%.
(iii) Invoice price is cost plus 15%.
(iv) Other information from accounts of branch:
`
Opening Stock as on 01/04/2017 3,45,000
Goods sent during the year by HO to BO 16,10,000
Sales during the year 21,00,000
Question 47
Martis Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost, plus a fixed percentage (mark up) to
give the normal selling price. The mark-up is credited to a memorandum departmental
'Mark-up account', any reduction in selling prices (mark-down) will require adjustment in
the stock account and in mark-up account. The mark up for Department A for the last
three years has been 25%. Figures relevant to Department A for the year ended 31st
March, 2013 were as follows:
Opening stock as on lst April, 2012, at cost ` 65,000
Purchase at cost ` 2,00,000
Sales ` 3,00,000
It is further ascertained that:
(1) Shortage of stock found in the year ending 31.03.2013, costing to ` 1,000 were
written off.
(2) Opening stock on 01.04.12 including goods costing ` 6,000 had been sold during the
year and had been marked down in the selling price by ` 600. The remaining stock
had been sold during the year.
(3) Goods purchased during the year were marked down by ` 1,200 from a cost of
` 15,000. Marked-down stock costing ` 5,000 remained unsold on 31.03.13.
(4) The departmental closing stock is to be valued at cost subject to adjustment for
mark-up and mark-down.
385
You are required to prepare:

(i) A Departmental Trading Account for Department A for the year ended 31st March,
2013 in the books of Head Office.
(ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year.
(Nov. 2018 – Group 2 – IPCC)
Question 48
M/s. Shyam Udyog, a retail store, has two departments. Department X and Department
Y for each of which stock account and memorandum 'mark-up' account are kept. All
the goods supplied to each department are debited to the stock account at cost plus
a ‘mark-up’ which together make up the selling price of the goods and in the account
the sale proceeds of the goods are credited. The amount of 'mark-up' is credited to the
Departmental Mark-up Account If the selling price of any goods is reduced below its
normal selling price, the reduction 'marked down' is adjusted both in the Stock Account
and the Departmental Mark-up Account. The rate of 'Mark-up' for X Department is 33
1/3 % of the cost and for Y Department it is 50% of the cost.
The following figures have been taken from the books for the year ended March 2016;
Dept. X Dept. Y
` `
Stock as on April 1st at cost 3,15,000 5,58,000
Purchases 22,77,000 28,02,000
Sales 28,68,000 37,50,000
(1) The stock of Department X on April 1, 2015 included goods the Selling price of which
had been marked down by ` 37,800. These goods were sold during the year at the
reduced prices.
(2) Certain stock of the value of ` 2,07,000 purchased from the Department X was later
in the year transferred to the Department Y and sold for ` 3,10,500. As a result
though cost of the goods is included in the Department X the sale proceeds have
been credited to the Department Y.
(3) During the year 2015-16 to promote the goods, they were marked down as follows:
Cost Marked down
` `
Department X 1,68,000 10,800
Department Y 3,00,000 60,000
All the goods marked down, were sold except of Department Y of the value of
386
` 1,50,000 marked down by ` 30.000.

(4) At the time of stock taking on 31st March. 2016, it was discovered that cloth of
Department X of the cost of ` 11,700 was missing and it was decided that the
amount be written off.
You are required to prepare for both the departments for the year ended 31st March,
2016:
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark-up Account. (Nov. 2016 - Group 2)
Question 49
M/s Rani & Co. has head office at Singapore and branch at Delhi (India). Delhi branch is
an integral foreign operation of M/s Rani & Co. Delhi branch furnishes you with its Trial
Balance as on 31st March, 2019 and the additional information thereafter:
Dr. Cr.
(Rupee in thousands)
Stock on 1st April, 2018 600 -
Purchases and Sales 1,600 2,400
Sundry Debtors and Creditors 800 600
Bills of Exchange 240 480
Wages 1,120 -
Rent, rates and taxes 720 -
Sundry Expenses 320 -
Computers 600 -
Bank Balance 520 -
Singapore Office A/c - 3,040
Total 6,520 6,520
(a) Computers were acquired from a remittance of Singapore dollar 12,000 received
from Singapore Head Office and paid to the suppliers. Depreciate Computers at the
rate of 40% for the year.
(b) Closing Stock of Delhi branch was ` 15,60,000 on 31st March, 2019.
(c) The Rates of Exchange may be taken as follows :
(i) on 1.4.2018 @ ` 50 per Singapore Dollar
(ii) on 31.3.2019 @ ` 52 per Singapore Dollar
(iii) Average Exchange Rate for the year @ ` 51 per Singapore Dollar.
(iv) Conversion in Singapore Dollar shall be made upto two decimal accuracy.
387
(d) Delhi Branch Account showed a debit balance of Singapore Dollar 59,897.43 on
31.3.2019 in the Head office books and there were no items pending for reconciliation.
In the books of Head office you are required to prepare:
(1) Revenue statement for the year ended 31st March, 2019 (in Singapore Dollar)
(2) Balance Sheet as on that date. (In Singapore Dollar)
Question 50
Karan Enterprises having its Head Office in Mangalore, Karnataka has a branch in
Greenville, USA. Following is the trial balance of Branch as at 31 -3-2019:
Amount ($) Amount ($)
Particulars
Dr. Cr.
Fixed assets 8,000
Opening inventory 800
Cash 700
Goods received from Head Office 2,800
Sales 24,050
Purchases 11,800
Expenses 1,800
Remittance to head office 2,450
Head office account _ 4,300
28,350 28,350
(i) Fixed assets were purchased on 1st April, 2015.
(ii) Depreciation at 10% p.a. is to be charged on fixed assets on straight line method.
(iii) Closing inventory at branch is $ 700 as on 31-3-2019.
(iv) Goods received from Head Office (HO) were recorded at ` 1,85,500 in HO books.
(v) Remittances to HO were recorded at ` 1,62,000 in HO books.
(vi) HO account is recorded in HO books at ` 2,84,500.
(vii) Exchange rates of US Dollar at different dates can be taken as :
1-4-2015 ` 63
1-4-2018 ` 65 and
31-3-2019 ` 67
Prepare the trial balance after been converted into Indian rupees in accordance with AS-
11. (5 Marks – Nov 2019 – Inter)
388
Question 51
ABC Ltd. has several departments. Goods supplied to each department are debited to
a Memorandum Departmental Stock Account at cost plus a fixed percentage (mark-up)
to give the normal selling price. The amount of mark-up is credited to a Memorandum
Departmental Markup account. If the selling price of goods is reduced below its normal
selling prices, the reduction (mark-down) will require adjustment both in the stock account
and the mark-up account. The mark-up for department X for the last three years has
been 20%. Figures relevant to department X for the year ended 31 st March, 2019 were
as follows:
Stock as on 1st April, 2018, at cost ` 1,50,000
Purchases at cost ` 4,30,000
Sales ` 6,50,000
It is further ascertained that:
(1) Shortage of stock found in the year ending 31.3.2019, costing ` 4,000 were written
off.
(2) Opening stock on 1.4.2018 including goods costing ` 12,000 had been sold during
the year and had been marked-down in the selling price by ` 1,600. The remaining
stock had been sold during the year.
(3) Goods purchased during the year were marked down by ` 3,600 from a cost of
` 30,000. Marked-down stock costing ` 10,000 remained unsold on 31.3.2019.
mark- up and mark-down.
You are required to prepare for the year ended 31st March, 2019 :
(i) Departmental Trading Account for department X for the year ended 31st March,
2019 in the books of head office.
(ii) Memorandum Stock Account for the year ended 31st March, 2019.
(iii) Memorandum Mark-Up account for the year ended 31st March, 2019.
Question 52
Vijay & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost.
The branch makes both cash & credit sales. Branch expenses are paid direct from Head
office and the branch has to remit all cash received into the bank account of Head office.
Branch doesn't maintain any books of accounts, but sends monthly returns to the head
office.
389
Following further details are given for the year ended 31st March, 2020:
Amount (`)
Goods received from Head office at invoice price 8,40,000
Goods return to Head office at invoice price 60,000
Cash sales for the year 2019-20 1,85,000
Credit sales for the year 2019-20 6,25,000
Stock at branch as on 01-04-2019 at invoice price 72,000
S. Debtors at Patna branch as on 01-04-2019 96,000
Goods returned by customers at Patna branch 14,000
Bad debts written off 5,500
Amount recovered from Bad debts previously written off as Bad 1,000
Rent Rates & Taxes at Branch 24,000
Salaries & wages at Branch 72,000
Office Expenses (at Branch) 9,200
Stock at Branch as on 31-03-2020 at cost price 1,25,000
Prepare necessary ledger accounts in the books of Head office by following stock and
Debtors method and ascertain Branch profit. (5 Marks – Nov 2020 – Inter)
Question 53
The Washington branch of ABC India sent the following trial balance as on 31st December,
2017.
Particulars $ $
Head office A/c - 13,680
Sales - 50,400
Debtors and creditors 2,880 2,040
Machinery 14,400 -
Cash at bank 720 -
Stock, 1 January, 2017 6,720 -
Goods from H.O. 38,400 -
Expenses 3,000 -
66,120 66,120
In the books of head office, the Branch A/c stood as follows:
390
Washington Branch A/c

Particulars Particulars
To Balance b/d 4,86,000 By Cash 23,25,600
28,41,600 28,41,600
Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice price
plus 25%. Machinery was acquired on 31st January, 2012, when $ 1.00 = ` 46.
Exchange rate per US$ were:
1st January, 2017 ` 64
31st December, 2017 ` 66
Average Rate ` 65
Machinery is depreciated @ 10% on written down value basis.
The branch manager is entitled to a commission of 5% on the profits of the branch. You
are required to prepare in the books of Head Office:
(i) Branch Trading & Profit & Loss A/c in dollars.
(ii) Convert the Trial Balance of branch into Indian currency
(iii) Branch Trading & Profit and Loss Account in Rupees
(iv) Branch Account. (8 Marks – May 2019 – IPCC – Adv. Accounting)
Question 54
Rohit of Delhi has a branch at Nagpur. Following is the information of Nagpur Branch for
the year ending 31st March, 2019.
(2) Sale Price is cost plus 40%.
(3) Goods sent during the year at invoice price ` 13,50,000
(4) Sales during the year ` 14,70,000
(5) Branch Expenses ` 55,000
(6) Stock as on 1st April, 2018 at Invoice Price ` 3,20,000
Calculate the profit earned by the branch during the year and Branch Stock Reserve in
respect of unrealized profit. (6 Marks – Nov 2019 – IPCC – Adv. Accounting)
Question 55
Explain in brief Non-Integral Foreign Operation (NFO) and Integral Foreign Operation
(IFO) as per AS-11. (4 Marks – Nov 2019 – IPCC – Adv. Accounting)
391
Question 56
PQR Limited is a retail organization with several departments. Goods supplied to each
department are debited to a Memorandum Departmental Stock Account at cost, plus a
fixed percentage (mark-up) to give the normal selling price. The mark-up is credited to
a memorandum departmental 'Mark-up account', any reduction in selling prices (mark-
down) will require adjustment in the stock account and in mark-up account. The markup
for Department A for the last three years has been 20%. Figures relevant to Department
A for the year ended 31st March, 2020 were as follows:
Opening stock as on 1st April, 2019, at cost ` 70,000
Purchases at cost ` 2,16,000
Sales ` 3,24,000
It is further ascertained that :
(1) Goods purchased in the period were marked down by ` 1,680 from a cost of ` 19,200.
Marked down stock costing ` 4,800 remained unsold on 31st March 2020.
(2) Shortage of stock found in the year ending 31.03.2020, costing ` 1,440 was written
off.
(3) Opening stock on 01.04.19 including goods costing ` 9,840 had been sold during the
year and had been marked down in the selling price by ` 888. The remaining stock
had been sold during the year.
mark-up and mark-down.
(i) A Departmental Trading Account for Department A for the year ended 31st
March, 2020 in the books of Head Office.
(ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year.
Question 57
PQR has a branch at Houston (USA). Business of the Branch is carried out substantially
independent by way of accumulating cash and other monetary items, incurring expenses,
generating income and arranging borrowing in its local currency. The trial balance of the
Branch as at 31" March, 2020 is as follows:
392
US $
Particulars
Debit Credit
Office equipment (Cost) 56,400
Opening Accumulated Depreciation (Office 5,400
equipment)
Furniture and Fixtures (Cost) 36,000
Opening Accumulated Depreciation 6,840
(Furniture and Fixtures)
Opening Stock as on 1st April, 2019 24,500
Purchases 96,500
Sales 1,76,250
Salaries 4,250
Carriage inward 256
Rent, Rates & Taxes 956
Sundry debtors 12,560
Cash at bank 2,540
Cash in hand 500
Head office Account 37,322
Total 2,34,462 2,34,462
Following further information are given :

(i) Salaries outstanding as on 31st March, 2020 is US $ 600.
(ii) Depreciate office equipment and furniture & fixtures @ 10% at written down value.
(iii) Closing stock as on 31st March, 2020 is US $ 24,650.
(iv) You are informed that the Head office is showing receivable from the Branch as
` 23,75,614 as on 31" March, 2020. No transaction in respect of the Branch is pending
in Head office.
(v) Office equipment (cost) includes one office equipment of US $ 2,400 purchased on
01/04/2019.
(vi) One furniture of carrying value of US $ 450 as on 01/04/2019 (cost: US $ 500 and
Accumulated depreciation: US $ 50) has been sold for US $ 405 on 31/03/2020 to
Mr. M at no profit no loss. Mr. M has not paid the amount till the finalization of
branch account. No entry has been passed for this sale of furniture in the above trial
balance.
393
(vii) The rate of exchange on different dates are :

Date 1 US $ is equivalent to
1st April, 2019 ` 64
31st December, 2019 ` 70
31st March, 2020 ` 75
Average for the year ` 72
You are required to prepare the Trial Balance after incorporating adjustments given and
converting US $ into rupees.
Question 58
Pass necessary Journal entries in the books of an independent Branch of a Company,
wherever required, to rectify or adjust the following :
(i) Branch incurred travelling expenses of ` 4,000 on behalf of other Branches, but not
recorded in the books of Branch.
(ii) Goods dispatched by the Head office amounting to ` 8,000, but not received by the
Branch till date of reconciliation. The Goods have been received subsequently.
(iii) Provision for doubtful debts, whose accounts are kept by the Head Office, not
provided earlier for ` 2,000.
(iv) Branch paid ` 2,000 as salary to a Head Office Manager, but the amount paid has
been debited by the Branch to Salaries Account.
394
12 SINGLE ENTRY SYSTEM
There are two methods of ascertaining profit or loss under single entry system :
(a) statement of affairs method (calculation of profit or loss without preparing trading
and profit and loss account)
(b) conversion method (Accounts from incomplete records)
(A) Statement of Affairs Method :

Here, total capital at the end of the year is compared with total capital at the beginning
and profit is calculated as under:
Total Capital at the End xx
(-) Total capital at the Beginning xx
xx
Add : Drawings during the year xx
(Including Interest on Drawings) xx
Less : Capital introduced during the year xx
(Including Interest on capital)
PROFIT xx
(B) Conversion Method

Here, all scattered and incomplete data is converted into double entry system. Here in
addition to Trading, Profit & Loss A/c and Balance Sheet following additional notes are
to be prepared.
(a) Opening Balance - Sheet (If opening capital is not given)
(b) Cash / Bank A/c (In columnar form if cash on hand and Cash at Bank is separately
given)
(c) Total Debtors A/c
(d) Total Creditors A/c
(e) Bills Receivable A/c
(f) Bills Payable A/c
395
Preparation of Various Accounts:

(i) In order to ascertain missing figures, various accounts are required to be prepared.
These have been explained below:
Dr. Total Debtors Account Cr.
To Opening Balance xxx By Cash Received xxx
To Credit Sale xxx By Bad Debts xxx
To B/R Dishonoured xxx By Discount Allowed xxx
To Expenses Charged xxx By Bills Receivable xxx
By Sales Returns xxx
By Closing Balance xxx
xxx xxx
Out of various contents of Total Debtors Account significant are - opening balance, Credit
Sales, Cash Received, Bills Receivable drawn during the year and closing balance. Out of
the above any one figure may be missing figure.
(ii) Dr. Total Creditors Account Cr.

To Cash paid xxx By Opening Balance xxx
To Discount Received xxx By Credit Purchased xxx
To Bills Payable xxx By B/P Dishonoured xxx
To B/R endorsed xxx By Endorsed B/R Dishonoured xxx
To Closing Balance xxx
xxx xxx
Out of the above contents of Total Creditors Account significant are opening balance,
Credit Purchases, Cash Paid, Bills Payable accepted during the year and closing balance.
Out of these any one figure may be missing figure.
(iii) Dr. Bills Receivable Account Cr.

To Opening Balance xxx By Cash Received xxx
To Total Debtors xxx By Bank xxx
(Drawn during the year) By Discount xxx
By Total Debtors (Dishonour) xxx
By Total Creditors (Endorsed) xxx
xxx xxx
396
If B/R is dishonoured it is debited to Total Debtors Account and credited to B/R Account.
But if B/R has been discounted with Bank or endorsed to creditor is dishonoured then,
Bank Account and Creditors Accounts respectively will be credited.
Out of the above contents of Bill Receivable Account significant contents are opening
balance, Bill drawn during the year, Cash received and closing balance. Any one missing
figure will be balancing amount.
(iv) Dr. Bills Payable Account Cr.

To Cash Paid xxx By Opening Balance xxx
To Total creditors (Dishonour) xxx By Total Creditors xxx
To Closing Balance xxx (Bill accepted during the year) xxx
xxx xxx
Out of the above contents of Bills Payable Account significant contents are-opening
balance. Bills accepted during the year, Cash paid and closing balance, any one figure
may be missing figure.
(v) Cash Book

If there are bank transaction Cash Book should be prepared having two separate columns-
one for cash transactions and other for bank transactions. Sometimes, details of bank
transaction are not available. In such case single column Cash Book should be prepared
- containing cash as well as bank transaction. Normal contents of Cash Book will be:
Dr. Cash Book Cr.
To Opening Balance xxx By Balance (overdraft) xxx
To Cash Sales xxx By Cash purchase xxx
To Collection from Debtors xxx By Paid to creditors xxx
To Collection for B/R xxx By Paid for B/P xxx
To Additional Capital xxx By Expenses xxx
To Other Receipts xxx By Drawings xxx
xxx xxx
Balancing figure may be any one figure. Amount derived from one account may be used in
the other account also. For example, if balancing figure of Total Debtors Account is cash
collection, this will be shown in cash also.
397
(I) STATEMENT OF AFFAIRS METHOD:

Question 1
Ramesh carries on business as dressmaker. He does not keep any accounts but wants to
ascertain his profit or loss for the year 2010-11. He gives you an idea of the assets and
liabilities as on 31.3.2010 and 31.3.2011 which is as follows:
31.3.2010 31.03.2011
` `
Bank Balance as per Pass Book 6,230 8,170
Book Debts 3,100 2,900
Stock in trade 15,000 18,000
Investment in D.C.M. Debentures 8,000 3,000
Equipment at cost 6,000 10,000
Owing for Supplies 5,000 6,000
On enquiry you find the following:

(i) Certain cheques for payment for taxes amounting to ` 2,500 issued on 28.3.2010
had not been presented; these were paid in April, 2010.
(ii) Stock in trade is valued at selling price; the mark up in 2009-10 has 25% on selling
price but during 2010-11 it was 25% on cost.
(iii) Book debts on 31.3.2010 include ` 1,000 for goods sent on sale or return basis,
the customers still having the right to return the goods.
(iv) The investments are shown at face value, the purchase having been made at 95.
(v) A cheque for ` 500 was returned by the bank dishounered on 30th March,2011 and a
customer had deposited ` 700 directly into the bank on the same date. Ramesh did
not know of these as yet.
(vi) His drawings during 2010-11 have been at the rate of ` 500 p.m.
(vii) A cheque issued for ` 3,100 for his income tax was not presented as on 31.3.2011
You are requested to ascertain the profit earned or loss suffered by Ramesh in 2010-11
398
(II) CONVERSION METHOD:
Question 2
From the following data, you are required to prepare a Trading and Profit and Loss
Account for the year ended 31st March 2017, and a Balance Sheet as at that date. All
working should from part of your answer.
Assets and Liabilities As on As on

1st April, 2016 31st March, 2017
` `
Creditors 15,770 12,400
Sundry Expenses Outstanding 600 330
Fixed Assets 11,610 11,120
Stock-in-trade 8,040 11,120
Cash in hand and at bank 6,960 8,080
Trade Debtors 20,990 17,870
Details relating to transactions in the year: `
Cash and Discount credited to Debtors 64,000
Sales Return 1,450
Bad Debts 420
Sales (Cash and Credit) 71,810
Discount allowed by Trade Creditors 700
Purchase Return 400
Additional Capital-Deposited by cheque 8,500
Realisation from Debtors-paid into Bank 62,500
Cash Purchases 1,030
Sundry Expenses paid in cash 9,570
Paid by cheque for Machinery purchased 430
Household expenses drawn from Bank 3,180
Cash paid into Bank 5,000
Cash drawn from Bank 9,240
Cash in hand on 31.3.2017 1,200
Cheque issued to Trade Creditors 60,270
Balance in Cash account should be concluded as Cash withdrawn or introduced
399
Question 3
The following is the Balance Sheet of Sri Ram as on 31st March, 2016.
Capital Account 96,000 Building 65,000
Loan 30,000 Furniture 10,000
Creditors 62,000 Motor Car 18,000
Stock 40,000
Debtors 34,000
Cash in hand 4,000
Cash at Bank 17,000
1,88,000 1,88,000
A riot occurred on the night of 31st March, 2017 in which all books and records were
lost. The Cashier had absconded with the available cash. Sri Ram gives you following
information:
(a) His sales for the year ended 31st March, 2017 were 20% higher than the previous
year's and 20% of the total sales for the year ended 31.3.2017 were for cash. There
were no cash purchases. He always sells his goods for cost plus 25%.
(b) On 1st April, 2016 the stock level was raised to ` 60,000 and stock was maintained
at this new level all throughout the year.
(c) Collection from debtors amounted to ` 2,60,000 of which ` 70,000 was received in
cash. Business Expenses amounted to ` 40,000 of which ` 10,000 was outstanding
on 31st March, 2017 and ` 12,000 was paid by cheque.
(d) Analysis of the Pass Book revealed the following:
`
Payment to creditors 2,75,000
Personal Drawings 15,000
Cash deposited in Bank 1,43,000
Cash withdrawn from bank 24,000
(e) Gross profit as per last year's audited accounts was ` 60,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
Prepare the Trading and Profit and Loss Account for the year ended 31st March, 2017
and Balance Sheet as on that date.
400
Question 4
The following is the Balance Sheet of Sri Agni Dev as on 31st March, 2016 :
Capital Account 2,52,500 Machinery 1,20,000
Sundry Creditors for purchases 45,000 Furniture 20,000
Stock 33,000
Debtors 1,00,000
Cash in hand 8,000
Cash at Bank 16,500
2,97,500 2,97,500
Riots occurred and fire broke out on the evening of 31st March, 2017 destroying the
books of account and Furniture. The cashier was grievously hurt and the cash available
in the cash box was stolen.
The trader gives you the following information:
(a) Sales are effected as 25% for cash and the balance on credit. His total sales for the
year ended 31st March, 2017 were 20% higher then the previous year. All the sales
and purchases of goods were evenly spread throughout the year (as also in the last
year)
(b) Terms of credit

Debtors 2 Months
Creditors 1 Month
(c) Stock level was maintained at ` 33,000 all throughout the year.
(d) A steady Gross Profit rate of 25% on the turnover was maintained throughout.
Creditors are paid by cheque only, except for cash purchase of ` 50,000.
(e) His private records and the Bank Pass-book disclosed the following transaction for
the year.
(i) Miscellaneous Business Exp. ` 1,57,500 (including ` 5,000 paid by
cheque and ` 7,500 was outstanding as on
31.03.2017)
(ii)
Repairs ` 3,500 (paid by cash)
(iii) Addition to Machinery ` 60,000 (paid by cheque)
401
(iv) Private Drawing ` 30,000 (paid by cash)

(v) Travelling Expenses ` 18,000 (paid by cash)
(vi) Introduction of additional capital ` 5,000 by depositing in to the Bank
(vi) Collection from debtors were all through cheques.
(vii) Depreciation on Machinery is to be provided @ 15% on the Closing Book Value.
(viii) The Cash stolen is to be charged to the Profit and Loss Account.
(ix) Loss of furniture is to be adjusted from the Capital Account.
Prepare Trading Profit and Loss Account for the year ended 31st March, 2017 and a
Balance Sheet as on that date. Make appropriate assumptions whenever necessary. All
working should form part of your answer.
Question 5
Ms. Rashmi furnishes you with the following information relating to her business:
(a) Assets and liabilities
1.1.2016 31.12.2016
Furniture (w.d.v) 12,000 12,700
Inventory at cost 16,000 14,000
Sundry Debtors 32,000 ?
Prepaid expenses 1,200 1,400
Unpaid expenses 4,000 3,600
Cash in hand and at bank 2,400 1,250
(b) Receipts and payments during 2016:
Collections from debtors, after allowing discount of ` 3,000 amounted to ` 1,17,000.
Collections on discounting of bills of exchange, after deduction of discount of
` 250 by the bank, totalled to `12,250.
Creditors of ` 80,000 were paid ` 78,400 in full settlement of their dues.
Payment for freight inwards ` 6,000.
Amount withdrawn for personal use ` 14,000.
Payment for office furniture ` 2,000.
Investment carrying annual interest of 4% were purchased at ` 192 (face value
` 200) on 1st July, 2016 and payment made there for.
Expenses including salaries paid ` 29,000.
Miscellaneous receipts ` 1,000.
402
(c) Bills of exchange drawn on and accepted by customers during the year amounted to
` 20,000. Of these, bills of exchange of ` 4,000 were endorsed in favour of creditors.
An endorsed bill of exchange of ` 800 was dishonoured.
(d) Goods costing ` 1,800 were used as advertising materials.
(e) Goods are invariably sold to show a gross profit of 33 & 1/3% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction of
capital by Ms. Rashmi.
(g) Provide at 2.5% for doubtful debts on closing debtors.
Rashmi asks you to prepare trading and profit and loss account for the year ended
31st December, 2016 and the balance sheet as on that date.
Question 6
Following incomplete information of X are given below:
Trading and Profit & Loss Account for the year ended 31st March, 2017
` '000 ` '000
To Opening stock 700 By Sales ?
To Purchases ? By Closing stock ?
To Direct expenses 175
To Gross profit c/d ?
? ?
To Establishment expenses 740 By Gross profit b/d ?
To Interest on loan 60 By Commission 100
To Provision for taxation ?
To Net profit c/d ?
? ?
To Proposed dividends ? By Balance b/f 140
To Transfer to general reserve ? By Net profit b/d ?
To Balance transferred to ?
Balance sheet
? ?
403
Balance Sheet as at 31st March, 2017

Liabilities Amount Assets Amount
` '000 ` '000
Paid-up Capital 1,200 Fixed Assets :
General Reserve: Plant & Machinery 1,400
Balance at the beginning ? Other fixed assets ?
Proposed addition ? Current assets:
Profit and loss account ? Stock ?
10% Loan account ? Sundry debtors ?
Current liabilities ? Cash at Bank 125 ?
? ?
Other information:
(i) Current ratio is 2 : 1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends to paid-up capital ratio is 2 : 3.
(iv) Gross profit ratio is 60% of turnover.
(v) Loan is half of current liabilities.
(vi) Transfer to general reserves to proposed dividends ratio is 1 : 1.
(vii) Profit carried forward is 10% of proposed dividends.
(viii) Provision for taxation is equal to the amount of net profit of the year.
(ix) Balance to credit of general reserve at the beginning of the year is twice the amount
transferred to that account from the current year's profits.
All working notes should be part of your answer. You are required to complete:
(i) Trading and Profit and Loss account for the year ended 31st March, 2017 and
(ii) The Balance Sheet as on that date.
404
Question 7
The following information relates to the business of Mr. Shiv Kumar, who request you to
prepare a Trading and Profit & Loss Account for the year ended 31st March, 2017 and a
Balance Sheet as on that date:
(a)
Balance as on Balance as on
31st March, 2016 31st March, 2017
` `
Building 3,20,000 3,60,000
Furniture 60,000 68,000
Motor car 80,000 80,000
Stocks ? 40,000
Bills payable 28,000 16,000
Cash and Bank balance 1,80,000 1,40,000
Sundry Debtors 1,60,000 ?
Bills receivable 32,000 28,000
Sundry Creditors 1,20,000 ?
(b) Cash transactions during the year included the following beside certain other items:
` `
Sale of Old Papers and Cash Purchase 48,000
Miscellaneous Income 20,000
Miscellaneous Trade Expenses Payment to Creditors 1,84,000
(including salaries etc.) 80,000
Collection from Debtors 2,00,000 Cash Sales 80,000
(c) Other information:

(i) Bills receivable drawn during the year amount to ` 20,000 and Bills Payable accepted
` 16,000.
(ii) Some items of old furniture, whose written down value on 31st March, 2016 was
` 20,000 was sold on 30th September, 2016 for ` 8,000. Depreciation is to be
provided on Building and Furniture @10% p.a. and on Motor car @ 20% p.a. The
Closing Balance of Fixed Assets is before charging depreciation.
(iii) Of the Debtors, a sum of ` 8,000 should be written of as Bad Debt and a reserve for
doubtful debts is to be provided @ 2%.
(iv) Mr. Shivkumar has been maintaining a steady gross profit rate of 30% on turnover.
(v) Outstanding salary on 31st March, 2016 was ` 8,000 and on 31st March, 2017
405
was ` 10,000. Profit and Loss Account had a credit balance of ` 40,000 as on 31st
March, 2016.
(vi) 20% of total sales and total purchases are to be treated as for cash.
(vii) Balance in Cash / Bank account should be concluded as cash
withdrawn or deposited.
(viii) Addition to building and furniture are at the beginning of the year
Question 8
Mr. X runs a retail business. Suddenly he finds on 31.3.2017 that his Cash and Bank
balances have reduced considerably. He provides you the following information:
(i)
Balances 31.3.2016 31.3.2017
` `
Cash at Bank 1,08,400 2,500
Cash in Hand 10,400 500
Rent (Outstanding for one month) 2,400 3,000
Stock 11,400 20,000
Electricity and Telephone bills - outstanding ---- 6,400
(ii) Bank Pass-book reveals the following

Total Deposits 10,34,000
Withdrawals:
Creditors 8,90,000
Professional charges 34,000
Furniture and Fixtures (acquired on 1.10.16) 54,000
Proprietor’s drawings 1,61,900
(iii) Rent has been increased from January, 2017.

(iv) Mr. X deposited all cash sales and collections from debtors after meeting wages,
shop expenses, rent, electricity and telephone charges.
(v) Mr. X made all purchases on credit.
(vi) His credit sales during the year amounts to ` 9,00,000.
(vii) He incurred ` 6,500 per month towards wages.
(viii) He incurred following expenses:
(a) Electricity and telephone charges ` 24,000 (paid)
406
(b) Shop expenses ` 18,000 (paid).

(ix) Charge depreciation on furniture and fixtures @ 10% p.a.
Finalise the accounts of Mr. X and compute his profit for the year ended 31.3.2017.
Question 9
K. Azad, who is in business as a wholesaler in sunflower oil, is a client of your accounting
firm. You are required to draw up his final accounts for the year ended 31.3.2011.
From the files, you pick up his Balance Sheet as at 31.3.2010 reading as below:
Balance Sheet as at 31.3.2010
Liabilities ` `
K. Azad’s Capital 1,50,000
Creditors for Oil Purchases 2,00,000
12% Security Deposit from Customers 50,000
Creditors for Expenses:
Rent 6,000
Salaries 4,000
Commission 20,000
4,30,000
Assets
Cash and Bank Balances 75,000
Debtors 1,60,000
Stock of Oil (125 tins) 1,25,000
Furniture 30,000
Less: Depreciation (3,000) 27,000
Security Deposit with Landlord 12,000
Electricity Deposit 1,000
3-Wheeler Tempo Van 40,000
Less: Depreciation (10,000) 30,000
4,30,000
407
A Summary of the rough Cash Book of K. Azad for the year ended 31.3.2011 is as below:
Cash and Bank Summary
`
Receipts
Cash Sales 5,26,500
Collections from Debtors 26,73,500
Payments
To Landlord 79,000
Salaries 48,000
Miscellaneous Office Expenses 12,000
Commission 20,000
Personal Income-tax 50,000
Transfer on 1.10.2010 to 12% Fixed Deposit 6,00,000
To Creditors for Oil Supplies 24,00,000
A scrutiny of the other records gives you the following information:

(i) During the year oil was purchased at 250 tins per month basis at a unit cost of
` 1,000. 5 tins were damaged in transit in respect of which insurance claim has been
preferred. The surveyors have since approved the claim at 80%. The damaged ones
were sold for ` 1,500 which is included in the cash sales. One tin has been used up
for personal consumption. Total number of tins sold during the year was 3,000 at
a unit price of `1,750.
(ii) Rent until 30.9.2010 was ` 6,000 per month and was increased thereafter by ` 1,000
per month. Additional Security Deposit of ` 2,000 was paid and this is included in
the figure of payments to landlord.
(iii) Provide depreciation at 10% and 25% of WDV on furniture and tempo van respectively.
(iv) It is further noticed that a customer has paid ` 10,000 on 31.3.2011 as security
deposit by cash. One of the staff has defalcated. The claim against the Insurance
Company is rejected by insurance company.
You are requested to prepare final accounts for the year ended 31.3.2011.
408
Question 10
A and B are in Partnership having Profit sharing ratio 2 : 1. The following information is
available about their assets and liabilities:
31.3.2016 31.3.2017
` `
Furniture 1,20,000 ?
Advances 70,000 50,000
Creditors 32,000 30,000
Debtors 40,000 45,000
Inventory 60,000 74,750
Loan 80,000 ----
Cash at Bank 50,000 1,40,000
The partners are entitled to salary @ ` 2,000 p.m. They contributed proportionate
capital. Interest is paid @ 6% on capital and charged @ 10% on drawings.
Drawings of A and B
A B
(`) (`)
April 30 2,000 -----
May 31 ----- 2,000
June 30 4,000 -----
Sept. 30 ----- 6,000
Dec. 31 2,000 -----
Feb. 28 ----- 8,000
On 30th June, they took C as 1/3rd partner who contributed ` 75,000. C is entitled to share
of 9 months’ profit. The new profit ratio becomes 1:1:1. A withdrew his proportionate
share. Depreciate furniture @ 10% p.a., new purchases ` 10,000 may be depreciated for
1/4th of a year.
Current account balance as on 31-3-2016: A `5,000 (cr.), B `2,000 (Dr.) Prepare
Statement of profit, Current account of partners and Statement of Affairs as on 31-3-2017
Question 11
A. Adamjee keeps his books on single entry basis. The analysis of the cash book for the
year ended on 31st December, 2016 is given below:
409
Receipt (`) Payment (`)

Bank Balance as on 1st January, Payments to Sundry creditors 35,000
2016 2,800
Received from Sundry Debtors 48,000 Salaries 6,500
Cash Sales 11,000 General expenses 2,500
Capital brought during the year 6,000 Rent and Taxes 1,500
Interest on Investments 200 Drawings 3,600
Cash purchases 12,000
Balance at Bank on 31st Dec.,
2016 6,400
Cash in hand on 31st Dec.,
2016 500
68,000 68,000
Particulars of other assets and liabilities are as follows:

1st January, 2016 31st December,2016
Sundry creditors 5,800 7,900
Machinery 7,500 7,500
Furniture 1,200 1,200
Inventory 3,900 5,700
Investments 5,000 5,000
Prepare final accounts for the year ending 31st December, 2016 after providing
depreciation at 10 percent on machinery and furniture and ` 800 against doubtful debts.
Question 12
Mr. Anup runs a wholesale business where in all purchases and sales are made on
credit. He furnishes the following closing balances:
31.12.2015 (`) 31.12.2016 (`)
Bills receivable 15,000 6,000
Bills payable 12,000 14,000
Sundry creditors 40,000 56,000
Inventory 1,10,000 1,90,000
Bank 90,000 87,000
Cash 5,200 5,300
410
Summary of cash transactions during the year 2016:

(i) Deposited to bank after payment of shop expenses @ ` 600 p.m., wages @ ` 9,200
p.m. and personal expenses @ ` 1,400 p.m. ` 7,62,750.
(ii) Withdrawals ` 1,21,000.
(iii) Cash payment to suppliers ` 77,200 for supplies and ` 25,000 for furniture.
(iv) Cheques collected from customers but dishonoured ` 5,700.
(v) Bills accepted by customers ` 40,000.
(vi) Bills endorsed ` 10,000.
(vii) Bills discounted ` 20,000, discount ` 750.
(viii) Bills matured and duly collected ` 16,000.
(ix) Bills accepted ` 24,000.
(x) Paid suppliers by cheque ` 3,20,000.
(xi) Received ` 20,000 on maturity of one LIC policy of the proprietor by cheque.
(xii) Rent received ` 14,000 by cheque for the premises owned by proprietor.
(xiii) A building was purchased on 30-11-2016 for opening a branch for ` 3,50,000 and
some expenses were incurred on this building, details of which are not maintained.
(xiv) Electricity and telephone bills paid by cash ` 18,700, due ` 2,200.
Other transactions:
(i) Claim against the firm for damage ` 1,55,000 is under legal dispute. Legal expenses
` 17,000. The firm anticipates defeat in the suit.
(ii) Goods returned to suppliers ` 4,200.
(iii) Goods returned by customers ` 1,200.
(iv) Discount offered by suppliers ` 2,700.
(v) Discount offered to the customers ` 2,400.
(vi) The business is carried on at the rented premises for an annual rent of ` 20,000
which is outstanding at the year end.
Prepare Trading and Profit & Loss Account of Mr. Anup for the year ended
31-12-2016 and Balance Sheet as on that date.
Question 13
Mr. A runs a business of readymade garments. He closes the books of accounts on 31st
March. The Balance Sheet as on 31st March, 2016 was as follows:
411
Liabilities (`) Assets (`)

A’s capital a/c 4,04,000 Furniture 40,000
Creditors 82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4,86,000 4,86,000
You are furnished with the following information:

(1) His sales, for the year ended 31st March, 2017 were 20% higher than the sales of
previous year, out of which 20% sales was cash sales.
Total sales during the year 2015-16 were ` 5,00,000.
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay by cheques only.
(4) Deprecition on furniture is to be charged 10% p.a.
(5) Mr. A sent to the bank the collection of the month at the last date of the each month
after paying salary of ` 2,000 to the clerk, office expenses ` 1,200 and personal
expenses ` 500.
Analyses of bank pass book for the year ending 31st March 2017disclosed the
following:
`
Payment of rent up to 31st March, 2017 16,000
Cash deposited into the bank during the year 80,000
The following are the balances on 31st March, 2017:

`
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March 2017, the cashier absconded with the available cash.
You are required to prepare Trading and Profit and Loss A/c for the year ended 31st
March, 2017 and Balance Sheet as on that date. All the workings should form part
of the answer.
412
Question 14
The following is the Balance Sheet of a concern on 31st March, 2015:
` `
Creditors (Trade) 1,40,000 Stock 3,00,000
Profit & Loss A/c 60,000 Debtors 1,50,000
Cash & Bank 3,50,000
12,00,000 12,00,000
The management estimates the purchases and sales for the year ended 31st March,
2016 as under:
Upto 28.2.2016 ` March 2016 `
Purchase 14,10,000 1,10,000
Sales 19,20,000 2,00,000
It was decided to invest ` 1,00,000 in purchases of fixed assets, which are depreciated
@ 10% on cost.
The time lag for payment to Trade Creditors for purchase and receipt from Sales is one
month. The business earns a gross profit of 30% on turnover. The expenses against
gross profit amount to 10% of the turnover. The amount of depreciation is not included
in these expenses.
Draft a Balance Sheet as at 31st March, 2016 assuming that creditors are all Trade
Creditors for purchases and debtors for sales and there is no other item of current
assets and liabilities apart from stock and cash and bank balances. Assume that all
sales and purchases are on credit basis.
Question 15
A trader keeps his books of account under single entry system. On 31st March, 2015 his
statement of affairs stood as follows:
Trade Creditors 5,80,000 Furniture, Fixtures and Fittings 1,00,000
Bills Payable 1,25,000 Stock 6,10,000
Outstanding Expenses 45,000 Trade Debtors 1,48,000
Capital Account 2,50,000 Bills Receivable 60,000
Unexpired Insurance 2,000
Cash in Hand and at Bank 80,000
10,00,000 10,00,000
413
The following was the summary of Cash–book for the year ended 31st March, 2016:
Receipts ` Payments `
Cash in Hand and at Bank on Payments to Trade Creditors 75,07,000
1st April, 2016 80,000 Payments for Bills payable 8,15,000
Cash Sales 73,80,000 Sundry Expenses paid 6,20,700
Receipts from Trade Debtors 15,10,000 Drawings 2,40,000
Receipts for Bills Receivable 3,40,000 Cash in Hand and at Bank on 1,27,300
31st March, 2016
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to
` 36,000 and ` 28,000 respectively. Bills endorsed amounted to ` 15,000. Annual Fire
Insurance premium of ` 6,000 was paid every year on 1st August for the renewal of the
policy. Furniture, fixtures and fittings were subject to depreciation @ 15% per annum on
diminishing balances method.
You are also informed about the following balances as on 31st March, 2016:
`
Stock 6,50,000
Trade Debtors 1,52,000
Bills Receivable 75,000
Bills Payable 1,40,000
Outstanding Expenses 5,000
The trader maintains a steady gross profit ratio of 10% on sales.

Prepare Trading and Profit and Loss Account for the year ended 31st March, 2016 and
Balance Sheet as at that date.
Question 16
Lucky does not maintain proper books of accounts. However, he maintains a record of his
bank transactions and also is able to give the following information from which you are
requested to prepare his final accounts for the year 2011:
1.1.2011 31.12.2011
` `
Debtors 1,02,500 -----
Creditors ---- 46,000
Stock 50,000 62,500
Bank Balance ---- 50,000
414
Details of his bank transactions were as follows:

`
Received from debtors 3,40,000
Additional capital brought in 5,000
Sale of fixed assets (book value ` 2,500) 1,750
Paid to creditors 2,80,000
Expenses paid 49,250
Personal drawings 25,000
Purchase of fixed assets 5,000
No cash transactions took place during the year. Goods are sold at cost plus 25%. Cost
of goods sold was ` 2,60,000.
Question 17
Lokesh, who keeps books by single entry, had submitted his Income-tax returns to
Income-tax authorities showing his incomes to be as follows:
`
Year ending March 31, 2005 = 33,075
The Income-tax officer is not satisfied as to the accuracy of the incomes returned. You are
appointed as a consultant to assist in establishing correctness of the incomes returned
and for that purpose you are given the following information:
(a) Business liabilities and assets at March 31, 2004 were:
Creditors: ` 32,940, Furniture & Fittings: ` 22,500, Stock: ` 24,390 (at selling price
which is 25% above cost), Debtors: ` 11,025, Cash at Bank and in hand `15,615.
(b) Lokesh owed his brother ` 18,000 on March 31, 2004. On February 15, 2007 he
repaid this amount and on April 1, 2009, he lent his brother ` 13,500.
(c) Lokesh owns a house which he purchased in 1999 for ` 90,000 and a car which he
purchased in October, 2005 for ` 33,750. In January, 2009, he bought debentures in
X Ltd. having face value of ` 40,000 for ` 33,750.
(d) In May, 2009 a sum of ` 13,500 was stolen from his house.
(e) Lokesh estimates that his living expenses have been 2004-05 – ` 13,500; 2005-06
415
– ` 18,000; 2006-07 – ` 27,000; 2007-08, 2008-09 and 2009-10 – ` 31,500 p.a.

exclusive of the amount stolen.
(f) On March 31, 2010 business liabilities and assets were: Creditors `37,800,
Furniture, Fixtures and Fittings ` 40,500, Stock ` 54,330 (at selling price with a gross
profit of 25%), Debtors ` 26,640, Cash-in-Hand and at Bank ` 29,025.
From the information submitted, prepare statements showing whether or not the incomes
declared by Lokesh are correct.
Question 18
Shri. Kanubhai is operating a small manufacturing business. He did not keep adequate
records to determine his income or prepare a proper Balance Sheet. The following
particulars are furnished to you :
Statement of Affairs
31.3.2016 31.3.2017
` `
Cash at Bank 6,000 4,100
Stock of Raw Materials 7,500 12,000
Stock of Finished goods 33,000 36,000
Fixed Assets 95,000 1,10,000
Investments 36,700 24,900
2,06,700 2,08,500
Loan from Banubhai --- 9,000
Kanubhai Capital 1,81,700 1,67,000
2,06,700 2,08,500
Your examination of the available records reveals the following additional information
:-
(i) Sundry debtors as at the end of the year 31st March 2017, do not include the sum of
` 4,600/- due from a customer as full collection from him was considered doubtful.
However, prior to the time you start your work, you find that the above account was
settled for ` 3,500/-.
(ii) The stocks of finished goods have been valued at sale price. The average margin of
profit on sales was 30% at 31st March, 2016 and 40% at 31st March, 2017. Raw
416
materials were valued at cost.

(iii) Sundry debtors include the sum of ` 1,000/- in respect of goods sent on consignment
on 30th March, 2017. The same has been billed at sale price.
(iv) The details of investments are as under:
Name of the Company Shares Face Value 31.3.2016 31.3.2017

` `
A Ltd. 200 100 20,000 20,000
B Ltd. 167 100 16,700 ---
C Ltd. 98 50 --- 4,900
36,700 24,900
(a) The shares of A Ltd. were acquired in 2006 for ` 27,000/-.

(b) The shares of B Ltd. were purchased in June 2006 for ` 17,000/- and sold in
April, 2016 for ` 22,000/-.
(c) The shares of C Ltd. were purchased in June, 2016 for ` 7,000/-.
(v) The loan from Banubhai was utilised for making a gift to the proprietor's newly born
daughter.
(vi) The figures of cash at Bank are amounts appearing as the balances in his bank
statements as on 31st March, 2016 and 31st March, 2017, respectively. By reviewing
subsequent bank statements, you find the following:
(a) A deposit of ` 2,000/- made on 31st March, 2016 was not recorded by the
bank until 4th April, 2016. A cheque for ` 900/- issued prior to 31st March,
2016 was not presented to Bank until April, 2016.
(b) A deposit of ` 4,000/- from a customer was entered by the bank on 30th
March, 2017. Shri Kanubhai did not receive notice of this collection until 6th
April, 2017.
(vii) The following expenditures were made during the year 2016 - 2017.
All these were paid out of account with bank:
(a) Advance payment of tax ` 6,000
(b) Household and personal expenses ` 25,600
417

(i) A statement of Shri Kanubhai's income for the year ending 31st March, 2017.
(ii) His balance sheet as on that date, and
(iii) Supporting schedules
418

Question 19
From the following information, calculate the amount of Sundry Debtors as on 31.3.2010
Balance as on 1.4.2009 is ` 50,000.
Bad debts are 2% and discount to the customers is given @ 1% of the opening balance
of Sundry Debtors.
Returns from the customers are ` 3,000.
Cash received from Debtors is ` 2,30,000.
Cash received from Debtors in transit is ` 14,000.
Cash Sales are ` 5,00,000.
Credit Sales are ` 2,50,000. (May 2010)

Question 20
The books of account of Ruk Ruk Maan of Mumbai showed the following figures:
31.3.2008 31.3.2009
` `
Furniture & Fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ?
Cash in hand & Bank 1,10,000 ?
Creditors 1,35,000 1,90,000
Bills Payable 70,000 80,000
Outstanding Salaries 19,000 20,000
An analysis of the cash book revealed the following:

`
Cash sales 16,20,000
Collection from debtors 10,58,000
Discount allowed to debtors 20,000
Cash purchases 6,15,000
Payment to Creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
419
Depreciation is provided, on furniture & fixtures @ 10% p.a. on diminishing balance

method. Ruk Ruk Maan maintains a steady gross profit rate of 25% on sales.
You are required to prepare trading and profit and loss account for the year ended 31st
March, 2009 and Balance Sheet as on that date. (May 2010 – IPCC)
Question 21
Mr. A runs a business of readymade garments. He closes the books of accounts on 31st
March, 2010. The balance sheet as on 31st March, 2010 was as follows:
A’s capital a/c 4,04,000 Furniture 40,000
reditors 82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4,86,000 4,86,000
You are furnish with the following information:

(1) His sales, for the year ended 31st March, 2011 were 20% higher than the sales of
previous year, out of which 20% sales was cash sales. Total sales during the year
2009-10 were ` 5,00,000.
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay by cheques only.
(4) Depreciation on furniture is to be charged 10% p.a.
(5) Mr. A sent to the bank the collection of the month at the last date of the each month
after paying salary of ` 2,000 to the clerk, office expenses ` 1,200 and personal
expenses ` 500.
Analysis of bank pass book for the year ending 31st March, 2011 disclosed the
following:
`
Payment of rent up to 31st March, 2011 16,000
Cash deposited into the bank during the year 80,000
420
The following are the balances on 31st March, 2011:

`
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March 2011, the cashier absconded with the available cash in
the cash box.
March, 2011 and Balance Sheet as on that date. All the workings should form part of
the answer. (May 2011 – Accounting)
Question 22
A sole trader requests you to prepare his Trading and Profit & Loss Account for the year
ended on 31st March, 2013 and Balance sheet as at that date. He provides you the
following information:
Statement of Affairs as at 31st March, 2012

Bank Overdraft 4,270 Furniture 96,000
Outstanding Expenses Computer 24,300
Salaries 8,000 Mobile Phone 8,000
Rent 6,000 14,000 Stock 89,500
Bills Payable 22,500 Trade Debtors 55,000
Trade Creditors 52,500 Bills Receivable 15,000
Capital Unexpired Insurance 2,400
(balancing figure) 1,97,430 Stock of Stationery 200
Cash in Hand 300
2,90,700 2,90,700
He informs you that there has been no addition to or sale of Furniture, Computer and
Mobile Phone during the accounting year 2012 – 2013. The other assets and liabilities on
31st March, 2013 are as follows:
421
`
Stock 95,400
Trade Debtors 65,000
Bills Receivable 20,000
Unexpired Insurance 2,500
Stock of Stationery 250
Cash at Bank 18,000
Cash at Hand 7,230
Salaries Outstanding 8,300
Rent Outstanding 6,000
Bills Payable 26,500
Trade Creditors 76,000
He also provides to you the following summary of his cash transactions:
Receipts ` Payments `
Cash Sales 5,09,800 Trade Creditors 3,06,000
Trade Debtors 1,51,900 Bills Payable 80,000
Bills Receivable 65,000 Salaries 99,000
Rent 72,000
Insurance Premium 10,000
Stationery 1,500
Mobile Phone Expenses 9,000
Drawings 1,20,000
It is found prudent to depreciate Furniture @ 5%, Computer @ 10% and Mobile Phone
@ 25%. A provision for bad debts @ 5% on Trade Debtors is also considered desirable.
(May 2013)
Question 23
The details of Assets and Liabilities of Mr. 'A' as on 31-3-2012 and 31-3-2013 are as
follows:
422
31-3-2012 31-3-2013
` `
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000
Sundry Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
Liabilities:
Loans 90,000 70,000
Mr. 'A' decided to provide depreciation on building by 2.5% and furniture by 10% for the
period ended on 31-3-2013. Mr. 'A" purchased jewellery for ` 24,000 for his daughter in
December 2012. He sold his car on 30-3-2013 and the amount of ` 40,000 is retained
in the business.
(i) Prepare statement of affairs as on 31-3-2012 & 31-3-2013.
(ii) Calculate the profit received by 'A' during the year ended 31-3-2013.
(Nov. 2013)
Question 24
Following are the incomplete information of Moonlight Traders:
The following balances are available as on 31.03.2013 and 31.03.2014.
Balances 31-3-2013 31-3-2014
` `
Land and Building 500,000 5,00,000
Plant and Machinery 220,000 3,30,000
Office equipment 105,000 85,000
Debtors ? 2,25,000
Creditors for purchases 95,000 ?
Creditors for office expenses 20,000 15,000
Stock ? 65,000
Long term loan from SBI @ 12%. 125,000 1,00,000
Bank 25,000 ?
Provision for tax (rate 30%) 35,000 30,000
423
Other Information:
In `
Collection from debtors 9,25,000
Payment to creditors for purchases 5,25,000
Payment of office expenses 42,000
Salary paid 32,000
Selling expenses 15,000
Cash sales 2,50,000
Credit sales (80% of total sales) ?
Credit purchases 5,40,000
Cash purchases (40% of total purchases) ?
GP Margin at cost plus 25%
Discount Allowed 5,500
Discount Received 4,500
Bad debts (2% of closing debtors)
Depreciation to be provided as follows
Land and Building 5%
Plant and Machinery 10%
Office Equipment 15%
Other adjustments:
(i) On 01.10.2013 they sold machine having Book Value ` 40,000 (as on 31.03.2013)
at a loss of ` 15,000. New machine was purchased on 01.01.2014.
(ii) Office equipment was sold at its book value on 01/04/2013,
(iii) Loan was partly repaid on 31.03.14 together with interest for the year,
Prepare Trading P & L A/c. and Balance Sheet as on 31.03.2014. (May – 2014)
Question 25
The following is the Balance Sheet of M/s. Care Traders as on 1/4/2014:
In `
Sources of Funds
Share Capital 10,00,000
Profit and Loss 1,47,800
Unsecured loan @ 10% 1,75,000
Trade Payables 45,800
13,68,600
424
Application of Funds
Machinery 8,25,500
Furniture 1,28,700
Inventory 1,72,000
Trade Receivables 2,29,600
Bank Balance 12,800
13,68,600
A fire broke out in the premises on 31/3/2015 and destroyed the books of account. The
accountant could however provide the following information:
(1) Sales for the year ended 31/3/2014 was `18,60,000. Sales for the current year were
20% higher than the last year.
(2) 25% sales were made in cash and the balance was on credit
(3) Gross profit on sales is 30%.
(4) Terms of Credit
Debtors: 2 months
Creditors: 1 month
All creditors are paid by cheque and all credit sales are collected in cheque.
(5) The Bank Pass Boot has the following details (other than payment to creditors and
collection from debtors)
In `
Machinery purchased 1,14,000
Rent paid 1,32,000
Advertisement expenses 80,000
Travelling expenses 78,400
Repairs 36,500
Sales of furniture 9,500
Cash withdrawn for petty expenses 28,300
Interest paid on unsecured loan 8,750
(6) Machinery was purchased on 1/10/2014,

(7) Rent was paid for 11 months only and 25% of the advertisement expenses relates
to the next year.
(8) Travelling expenses of ` 7,800 for which cheques were issued but not presented in
bank.
(9) Furniture was sold on 1/4/2014 at a loss of ` 2,900 on book value.
425
(10) Physical vertification as on 31/3/2015 ascertained the stock position at ` 1,81,000

and petty cash balance at nil.
(11) There was no change in unsecured loan during the year.
(12) Depreciation is to be provided at 10% on machinery and 20% on furniture.
Prepare Bank Account, Trading and Profit and Loss Account for the year ended 31/3/2015
in the books of M/s. Care Traders and a Balance Sheet as on that date. Make necessary
assumptions wherever necessary. (May 2015 – Group 1)
Question 26
A company sold, 20% of the goods on cash basis and the balance on credit basis. Debtors
are allowed month’s credit and their balance as on 31/03/2015 is ` 1,25,000. Assume
that the sale is uniform throughout the year. Calculate the credit sales and total sales of
the company for the year ended on 31/03/2015.
Question 27
The following is the Balance Sheet of Manish and Suresh as on 1st April, 2015:
Capital: Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for goods 30,000 Debtors 50,000
Creditors for expenses 25,000 Bank 25,000
2,80,000 2,80,000
They give you the following additional information:

(i) Creditors' Velocity 1.5 month & Debtors' Velocity 2 months.
(ii) Stock level is maintained uniformly in value throughout all over the year.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the
current year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current
year will increase by 25% in volume.
(v) Rate of gross profit remains the same.
(vi) Business Expenditures are ` 50,000 for the year. All expenditures are paid off in
cash.
(vii) Closing stock is to be valued on LIFO Basis.
Prepare Trading, Profit and Loss Account, Trade Debtors A/c and Trade Creditors A/c
for the year ending 31.03.2016. (May 2016 – Group 1)
426
Question 28
The following particulars are obtained from books of Prime Ltd. for the year ended 31st
March 2016:
` `
Cash Sales 50,000Bills Receivable dishonoured 5,000
Credit Purchases 5,60,000Return Inward 17,000
Collection from Debtors 8,50,000Payment to creditors 3,24,000
Bills Receivable drawn 40,000Discount allowed 6,000
Discount Received 5,000Debtor's cheque returned
Cash Purchases 24,000dishonoured 15,000
Bills Payable Paid 13,000Credit Sales 9,80,000
Recovery of Bad debts 3,000Bills Receivable Collected
Bills receivable discounted Return Outward 20,000
with Bank 16,000 Bills Receivable endorsed to
Interest charged on overdue Creditors 7,400
customer's A/c. 2,400 Overpayment refunded by
Endorsed Bills Receivable Suppliers 15,800
dishonoured (noting charges Bad debts 1,200
` 150) 11,000 Opening Balances: 2,000
Bills payable accepted 32,000 Sundry Debtors 1,56,000
Sundry Creditor 1,70,000
You are required to prepare the Total Debtors Account and Total Creditors Account.
(Nov. 2016 – Group 1)
Question 29
The following information relates to the business of ABC Enterprises, who requests you
to prepare a Trading and Profit & Loss A/C for the year ended 31st March, 2017 and a
Balance Sheet as on that date.
(a) Assets and Liabilities as on
In `
1/4/2016 31/3/2017
Furniture 60,000 63,500
Stock 80,000 70,000
Sundry Debtors 1,60,000 -
Sundry Creditors 1,10,000 1,50,000
Prepaid Expenses 6,000 7,000
Outstanding Expenses 20,000 18,000
Cash in Hand & Bank Balance 12,000 26,250
427
(b) Cash transaction during the year:

(i) Collection from Debtors, after allowing discount of ` 15,000 amounted to
` 5,85,000.
(ii) Collection on discounting of Bills of Exchange, after deduction of discount of
` 1250 by bank, totalled to ` 61,250.
(iii) Creditors of ` 4,00,000 were paid ` 3,92,000 in full settlement of their dues.
(iv) Payment of Freight inward of ` 30,000.
(v) Amount withdrawn for personal use ` 70,000.
(vi) Payment for office furniture ` 10,000.
(vii) Investment carrying annual interest of 6% were purchased at ` 95 (200 shares,
face value ` 100 each) on 1st October 2016 and payment made thereof.
(viii) Expenses including salaries paid ` 95,000.
(ix) Miscellaneous receipt of ` 5,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounted
to ` 1,00,000. Of these, bills of exchange of ` 20,000 were endorsed in favor of
creditors. An endorsed bill of exchange of ` 4,000 was dishonored.
(d) Goods costing ` 9,000 were used as advertising material.
(e) Goods are invariably sold to show a gross profit of 20% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction of
capital by proprietor of ABC enterprises.
(g) Provide at 2% for doubtful debts on closing debtors. (May 2017 – Group 1)
Question 30
Mr. Aman is running a business of readymade garments. He does not maintain his books
of accounts under double entry system. While assessing the income of Mr. Aman for
the financial year 2016-17, Income Tax Officer feels that he has not disclosed the full
income earned by him from his business. He provides you the following information:
On 31st March, 2016
Sundry Assets ` 16,65,000
Liabilities ` 4,13,000
On 31st March, 2017
Sundry Assets ` 28,40,000
Liabilities ` 5,80,000
Mr. Aman's drawings for the year 2016-17 ` 32,000 per month
Income declared to the Income Tax Officer ` 9,12,000
428
During the year 2016-17, one life insurance policy of Mr. Aman was matured and amount
received ` 50,000 was retained in the business.
State whether the Income Tax Officer's contention is correct. Explain by giving your
working. (Nov. 2017 – Group 1)
Question 31
Aman, a readymade garment trader, keeps his books of account under single entry
system. On the closing on 31st March, 2017 his statement of affairs stood as follows:
Aman's capital 4,80,000 Building 3,25,000

Loan 1,50,000 Furniture 50,000
Creditors 3,10,000 Motor car 90,000
Stock 2.00,000
Debtors 1,70,000
Cash in hand 20,000
Cash at bank 85,000
9,40,000 9,40,000
Riots occurred and a fire broke out on the evening of 31st March, 2018, destroying the
books of accounts. On that day, the cashier had absconded with the available cash.
You are furnished with the following information:
1. Sales for the year ended 31st March, 2018 were 20% higher than the previous year's
sales, out of which, 20% sales were for cash. He always sells his goods at cost plus
25%. There were no cash purchases.
2. Collection from debtors amounted to ` 14,00,000, out of which ` 3,50,000 was

received in cash.
3. Business expenses amounted to ` 2,00,000, of which ` 50,000 were outstanding on

31st March, 2018 and ` 60,000 paid by cheques.
4. Gross profit as per last year's audited accounts was ` 3,00,000.
5. Provide depreciation on building and furniture at 5% each and motor car at 20%.
429
6. His private records and the Bank Pass Book disclosed the following transactions for
the year 2017-18:
`
Payment to creditors (paid by cheques) 13,75,000
Personal drawings (paid by cheques) 75,000
Repairs (paid by cash) 10,000
Travelling expenses (paid by cash) 15,000
Cash deposited in bank 7,15,000
Cash withdrawn from bank 1,20,000
7. Stock level was maintained at ` 3,00,000 all throughout the year.
8. The amount defalcated by the cashier is to be written off to the Profit and Loss
Account.
March, 2018 and Balance Sheet as on that date of Aman. All the workings should form
part of the answer. (Nov. 2018 – Group 1)
Question 32
From the following information, prepare Trading and Profit & Loss Account for the year
ended 31/03/2018 and the Balance Sheet as at 31/03/2018 of M/s Prasad & Co., a
proprietorship firm.
Assets & Liabilities As on 01/04/2017 As on 31/03/2018

Creditors 20,000 15,000
Outstanding Expenses 600 800
Stock 10,000 12,000
Cash in hand & at bank 10,000 12,000
Debtors ? 18,000
430
Details of the year's transactions are as follows:
(1) Discounts allowed to Debtor 4,000

(2) Returns from debtors 1,450
(3) Bad debts 500
(4) Total sales (Cash and Credit) 72,000
(5) Discount allowed by creditors 700
(6) Returns to creditors 400
(7) Receipts from debtors paid into Bank 76,000
(8) Cash purchases 1,000
(9) Expenses paid by cash 9,000
(10) Drawings by cheque 500
(11) Purchase of Fixed Assets by cheque 4,000
(12) Cash deposited into bank 5,000
(13) Cash withdrawn from bank 9,000
(14) Cash in hand at 31.03.2018 2,000
(15) Payments to creditors by cheque 60,000
No assets were sold during the year. (Nov. 2018 – IPCC Group 1)
Question 33
The following balances appeared in the books of M/s Sunshine Traders:
As on As on
31-03-2018 31-03-2019
(`) (`)
Land and Building 2,50,000 2,50,000
Plant and Machinery 1,10,000 1,65,000
Office Equipment 52,500 42,500
Sundry Debtors 77,750 1,10,250
Creditors for Purchases 47,500 ?
Provision for office expenses 10,000 7,500
Stock ? 32,500
Long Term loan from ABC Bank @ 10% per annum 62,500 50,000
Bank 12,500 ?
Capital 4,65,250 ?
431
Other information was as follows:

In (`)
- Collection from Sundry Debtors 4,62,500
- Payments to Creditors for Purchases 2,62,500
- Payment of office Expenses 21,000
- Salary paid 16,000
- Selling Expenses paid 7,500
- Total sales 6,25,000
Credit sales (80% of Total sales)
- Credit Purchases 2,70,000
Cash Purchases (40% of Total Purchases)
- Gross Profit Margin was 25% on cost
- Discount Allowed 2,750
- Discount Received 2,250
- Bad debts 2,250
- Depreciation to be provided as follows:
Land and Building - 5% per annum
Plant and Machinery - 10% per annum
Office Equipment - 15% Per annum
- On 01.10.2018 the firm sold machine having book value, ` 20,000 (as on 31.03.2018)
at a loss of ` 7,500. New machine was purchased on 01.01.2019.
- Office equipment was sold at its book value on 01.04.2018.
- Loan was partly repaid on 31.03.2019 together with interest for the year.
You are required to prepare:
(i) Trading and Profit & Loss account for the year ended 31st March, 2019.
(ii) Balance Sheet as on 31st March 2019. (12 Marks – May 2019 – Inter)
Question 34
Archana Enterprises maintain their books of accounts under single entry system. The
Balance-Sheet as on 31st March, 2018 was as follows:
Liabilities Amount (`) Assets Amount (`)
Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding expenses 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000
Cash in hand & at bank 1,20,000
15,00,000 15,00,000
The following was the summary of cash and bank book for the year ended 31st March, 2019:
432
Receipts Amount (`) Payments Amount (`)

Cash in hand & at Bank Payment to
on 1st April, 2018 1,20,000 trade creditors 1,24,83,000
Cash sales 1,10,70,000 Sundry expenses paid 9,31,050
Receipts from trade Drawings 3,60,000
debtors 27,75,000 Cash in hand & at Bank
on 31st March, 2019
1,90,950
1,39,65,000 1,39,65,000
(i) Discount allowed to trade debtors and received from trade creditors amounted to
` 54,000 and ` 42,500 respectively (for the year ended 31st March, 2019).
(ii) Annual fire insurance premium of ` 9,000 was paid every year on 1st August for the
renewal of the policy.
(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on diminishing balance
method.
(iv) The following are the balances as on 31st March, 2019:
Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.
You are required to prepare Trading and Profit & Loss account for the year ended
31st March, 2019, and Balance Sheet as on that date.
Question 35
M/S Rohan & Sons runs a business of Electrical goods on wholesale basis. The books
of accounts are closed on 31st March every year. The Balance Sheet as on 31st March,
2019 is as follows:

Trade Creditors 1,90,000 Closing stock 3,75,000
Profit & Loss A/c 1,45,000 Trade Debtors 3,65,000
Cash & Bank 1,95,000
15,85,000 15,85,000
433
The management estimates the purchase & sales for the year ended 31st March, 2020
as under:
Particulars Upto 31.01.2020 (`) February 2020 (`) March 2020 (`)
Purchases 16,20,000 1,40,000 1,25,000
Sales 20,75,000 2,10,000 1,75,000
All sales and Purchases are on credit basis. It was decided to invest `1,50,000 in purchase
of fixed assets, which are depreciated @ 10% on book value. A Fixed Asset of book value
as on 01.04.2019, `60,000 was sold for `56,000 on 31st March, 2020.
The time lag for payment to Trade creditors for purchases is one month and receipts
from Trade debtors for sales is two months. The business earns a gross profit of 25% on
turnover. The expenses against gross profit amounts to 15% of the turnover. The amount
of depreciation is not included in these expenses.
Prepare Trading & profit & Loss Account for the year ending 31st March, 2020 and draft
a Balance Sheet as at 31st March, 2020 assuming that creditors are all Trade creditors
for purchases and debtors are all Trade debtors for sales and there is no other current
assets and liabilities apart from stock and cash and bank balances. Also, prepare Cash
& Bank account and Fixed Assets account for the year ending 31' March, 2020.
434

Accounting

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting

Uploaded by

Copyright:

Available Formats

INTER CA

Welcome to the World of Knowledge - J.K. Shah Classes !

Each Topic of four parts :

I wish you a very happy study time.

Prof. J.K. Shah.

Sr. No PARTICULARS PAGE

1 Accounting Standards 1-132

Redemption of Redeemable Preference

3 Redemption of Debentures 156-167

4 Company Final Accounts 168-194

5 Cash Flow Statement 195-219

6 Profit Prior To Incorporation 220-242

7 Investment Accounts 243-262

8 Fire Insurance Claim 263-300

9 Hire Purchase Installment Selling 301-316

10 Departmental Accounts 317-340

11 Branch Accounts 341-394

12 Single Entry System 395-434

1. What are Accounting Standards?

2. Which Issues are Covered by AS?

4. How Many AS?

5. To Whom AS are Applicable?

PAST PAPER SECTION

(ii) Comparability of financial statements: The application of accounting standards would,

However, there are some limitations of setting of accounting standards:

1. WHAT ARE ACCOUNTING POLICIES?

2. EXAMPLES OF DIFFERENT ACCOUNTING POLICIES :

• INSIGNIFICANT ACCOUNTING POLICIES:

• FUNDAMENTAL ACCOUNTING ASSUMPTIONS:

The following are generally accepted fundamental accounting assumptions:

5. FACTORS TO BE CONSIDERED WHILE CHOOSING AN ACCOUNTING POLICIES:

Secondary consideration governing selection and application of accounting policies are:

• Substance over form:

6. CHANGES IN ACCOUNTING POLICIES:

(ii) If fundamental accounting assumptions are not followed in presentation and

PAST PAPER SECTION

3. Realisable (Settlement) Value:

Particulars Financial Capital Maintenance at

Historical Acquisition price. According to this, assets are recorded at an

value of the inventory as on 31.03.2020 amounts to ` 2,07,000.

1. WHY VALUATION OF INVENTORY IS REQUIRED ?

2. MEANING / DEFINITION OF INVENTORY As Per AS-2 :

7. METHODS OF INVENTORY VALUATION :

it were to result in estimation of value of inventory that approximates the

10. DISCLOSURES REQUIRED :

Cost (`) NRV (`)

Find out the value of inventories of

Hence, closing stock will be valued at ` 76 lakhs.

Amount of Abnormal Loss:

selling price ` 300 per unit less additional cost of ` 60).

Valuation of Total Inventory as on 31.03.2015:

PAST PAPER SECTION

Qty. Rate (`) Amount (`)

Valuation of Total Inventory as on 31.03.2019:

AS – 10 PROPERTY, PLANT &

2. AS 10 DOES NOT APPLY :

3. AT WHAT VALUE SHOULD ANY ASSET BE SHOWN IN BALANCE SHEET ?

- Cost of jointly held assets

recognition criteria then such expense is recognized as a separate component

Calculate the cost of the fixed asset.

PAST PAPER SECTION

Depreciation for the year 2013-14

Less: Depreciation for 2013- 15,000 15,000 Depreciation