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Question Paper

Financial Accounting – I (MB131) : October 2006

• Answer all questions.

• Marks are indicated against each question.

1. Gross profit is the difference between

(a) Net sales and cost of goods sold

(b) PAT and dividends

(c) Net sales and cost of production

(d) Net sales and direct costs of production

(e) Net sales and net purchases.

(1 mark)

< Answer >

2. Recording of capital contributed by the owner as liability ensures the adherence of principle of

(a) Double entry

(b) Going concern

(c) Separate entity

(d) Materiality

(e) Consistency.

(1 mark)

< Answer >

3. If the going concern concept is no longer valid, which of the following is true?

(a) All prepaid assets would be completely written off immediately

(b) Total contributed capital and retained earnings would remain unchanged

(c) The allowance for uncollectable accounts would be eliminated

(d) Intangible assets would continue to be carried at net amortized historical cost

(e) Land held as an investment would be valued at its realizable value.

(1 mark)

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4. The accounting measurement that is not consistent with the going concern concept is

(a) Historical cost

(b) Realization

(c) The transaction approach

(d) Liquidation value

(e) Continuity.

(1 mark)

< Answer >

5. X Ltd. purchased goods for Rs.5 lakh and sold 9/10th of the value of goods for Rs.6 lakh. Net expenses during

the year were Rs.25,000. The company reported its net profit as Rs.75,000. Which of the following concepts is

violated by the company?

(a) Realization

(b) Conservation

(c) Matching

(d) Accrual

(e) Materiality.

(1 mark)

< Answer >

6. Which of the following statements are/is true? “Events after balance sheet date” are

(a) All the significant events after the balance sheet date

(b) The events after balance sheet date but before submitting it to the Registrar of Companies

(c) The events after balance sheet date but before its approval by the board

(d) All changes after balance sheet date but before its approval by the shareholders

(e) All the errors rectified after the balance sheet date.

(1 mark)

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7. Which of the following is true with respect to reporting of contingencies?

(a) Guarantees of others’ indebtedness are reported as a loss contingency only if the loss is considered

imminent or highly probable

(b) Disclosure of a loss contingency is to be made if there is a remote possibility that the loss has been

incurred

(c) Disclosure of a loss contingency must include a rupee estimate of the loss

(d) Disclosure of a loss contingency is required for unasserted claims even if there is no manifestation of the

claim and only a remote possibility that the outcome will be unfavorable

(e) A loss that is probable but cannot be estimated must be disclosed with a notation that the amount of the

loss cannot be estimated.

(1 mark)

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8. Which of the following is not treated as `unusual item’ by AS-5?

(a) Sale of significant part of the business

(b) Sale of investment acquired without an intention of resale

(c) Write-off of inventory due to obsolescence

(d) Liability arising on account of legislative changes

(e) Liability arising on account of judicial pronouncements.

(1 mark)

< Answer >

9. Which of the following items is/are covered under Accounting Standard-2 with regard to accounting for

inventory?

I. Financial instruments held as stock-in-trade.

II. Work-in-progress arising under construction contracts.

III. Work-in-progress of service providers.

IV. Work-in-progress of a manufacturing industry.

(a) Only (I) above

(b) Only (IV) above

(c) Both (I) and (II) above

(d) Both (III) and (IV) above

(e) (II), (III) and (IV) above.

(1 mark)

< Answer >

10. When fixed assets are sold

(a) The total assets will increase

(b) The total liabilities will increase

(c) The total assets will decrease

(d) There is no change in the total assets

(e) The liabilities will decrease.

(1 mark)

< Answer >

11. Withdrawals by proprietor would

(a) Reduce both assets and owner’s equity

(b) Reduce assets and increase liabilities

(c) Reduce owner’s equity and increase liabilities

(d) Have no affect on the balance sheet

(e) Reduce owner’s equity and increase assets.

(1 mark)

< Answer >

12. If the petty cash fund is not reimbursed just prior to an year end and an appropriate adjusting entry is not made,

then

(a) A complete audit is necessary

(b) The petty cash account is to be returned to the company’s cashier

(c) Expenses are overstated and cash is understated

(d) Cash is overstated and expenses are understated

(e) Cash is overstated and expenses are overstated.

(1 mark)

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13. Which of the following statements is false?

(a) When the bank column of a cash book shows a credit balance, it means an amount is due to the bank

(b) When passbook shows a debit balance, it means overdraft as per passbook

(c) While preparing bank reconciliation statement, cheques paid into bank but not yet cleared are deducted

from the balance as per cash book to arrive at the balance as per passbook

(d) A bank reconciliation statement is a part of passbook

(e) A bank reconciliation statement is a statement, but not the account by the customer of the bank.

(1 mark)

< Answer >

14. ABC Ltd. makes payments to its sundry creditors through cheques and the cash discount received on these

payments is recorded in the triple columnar cash book. In the event of dishonour of any such cheques, the

discount so received should be written back through

I. A debit to discount column of the cash book.

II. A credit to discount column of the cash book.

III. A credit to bank column of the cash book.

IV. A debit to discount account through journal proper.

V. A credit to creditor’s account through journal proper.

(a) Only (I) above

(b) Only (II) above

(c) Only (IV) above

(d) Both (I) and (III) above

(e) Both (IV) and (V) above.

(1 mark)

< Answer >

15. If office equipment is purchased for cash, what effect will this transaction have on the financial position of the

company?

(a) There is no change in the assets, liabilities and owners’ equity

(b) There is a decrease in assets, increase in liabilities and no change in owners' equity

(c) There is a decrease in assets, no change in liabilities and a decrease in owners' equity

(d) There is an increase in assets, decrease in liabilities and no change in owners’ equity

(e) There is an increase in assets, no change in liabilities and an increase in owners’ equity.

(1 mark)

< Answer >

16. The adjustment to be made for prepaid expenses is

(a) Add prepaid expenses to respective expenses and show it as asset

(b) Deduct prepaid expenses from respective expenses and show it as an asset

(c) Add prepaid expenses to respective expenses and show it as a liability

(d) Deduct prepaid expenses from respective expenses and show it as liability

(e) Deduct prepaid expenses from respective income and show it as an asset.

(1 mark)

< Answer >

17. Closing stock in the trial balance implies that

(a) It is already adjusted in the opening stock

(b) It is adjusted in the purchase a/c

(c) It is adjusted in the cost of sale a/c

(d) It is adjusted in the sale a/c

(e) It is adjusted in the profit and loss a/c.

(1 mark)

< Answer >

18. Which of the following statements is correct?

(a) Depreciation cannot be provided in case of loss in a financial year

(b) Depreciation is a charge against profit

(c) Depreciation is provided in the books only when there is profit

(d) Depreciation is an appropriation of profit

(e) Depreciation is a loss to the business.

(1 mark)

< Answer >

19. While finalizing the current year’s accounts, the company realized that an error was made in the calculation of

closing stock of the previous year. In the previous year, closing stock was valued more by Rs.50,000. As a result

< Answer >

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closing stock of the previous year. In the previous year, closing stock was valued more by Rs.50,000. As a result

(a) Previous year’s profit is overstated and current year’s profit is also overstated

(b) Previous year’s profit is understated and current years profit is overstated

(c) Previous year’s profit is understated and current years profit is also understated

(d) Previous year’s profit is overstated and current years profit is understated

(e) There will be no impact on the profit of either the previous year or the current year.

(1 mark)

20. Sundry debtors as per Trial Balance is Rs.43,000 which includes Rs.2,200 due from `H’ in respect of goods sent

to him on approval basis, the cost price of which is Rs.1,800. Rectification would involve:

(a) Adding Rs.2,200 to closing stock

(b) Deducting Rs.1,800 from closing stock and deducting Rs.2,200 each from debtors and sales

(c) Adding Rs.1,800 to closing stock and deducting Rs.2,200 each from debtors and sales

(d) Deducting Rs.1,800 from debtors

(e) Deducting Rs.1,800 from sales.

(1 mark)

< Answer >

21. Which of the following equations is correct?

(a) Gross profit + Sales + Direct expenses + Purchases + Closing stock = Opening stock

(b) Gross profit + Sales + Direct expenses + Purchases – Closing stock = Opening stock

(c) Gross profit + Opening stock + Direct expenses + Purchases – Closing stock = Sales

(d) Gross profit – Opening Stock + Direct expenses + Purchases + Closing stock = Sales

(e) Gross profit + Purchases – Administrative and other expenses = Net profit.

(1 mark)

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22. Cash profit is

(a) Gross profit – Net profit

(b) Net profit – Non-trading profit – Depreciation and provision

(c) Gross profit – Non-trading profit + Depreciation and provision

(d) Net profit + Depreciation and provision

(e) Gross profit – Operational expenses.

(1 mark)

< Answer >

23. Which of the following is not a financial statement?

(a) Profit and loss account

(b) Profit and loss appropriation account

(c) Balance sheet

(d) Cash flow statement

(e) Trial Balance.

(1 mark)

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24. Tax deducted at source appears in the Balance Sheet __________ .

(a) On the assets side under current assets

(b) On the assets side under loans and advances

(c) On the liabilities side under current liabilities

(d) On the liabilities side under provisions

(e) On the assets side under miscellaneous expenditure.

(1 mark)

< Answer >

25. Which of the following statements is true?

(a) The balance of the goods account shows the value of stock in hand

(b) Balancing of all accounts must be done at the end of each day

(c) Balances of nominal accounts are carried forward to the next financial year

(d) Assets which are to remain in business for continuous use and not meant for conversion into cash are

fixed assets

(e) Balance sheet discloses income position of the business.

(1 mark)

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26. Cost of production is equal to

(a) Prime costs + Other manufacturing costs

(b) Production costs + Administration expenses

(c) Works cost + Administration costs + Selling expenses

(d) Prime costs + Manufacturing costs + Opening W.I.P – Closing W.I.P

(e) Prime cost + Other manufacturing costs + Administrative expenses.

(1 mark)

< Answer >

27. By-products should be valued at

(a) Cost

(b) Net realizable value

(c) Cost or net realizable value whichever is less

(d) Cost or net realizable value whichever is more

(e) Cost or market value whichever is less.

(1 mark)

< Answer >

28. During a period of steadily rising prices, which of the following methods of measuring the cost of goods sold is

likely to result in the lowest possible taxable income?

(a) Average cost

(b) Weighted average cost

(c) First in first out

(d) Last in first out

(e) Next in first out.

(1 mark)

< Answer >

29. The method of pricing inventory where all items are assigned the same unit cost is

(a) LIFO

(b) FIFO

(c) Average cost

(d) Specific identification

(e) Base stock.

(1 mark)

< Answer >

30. Revenues of an entity are normally measured by the exchange values of the assets or liabilities involved.

Recognition of revenues does not occur until

(a) The revenue is recognized and assured of collection

(b) The revenue is realized and earned

(c) Products or services are exchanged for cash or claims to cash

(d) The company has substantially accomplished what it agreed to do

(e) The revenue is earned and recorded.

(1 mark)

< Answer >

31. Which of the following methods is not a practical way of realizing revenue?

(a) Delivery method

(b) Percentage-of-completion method

(c) Production method

(d) Installment method

(e) Moving average method.

(1 mark)

< Answer >

32. The cost of self-constructed assets is taken as

(a) Prime cost + Indirect cost

(b) Construction cost + Interest cost on funds borrowed for construction till all the inputs are acquired

(c) Construction cost + Interest cost on funds borrowed for construction till the asset is ready for its intended

use

(d) Construction costs + Interest on borrowing – Losses due to strikes

(e) Total construction cost or market value whichever is less.

(1 mark)

< Answer >

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33. Which of the following items should not be capitalized according to AS-10, relating to fixed assets?

(a) Interest payable on loans or deferred credits taken for the acquisition or construction of fixed assets

before they are ready for use

(b) Stand by equipment and servicing equipment

(c) Expenditure incurred on test runs and experimental production

(d) Administration and general expenses

(e) Cost of the asset if it is acquired through a trade-in.

(1 mark)

< Answer >

34. Which of the following is true with respect to providing depreciation under diminishing balance method?

(a) The amount of depreciation keeps increasing every year while the rate of depreciation keeps decreasing

(b) The amount of depreciation and the rate of depreciation decrease every year

(c) The amount of depreciation decreases while the rate of depreciation remains the same

(d) The amount of depreciation and the rate of depreciation increases every year

(e) The amount of depreciation increases while rate of depreciation remains the same.

(1 mark)

< Answer >

35. From which of the following accounts can transfers be made to capital redemption reserve?

(a) Share premium

(b) Capital reserve

(c) Development rebate reserve

(d) Profits prior to incorporation

(e) Sinking fund.

(1 mark)

< Answer >

36. Which of the following statements is true with regard to the underwriting commission?

(a) It is paid to the underwriters on the amount of subscription procured by them

(b) It is paid to the underwriters on the amount of shares or debentures underwritten by them

(c) It is paid only for the amount subscribed by the general public and not on firm underwriting

(d) Underwriting commission is not paid on the amount of shares or debentures devolved on the

underwriters

(e) Underwriting commission is paid on the amount of privately placed issue.

(1 mark)

< Answer >

37. The premium collected on issue of debentures is transferred to

(a) Profit & loss account

(b) Profit & loss appropriation account

(c) Capital reserve account

(d) Reserve capital account

(e) General reserve account.

(1 mark)

< Answer >

38. As per Schedule VI, which of the following is true regarding the treatment of calls in arrears in the final

accounts of a company?

(a) The amount will be shown under the head `current assets’ on the assets side of the balance sheet

(b) The amount will be deducted from the share capital in the balance sheet

(c) The amount will be shown under the head `current liabilities’

(d) The amount will be shown in the P & L account as a loss without showing it in the balance sheet

(e) The amount will be added to the share capital in the balance sheet.

(1 mark)

< Answer >

39. Brokerage on shares can be paid by the listed companies, in respect of

(a) Rights issue taken up by the existing shareholders

(b) Rights issue renounced by the existing shareholders

(c) Private placement of shares

(d) Applications made by institutions / banks against their underwriting commitments

(e) Shares taken by directors’ friends.

(1 mark)

< Answer >

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40. Which of the following statements is not true regarding the issue of convertible debentures?

(a) Compulsory credit rating is required if conversion of FCDs is made after 18 months from the date of

allotment

(b) The discount on non-convertible portion of PCDs need not be disclosed in prospectus

(c) Issue of FCDs with a conversion period of more than 36 months will not be permissible

(d) Premium on conversion of FCDs shall be predetermined

(e) Any conversion, in part or whole, will be optional at the hands of the debenture holder, if it takes place

after 18 months from the date of allotment.

(1 mark)

< Answer >

41. Sinking fund for redemption of debentures is created out of

(a) Reserve capital account

(b) Capital reserve account

(c) Share premium account

(d) Current year profit

(e) Capital redemption reserve account.

(1 mark)

< Answer >

42. The cost price of a long-term construction project is Rs.7,20,000 and total costs are estimated at Rs.5,00,000.

During the first year, cost incurred on the project amounted to Rs.3,00,000. If the percentage of completion

method is used, the gross profit recognized for the year on the project would be

(a) Rs.2,20,000

(b) Rs.2,00,000

(c) Rs.1,50,000

(d) Rs.1,20,000

(e) Rs.1,32,000.

(2 marks)

< Answer >

43. The balance shown on the bank statement is Rs.3,093 but this does not agree with the cash book. The differences

are found to be a cheque written by the firm for Rs.30 not yet presented; a standing order of the firm to bank for

payment of Rs.21 recorded in cash book only; a dividend of Rs.84 paid direct to the bank.

The balance shown in the cash book is

(a) Rs.2,958

(b) Rs.2,988

(c) Rs.3,000

(d) Rs.3,126

(e) Rs.3,228.

(2 marks)

< Answer >

44. The bank passbook of Reddy Ltd. showed a credit balance of Rs.6,300 on December 31, 2005. The cash book

bank balance did not agree with the bank passbook balance. The reasons were as follows:

i. On Dec. 27th, two customers of Reddy Ltd. had paid direct to the company’s bank account Rs.499 and

Rs.157 respectively in payment of goods supplied. The advices were not received by the company until Jan,

1st, and were entered in the cash book under that date. ii. On September 30, the company had entered into a hire purchase agreement to pay by banker’s order a sum of

Rs.26 on the 10th day of each month, commencing from October. No entries had been made in the cash book.

iii. Rs.364 paid into the bank had been entered twice in the cash book.

The bank balance as per cash book on December 31, 2005 was

(a) Rs.5,358 (favorable)

(b) Rs.5,930 (favorable)

(c) Rs.6,514 (favorable)

(d) Rs.6,086 (favorable)

(e) Rs.6,670 (favorable).

(2 marks)

< Answer >

45. The accountant of Narmada Ltd. has drawn the below trial balance on March 31, 2006.

Particulars Debit Credit

< Answer >

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Rs. Rs.

Opening stock 10,000

Purchases 50,000

Reserve fund 5,000

Carriage on goods purchased 1,000

Bank deposit 50,000

Cash in hand 2,000

Purchase returns 1,500

Sales 92,600

Sales returns 2,400

Capital 1,50,000

Import duty 1,200

Export duty 1,050

Debtors 50,000

Creditors 22,500

Plant and Machinery 62,500

Salary 20,000

Wages 10,000

B/R 15,000

B/P 10,000

Interest received 3,000

Commission on sales 1,000

Miscellaneous expenses 6,600

Carriage on goods sold 1,850

Total 2,01,100 3,68,100

In the above trial balance which of the following accounts are wrongly placed?

(a) Opening stock, Reserve fund, bank deposits, carriage on goods purchased

(b) Reserve fund, Bank deposits, Purchase returns, Export duty, Import duty

(c) Reserve fund, Carriage on goods sold, Creditors, Plant and machinery, Commission on sales

(d) Plant and machinery, Creditors, Purchase returns, Bank deposits, Reserve fund

(e) Creditors, Debtors, Sales, Purchases and Commission on sales.

(3 marks)

46. Kamraj & Co. employs 15 workers who are paid Rs.3,500 per month. On April 01, 2005 the proprietor revised

their pay with effect from January 01, 2005 to Rs.4,000 per month. On March 31, 2006 Rs.8,000 were

outstanding. The amount of wages to worker to be debited to Trading account for the period ended March 31,

2006 was

(a) Rs.9,00,000

(b) Rs.7,87,500

(c) Rs.7,20,000

(d) Rs.7,28,000

(e) Rs.7,12,000.

(2 marks)

< Answer >

47. The following balances are extracted from the books of Shangai & Co. for the year ended March 31, 2006.

Particulars Rs.

Credit Sales 9,36,000

Debtors balance (as on April 1, 2005) 97,200

Discount allowed 5,600

Cash received from debtors 8,40,000

Return inward 22,000

Carriage outward 4,200

i. A cheque of Rs.3,100 received from Mr.Reddy, a customer, has been returned by the bank with the reason

“Refer to drawer”.

ii. During the year, Rs.3,900 has been declared as bad debts.

The closing balance in the sundry debtors account after effecting the above adjustments is

< Answer >

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(d) Rs.1,90,700

(e) Rs.1,86,800.

(2 marks)

48. Trial Balance of Aakash as at 31st December, 2005 is as under:

Particulars Debit Credit

Rs. Rs.

Purchases 1,65,625

Sales 2,56,650

Returns 4,250 3,120

Provision for doubtful debts 5,200

Sundry Debtors and Creditors 40,200 25,526

Bills payable 8,950

Stock on 1-1-05 26,725

Wages 20,137

Salaries 8,575

Furniture 6,075

Alterations to shop 4,500

Postage, Printing and Insurance 3,226

Lighting 350

Sundry expenses 2,314

Rent, Rates and Taxes 3,517

Bad debts 525

Loan at 5% to Bharat (1-9-05) 3,000

Investments 11,500

Dividend from investments 825

Prepaid insurance 524

Cash at Bank 5,752

Bills receivable 17,070

Capital account 28,000

Drawings 6,000

Outstanding wages 2,019

Rent accrued 750

Depreciation on furniture 675

Additions to furniture 500

Total 3,31,040 3,31,040

Adjustments:

i. Sundry debtors include Rs.250 for goods supplied to the proprietor and Rs.600 due from a customer who

has become insolvent.

ii. Provision for doubtful debts is to be maintained at 5% of the sundry debtors.

iii. One fifth of the alterations to the shop is to be written off.

iv. Goods of the value of Rs.1,000 have been destroyed by fire and the insurance company has admitted the

claim for Rs.700.

v. Bills receivable include a dishonored promissory note for Rs.650.

vi. Stock at the end was Rs.10,520.

vii. An intimation from the bank that a customer’s cheque for Rs.1,000 had been dishonored is still to be

entered in the books.

The total balance sheet as on 31.12.2005 after making all the adjustment was

(a) Rs.94,568

(b) Rs.92,365

(c) Rs.96,591

(d) Rs.96,277

(e) Rs.96,681.

< Answer >

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(3 marks)

49. Jojo Ltd. uses a periodic inventory system. The beginning inventory was Rs.50,000 and year-end inventory was

Rs.60,000. Purchase of goods and sales during the year were Rs.2,00,000 and Rs.3,00,000 respectively. The

company’s cost of goods sold during the year is

(a) Rs.2,00,000

(b) Rs.1,90,000

(c) Rs.1,50,000

(d) Rs.1,40,000

(e) Rs.1,10,000.

(1 mark)

< Answer >

50. Following data was extracted from the books of Peter Ltd. for the period 2005-06.

Particulars Opening balance in (Rs.) Closing balance in (Rs.)

Raw material inventory 1,54,000 1,63,000

Work-in-process 19,000 43,000

Finished goods inventory 69,000 66,000

If the purchases for the period were Rs.2,73,000 and the other manufacturing costs amounted to Rs.3,30,000.

Value of raw material used in the production is

(a) Rs.44,000

(b) Rs.2,64,000

(c) Rs.1,54,000

(d) Rs.2,73,000

(e) Rs.2,82,000.

(2 marks)

< Answer >

51. On 1st April, 2006, Bihar Collieries obtained wagons on hire purchase system, the total amount payable being

Rs.2,50,000. Payment was to be made Rs.50,000 down, and the balance in four installments of Rs.50,000 each.

Interest charged was at the rate of 15%. The capital content in the payments amounts to

(a) Rs.2,00,000

(b) Rs.1,30,000

(c) Rs.2,87,500

(d) Rs.1,92,749

(e) Rs.1,50,350.

(2 marks)

< Answer >

52. A fixed asset has a life of 4 years. If it is depreciated by the W.D.V method, its book value at the end of 4 years

is 24% of its original cost. Hence the rate of depreciation applied is ____ (choose nearest answer).

(a) 24%

(b) 28%

(c) 30%

(d) 32%

(e) 34%.

(2 marks)

< Answer >

53. ABC Limited issued 50,000 equity shares of Rs.10 each at a premium of Rs.2.50 per share. Under the terms of

the issue, the shares were to be paid for as follows:

2006 January 1, on application (including Rs.2.50

premium on issue per share)

Rs.5.00

February 1, on allotment Rs.5.00

March 1, balance Rs.2.50

The issue was oversubscribed. The applications received are summarized below:

Number of Applications in

Categories

40 20 1

Applied for by each applicant in the

three categories

1,000 10,000 40,000

Issued to each applicant 500 1,000 10,000

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One of the conditions of the issues was that amounts overpaid on application were to be retained by the company

and used in reduction of further sums due on shares allotted. All surplus contributions were refunded on 15th

February, 2006.

S who had subscribed Rs.5,000 on an application for 1,000 shares was unable to meet the claim due on March 1.

On April 1, 2006 the directors forfeited his shares. All other shareholders paid the sums requested on the due

dates. On May 1, 2006 the directors reissued the forfeited shares as fully paid to G, on receiving a payment of

Rs.5,250.

The amount transferred to Calls-in-advance for various categories of the applicants are

(a) Nil, Rs.7,50,000, Rs.50,000

(b) Nil, Rs.50,000, Rs.25,000

(c) Rs.50,000, Nil, Rs.25,000

(d) Rs.75,000, Rs.50,000, Rs.25,000

(e) Rs.50,000, Rs.25,000, Nil.

(3 marks)

54. Kumar Ltd. issued 75,000 shares of Rs.10 each at par payable Rs.2 on application, Rs.4 on allotment and Rs.4 on

call. Applications were received for 75,000 shares and all applicants were allotted in full. Rahul, who was allotted

500 shares, paid Rs.2,500 at the time of allotment indicating that the excess amount to be adjusted against call

money. Subsequently, when the directors made the call, Rahul paid the balance amount. The entry to record the

receipt of balance amount and adjustment of calls-in-advance of Rahul is

Rs. Rs.

(a) Bank a/c Dr. 500

Calls-in-Advance a/c. Dr. 1,500

To Share first and final call a/c. 2,000

(b) Share first and final call a/c. Dr. 2,000

To Bank a/c. 1,500

To Calls-in-Advance a/c. 500

(c) Bank a/c. Dr. 500

To Calls-in-Advance a/c. 500

(d) Bank a/c. Dr. 1,500

Calls-in-Advance a/c. Dr. 500

To Share first and final call a/c. 2,000

(e) Share first and final call a/c. Dr. 1,500

Bank a/c. Dr. 500

To Calls-in-Advance a/c. 2,000.

(2 marks)

< Answer >

55. XY Ltd. offers to its existing shareholders 3 shares for every 7 shares held by them. The market value of the

share is Rs.80 and the right issue price is Rs.60 per share. The value of right is ____ and post issue price is ____.

(a) Rs.6.00; Rs.74

(b) Rs.8.57; Rs.71.43

(c) Rs.18.00; Rs.62

(d) Rs.20.00; Rs.80

(e) Rs.24.00; Rs.84.

(2 marks)

< Answer >

56. The following is the Balance Sheet of May Fair Co. Ltd. as at 31st December 2005:

Liabilities Rs. Assets Rs.

Share capital: Fixed Assets: Equity Shares of Rs.100 each 10,00,000 Goodwill 1,00,000

Less: Calls-in-Arrears 1,00,000 Machinery 5,00,000

Factory Shed 5,50,000

Vehicle 1,50,000

9,00,000 Furniture 50,000

Investments 2,00,000

10% Preference Shares of Current Assets:

Rs.10 each fully paid 4,00,000 Stock-in-trade 4,00,000

Reserve and Surplus: Sundry Debtors 7,00,000

General Reserve 4,00,000 Cash at bank 1,00,000

< Answer >

12

General Reserve 4,00,000 Cash at bank 1,00,000

Profit and Loss Account 3,00,000 Miscellaneous Expenditure:

Current Liabilities Preliminary Expenses 50,000

Bank Loan 2,00,000

Sundry Creditors 6,00,000

Total 28,00,000 Total 28,00,000

Additional Information is as under:

i. Fixed assets are worth 20% above their book value. Depreciation on appreciated value of fixed assets not to

be considered for valuation of goodwill.

ii. Of the investments, 60% is non-trading and the balance is trading. All trade investments are to be valued at

25% above cost. A uniform rate of dividend @ 15% is earned on all investments.

iii. For the purpose of valuation of shares, goodwill is to be considered on the basis of 4 years purchase of the

super profits based on average profit (after tax) of the last 3 years.

Profits (after tax) are as follows:

Rs.

2003 4,00,000

2004 4,30,000

2005 4,50,000

In a similar business, return on capital employed is 15% (after tax).

iv. In 2003 new machinery costing Rs.20,000 was purchased but wrongly charged to revenue

(no effect has yet been given for rectifying the same).

Depreciation charged on machinery is @ 10% on reducing balance method.

The Net Tangible operating assets on 31st December, 2005 was

(a) Rs.20,17,496

(b) Rs.20,17,469

(c) Rs.20,17,964

(d) Rs.20,17,946

(e) Rs.20,17,649.

(3 marks)

57. The Balance Sheet of Marvel Ltd. as on March 31, 2006 is as under:

Liabilities Rs. Assets Rs.

Equity share capital 6,00,000 Land and building 4,70,000

Reserves and surplus 2,10,000 Plant and machinery 2,50,000

12% Debentures 1,50,000 Furniture and fixtures 2,00,000

Sundry creditors 72,500 Sundry debtors 90,000

Bank overdraft 32,500 Inventories 65,000

Provision for taxation 45,000 Cash 35,000

Total 11,10,000 Total 11,10,000

The following assets are revalued as under:

Land and building Rs.5,00,000

Plant and machinery Rs.2,00,000

Sundry debtors Rs.85,000

The profit of the company for the year ended March 31, 2006 was Rs.1,15,500. The company charges

depreciation on all its fixed assets at the rate of 10% per annum. The depreciation adjustment on the revalued

assets should be made for one year. The return on capital employed to equity shareholders is

(a) 14.33%

(b) 12.89 %

(c) 13.12 %

(d) 10.85 %

(e) 14.15 %.

(2 marks)

< Answer >

58. The following information is made available from the books of a public limited company:

Paid-up Share Capital:

Equity shares of Rs.10 each Rs.11,00,000

14% Preference shares of Rs.100 each Rs. 9,00,000

Rs.20,00,000

Average net profit and expected normal yield are Rs.5,25,000 and 24% respectively. It is also observed that the

< Answer >

13

net tangible assets are revalued by Rs.1,85,000 more than the amounts at which they are stated in the books.

For the purpose of valuation of shares, goodwill is to be considered on the basis of 2 years’ purchase of the super

profit.

Earning per share for the purpose of valuing equity shares on yield basis is

(a) Rs.4.22

(b) Rs.5.12

(c) Rs.5.22

(d) Rs.6.12

(e) Rs.3.63.

(2 marks)

59. Bach and Chenoy Limited’s Balance Sheet as on 31st March, 2006 is given below:

Liabilities and Capital Amount

Rs.

Assets Amount

Rs.

Share Capital:

1,00,000 Equity Shares of Rs.10/-fully paid-up 10,00,000 Sundry Net Fixed

Assets

28,00,000

50,000 Equity shares of Rs.10/-, Rs.8 paid-up 4,00,000 Non Trade

Investments

13,00,000

1,00,000 Equity Shares of Rs.5/-fully paid-up 5,00,000 Stock 12,00,000

Free Reserves 15,00,000 Sundry Debtors 22,00,000

13% Debentures 12,00,000 Cash and Bank 6,00,000

Sundry Creditors 28,95,000 Preliminary

Expenses

2,80,000

Tax Provision 6,00,000

Proposed Dividend 2,85,000

Total 83,80,000 Total 83,80,000

Information:

1. Profit before taxes for the last five years are as follows –

2001 – Rs.4,40,000

2002 – Rs.4,60,000

2003 – Rs.4,20,000

2004 – Rs.4,50,000

2005 – Rs.4,40,000

Goodwill to be computed based on 5 years purchase of super profit based on average profit of the last 5

years.

2. The 13% Debentures are partially convertible. 50% of these will be converted into equity shares next year.

3. Non-trade investments earn @ 6% p.a.

4. The company is planning to shift its offices to a bigger location. The estimated additional costs would be

Rs.20,000 per annum.

5. Since the value of the Indian rupee is appreciating, the company expects a foreign currency loss of

Rs.24,000 p.a. on its exports for the foreseeable future .

6. Present tax rate is 35%, but the company expects it to fall to 30% in future.

7. Normal return is 8% on the closing capital.

8. Assume that proposed dividend rate will not change after conversion of part of debentures into equity.

Net assets available to the share holders is

(a) Rs.38,71,000

(b) Rs.37,71,000

(c) Rs.38,72,000

(d) Rs.42,62,000

(e) Rs.41,00,000.

(3 marks)

< Answer >

60. An investor purchases one share of Rs.100 each (face value and paid-up value) at Rs.190 from a stock exchange

on which he receives a dividend @ 20%. The yield of the investor will be

(a) 20%

(b) 13.33%

< Answer >

14

(b) 13.33%

(c) 22.22%

(d) 10.53%

(e) 10%.

(1 mark)

61. Sunder Ltd. issued debentures at 94% for Rs.2,00,000 on 1st January, 2004 repayable by five equal annual

drawing of Rs.40,000 each. The company closes its accounts on 31st March every year. The company decides to

write-off the debenture discount during the life of the debentures.

The amount of discounts which the company needs to write-off respectively in year 1, 2 and 3 are

(a) Rs.1,200, Rs.4,300 and Rs.3,000

(b) Rs.1,600, Rs.3,600 and Rs.2,800

(c) Rs.2,200, Rs.3,800 and Rs.3,200

(d) Rs.1,000, Rs.3,800 and Rs.3,000

(e) Rs.1,000, Rs.3,800 and Rs.3,200.

(3 marks)

< Answer >

62. Komal Ltd. issued 20,000, 8% debentures of Rs.10 each at par, which are redeemable after 5 years at a premium

of 20%. The amount of loss on redemption of debentures to be written-off every year is

(a) Rs.40,000

(b) Rs.10,000

(c) Rs.20,000

(d) Rs.8,000

(e) Rs.5,000.

(1 mark)

< Answer >

63. Well Done Ltd. issued 500 Debentures of Rs.100 each at a discount of 10%. Holders of these debentures have an

option to convert their holdings to equity shares of Rs.100 each at a premium of Rs.25 at anytime within 3 years.

The total number of equity shares to be issued, if all the debenture holders opt for conversion, is

(a) 500

(b) 450

(c) 430

(d) 400

(e) 360.

(2 marks)

< Answer >

64. In the month of April 2006, the accountant of Aditya & Co. found the following errors in the books of accounts

for the year 2005-2006, in spite of the agreed balance sheet:

Goods worth Rs.20,050 sold to Mr. Dutta was entered in the sales day book as Rs.20,500 and it was debited to

Mr. Dutta’s account as Rs.25,000.

Goods worth Rs.16,000 were purchased from M/s.Philip & Company on March 30, 2006. The invoice was not

passed through the purchases day book.

Goods to the value of Rs.2,750 returned by Mr. Rajkumar, was debited to his account and also to sales returns

account.

The purchases day book for the month of March 2006 was undercast by Rs.10,000.

Bank interest on overdraft for the month of March 2006, amounting to Rs.3,750 was not recorded in the books of

accounts.

A credit sale of goods worth Rs.20,000 on March 29, 2006, was completely omitted to be recorded in the sales

day book.

The effect of rectification of the above transactions on the profit for the year 2005-2006 will be

(a) Profit will increase by Rs.10,200

(b) Profit will decrease by Rs.30,450

(c) Profit will decrease by Rs.3,750

(d) Profit will increase by Rs.36,450

(e) Profit will decrease by Rs.10,200.

(3 marks)

< Answer >

65. The following information is extracted from the books of Mercury Limited: < Answer >

15

i. The average annual profits of the company after providing for depreciation and taxation amounted to

Rs.60,000. It is considered necessary to transfer Rs.10,000 to general reserve before declaring any

dividend.

ii. The paid-up share capital of the company consists of 20,000 equity shares of Rs.10 each.

iii. The normal return expected by investors on equity shares from this type of business carried on by the

company is 10%.

The value of the equity share is

(a) Rs.10

(b) Rs.12.50

(c) Rs.15

(d) Rs.20

(e) Rs.25.

(2 marks)

66. Advertisement expenses of Rs.24,000 were paid on January 24, 2006. The company believes that the effect of

advertisement being not yet expired, 1/4 of the amount of advertisement expenses is to be carried forward to the

next year.

The amount of advertisement expenses debited to profit and loss account during the period ended March 31,

2006 is __________ and the heading under which the advertisement expenses carried forward are shown is

___________.

(a) Rs.18,000; Prepaid expenses

(b) Rs.6,000; Prepaid expenses

(c) Rs.18,000; Miscellaneous expenditure

(d) Rs.12,000; Miscellaneous expenditure

(e) Rs.6,000; Current assets.

(2 marks)

< Answer >

67. Sonex Ltd., had allotted 10,000 shares to applicants of 14,000 shares on pro rata basis. The amount payable on

application is Rs.2. Pramod applied for 420 shares. The number of shares allotted and the amount carried

forward for adjustment against allotment money due is

(a) 60 shares; Rs.120

(b) 340 shares; Rs.160

(c) 320 shares; Rs.200

(d) 300 shares; Rs.240

(e) 420 shares; Nil.

(2 marks)

< Answer >

68. The capital employed of Manchuria Ltd. is Rs.12,00,000.

i. Net profit of the company for the last 4 (four) years before providing taxation was as follows:

1st year Rs.2,00,000

2nd year Rs.2,50,000

3rd year Rs.2,10,000

4th year Rs.3,00,000

ii. Income tax rate is 35%.

iii. Normal rate of return in the similar business is 10%.

The value of goodwill on the basis of 4 years’ purchase of super profits based on 4 years average profit of the

company is

(a) Rs.2,40,000

(b) Rs.1,56,000

(c) Rs.1,20,000

(d) Rs.1,44,000

(e) Rs.1,08,000.

(3 marks)

< Answer >

16

Suggested Answers

Financial Accounting – I (MB131) : October 2006

1. Answer : (a)

Reason : Trading account is prepared to find out the gross profit due to the operations of a business. It is the

difference between the Net sales (i.e. Sales less sales return) and the Cost of goods sold. Cost of

goods sold = Opening Stock + Net Purchases – Closing stock + Direct expenses.

Hence option (a) is the right option. Option (c) is incorrect because cost of production does not

consider the opening stock and closing stock adjustment. Similarly option (d) ignores stock balance

adjustment. Option (e) is incorrect because it ignores the direct expenses and the stock balance

adjustment.

< TOP >

2. Answer : (c)

Reason : Recording of capital contributed by the owner as liability ensures the adherence of principle of the

“Separate entity or Business entity concept”. The concept requires the business to be treated as

distinct from the persons who own it; then it becomes possible to record transactions of the business

with the proprietor also. Without such a distinction, the affairs of the firm will be mixed up with the

private affairs of the proprietor and the true picture of the firm will not be available.

Under the Going concern concept, it is assumed that the business will exist for a long time and

transactions are recorded from this point of view. It is this that necessitates distinction between

expenditure that will render benefit over a long period and that whose benefit will be exhausted

quickly.

Consistency requires that the accounting practices followed should remain the same from one year to

another – for instance, it would not be proper to value stock-in-trade according to one method one

year and another method next year. If a change becomes necessary, the change and its effect should

be stated clearly.

Under Double-entry or Dual aspect concept, each transaction has two aspects, if a business has

acquired an asset, it must have resulted in one of the following:

• Some other asset has been given up.

• The obligation to pay for it has arisen.

• There has been a profit, leading to an increase in the amount that the business owes to the

proprietor.

• The proprietor has contributed money for the acquisition of the asset.

• The concept of Materiality requires all the material items to be recorded and disclosed

separately.

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3. Answer : (e)

Reason : Under the going concern concept, it is assumed that the business will exist for a long time and

transactions are recorded from this point of view. It is this that necessitates distinction between

expenditure that will render benefit over a long period and that whose benefit will be exhausted

quickly. If the concept ceases to be valid, then land held as an investment would be valued at its

realizable value.

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4. Answer : (d)

Reason : Liquidation value is the value of the business when the business is wound up and is under liquidation

whereas the going concern concept assumes that the business will continue over a long time and

therefore the accounting measurement “Liquidation value” is inconsistent with going concern

concept.

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5. Answer : (c)

Reason : Matching concept requires the expenses must relate to the goods and services sold during that period

to arrive at the net profits of the enterprise. Hence matching concept requires the recognition of

revenue and expenses on a comparable basis. In the above question that amount of Rs.75,000 as net

profit was arrived at by deducting Rs.5,00,000 (being cost of purchases) + Rs.25,000 expenses from

the sale proceeds of Rs.6,00,000. This does not follow matching concept since the cost of goods sold

is to be deducted and not the cost of purchases, since some purchases have been left in stock. So the

net profit using matching concept is Rs.6,00,000 less cost of goods Rs.4,50,000 (i.e., Rs.5,00,000 x

9/10) less expenses of Rs.25,000 = Rs.1,25,000

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17

6. Answer : (c)

Reason : Events occurring after the balance sheet date are those significant events, both favorable and

unfavorable, that occur between the balance sheet date and the date on which the financial

statements are approved by the Board of Directors in the case of a company, and, by the

corresponding approving authority in the case of any other entity.

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7. Answer : (e)

Reason : According to AS-4, Contingencies and Events Occurring After the Balance Sheet Date, para 10 & 11

of the standard states that the amount of a contingent loss should be provided for by a charge in the

statement of profit and loss if: (a) it is probable that future events will confirm that, after taking into

account any related probable recovery, an asset has been impaired or a liability has been incurred as

at the balance sheet date, and (b) a reasonable estimate of the amount of the resulting loss can be

made.

The existence of a contingent loss should be disclosed in the financial statements if either of the

conditions in paragraph (as mentioned above) is not met, unless the possibility of a loss is remote.

In option (a), the probability of the loss is highly imminent and a reasonable estimate of the same

can be as a reasonable estimate of the guarantees can be made, hence it is to be provided for in the

profit and loss account.

In options (b) & (d) there is remote possibility of loss contingency, hence can be ignored.

In case of option (c) reasonable estimate does not imply a rupee estimate. Hence option (c) is false.

Option (e) is true, since when a contingent loss is probable and cannot be estimated reasonably, a

disclosure of the same is made.

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8. Answer : (c)

Reason : `Unusual items’ are defined as incomes or expenses arising from transactions that are clearly distinct

from the ordinary activities of the enterprise and, therefore, not expected to recur frequently or

regularly. Writing-off inventory for obsolescence is a prudent accounting practice, which happens

regularly and is an ordinary activity and is not an unusual item.

< TOP >

9. Answer : (b)

Reason : The Accounting Standard-2 deals with regard to accounting for inventory. According to the

statement, work-in-progress of a manufacturing industry is covered. Thus, the alternative (b) is the

correct answer. The items of inventory stated in other alternatives are not covered under AS-2.

Financial instruments held as stock-in-trade: Work-in-progress arising under construction contracts

and work-in-progress of service providers. Hence, alternatives (a) reflecting statement (i); (c)

combination of statements (i) and (ii); alternative (d) combination of statements (iii) and (iv) and

alternative (e) combination of statements ii, iii and iv are incorrect.

< TOP >

10. Answer : (d)

Reason : When fixed assets are sold for book value, there will be no change in the total assets.

< TOP >

11. Answer : (a)

Reason : Withdrawals by proprietor would reduce both assets and owner’s equity.

< TOP >

12. Answer : (d)

Reason : Under the imprest system an amount is given to petty cashier to meet expenses during a period. At

the end of the period he is given cash equal to the amount spent during the relevant period, if this

adjusting entry is not made, the cash balance in the main cash book is overstated to the extent of the

expenses routed through the petty cash book. And the expenses are understated.

< TOP >

13. Answer : (d)

Reason : A credit balance in the Cash book (bank column) denotes an overdraft balance. It implies that the

business is due to the bank in respect of that amount it has overdrawn. Hence option (a) is true,

option (b), (c) and (e) are also true. Hence the correct statement is (d).

< TOP >

14. Answer : (e)

Reason : The amount of cash discount received on the payments made to sundry creditors through cheques by

the business will be recorded in the cash book, and if the previously issued cheque is dishonored, the

discount should be written back through (iv) A debit to discount account through journal proper and

(v) A credit to creditor’s account through journal proper (e) the combinations of these two

statements is the correct answer. Discount received and allowed accounts separately maintained are

not netted as such the discount received which got to be written back because of return of previously

issued cheque cannot be debited to discount column of the cash book (a) is the incorrect answer.

Since it is reversal of already credited discount account again a credit to discount column of the cash

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18

Since it is reversal of already credited discount account again a credit to discount column of the cash

book cannot be given and (b) is the incorrect answer. Bank column is debited with the amount of

cheque returned which does not include discount component and it is not a credit to bank column of

the cash book as such (c) is the incorrect answer. The combination of the incorrect statements in

(i) and (iii) i.e., d) is not the correct answer. Thus, (e) is the correct answer.

15. Answer : (a)

Reason : When office equipment is purchased for cash, there is no change in the assets, liabilities and owners’

equity. Thus, the alternative (a) is the correct answer. The cash on hand is used for purchase and it is

only a change in the composition of the assets. The other alternatives (b), (c), (d) and (e), which

indicate a change either an increase or a decrease in assets/liabilities/owners equity are (b) there is a

decrease in assets, increase in liabilities and no change in owners’ equity (c) there is a decrease in

assets, no change in liabilities and a decrease in owners’ equity (d) there is an increase in assets,

decrease in liabilities and no change in owners’ equity (e) there is an increase in assets, no change in

liabilities and an increase in owners’ equity are not the correct answers. Hence (a) is the correct

answer.

< TOP >

16. Answer : (b)

Reason : Prepaid expense is an expense relating to the next accounting period but has been paid in the current

accounting period and hence it is a current asset. The adjustment would be to deduct it from the

respective expense account in the P&L A/c and show it as a current asset in the balance sheet.

< TOP >

17. Answer : (b)

Reason : Closing stock appearing in the trial balance implies that it has already been adjusted in the purchases

account and hence appears as an asset in the balance sheet.

< TOP >

18. Answer : (b)

Reason : Depreciation is provided as a charge against profits. It is not an appropriation of profit. It is provided irrespective of whether the business is making a loss or a profit. Hence statement (b) is a true statement.

< TOP >

19. Answer : (d)

Reason : Closing stock overstatement and opening stock understatement increases the profits and vice-versa is

also equally true.

< TOP >

20. Answer : (c)

Reason : While sending goods on approval basis debtors a/c is debited and sales a/c is credited. If the goods

are not approved. The journal entry written previously is reversed i.e., debtors a/c is credited and

sales a/c is debited. This results in increase in stock. Thus cost price of stock is added to stock.

< TOP >

21. Answer : (c)

Reason : Sales = Gross Profit + Opening Stock + Direct expenses + Purchases – Closing Stock.

< TOP >

22. Answer : (d)

Reason : Cash profit is the net profit + depreciation and provision. Depreciation is a non-cash outflow which

is deducted from the profit and therefore, it is added back to the net profit to arrive at the net cash

profit.

< TOP >

23. Answer : (e)

Reason : Trial balance (e) is not a financial statement. It is a list of all accounts showing outstanding balances

at the end of the accounting period. It helps in the preparation of financial statements. The Profit

and Loss account (a); Profit and Loss appropriation account (b) Balance Sheet (c) and Funds Flow

statement (d) are the financial statements prepared by a business entity. Funds flow statement

though categorized as one of the financial statements, its preparation is not mandatory. Thus (e) is

the correct answer.

< TOP >

24. Answer : (c)

Reason : Tax deduced at source is a current liability because it should be payable to government with in

prescribed time. Thus, it should be shown on the liabilities side under current liabilities.

< TOP >

25. Answer : (d)

Reason : Asset which are not only easily converted into cash and used in the business for a long period are

termed as fixed asset. There will be no goods accounts in the books. Balances of all accounts is not

necessary at the end of every day. Nominal accounts are closed at the end of accounting period by

transferring trading a/c or P & L a/c. Balance sheet discloses the financial position of the business.

< TOP >

19

Thus all option except (d) are wrong.

26. Answer : (d)

Reason : Cost of production = Prime cost + Manufacturing cost + Opening WIP – Closing WIP.

< TOP >

27. Answer : (c)

Reason : AS-2 defines “Net Realizable Value” which is the estimated selling price in the ordinary course of

business less the estimated costs of completion and the estimated costs necessary to make the sale. It

also states that by-products should be valued at cost or net realizable value whichever is less.

< TOP >

28. Answer : (d)

Reason : During a period of steadily increasing prices, LIFO results in lower profits and hence in lowest

possible taxable income.

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29. Answer : (c)

Reason : Under the average inventory method costs to be assigned to inventories are ascertained by applying

to the closing inventory an average cost computed by dividing the total costs of units by the total

number of such units. This method assumes that all items available for sale during the year were

acquired at an average cost, and that all items sold hold this same average cost.

< TOP >

30. Answer : (a)

Reason : As per AS-9 on Revenue Recognition, recognition of revenue requires that revenue is measurable

and that at the time of sale or the rendering of the service it would not be unreasonable to expect

ultimate collection. Therefore, revenue recognition does not occur until the revenue is recognized

and is assured of collection.

< TOP >

31. Answer : (e)

Reason : The following methods are the practical ways of realizing revenue applying the conservatism

concept and realization concept and the (a) Delivery method in case of sale of goods, (b) Percentage-

of-completion method in case of rendering of services, (c) Production method in case of agriculture

produce and (d) Installment method in case of sale of goods on installments. Thus, these are the

various ways of recognizing revenue and the methods adopted to recognize revenue. Moving

average method (e) is the method of valuing inventory and it is not the method adopted to recognize

revenue. Thus, (e) is the correct answer.

< TOP >

32. Answer : (c)

Reason : In the case of self-constructed assets, AS-10 states that the cost of a self-constructed fixed asset

should comprise those costs that relate directly to the specific asset and those that are attributable to

the construction activity in general and can be allocated to the specific asset.

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33. Answer : (d)

Reason : Only those expenses which relate to and specifically attributable to the asset are capitalized.

Administration and general expenses cannot be specifically attributable to the asset and hence cannot

be capitalized.

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34. Answer : (c)

Reason : Under the written-down value method of depreciation, the rate of percentage of depreciation is fixed,

but it applies to the value of the asset at which the asset stands in the books in the beginning of the

year. Therefore, the amount of depreciation decreases as the fixed rate of depreciation is charged on

written-down values of the asset.

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35. Answer : (e)

Reason : Since only those profits which are otherwise available for dividends can be used for redemption of

preference shares, transfer to capital redemption reserve account should be made only from such

accounts which represent divisible profits. Amounts in share premium account, forfeited shares A/c,

profits prior to incorporation A/c, development rebate reserve A/c and capital reserve A/c must not

be transferred to capital redemption reserve A/c.

< TOP >

36. Answer : (b)

Reason : Underwriting commission is paid to the underwriters on the amount of shares/ debentures

underwritten by them.

< TOP >

37. Answer : (c)

Reason : The premium collected on issue of debentures should be transferred to the security premium

account.

< TOP >

20

38. Answer : (b)

Reason : As per Schedule VI, the amount of calls-in-areas will be deducted from the shares capital in the

liability side of the balance sheet.

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39. Answer : (c)

Reason : Brokerage will not be allowed in respect of promoters’ quota, including the amounts taken up by the

directors, their friends and the employees, in respect of the rights issues taken up or renounced by

the existing shareholders and when applications are made by the institutions or banks against their

underwriting commitments. However, brokerage can be paid by the listed companies on private

placement at a maximum rate of 0.5 percent Thus, the correct answer is (c).

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40. Answer : (b)

Reason : Convertible debentures are subject to the following guidelines issued by the SEBI

i. Issue of Fully Convertible Debentures (FCDs) having a conversion period more than 36 months

will not be permissible, unless conversion is made optional with put or call option.

ii. Compulsory credit rating will be required if conversion is made for FCDs after 18 months.

iii. Premium amount on conversion, time of conversion in stages if any shall be predetermined and

stated in the prospectus. The issuer will freely determine interest rates for the debentures.

iv. Any conversion in part or whole of the debentures will be optional at the hands of the

debenture holder, if the conversion takes place at or after 18 months from the date of allotment

but before 36 months.

v. In case of NCDs/PCDs credit rating is compulsory when maturity exceeds 18 months.

vi. Premium amount at the time of conversion for the PCD shall be determined and stated in the

prospectus. Redemption amount, period of maturity yield on redemption for the PCDs/NCDs

shall be indicated in the prospectus.

vii. The discount on the non-convertible portion of the PCD in case they are traded and the

procedure for their purchase on spot trading basis must be disclosed in the prospectus.

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41. Answer : (d)

Reason : A sinking fund by definition is a fund created by a charge against or an appropriation of profits and

represented by specific investments, and which is brought into existence for a special purpose such

as the replacement of an asset on the expiration of its useful life or the redemption of debentures.

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42. Answer : (e)

Reason : Revenue from the contract = Cost price of the contract – Estimated total costs

= 7,20,000 – 5,00,000 = 2,20,000.

% of completion = Actual costs incurred on the project/Estimated total costs

= 3,00,000/5,00,000 = 60%.

Gross profit to be recognized = 2,20,000 x 60% = 1,32,000.

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43. Answer : (a)

Reason : Cash book = 3,093 – 30 – 21 – 84 = 2,958.

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44. Answer : (d)

Reason :

Particulars Amount Rs. Amount

Rs.

Bank balance as per pass book (favorable)

Add: Payment as per order not entered in cash book (26×3)

Deposit entered in cash book twice

Less: Cash directly deposited by customers, not entered in the cash

book (499 +157)

Favorable balance as per cash book

78

364

6,300

442

6,742

656

6,086

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45. Answer : (d)

Reason : Plant and machinery: P & M Shows a debit balance as it is an asset and is debited on purchase of

asset.

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21

asset.

Creditors: Shows a credit balance, it is a personal account and is credited when we purchase raw

materials from them. Hence it should shows a credit balance.

Purchase returns: Purchases shows a debit balance. However when goods purchased are returned,

we credit the purchase return account and correspondingly debit the creditor account.

Bank deposits: Bank deposits are excess funds deposited in Bank, hence our asset, should a debit

balance.

Reserve Fund: It denotes accumulated profits and belong to the owners who contributed capital,

hence shows a credit balance.

All the above items have been wrongly treated by the accountant wrongly. The correct trial balance

is as follows.

Debit

Rs.

Credit

Rs.

Opening stock 10,000

Purchases 50,000

Reserve fund 5,000

Carriage on goods purchased 1,000

Bank deposit 50,000

Cash in hand 2,000

Purchase returns 1,500

Sales 92,600

Sales returns 2,400

Capital 1,50,000

Import duty 1,200

Export duty 1,050

Debtors 50,000

Creditors 22,500

Plant & Machinery 62,500

Salary 20,000

Wages 10,000

B/R 15,000

B/P 10,000

Interest received 3,000

Commission on sales 1,000

Miscellaneous expenses 6,600

Carriage on goods sold 1,850

2,84,600 2,84,600

46. Answer : (c)

Reason : For the financial year 2005-06, the amount of Wages payable to the workers is

= Rs.4,000 x 15 workers x 12 months. = Rs.7,20,000, this amount is accrued and is to be debited to the

profit and loss account for the period 2005-06. The wages which are in arrears from Jan – March do not

effect the profits of the firm whose accounting period starts from April 01, 2005 and ends with March

31, 2006. The salaries outstanding are irrelevant here for profit determination since we have directly

calculated the wages accrued (irrespective of paid or not) for the period directly.

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47. Answer : (a)

Reason : The debtors account in the books of Shangai & Co. is as follows after affecting the adjustments.

In the books of Shangai & Co. Debtors Account

Dr. Cr.

Date Particulars Rs. Date Particulars Rs.

1.4.2005 To Balance b/f 97,200 31.3.2002 By Discount allowed 5,600

31.3.2006 To Sales – Credit sales 9,36,000 By Cash from debtors 8,40,000

To Bank–cheque returned 3,100 By Return inward 22,000

By Bad debts 3,900

By Balance c/d 1,64,800

10,36,300 10,36,300

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22

48. Answer : (c)

Reason : Trading and Profit and Loss account of Aakash for the year ended 31.12. 2005

Dr. Cr.

Liabilities Amount

Rs.

Amount

Rs.

Assets Amount

Rs.

Amount

Rs.

To Opening Stock 26,725 By Sales 2,56,650

To Purchases 1,65,625 Less: Returns 4,250 2,52,400

Less: Returns 3,120 1,62,505 Closing Stock 10,520

To Wages 20,137 Stock destroyed 1,000

To Gross Profit c/d 54,553

2,63,920 2,63,920

To Salaries 8,575 By Gross profit b/d 54,553

To Sundry expenses 2,314 By Dividends 825

To Rent Rates and

Taxes

3,517 By Existing provision

for doubtful debts

5,200

To Postage printing

and insurance

3,226 Less: New provision 2,050

To Lighting 350 3,150

To Depreciation on

furniture

675 Less: Bad debts (600

+ 525)

1,125 2,025

To Alterations to

Shop

900 By Interest on loan for

4 months @ 5%

50

To Loss on stock

destroyed

300

To Net profit 37,596

57,453 57,453

Balance Sheet as on 31st December, 2005

Liabilities Amount

Rs.

Amount

Rs.

Assets Amount

Rs.

Amount

Rs.

Capital 28,000 Furniture (6,075 + 500) 6,575

Add: Net profit 37,596 Investments 11,500

65,596 Bills receivables 17,070

Less: Drawings

(6,000 + 250)

6,250 59,346 Less: Dishonored

promissory

650 16,420

Trade creditors 25,526 Debtors 40,200

Outstanding

Creditors:

Add: Dishonored

promissory

650

Wages 2,019 40,850

Rent 750 2,769 Less: Goods supplied to

proprietor

250

Bills payable 8,950 40,600

Add: dishonored cheque 1,000

41,600

Less: Bad debts 600

41,000

Less: Provision for bad

debts (5%)

2,050 38,950

Stock 10,520

Loan to Bharat 3,050

Cash at Bank 5,752

Less: Dishonored Cheque 1,000 4,752

Alternations to shop 3,600

Insurance Company 700

Prepaid insurance 524

96,591 96,591

The total balance sheet as on 31.12.2005 after making all the adjustment is Rs.96,591.

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49. Answer : (b)

Reason : Cost of goods sold = Rs.50,000 + Rs.2,00,000 – Rs.60,000 = Rs.1,90,000.

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23

50. Answer : (b)

Reason : Material used

= Opening raw material + Purchases – Closing raw material

= 1,54,000 + 2,73,000 – 1,63,000 =Rs.2,64,000.

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51. Answer : (d)

Reason :

Particulars Rs.

Amount due at the end of 4thYear 50,000

Less: Interest for the 4thYear 50000 × 15/115 6,522

43,478

Amount of 3rd installment 50,000

93,478

Less: Interest for the 3rd year 12,193

81,285

Amount of 2nd installment 50,000

Less: Interest for the 2nd year 17,124

1,14,161

Amount of 1st installment 50,000

1,64,161

Less: Interest for the 1st year 21,412

1,42,749

Down payment 50,000

1,92,749

Total content of principal = Rs.1,92,749

Content of interest = Rs.57,251

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52. Answer : (c)

Reason : l(X)n = 0.24

X4 = 0.24 or X = 0.7

Hence, depreciation = (1 – 0.7) = 0.3 or 30%.

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53. Answer : (b)

Reason : The amount transferred to Calls-in-Advance for various categories of the applicants are NIL,

Rs.50,000, Rs.25,000.

ABC Limited

Statement of Shares Applied, Allotted and amount Adjusted

A B C

Applied 40,000 2,00,000 40,000

Allotted 20,000 20,000 10,000

Amount Received (Rs.) 2,00,000 10,00,000 2,00,000

Adjusted on allotment (Rs.) (application + allotment) 2,00,000 2,00,000 1,00,000

Transfer to Calls-in-Advance @ Rs.2.50 – 50,000 25,000

Refund – 7,50,000 75,000

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54. Answer : (d)

Reason : Amount payable by Rahul on allotment is 500 shares × Rs.4 = Rs.2,000

Amount of calls-in advance paid by Rahul

= Rs.2,500 – Rs.2,000 = Rs.500

Amount paid by Rahul at the time of call

= (500 shares × Rs.4) – Rs.500 = Rs.1,500

Hence the entry to record the receipt of payment and adjustment of calls-in-advance is

Bank account Dr. Rs.1,500

Calls-in-Advance a/c. Dr. Rs.500

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24

To share first and final call a/c. Rs.2,000

55. Answer : (a)

Reason : Rights issue =

No.of right shares

Rights issued Existingshares+ × (Market value – Rights price)

= 3/10 x (80 – 60) = Rs.6.

Post issue price = 80 – 6 = Rs.74.

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56. Answer : (a)

Reason : The Net Tangible operating assets on 31st December, 2005 is Rs.20,17,496.

Statement of Net Tangible operating assets on 31st December, 2005

Rs.

Machinery 5,00,000

Factory Shed 5,50,000

Vehicle 1,50,000

Furniture 50,000

Machinery-Addition cost 20,000

Depreciation 5,420

14,580

12,64,580

Add: Appreciation 20% 2,52,916

15,17,496

Trade Investment

(80,000 + 20,000)

1,00,000

Stock-in-Hand 4,00,000

Sundry Debtors 7,00,000

Cash at Bank 1,00,000

28,17,496

Less: Bank Loan Rs.2,00,000

Sundry Creditor’s Rs.6,00,000 8,00,000

20,17,496

Note: Roughly half of the profits for the current year have been distributed as dividend. Hence,

capital as on 31st Dec., 2005 has been taken as average capital employed.

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57. Answer : (a)

Reason :

Particulars Rs.

Land and building 5,00,000

Plant and machinery 2,00,000

Furniture and fixtures 2,00,000

Sundry debtors 85,000

Inventories 65,000

Cash 35,000

10,85,000

Less:

12% Debentures 1,50,000

Sundry creditors 72,500

Bank overdraft 32,500

Provision for taxation 45,000

Capital employed 7,85,000

Particulars Rs.

Profit for the year 2005-2006 1,15,500

Less: Depreciation on land and building 3,000

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25

Less: Depreciation on land and building 3,000

Add: Depreciation on plant and machinery 5,000

Less: Bad debts 5,000

Profit 1,12,500

Return on capital employed

= Rs.1,12,500 / Rs.7,85,000 x100 = 14.33%

58. Answer : (e)

Reason : Value of an equity share on yield basis:

Profit 5,25,000

Less: Preference dividend 1,26,000

3,99,000

Earning per share

= Rs.3,99,000/1,10,000 = Rs.3.63.

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59. Answer : (c)

Reason : Capital employed by the company is Rs.24,20,000.

Valuation of shares of M/s Bach and Chenoy Ltd. by the intrinsic value method

Calculation of Goodwill

Capital Employed Amt. Rs. Amt. Rs.

Total of Assets side of the Balance Sheet 83,80,000

Less:

Non-trade Investments 13,00,000

Preliminary Expenses 2,80,000

15,80,000

68,00,000

Less: Liabilities

Debentures (Net of Conversion) 6,00,000

Sundry Creditors 28,95,000

Tax Provision 6,00,000

Proposed Dividend 2,85,000

43,80,000

Capital Employed 24,20,000

Future Maintainable profit of the company is Rs.2,24,000.

Future Maintainable Profit: Since the profit does not show any trend, either upward or downward,

simple average is taken for the five-year profit.

Average Maintainable Profit

=

4,40,000+4,60,000+4,20,000+4,50,000+4,40,000

5

=

22,10,000

5 = Rs.4,42,000

Average Maintainable Profit 4,42,000

Less:

Income from non-trade investments 78,000

Additional Cost of new office 20,000

Increase in FOREX liability 24,000 1,22,000

3,20,000

Less: Income Tax @30% 96,000

Expected profit after tax 2,24,000

Normal profit of the company is Rs.1,93,600.

Normal Return: Is 8% of capital employed i.e., 8% of 24,20,000

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26

Normal Return = 1,93,600

Super profits of the company is Rs.30,400.

Super Profit: Expected Profit less Normal Profit

i.e., 2,24,000 – 1,93,600 = Rs.30,400

Goodwill of the company is Rs.1,52,000.

Goodwill: 5 years’ purchase of super profit

= Rs.30,400 × 5 = Rs.1,52,000

Net assets available to the share holders is Rs.38,72,000.

Net Assets available

Amount

Rs.

Goodwill 1,52,000

Sundry Net Fixed Assets 28,00,000

Non-trade investments 13,00,000

Stock 12,00,000

Sundry Debtors 22,00,000

Cash and Bank 6,00,000

82,52,000

Less: Liabilities 43,80,000

Net Assets available to the shareholders 38,72,000

60. Answer : (d)

Reason : Yield of the investor

Dividend

Paid up Value of share− =

(100 x 0.2)

190 = 10.53%

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61. Answer : (d)

Reason : The amount of discounts which the company needs to write-off respectively in year 1, 2 and 3 are

Rs.1,000,Rs.3,800 and Rs.3,000.

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62. Answer : (d)

Reason : Amount debited to loss on issue of debentures

= Rs,20,000 × Rs.10 × 20% = Rs.40,000

Amount of loss on issue of debentures to be written off every year

= Rs.40,000/5 = Rs.8,000.

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63. Answer : (d)

Reason : Debenture amount–500 units × Rs.100 = Rs.50,000

These debentures are converted into equity shares of Rs.100 each at a premium of Rs.25.

So, the amount of equity share per unit

= Rs.100 + Rs.25 = Rs.125

No. of equity shares to be issued =

Rs.50,000

Rs.125 = 400 shares.

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64. Answer : (e)

Reason : The effect of rectification will be the profit and loss adjustment account will be debited with

Rs.30,200 and will be credited with Rs.20,000 resulting in a net decrease of profit of Rs.10,200 i.e

Rs.450 + Rs.16,000 + Rs.10,000 + 3,750 less Rs.20,000.

Aditya & Co.

Journal entries

Particulars Rs. Rs.

i. Profit & loss Adjustment a/c. Dr. 450

Suspense a/c Dr. 4,500

To Mr. Dutta A/c 4,950

(Sale to Mr. Dutta of Rs.20,050 wrongly entered in the sales book as

Rs.20,500 and posted to his account as Rs.25,000 now rectified)

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27

Rs.20,500 and posted to his account as Rs.25,000 now rectified)

ii. Profit & loss Adjustment a/c Dr. 16,000

To Mr. Philip a/c 16,000

(Goods purchased on 30th

March 2002 were included in stock but not

recorded in the purchase book, now rectified)

iii. Suspense a/c. Dr. 5,500

To Mr. Rajkumar a/c (Rs.2,750 × 2) 5,500

(Goods returned by Mr. Rajkumar wrongly debited to his account,

now rectified)

iv. Profit & loss Adjustment a/c Dr. 10,000

To Suspense a/c 10,000

(Error caused by undercasting of the purchase book in the month of

March 2002, now rectified)

v. Profit & loss adjustment a/c. Dr. 3,750

To Bank a/c. 3,750

(Bank interest previously not recorded now rectified)

vi. Sundry debtors a/c Dr. 20,000

To Profit & loss adjustment a/c 20,000

(Credit sales completely omitted from sales day book, now rectified)

65. Answer : (e)

Reason : Average annual profit Rs.60,000

Less: Transfer to general reserve Rs.10,000

Profit for equity shareholder Rs.50,000

Equity share capital = 20,000 × Rs.10 = Rs.2,00,000

Return on equity = Profit for equity share holder/Outstanding balance of equity share capital

= Rs.50,000/Rs.2,00,000 x 100 = 25%

Normal rate of return = 10%

Value of equity share = Rs.10 × 25%/10% = Rs.25.

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66. Answer : (c)

Reason : The total advertisement expenses = Rs.24,000

Since 1/4 of the amount carried forward = Rs.6,000

Amount debited to the P&L account = Rs.18,000

The amount of the unexpired advertisement expenses can be carried forward under the head

‘Miscellaneous Expenditure’.

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67. Answer : (d)

Reason : Since the allotment is made pro rata.

The calculation of shares allotted to Pramod is as under:

420 × 10,000/14,000 = 300 shares allotted.

Hence the amount paid @ 2 per application = 2 x 420 shares = Rs.840

The amount actually adjusted for application = 2 x 300 shares = Rs.600

Surplus amount utilized for adjustment of allotment money = Rs.240

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68. Answer : (d)

Reason : Calculation of Super Profit

Particulars Rs. Rs.

Profit – 1st year 2,00,000

2nd year 2,50,000

3rd year 2,10,000

4th year 3,00,000

Average profit 9,60,000 ÷ 4 2,40,000

Less: Income tax at the rate 35% 84,000

1,56,000

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28

1,56,000

Less: Normal return: (10% on

Rs.12,00,000 capital employed) 1,20,000

Super profit 36,000

Goodwill = 4 years × Super profit

= 4 × Rs.36,000 = Rs.1,44,000

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