PAPER – 1 : ACCOUNTING

Answers all questions

Wherever appropriate, suitable assumptions should be made by the candidate.
Working notes should form part of the answer.
Questions 1
Following is the Balance Sheet of M Ltd. as at 31st March, 2008:
Liabilities Rs. Assets Rs.
15,000, 10% Preference shares of 15,00,000 Goodwill 3,50,000
Rs.100 each
35,000 Equity shares of Rs.100 each 35,00,000 Land & Buildings 15,00,000
Securities Premium account 1,00,000 Plant & Machinery 10,00,000
7% Debentures of Rs.100 each 5,00,000 Stock 6,00,000
Creditors 12,50,000 Debtors 15,00,000
Loan from Director 1,50,000 Cash at bank 1,00,000
Preliminary expenses 4,00,000
Profit & Loss A/c 15,50,000
70,00,000 70,00,000

No dividend on Preference shares has been paid for the last 5 years.
The following scheme of reorganization was duly approved by the court:
(i) Each Equity share to be reduced to Rs.25.
(ii) Each existing Preference share to be reduced to Rs.75 and then exchanged for 1 new
13% Preference share of Rs.50 each and 1 Equity share of Rs.25 each.
(iii) Preference shareholders have forgone their right for dividend for four years. One year’s
dividend at the old rate is however, payable to them in fully paid equity Shares of Rs.25.
(iv) The Debentureholders be given the option to either accept 90% of their claims in cash or
to convert their claims in full into new 13% Preference shares of Rs.50 each issued at
par. One half (in value) of the debentureholders accepted Preference shares for their
claims. The rest were paid cash.
(v) Contingent liability of Rs.1,50,000 is payable, which has been created by wrong action of
one Director. He has agreed to compensate this loss out of the loan given by the
Director to the company.
 PROFESSIONAL EDUCATION (EXAMINATION – II ) : JUNE, 2009

(vi) Goodwill does not have any value in the present. Decrease the value of Plant and
Machinery, Stock and Debtors by Rs.4,00,000, Rs.1,00,000 and Rs.1,50,000
respectively. Increase the value of Land and Buildings to Rs.18,00,000.
(vii) 40,000 new Equity shares of Rs.25 each are to be issued at par, payable in full on
application. The issue was underwritten for a commission of 4%.
Shares were fully taken up.
(viii) The total expenses incurred by the company in connection with the scheme excluding
underwriting commission amounted to Rs.15,000.
Pass necessary Journal Entries to record the above transactions. (16 Marks)
Answer
In the books of M Ltd.
Journal Entries
Particulars Dr. Cr.
Amount Amount
(Rs.) (Rs.)
1. Equity Share Capital (Rs.100) A/c Dr. 35,00,000
To Equity Share Capital (Rs.25) A/c 8,75,000
To Capital Reduction A/c 26,25,000
(Being Equity shares of Rs.100 each reduced to Rs.25
each and balance transferred to Capital Reduction A/c)
2. 10% Preference Share Capital (Rs.100) A/c Dr. 15,00,000
To 10% Preference Share Capital (Rs.75) A/c 11,25,000
To Capital Reduction A/c 3,75,000
(Being Preference shares of Rs. 100 each reduced to
Rs.75 each and balance transferred to Capital Reduction
A/c)
3. 10% Preference Share Capital (Rs.75) A/c Dr. 11,25,000
To 13% Preference Share Capital (Rs.50) A/c 7,50,000
To Equity Share Capital A/c 3,75,000
(Being one new 13% Preference share of Rs.50 each
and one equity share of Rs.25 each issued against 10%
Preference Share of Rs. 75 each)
4. Capital Reduction A/c Dr. 1,50,000
To Preference share dividend payable A/c 1,50,000
(Being arrear of Preference share dividend payable for
one year)

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5. Preference share dividend payable A/c Dr. 1,50,000

To Equity Share Capital A/c 1,50,000
(Being Equity Shares of Rs.25 each issued for arrears of
Preference Share dividend)
6. 7% Debentures A/c Dr. 5,00,000
To Debenture holders A/c 5,00,000
(Being balance of 7% Debentures transferred to
Debenture holders A/c )
7. Debenture holders A/c Dr. 5,00,000
To 13% Preference Share Capital A/c 2,50,000
To Bank A/c 2,25,000
To Capital Reduction A/c 25,000
(Being 50% of Debenture holders opted to take 13%
Preference shares at par and remaining took 90% cash
payment for their claims)
8. Loan from Director A/c Dr. 1,50,000
To Provision for Contingent Liability A/c 1,50,000
(Being contingent liability of Rs.1,50,000 is payable and
adjusted against Loan from director A/c)
9. Bank A/c Dr. 10,00,000
To Equity Share Application & Allotment A/c 10,00,000
(Being application money received on 40,000 Equity
shares @ Rs.25 each)
10. Equity Share Application & Allotment A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(Being application money transferred to capital A/c, on
allotment)
11. Underwriting Commission A/c Dr. 40,000
To Bank A/c 40,000
(Being underwriting commission paid)
12. Land & Buildings A/c Dr. 3,00,000
To Capital Reduction A/c 3,00,000
(Being value of Land & Buildings appreciated)
13. Expenses on Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of expenses on reconstruction )

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 PROFESSIONAL EDUCATION (EXAMINATION – II ) : JUNE, 2009

14. Capital Reduction A/c Dr. 31,75,000

To Goodwill A/c 3,50,000
To Plant & Machinery A/c 4,00,000
To Stock A/c 1,00,000
To Debtors A/c 1,50,000
To Preliminary Expenses A/c 4,00,000
To Profit & Loss A/c 15,50,000
To Expenses on Reconstruction A/c 15,000
To Underwriting Commission A/c 40,000
To Capital Reserve A/c 1,70,000
(Being various losses written off and balance of Capital
Reduction A/c transferred to Capital Reserve A/c)
Questions 2
(a) The Balance Sheets of X Ltd. as on 31st March, 2008 and 31 st March, 2009 are as
follows:
Liabilities 2008 2009 Assets 2008 2009
Amount Amount Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 5,00,000 7,00,000 Land and Buildings 80,000 1,20,000
General Reserve 50,000 70,000 Plant and Machinery 5,00,000 8,00,000
Profit and Loss A/c 1,00,000 1,60,000 Stock 1,00,000 75,000
Sundry Creditors 1,53,000 1,90,000 Sundry Debtors 1,50,000 1,60,000
Bills Payable 40,000 50,000 Cash 20,000 20,000
Outstanding Expenses 7,000 5,000
8,50,000 11,75,000 8,50,000 11,75,000

Additional Information:
(a) Rs.50,000 depreciation has been charged to Plant and Machinery during the year
2009.
(b) A piece of Machinery costing Rs.12,000 (Depreciation provided there on Rs.7,000)
was sold at 60% profit on book value.
You are required to prepare Cash flow statement for the year ended 31st March 2009 as
per AS 3 (revised), using indirect method.

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(b) S Ltd. grants 1,000 options to its employees on 1.4.2005 at Rs.60. The vesting period is
two and a half years. The maximum period is one year. Market price on that date is
Rs.90. All the options were exercised on 31.7.2008. Journalize, if the face value of
equity share is Rs.10 per share. (8+8 = 16 Marks)
Answer
(a) Cash Flow Statement for the year ended 31 st March, 2009
Amount Amount
Rs. Rs.
I Cash Flows from Operating Activities
Closing Balance as per Profit & Loss A/c 1,60,000
Less: Opening Balance as per Profit & Loss A/c (1,00,000)
60,000
Add: Transfer to General Reserve 20,000
Net Profit before taxation and extra-ordinary items 80,000
Add: Depreciation on Plant and Machinery 50,000
Less: Profit on sale of machinery (Refer W.N.) (3,000)
Operating Profit 1,27,000
Add: Decrease in Stock 25,000
Increase in Creditors 37,000
Increase in Bills Payable 10,000 72,000
1,99,000
Less: Increase in Debtors (10,000)
Decrease in Outstanding expenses (2,000) (12,000)
Net Cash from Operating Activities 1,87,000
II. Cash Flows from Investing Activities
Purchase of Land & Building (40,000)
Proceeds from Sale of Machinery (Refer W.N.) 8,000
Purchases of Plant & Machinery (Refer W.N.) (3,55,000)
Net Cash Used in Investing Activities (3,87,000)
III. Cash Flows from Financing Activities
Proceeds from Issuance of Share Capital 2,00,000
Net Cash from Financing Activities 2,00,000
Net Increase/Decrease in Cash & Cash Equivalents 0
Add: Cash in hand at the beginning of the year 20,000
Cash in hand at the end of the year 20,000

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 PROFESSIONAL EDUCATION (EXAMINATION – II ) : JUNE, 2009

Working Note:
Plant and Machinery Account
Rs. Rs.
To Balance b/d 5,00,000 By Bank 8,000
To Profit and Loss A/c (Profit on sale) 3,000 By Depreciation 50,000
To Purchases (Bal. fig.) 3,55,000 By Balance c/d 8,00,000
8,58,000 8,58,000
(b) Books of S Ltd.
Journal Entries
Date Particulars Debit Credit
Rs. Rs.
31.3.06 Employees Compensation Expense Account Dr. 12,000
To Employees Stock Option Outstanding Account 12,000
(Being compensation expense recognized in respect of
1,000 options granted to employees at discount of Rs.30
each, amortized on straight line basis over 2½ years)
Profit and Loss Account Dr. 12,000
To Employees Compensation Expense Account 12,000
(Being employees compensation expense of the year
transferred to P&L A/c)
31.3.07 Employees Compensation Expense Account Dr. 12,000
To Employees Stock Option Outstanding Account 12,000
(Being compensation expense recognized in respect of
1,000 options granted to employees at discount of Rs.30
each, amortized on straight line basis over 2½ years)
Profit and Loss Account Dr. 12,000
To Employees Compensation Expense Account 12,000
(Being employees compensation expense of the year
transferred to P&L A/c)
31.3.08 Employees Compensation Expense Account Dr. 6,000
To Employees Stock Option Outstanding Account 6,000
(Being balance of compensation expense amortized
Rs.30,000 less Rs. 24,000)


160% of (12,000-7,000) = Rs.8,000.

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Profit and Loss Account Dr. 6,000

To Employees Compensation Expense Account 6,000
(Being employees compensation expense of the year
transferred to P&L A/c)
31.7.08 Bank Account (Rs. 60 × 1,000) Dr. 60,000
Employees Stock Option Outstanding Account (Rs.30×1,000) Dr. 30,000
To Equity Share Capital Account 10,000
To Securities Premium Account 80,000
(Being exercise of 1,000 options at an exercise price of
Rs.60 each and an accounting value of Rs.30 each)
Working Notes:
1. Total employees compensation expense = 1,000 x (Rs.90 – Rs.60) = Rs.30,000
2. Employees compensation expense has been written off during 2½ years on straight
line basis as under:
I year = Rs.12,000 (for full year)
II year = Rs.12,000 (for full year)
III year = Rs.6,000 (for half year)

Questions 3
(a) Z Ltd. has three departments and submits the following information for the year ending
on 31st March, 2009:
A B C Total (Rs.)
Purchases (units) 6,000 12,000 14,400
Purchases (Amount) 6,00,000
Sales (Units) 6,120 11,520 14,976
Selling Price (per unit) Rs. 40 45 50
Closing Stock (Units) 600 960 36
You are required to prepare departmental trading account of Z Ltd., assuming that the
rate of profit on sales is uniform in each case.
(b) The Balance Sheet of Amitabh, Abhishek and Amrish as at 31.12.2008 stood as follows:
Liabilities Amount Assets Amount
Rs. Rs.
Capital: Land & Buildings 74,000
Amitabh 60,000 Investments 10,000

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 PROFESSIONAL EDUCATION (EXAMINATION – II ) : JUNE, 2009

Abhishek 40,000 Goodwill 37,800

Amrish 40,000 1,40,000 Life Policy (at surrender value):
Creditors 25,800 Amitabh 2,500
General Reserve 8,000 Abhishek 2,500
Investment Fluctuation 2,400 Amrish 1,000
Reserve
Stock 20,000
Debtors 20,000
Less: Provision for
doubtful debts 1,600 18,400
Cash & bank balance 10,000
1,76,200 1,76,200
Amrish died on 31 March, 2009, due to this reason the following adjustments were
agreed upon:
(i) Land and Buildings be appreciated by 50%.
(ii) Investment be valued at 6% less than the cost.
(iii) All debtors (except 20% which are considered as doubtful) were good.
(vi) Stock to be reduced to 94%.
(v) Goodwill to be valued at 1 year’s purchase of the average profits of the past five
years.
(vi) Amrish’s share of profit to the date of death be calculated on the basis of average
profits of the three completed years immediately preceeding the year of death.
The profits of the last five years are as follows:
Year Rs.
2004 23,000
2005 28,000
2006 18,000
2007 16,000
2008 20,000
1,05,000
The life policies have been shown at their surrender values representing 10% of the sum
assured in each case. The annual premium of Rs.1,000 is payable every year on
1st August.
Give the necessary Journal Entries in the books of account and prepare the Balance
Sheet of the reconstituted firm. (8 + 8 = 16 Marks)

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Answer
(a) Departmental Trading Account for the year ended on 31st March, 2009
Particulars A B C Particulars A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Opening Stock 11,520 8,640 12,240 By Sales 2,44,800 5,18,400 7,48,800
To Purchases 96,000 2,16,000 2,88,000 By Closing Stock 9,600 17,280 720
To Gross Profit 1,46,880 3,11,040 4,49,280
2,54,400 5,35,680 7,49,520 2,54,400 5,35,680 7,49,520

Working Notes:
(1) Profit Margin Ratio
Selling price of unit purchased: Rs.
Department A 6,000 x 40 2,40,000
Department B 12,000 x 45 5,40,000
Department C 14,400 x 50 7,20,000
Total Selling Price 15,00,000
Less: Purchase (Cost) Value 6,00,000
Gross Profit 9,00,000
9,00,000
Profit Margin Ratio =  100 = 60%
15,00,000

(2) Statement showing department-wise per unit Cost and Purchase Cost
A B C
Selling Price (Per unit) (Rs.) 40 45 50
Less: Profit Margin @ 60% (Rs.) 24 27 30
Purchase price per unit (Rs.) 16 18 20
Number of units purchased 6,000 12,000 14,400
(Purchase cost per unit x Units purchased) 96,000 2,16,000 2,88,000
(3) Statement showing calculation of department-wise Opening Stock (in Units)
A B C
Sales (Units) 6,120 11,520 14,976
Add: Closing Stock (Units) 600 960 36
6,720 12,480 15,012
Less: Purchases (units) 6,000 12,000 14,400
Opening Stock (Units) 720 480 612

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 PROFESSIONAL EDUCATION (EXAMINATION – II ) : JUNE, 2009

(4) Statement showing department-wise cost of Opening Stock and Closing Stock
A B C
Cost of Opening Stock (Rs.) 720 x 16 480 x 18 612 x 20
Rs. 11,520 8,640 12,240
Cost of Closing Stock 600 x 16 960 x 18 36 x 20
Rs. 9,600 17,280 720

(b) Journal Entries

Particulars Amount Amount
1. Insurance Company’s A/c Dr. 10,000
To Life Policy A/c 10,000
(Being the policy on the life of Amrish matured on his death)
2. Life Policy A/c Dr. 9,000
To Amitabh’s Capital A/c 3,000
To Abhishek’s Capital A/c 3,000
To Amrish’s Capital A/c 3,000
(Being the transfer of balance in life policy account to all
partners’ capital accounts)
3. Amitabh’s Capital A/c Dr. 12,600
Abhishek’s Capital A/c Dr. 12,600
Amrish’s Capital A/c Dr. 12,600
To Goodwill A/c 37,800
(Being goodwill standing in the books written off fully)
4. Land & Buildings A/c Dr. 37,000
To Revaluation A/c 37,000
(Being an increase in the value of assets recorded)
5. Investment Fluctuation Reserve A/c Dr. 600
To Investment A/c 600
(Being reduction in the cost of investment adjusted through
Investment Fluctuation Reserve)
6. Revaluation A/c Dr. 3,600
To Stock A/c 1,200
To Provision for Doubtful Debts A/c 2,400
(Being the fall in value of assets recorded)

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7. Amitabh’s Capital A/c Dr. 3,500

Abhishek’s Capital A/c Dr. 3,500
To Amrish’s Capital A/c 7,000
(Being the share of Amrish’s revalued goodwill adjusted
through capital accounts of the remaining partners)
8. Profit & Loss Suspense Account Dr. 1,500
To Amrish’s Capital A/c 1,500
(Being Amrish’s Share of profit to date of death credited to his
account)
9. Revaluation A/c Dr. 33,400
To Amitabh’s Capital A/c 11,133
To Abhishek’s Capital A/c 11,133
To Amrish’s Capital A/c 11,134
(Being the transfer of profit on revaluation)
10. General Reserve A/c Dr. 8,000
Investment Fluctuation Reserve A/c (Rs. 2,400 - Rs. 600) Dr. 1,800
To Amitabh’s Capital A/c 3,267
To Abhishek’s Capital A/c 3,267
To Amrish’s Capital A/c 3,266
(Being the transfer of accumulated profits to capital
accounts)
11. Amrish’s Capital A/c Dr. 53,300
To Amrish’s Executor’s A/c 53,300
(Being the transfer of Amrish’s Capital A/c to his
Executor’s A/c)
Balance Sheet
as at 31st March, 2009
Liabilities Amount Assets Amount
Amithabh’s Capital Account 61,300 Land & Building 1,11,000
Abhishek’s Capital Account 41,300 Life Policy: Amitabh 2,500
Amrish’s Executor’s Account 53,300 Abhishek 2,500 5,000
Sundry Creditors 25,800 Investments 9,400
Stock 18,800


Rounded off.

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 PROFESSIONAL EDUCATION (EXAMINATION – II ) : JUNE, 2009

Debtors 20,000
Less: Provisions 4,000 16,000
Insurance Company 10,000
Cash & Bank Balance 10,000
Profit and loss Suspense A/c 1,500
1,81,700 1,81,700

Working Notes:
(i) Calculation of Amrish’s Share of Profit
Total profit for last three years Rs. 18,000+16,000+20,000= Rs.54,000
Average profit 54,000/3 = 18,000
Profit for 3 months = 18,000 x 3/12 = 4,500
Amrish’s share of Profit = 4,500 x 1/3 = 1,500

(ii) Calculation of Goodwill

Total profits for last five years Rs.1,05,000
Average profit 1,05,000/5 = 21,000
Goodwill at one year’s purchase Rs. 21,000 x 1 =Rs. 21,000

Questions 4
(a) The M. Water Works Company Limited decides to replace one of its old plants with a
modern one and large capacity. The cost of plant when installed in 1985 was
Rs.48 lakhs. The components of materials, labour and overheads are in the ratio of
5: 3: 2. It is ascertained that the costs of materials and labour have gone up by 40
percent and 80 percent respectively. The proportion of overheads to total cost is
expected to remain the same as before.
The cost of the new plant as per improved design is Rs.120 lakhs and in addition,
material recovered from the old plant of a value of Rs.4,80,000 has been used in the
construction of the new plant. The old plant was scrapped and sold for Rs.15,00,000.
Show the Journal Entries and Ledger Accounts in the books of M. Water Works Company
Ltd.
(b) The following information is presented by Mr. Z, relating to his holding in 9% Central
Government Bonds.
Opening balance (face value) Rs.1,20,000, Cost Rs.1,18,000 (Face value of each unit is
Rs.100).

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1.3.2008 Purchased 200 units, ex-interest at Rs.98.

1.7.2008 Sold 500 units, ex-interest out of original holding at Rs.100.
1.10.2008 Purchased 150 units at Rs.98, cum interest.
1.11.2008 Sold 300 units, ex-interest at Rs.99 out of original holdings.
Interest dates are 30th September and 31st March. Mr. Z closes his books every 31 st
December. Show the investment account as it would appear in his books.
(8+8 = 16 Marks)
Answer
(a) Journal Entries
Rs. Rs.
(i) Plant Account Dr. 45,60,000
Replacement Account Dr. 74,40,000
To Bank Account 120,00,000
(Cash cost of replacement of plant divided into
current cost and capital cost)
(ii) Plant Account Dr. 4,80,000
To Replacement Account 4,80,000
(Old material reused in the construction of new plant)
(iii) Bank Account Dr. 15,00,000
To Replacement Account 15,00,000
(Amount realized on sale of the old plant)
(iv) Revenue Account Dr. 54,60,000
To Replacement Account 54,60,000
(Balance of replacement account transferred to
revenue account)
Plant Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Balance b/d 48,00,000 By Balance c/d 98,40,000
To Bank Account (Cost of new plant 45,60,000
capitalised)
To Replacement Account (Old Plant) 4,80,000
98,40,000 98,40,000

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Replacement Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Bank Account 74,40,000 By Bank Account 15,00,000
(Current cost) By Plant Account 4,80,000
By Revenue Account 54,60,000
74,40,000 74,40,000
Working Notes:
(1) Calculation of Current replacement cost
Ratio Existing Cost Increase percentage Current Cost
Rs. Rs.
Material 50% 24,00,000 40% 33,60,000
Labour 30% 14,40,000 80% 25,92,000
59,52,000
Overhead 20% 9,60,000 (Being 25% Material & Labour 1/5 of Total cost) 14,88,000
48,00,000 74,40,000
Current cost of replacement = Rs.74,40,000

(2) Capital Cost Rs.

Total cash cost 1,20,00,000
Add: Old material used 4,80,000
1,24,80,000
Less: Current cost of old plant 74,40,000
Total capital cost 50,40,000

(b) 9% Central Government Bonds (Investment) Account

Particulars Face Interest Principal Particulars Face Interest Principal
Value Value
2008 Rs. Rs. Rs. 2008 Rs. Rs. Rs.
Jan.1 To Balance March By Bank
b/d 1,20,000 2,700 1,18,000 31 A/c - 6,300 -
March To Bank July 1 By Bank
1 A/c 20,000 750 19,600 A/c 50,000 1,125 50,000

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July 1 To P&L A/c - - 833 Sept. By Bank

30 A/c - 4,050 -
Oct. 1 To Bank Nov. 1 By Bank
A/c 15,000 - 14,700 A/c 30,000 225 29,700
Nov. 1 To P&L A/c - - 200 Dec. By Balance
31 c/d 75,000 1,688 73,633
Dec. To P&L A/c
31 (Transfer) 9,938
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333

Working Note:

Calculation of closing balance: Units Rs.

Bonds in hand remained in hand at 31st December 2008

From original holding (1,20,000 – 50,000 – 30,000)= 40,000 1,18,000

 40,000 = 39,333
1,20,000

Purchased on 1st March 20,000 19,600

Purchased on 1st October 15,000 14,700

75,000 73,633

Questions 5
(a) With the help of the following information prepare statement of affairs of Mr. Zenith, who
was declared insolvent under the Presidency Town Insolvency Act, 1909.
His capital was Rs.3,500 and his drawings were Rs.3,500.
His assets consist of:
(i) Stock (book value Rs.7,500) estimated to produce Rs.4,500.
(ii) Freehold house (private property) valued at Rs.10,000, the deed of which was
lodged with the bank as security for an overdraft on business account Rs.4,000.
(iii) Book-debts Rs.5,000 of which Rs.4,000 was considered good and the balance
estimated to produce Rs.500.
(iv) His life policy (Surrender value Rs.3,000) was given as a part security for a private
loan of Rs.5,000.
(v) Machinery (Book value Rs.8,000) Cost price Rs.9,000, Estimated to produce
Rs.5,500.

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His unsecured creditors amounted to Rs.20,150 and he owed Rs.250 to his clerk being
salary for two months just preceding the date of his insolvency.
(b) Following is the Balance Sheet of M/s Z Ltd. as on 31st March, 2009:
Liabilities Rs. Assets Rs.
80,000, 6% Redeemable 7,20,000 Sundry Assets 16,80,000
Preference shares of Rs.10 each Cash 5,20,000
Rs.9 paid up.
40,000 Equity shares of Rs.10 4,00,000
each fully paid
Securities premium 1,00,000
Profit and Loss Account 5,00,000
General Reserve 60,000
Sundry Creditors 4,20,000
22,00,000 22,00,000
By the terms of their issue, the preference shares were redeemable at a premium of
Re.0.50 per share on 1 st April, 2009, and it was decided to arrange for this, as far as
possible, out of the companies resources subject to leaving a credit balance of Rs.24,000
in the profit and loss a/c. It was also decided to raise the balance of funds required by
the issue of sufficient number of equity shares at a premium of 10%.
Show the necessary Journal Entries giving effect to the above transactions and the
Balance Sheet thereafter. (8+8 = 16 Marks)
Answer
(a) Statement of Affairs of Mr. Zenith
Gross Liabilities Expected Assets Book Estimated to
Liabilities to rank Value Produce
Rs. Rs. Rs. Rs.
20,150 Unsecured Creditors as per List ‘A’ 20,150 Properties as per List E

4,000 Fully secured creditors as Stock 7,500 4,500

per List B Machinery 8,000 5,500
Overdraft 4,000
Less: Estimated value of Debtor as per List F
security 10,000
Surplus as per contra 6,000 Good 4,000 4,000
5,000 Partly secured creditors Doubtful 1,000 500

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as per List C Bad - -

Private Loan 5,000 Bills of exchange as - -

per List G

Estimated value of security 3,000 2,000 14,500

250 Preferential Creditors as Add: Surplus as per contra 6,000
per List D
20,500
Salary outstanding 250 Less: Preferential Creditors
Deducted as Contra 250 - as per List D (Contra) 250

20,250
Deficiency as per List H 1,900

29,400 22,150 22,150

(b) Journal Entries

Particulars Debit Credit
Amount Amount
Rs. Rs.
(1) Redeemable Preference share final call A/c Dr. 80,000
To 6% Redeemable Preference share capital A/c 80,000
(Being final call due, because only fully paid shares can be
redeemed, so preference shares have to be made fully paid)
(2) Bank A/c Dr. 80,000
To 6% Redeemable Preference share final call A/c 80,000
(Being call money received from all shareholders)
(3) Securities Premium A/c Dr. 40,000
To Premium on Redemption of Preference shares 40,000
(Being premium payable on redemption @ 5% is charged
from Securities Premium A/c)
(4) Bank A/c Dr. 2,90,400
To Equity share application and allotment A/c 2,90,400
(Being amount received on issue of new shares)
(5) Equity Share Application & Allotment A/c Dr. 2,90,400
To Equity Share Capital A/c (W.N.1) 2,64,000
To Securities Premium A/c 26,400
(Being shares issued at a premium of 10%)

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 PROFESSIONAL EDUCATION (EXAMINATION – II ) : JUNE, 2009

(6) 6% Redeemable Preference Capital A/c Dr. 8,00,000

Premium on Redemption of Preference Shares A/c Dr. 40,000
To Preference Shareholders A/c 8,40,000
(Being redemption made)
(7) Preference Shareholders A/c Dr. 8,40,000
To Bank A/c 8,40,000
(Being payment made to preference shareholders)
(8) Profit & Loss A/c Dr. 4,76,000
General Reserve A/c Dr. 60,000
To Capital Redemption Reserve A/c 5,36,000
(Being revenue profit transferred to Capital redemption
reserve)
Balance Sheet (After Redemption)
Rs. Rs.
Share Capital Sundry Assets 16,80,000
Authorised Capital ? Cash (W.N.3) 50,400
Issued and subscribed 66,400 Equity
shares @ Rs. 10/- each fully paid 6,64,000
Reserve & Surplus
Capital Redemption Reserve 5,36,000
Securities Premium (W.N.2) 86,400
Profit & Loss A/c 24,000
Current Liabilities & Provisions
Sundry Creditors 4,20,000
17,30,400 17,30,400
Working Notes:
1. Calculation of minimum number of equity shares to be issued: Rs.

Face value of Redeemable Preference shares 8,00,000
Less: General Reserve 60,000
Profit and Loss Account (5,00,000 – 24,000) 4,76,000 5,36,000
Face value of equity shares to be issued 2,64,000


Balance in securities premium account is sufficient to pay premium on redemption of preference
shares, Therefore, only sum equal to face value of redeemable preference shares less funds
available in P &L A/c and general reserve is to be considered for issue of shares (face value).

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2. Calculation of balance in securities premium account after redemption: Rs.

Securities premium account before redemption 1,00,000
Add: Securities premium on issue of equity shares 26,400
1,26,400
Less: Premium on redemption of preference shares 40,000
86,400

3. Calculation of balance in cash account after redemption: Rs.

Balance in cash account before redemption 5,20,000
Add: Final call on preference shares 80,000
Add: Proceeds from issue of equity shares 2,90,400
8,90,400
Less: Payment to preference shareholders on redemption 8,40,000
50,400
Questions 6
Answer any four of the following:
(a) A major fire has damaged the assets in a factory of a Limited Company on 5 th April – five
days after the year end and closure of accounts. The loss is estimated at Rs.10 crores
out of which Rs.7 crores will be recoverable from the insurers. Explain briefly how the
loss should be treated in the final accounts for the previous year.
(b) Explain the types of lease as per AS 19.
(c) Explain the criteria of identification of Reportable Segments as per AS 17.
(d) Explain the use of accounting information in Agricultural farm.
(e) Describe the structure of Government Accounts.
(f) Goods purchased on 24.2.2008 of US $ 1,000 Rs.46.60 per US $
Exchange rate on 31.3.2008 Rs.47.00 per US $
Date of actual payment 05.06.2008 Rs.47.50 per US $
Calculate the loss/gain for the financial year 2007-2008 and 2008-2009 as per AS 11.
(5 x 4 = 20 Marks)
Answer
(a) The loss due to break out of fire is an example of event occurring after the balance sheet
date. The event does not relate to conditions existing at the balance sheet date. It has
not affected the financial position as on the date of balance sheet and therefore requires
no specific adjustments in the financial statements. However, paragraph 8.6 of AS 4
states that disclosure is generally made of events occurring after balance sheet date i.e.

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in subsequent periods that represent unusual changes affecting the existence or

substratum of the enterprise after the balance sheet date. In the given case, the amount
of loss of assets in a factory is material and may be considered as an event affecting the
substratum of the enterprise. Hence, as recommended in paragraph 15 of AS 4,
disclosure of the event should be made in the report of the approving authority.
(b) For the purpose of accounting AS 19 ‘Leases’ classify the lease into two categories as
follows:
(i) Finance Lease
(ii) Operating Lease
Finance Lease: It is a lease, which transfers substantially all the risks and rewards
incidental to ownership of an asset to the lessee by the lessor but not the legal
ownership. As per para 8 of the standard, in following situations, the lease transactions
are called Finance lease:
 The lessee will get the ownership of leased asset at the end of the lease term.
 The lessee has an option to buy the leased asset at the end of the lease term at
price, which is lower than its expected fair value at the date on which option will be
exercised.
 The lease term covers the major part of the life of asset even if title is not transferred.
 At the beginning of lease term, present value of minimum lease rental covers the
initial fair value.
 The asset given on lease to lessee is of specialized nature and can only be used by
the lessee without major modification.
Operating Lease: It is lease, which does not transfer all the risks and rewards
incidental to ownership.
(c) Paragraphs 27 to 29 of AS 17 on ‘Segment Reporting’ deal with reportable segments.
Paragraph 27 requires that a business segment or geographical segment should be
identified as a reportable segment if:
(i) Its revenue from sales to external customers and from transactions with other
segments is 10 percent or more of the total revenue, external and internal, of all
segments; or
(ii) Its segment result, whether profit or loss, is 10 percent or more of –
(a) the combined result of all segments in profit, or
(b) the combined result of all segments is loss,
whichever is greater in absolute amount; or
(iii) its segment assets are 10 percent or more of the total assets of all segments.
As per para 28, a business segment or a geographical segment which is not a reportable
segment as per paragraph 27 may be designated as a reportable segment despite its
size at the discretion of the management of the enterprise. If that segment is not

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designated as a reportable segment, it should be included as an unallocated reconciling

item.
Lastly, as per para 29 of the standard, if total external revenue attributable to reportable
segments constitutes less than 75 percent of the total enterprise revenue, additional
segments should be identified as reportable segments, even if they do not meet the 10
percent thresholds specified in paragraph 27 of the standard, until at least 75 percent of
the total enterprise revenue is included in reportable segments.
(d) A suitably designed accounting system can be used for extracting the following
information:
 Crop wise performance and overall performance of the agricultural enterprise.
 Comprehensive information regarding yield, revenue, input and cost of the
enterprise.
 Financial state of affairs i.e. assets and liabilities, of the firm, at a particular point of
time.
 Profit / Loss of the farm during a year.
 Data base for other decisions, namely
o Acquisition of assets or hire services for ploughing, irrigation, weeding etc;
o Replacement of draught animal, farm, machinery and farming;
o Selection of crop-mix;
o Choosing farm size;
o Farm diversification adding crop enterprise and non-farming activities like
processing of agricultural products; and
o Divestment decisions whether to continue agricultural operations.
 Supporting data to the lenders to assess farm’s financial requirements as well as
debt servicing ability.
 Reliable source document for assessment of agriculture income tax.
(e) In India, government accounts are kept in three main parts, i.e. Consolidated fund,
Contingency Fund and Public Account.
 In part I, namely the Consolidated Fund is further classified into:
(i) Revenue and Expenditure Heads;
(ii) Capital Receipts and Disbursement Heads; and
(iii) Public Debt, Loans and Advance.
To this fund all monies raised and received through taxation, borrowings, etc are
credited, and from this, all expenditures are met as per authorization of Parliament
at the centre and legislatures in the states.

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 In Part II, namely Contingency Fund, the transactions connected with the
Contingency Fund set up by the Government of India or of a State or Union Territory
Government are recorded.
 In Part III, namely Public Account, the transactions relating to ‘Debt’ (other than
those included in Part I), ‘Deposits’, ‘Advance’, ‘Remittances’, and ‘Suspense’ are
recorded. There being no separate Public Accounts in the case of Union Territory
Governments, the transactions pertaining to this account are booked in the Public
Account of the Central Government.
(f) As per para 9 of AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, a foreign
currency transaction should be recorded, on initial recognition in the reporting currency,
by applying to the foreign currency amount the exchange rate between the reporting
currency and the foreign currency at the date of the transaction.
Accordingly, goods purchased on 24.02.2008 and corresponding creditors would be
recorded at Rs. 46.60 = 1 US $ i.e. 1,000 x 46.60 = Rs.46,600.
As per para 11 of AS 11, at balance sheet date all monetary items should be reported
using the closing rate, therefore creditors of US$ 1,000 outstanding on 31.03.2008 will be
reported. i.e. 1,000 x 47.00 = Rs.47,000.
Exchange Loss (47,000 – 46,600) = Rs.400 should be debited in Profit and loss Account
for the year 2007-2008.
Exchange differences on settlement of monetary items should be transferred to Profit and
loss Account as gain or loss, therefore 1,000 x 47.50 = 47,500 – 47,000 = Rs. 500 will be
debited to Profit and loss Account for the year 2008-2009.

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