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Test Series: October, 2019

MOCK TEST PAPER
FOUNDATION COURSE
PAPER – 1: PRINCIPLES AND PRACTICE OF ACCOUNTING
ANSWERS
1. (a) (i) False- The right hand side of the equation includes cash twice- once as a part of current
assets and another separately. The basic accounting equation is
Equity + Long Term Liabilities = Fixed Assets + Current Assets - Current Liabilities
(ii) False: Consignment account is a nominal account
(iii) False- The Sales book is a register specially kept to record credit sales of goods dealt in by
the firm, cash sales are entered in the cash book and not in the sales book.
(iv) False- While calculating the average due date, any transaction date may be taken as the base
date.
(v) True- If a partner retires, his share of profit or loss will be shared by the other partners in their
profit sharing ratio.
(vi) False: Net income is determined by preparing income and expenditure in case of persons
practicing vocation.
(b) Limitations which must be kept in mind while evaluating the Financial Statements are as follows:
• The factors which may be relevant in assessing the worth of the enterprise don’t find place in
the accounts as they cannot be measured in terms of money.
• Balance Sheet shows the position of the business on the day of its preparation and not on the
future date while the users of the accounts are interested in knowing the position of the
business in the near future and also in long run and not for the past date.
• Accounting ignores changes in some money factors like inflation etc.
• There are occasions when accounting principles conflict with each other.
• Certain accounting estimates depend on the sheer personal judgement of the accountant.
• Different accounting policies for the treatment of same item adds to the probability of
manipulations.
(c) (i) Error of Principle.
(ii) Error of Omission.
(iii) Error of Commission.
(iv) Error of Omission.
(v) Error of Commission
2. (a) Quarry Lease Account
Dr. Cr.
Rs. Rs.
2016 2016
Jan. To Bank A/c 2,00,00,000 Dec. 31 By Depreciation A/c 2,00,000
[(4,000/4,00,000) ×
1

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Rs. 2,00,00,000]
Dec. 31 By Balance c/d 1,98,00,000
2,00,00,000 2,00,00,000
2017 2017
Jan. 1 To Balance b/d 1,98,00,000 Dec. 31 By Depreciation A/c 10,00,000
Dec. 31 By Balance c/d 1,88,00,000
1,98,00,000 1,98,00,000
2018 2018
Jan. 1 To Balance b/d 1,88,00,000 Dec. 31 By Depreciation A/c 15,00,000
Dec. 31 By Balance c/d 1,73,00,000
1,88,00,000 1,88,00,000
Depreciation Account
Dr. Cr.
Rs. Rs.
2016 2016
Dec. 31 To Quarry lease A/c 2,00,000 Dec. 31 By Profit & Loss A/c 2,00,000
2,00,000 2,00,000
2017 2017
Dec. 31 To Quarry lease A/c 10,00,000 Dec. 31 By Profit & Loss A/c 10,00,000
10,00,000 10,00,000
2018 2018
Dec. 31 To Quarry lease A/c 15,00,000 Dec. 31 By Profit & Loss A/c 15,00,000
15,00,000 15,00,000

(b) (i) Cash Book (Bank Column)

Date Particulars Amount Date Particulars Amount
2017 Rs. 2017 Rs.
Sept. Sept.
30 30
To Party A/c 32,000 By Balance b/d 8,124
To Customer A/c By Bank charges 1,160
(Direct deposit) 2,34,800 By Customer A/c 2,80,000
To Balance c/d 22,484 (B/R dishonoured)
2,89,284 2,89,284
(ii) Bank Reconciliation Statement as on 30th September, 2017
Particulars Amount
Rs.
Overdraft as per Cash Book 22,484
Add: Cheque deposited but not collected upto 30 th Sept., 2017 26,28,000
26,50,484

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Less: Cheques issued but not presented for payment upto 30th Sept., 2017 (26,52,000)
Credit by Bank erroneously on 6th Sept. (40,000)
Overdraft as per bank statement 41,516
Note: Bank has credited Neel by 40,000 in error on 6 th September, 2017. If this mistake is
rectified in the bank statement, then this will not be deducted in the above statement along
with Rs. 26,52,000 resulting in debit balance of Rs. 1,516 as per pass-book.
3. (a) In the books of Gagan
Consignment to Kumar of Chennai Account
Particulars Rs. Particulars Rs.
To Goods sent on By Kumar (Sales) 19,60,000
Consignment 20,00,000 By Loss in Transit 100 cases
@ Rs. 1,050 each 1,05,000
To Bank (Expenses) 1,00,000 By Consignment Inventories
To Kumar (Expenses) 63,000 In hand 300 @ Rs. 1,060
each 3,18,000
To Kumar (Commission) 1,96,000 In transit 200 @ Rs. 1,050
each 2,10,000 5,28,000
To Profit on Consignment to 2,34,000
Profit & Loss A/c
25,93,000 25,93,000

Kumar’s Account
Particulars Rs. Particulars Rs.
To Consignment to Chennai A/c 19,60,000 By Consignment A/c
(Expenses) 63,000
By Consignment A/c
(Commission) 1,96,000
By Balance c/d 17,01,000
19,60,000 19,60,000
Working Notes:
(i) Consignor’s expenses on 2,000 cases amounts to Rs. 1,00,000; it comes to Rs. 50 per case.
The cost of cases lost will be computed at Rs. 1,050 per case.
(ii) Kumar has incurred Rs. 17,000 on clearing 1,700 cases, i.e., Rs. 10 per case; while valuing
closing inventories with the agent Rs. 10 per case has been added to cases in hand with the
agent.
(iii) It has been assumed that balance of Rs. 17,01,000 is not yet paid.
(b) Calculation of Average Due Date
(Taking 3r d March, 2018 as base date)
Date of bill Term Due date Amount No. of days from Product
2018 2018 the base date i.e.
3rd March,2018
(Rs.) (Rs.) (Rs.)
28 January
th 1 month 3 March
rd 5,000 0 0

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20th March 2 months 23rd May 4,000 81 3,24,000

12th July 1month 14th Aug. 7,000 164 11,48,000
10th August 2 months 13th Oct. 6,000 224 13,44,000
22,000 28,16,000
Sum of Products
Average due date = Base date + Days equal to
Sum of Amounts
28,16,000
= 3rd March, 2018 +
22,000

= 3rd March, 2018 + 128 days = 9 th July, 2018

Working Note:
Bill dated 12th July, 2018 has the maturity period of one month, due date (after adding 3 days of
grace) falls on 15th August, 2018. 15th August being public holiday, due date would be preceding
date i.e. 14th August, 2018.
(c) Books of K. Katrak
Journal Entries
Dr. Cr.
Rs. Rs.
(i) Bills Payable Account Dr. 2,500
Interest Account Dr. 50
To Cash A/c 1,000
To Bills Payable Account 1,550
(Bills Payable to Basu discharged by cash payment of
Rs. 1,000 and a new bill for Rs.1,550 including Rs. 50 as
interest)
(ii) (a) G. Gupta Dr. 4,020
To M. Mehta 4,020
(G. Gupta’s acceptance for Rs. 4,000 endorsed to M. Mehta
dishonoured, Rs. 20 paid by M. Mehta as noting charges)
(b) M. Mehta Dr. 4,020
To Bank Account 4,020
(Payment to M. Mehta on withdrawal of bill earlier received
from Mr. G. Gupta)
(iii) Bank Account Dr. 1,990
Discount Account Dr. 10
To Bills Receivable Account 2,000
(Payment received from D. Dalal against his acceptance for
Rs. 2,000. Allowed him a discount of Rs. 10)
(iv) Bills Payable Account Dr. 5,000
To Bills Receivable Account 5,000
(Bills Receivable from Mody endorsed to Patel in settlement
of bills payable issued to him earlier)

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4. In the books of M/s ABC

Journal Entries
Date Particulars Dr. (Rs.) Cr.(Rs.)
2019 Fixed assets A/c Dr. 51,000
January 1 To Revaluation A/c 51,000
(Revaluation of fixed assets)
Revaluation A/c Dr. 11,000
To Stock A/c 8,000
To Provision for doubtful debts A/c 3,000
(Reduction in the value of stock and provision @ 5% on
sundry debtors created for doubtful debts)
B’s capital A/c Dr. 10,500
C’s capital A/c Dr. 21,000
To A’s capital A/c 31,500
(Adjustment for goodwill and joint life policy (W.N.1))
Revaluation A/c Dr. 40,000
To A’s capital A/c 20,000
To B’s capital A/c 12,500
To C’s capital A/c 7,500
(Transfer of profit on revaluation)
General reserve A/c Dr. 80,000
To A’s capital A/c 40,000
To B’s capital A/c 25,000
To C’s capital A/c 15,000
(Transfer of general reserve)
Balance Sheet (revised)
as on 1st January, 2019
Liabilities Amount Assets Amount
Rs. Rs.
Sundry creditors 1,50,000 Cash 40,000
Partners’ loan A/cs: Bills receivable 50,000
A 40,000 Sundry debtors 60,000
B 30,000 70,000 Less: Provision 3,000 57,000
Partners’ capital A/cs: Stock 1,12,000
(W.N.2)
Fixed assets 3,31,000
A 1,91,500
B 1,07,000
C 71,500 3,70,000 _______
5,90,000 5,90,000

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Working Notes:
(1) Adjustment for goodwill and joint life policy
Rs.
Average profit of last five years 20,000
Add: Insurance premium per annum 10,000
Average profit before charging premium 30,000
Value of goodwill (3x Rs. 30,000) 90,000
Add: Surrender value of joint life policy 78,000
Total amount for adjustment 1,68,000

A B C
Rs. Rs. Rs.
Raised in old profit sharing ratio (8:5:3) 84,000 52,500 31,500
Written off in new profit sharing ratio (5:6:5) 52,500 63,000 52,500
Net effect in capital accounts 31,500 10,500 21,000
(Cr.) (Dr.) (Dr.)
Alternatively, the net effect in partners’ capital accounts due to adjustment for goodwill and joint
life policy can be shown on the basis of profit sacrificing ratio. Profit sacrificing ratios are:
A = (8/16) - (5/16) = 3/16
B = (5/16) - (6/16) = (1/16)
C = (3/16) - (5/16) = (2/16)
Therefore, adjustments in partner’s capital account:
A = 3/16 x Rs. 1,68,000 = Rs. 31,500 (Cr.)
B = (1/16) x Rs. 1,68,000 = Rs. 10,500 (Dr.)
C = (2/16) x Rs. 1,68,000 = Rs. 21,000 (Dr.)
(2) Partners’ Capital Accounts
A B C A B C
2019 Rs. Rs. Rs. 2019 Rs. Rs. Rs.
Jan 1 To A’ capital - 10,500 21,000 Jan 1 By Balance b/d 1,00,000 80,000 70,000
A/c
To Balance 1,91,500 1,07,000 71,500 By B and C’s capital 31,500 - -
c/d A/c (as per contra)
By Revaluation A/c 20,000 12,500 7,500
(revaluation profit)
_______ _______ _____ By General reserve 40,000 25,000 15,000
1,91,500 1,17,500 92,500 1,91,500 1,17,500 92,500

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5. (a) Income and Expenditure Account of Mumbai Club

for the year ended 31 st December, 2018
Dr. Cr.
Expenditure Rs. Rs. Income Rs. Rs.
To Salary 2,000 By Donation 5,000
To Repair expenses 500 Less: Capitalised (50%) 2,500 2,500
To Misc. expenses 500 By Subscriptions 12,000
Less: Prepaid 90 410 Add: Outstanding 900
To Insurance premium 200 12,900
Add: Outstanding 40 240 Less: Advance for 2019 350 12,550
To Paper, ink etc. 150 By Entrance fees 1,000
To Drama expenses 500 By Interest on investment 300
To Surplus-excess of 14,150 [100+8/100x6,000x5/12]
income over expenditure
By Interest received from bank 400
By Sale of old newspapers 150
_____ By Sale of drama tickets 1,050
17,950 17,950
Balance Sheet of Mumbai Club
as on 31st December, 2018
Liabilities Rs. Rs. Assets Rs.
Capital fund Billiard table 30,000
Opening balance 36,000 Furniture 6,000
Add: Surplus 14,150 Investments 6,000
Donations 2,500 52,650 Interest accrued 200
Outstanding insurance premium 40 Prepaid expenses 90
Subscription received in advance 350 Subscriptions receivable 900
Cash in hand 2,650
______ Cash at bank 7,200
53,040 53,040

Working Note:
Balance Sheet of Mumbai Club
as on 31st December, 2017
Liabilities Rs. Assets Rs
Capital fund 36,000 Billiard table 30,000
(balancing figure) Cash in hand 4,000
Creditors for billiard table 8,000 Cash at bank 10,000
44,000 44,000

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(b) In the books of M/s. Ketan Traders

Trading Account for the year ended 31 st March, 2019
Particulars Amount Particulars Amount
Rs. Rs. Rs. Rs.
To Opening Inventory 1,50,000 By Sales 16,50,000
To Purchases 10,08,000 Less: Returns Inward (1,50,000) 15,00,000
Less: Returns
(1,08,000) 9,00,000 By Closing Inventory 3,00,000
outward
To Carriage Inwards 45,000
To Wages 75,000
To Gross profit 6,30,000
18,00,000 18,00,000
(c) Valuation of Physical Stock as at March 31, 2018
Rs.
Stock at cost on 31.12.2017 80,000
Add: (1) Undercasting of a page total 200
(2) Goods purchased and delivered during January – March, 2018
Rs. (70,000 – 3,000 + 4,000) 71,000
(3) Cost of sales return Rs. (1,000 – 200) 800 72,000
1,52,000
Less:(1) Overcasting of a page total Rs. (6,000 – 5,000) 1,000
(2) Goods sold and dispatched during January – March, 2018
Rs. (90,000 – 5,000 + 4,000) 89,000
 25 
Less: Profit margin  89,000   17,800 71,200 (72,200)
 125 
Value of stock as on 31st March, 2018 79,800
Note: In the above solution, transfer of ownership is assumed to take place at the time of delivery
of goods. If it is assumed that transfer of ownership takes place on the date of invoice, then
Rs. 4,000 goods delivered in March 2018 for which invoice was received in April, 2018, would be
treated as purchases of the accounting year 2017-2018 and thus excluded. Similarly, goods
dispatched in March, 2018 but invoiced in April, 2018 would be excluded and treated as sale of the
year 2017-2018
6. (a) A Ltd.
Journal
2017 Dr. Cr.
Rs. Rs.
May 20 Bank Account Dr. 8,00,000
To Share Application A/c 8,00,000
(Application money on 40,000 shares at Rs. 20
per share received.)
June 1 Share Application A/c Dr. 8,00,000

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To Share Capital A/c 8,00,000

(The amount transferred to Capital Account on
40,000 shares Rs. 20 on application. Directors’
resolution no........ dated ......)
Share Allotment A/c Dr. 12,00,000
To Share Capital A/c 12,00,000
(Being share allotment made due at Rs. 30 per
share. Directors’ resolution no...... dated ......)
July 15 Bank Account Dr. 12,00,000
To Share Application and Allotment A/c 12,00,000
(The sums due on allotment received.)
Oct. 1 Share First Call Account Dr. 10,00,000
To Share Capital Account 10,00,000
(Amount due from members in respect of first
call-on 40,000 shares at Rs. 25 as per Directors,
resolution no... dated...)
Oct. 20 Bank Account Dr. 10,00,000
To Share First Call Account 10,00,000
(Receipt of the amounts due on first call.)
2018
Feb. 1 Share Second and Final Call A/c Dr. 10,00,000
To Share Capital A/c 10,00,000
(Amount due on 40,000 share at Rs. 25 per share
on second and final call, as per Directors
resolution no... dated...)
Mar. 31 Bank Account Dr. 10,00,000
To Share Second & Final Call A/c 10,00,000
(Amount received against the final call on 40,000
shares at Rs.25 per share.)
(b) In the books of Simmons Limited
Date Particulars Rs. '000 Rs. '000
April 1 Bank A/c Dr. 11,000
To 12% Debentures Application A/c 11,000
(Being money received on 1,10,000 debentures)
April 7 12% Debentures Application A/c Dr. 1,000
To Bank A/c 1,000
(Being money on 10,000 debentures refunded as
per Board’s Resolution No…..dated…)
April 7 12% Debentures Application A/c Dr. 10,000
To 12% Debentures A/c 10,000
(Being the allotment of 1,00,000 debentures of
Rs. 100 each at par, as per Board’s Resolution
No….dated…)
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(c) The difference between the balance shown by the passbook and the cashbook may arise on
account of the following:
(i) Cheques issued but not yet presented for payment.
(ii) Cheques deposited into the bank but not yet cleared.
(iii) Interest allowed by the bank.
(iv) Interest and expenses charged by the bank.
(v) Interest and dividends collected by the bank.
(vi) Direct payments by the bank.
(vii) Direct deposits into the bank by a customer.
(viii) Dishonour of a bill discounted with the bank.
(ix) Bills collected by the bank on behalf of the customer.
(x) An error committed by the bank etc.
OR
(c) Normally, the following subsidiary books are used in a business:
(i) Cash book to record receipts and payments of cash, including receipts into and payments out
of the bank.
(ii) Purchases book to record credit purchases of goods dealt in or of the materials and stores
required in the factory.
(iii) Purchase Returns Books to record the returns of goods and materials previously purchased.
(iv) Sales Book to record the sales of the goods dealt in by the firm.
(v) Sale Returns Book to record the returns made by the customers.
(vi) Bills receivable books to record the receipts of promissory notes or hundies from various
parties.
(vii) Bills Payable Book to record the issue of the promissory notes or hundies to other parties.
(viii) Journal (proper) to record the transactions which cannot be recorded in any of the seven
books mentioned above.

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