Corporate Accounting

Unit 1.
Issue of Shares
A Joint Stock Company is a very important form of business organization. The

Public Limited Companies raise their capital by issuing shares to the public. This is
major portion of capital to any Public Limited Company.
Types of Shares:
The capita of the company can be divided into different units with definite value
called shares. Holders of these shares are called shareholders or members of the
company. They are two types of shares. They are:
1. Preference Shares and
2. Equity shares.
1. Preference Shares:
Shares which enjoy the preferential rights such as to dividend and repayment
of capital over the equity shares, in the event of winding up of the company are called
preference shares. The holders of preference shares will get a fixed rate of divided.
Preference shares are classified as follows:
a. Cumulative Preference shares
b. Non- Cumulative Preference shares
c. Redeemable Preference shares
d. Participating Preference shares
e. Non-Participating Preference shares
a. Cumulative Preference shares:
If the company does not earn adequate profit in any year, dividends on
preferences shares may not be paid for that year. But if the preference shares are
cumulative such unpaid dividends are treated as arrears and can be carried forward
to subsequent years. Such unpaid dividends on these shares go on accumulating and
become payable out of the profits of the company, in subsequent years. Only after
such arrears have been paid off, any divided can be paid to the equity shares.
b. Non- Cumulative Preference shares:

The holders of non-cumulative preference shares will get a preferential right in
getting fixed divided before it is distributed to equity shareholders. The fixed divided
is to be paid only out of the divisible profits but if in a particular year there is no profit,
the non-cumulative preference shareholders will not get any dividend for that year
and they cannot claim in future. Such dividend cannot be carried forward to next year.
c. Redeemable Preference shares:
Capital raised by issuing equity shares, is not to be repaid to the shareholders
but capital raised through the issue of redeemable preference shares it to be paid
back. So, the preferences shares on which amount is repayable on the expiry of the
period of the shares, are called redeemable preference shares. 1
As per the sec 55 of Companies Act 2013 a company can issue preference shares for a
maximum period of 20 years.
KINDS OF CAPITAL:
In Company Law, there are several words used in connection with capital, they
may be classified as follows:
1. Authorized Capital: This is also called Registered or Nominal Capital. The

amount of capital mentioned in the Memorandum of Association at the time of
registration of Company is called Authorized Capital. This is the maximum amount of
capital authorized to be raised by issue of shares.
2. Issued Capital: The total Authorized Capital may not be needed by the
Company at the time it commences business. Therefore, it may issue shares to the
required amount. So, Issued Capital is that part of the Authorized Capital which is
actually offered to the public for subscription.
3. Subscribed Capital: Subscribed Capital is that part of the Issued Capital which
has been subscribed by the public. This Capital is either equal to or less than the Issued
Capital.
4. Called up Capital: Called up Capital means the amount actually called by the
Company on the shares of the members.
5. Paid up Capital: It is the amount of money actually paid by the subscribers.
The amount not paid by the members becomes Calls in arrears.
6. Uncalled Share Capital: The unpaid portion of the Subscribed Capital is called
Uncalled Capital.
Shares may be issued (a) at par (Face Value), (b) at a premium and (c) at a
discount.
(a) Issue of Shares at par: Generally share amount is collected in some
installments’ like some amount on application, on allotment and the remaining on
calls. If shares are so issued, the following entries are to be recorded.
i) When money is received along with the application:
Bank A/c. Dr.
To Share Application A/c.
(Being application money received on ... shares at ... per share)
ii)(a) When application money is transferred to the Share Capital A/c.:
Share Application A/c. Dr.
To Share Capital A/c. 2
ii)(b) When application money is rejected :
To Bank A/c.
ii)(c) When Share application money is received in excess and the same is
adjusted to allotment :
To Share Allotment A/c.
iii) When allotment money is due:
Share Allotment A/c. Dr.
To Share Capital A/c.
(Being the share allotment money on ..... shares at Rs..... per share due
from shareholders)
iv) When the allotment money is received:
Bank A/c. Dr.
v) When the first call made and due:
Share first call A/c. Dr.
(Being the first call money on .... shares at Rs. . per share due)
vi) For receipt of first call:
Bank A/c. Dr.
To Share first call A/c.
Note: Similar call entries are to be passed for further calls.

Adjustments Entries:
1. When call money is received in advance:
Bank A/c. Dr.
To Share first call A/c.
2. When call money is in arrear:
Calls in arrear A/c. Dr.
To Share call A/c.
3. When interest is received on Calls in arrears:
Bank A/c. Dr.
To Interest A/c.
4. When Interest is paid on Calls in advance :
Interest A/c. Dr.
To Bank A/c.
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PROBLEMS
1. A Limited Company has been incorporated with an authorized capital of Rs.2,00,000
divided into 2000 equity shares of Rs.100 each. The Company issued 1000 equity
shares to the public payable as Rs.20 on application, Rs.25 on allotment,
Rs.35 on first call and the balance on final call. All the money was duly received. Make
journal entries to record the issue of shares.
Sol.
Journal entries
Date Particulars lf no Debit Rs. Credit Rs.
Bank a/c Dr. 20,000
To Share application a/c 20,000
(Being application money received for
1000 shares at Rs.20 per share )
Share Application a/c Dr. 20,000
To Share Capital a/c 20,000
(Being share application money
transferred to share capital account )
Share allotment a/c Dr. 25,000
To Share capital a/c 25,000
(Being allotment money due on
1000shares at Rs.25 per share )
Bank a/c Dr. 25,000
To Share allotment a/c 25,000
(Being allotment money received )
Share first call a/c Dr. 35,000
(Being first call money due on
Bank a/c Dr. 35,000
To Share first call a/c 35,000
(Being first call money received )
Share final call a/c Dr. 20,000
(Being final call money due on
Bank a/c Dr. 20,000
To Share final call a/c 20,000
(Being final call money received )
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2. Prameel Co. Ltd. was registered with a capital of Rs.20,00,000 divided into 80,000
shares of Rs.25 each. The Company offered to the public subscription 50,000 shares
payable at Rs.5 on application, Rs.10 on allotment and the balance equal call. The
Company received applications for 40,000 shares. All the money was duly received.
Pass necessary journal entries and show how they would appear in Balance Sheet.
Sol.
Journal Prameel Company limited
Date Particulars lf no Debit Rs. Credit Rs.
Bank a/c Dr. 2,00,000
To Share application a/c 2,00,000
(Being application money received for
40000 shares at Rs.5 per share )
Share Application a/c Dr. 2,00,000
To Share Capital a/c 2,00,000
(Being share application money
transferred to share capital account )
Share allotment a/c Dr. 4,00,000
To Share capital a/c 4,00,000
(Being allotment money due on
Bank a/c Dr. 4,00,000
To Share allotment a/c 4,00,000
(Being allotment money received )
Share first and final call a/c Dr. 4,00,000
To Share capital a/c 4,00,000
(Being first call money due on
Bank a/c Dr. 4,00,000
To Share first call a/c 4,00,000
(Being first call money received )
3. X Ltd. was registered with a capital of Rs.2,50,000 divided into 25,000 equity shares
of Rs.10 each. The Company offered to public2 subscription 20,000 shares, payable
Rs.3 on application, Rs.4 on allotment and the balance on call. The Company received
applications for 15,000 shares. The Company did not make call for. All the money was
duly received. Make necessary journal entries and show how the Share Capital will
appear in the Balance Sheet.
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4. On 01.01.2019 the directors of X Ltd. decided to issue 1,00,000 shares of Rs.10 each,
payable Rs.2-50 on application and Rs.2-50 on allotment. Applications are received
for 1,20,000 shares on 10th January and the Board of Directors decided to reject
20,000 share applications, money being refunded. All allotment money is received in
full. The balance on shares is not called up. Pass necessary journal entries.
5. XY Ltd. was registered with an authorized capital of 2,00,000 shares of Rs.10 each,
1,40,000 shares were issued to the public. The public subscribed for 1,80,000 shares.
The shares are payable as follows :
On Application Rs.3
On Allotment 2
On First call 3
On Final call 2
All the money was received. Pass journal entries.
Issue of Shares at Premium:

Every share is of a certain price is known as its face value. Generally, shares are
issued at their face value. Sometimes, Companies may issue shares at a premium, i.e.,
at a price higher than its face value. The excess price over face value is known as
Premium. For example, if a share of Rs.10 is issued at Rs.12, Rs.2 will be the premium.
Share Premium is a capital profit. Hence, it is not available for payment of dividend to
the shareholders. It appears on the Liabilities side of Balance Sheet.
Premium may be collected alongwith application or allotment or alongwith call.

The usual practice is to collect the premium along with the allotment money.
Entries:
I. When Premium is received with application money:
(i) Bank A/c. Dr.
To Share Application A/c.
(ii) For Transfer:
To Share Premium A/c.
II. When Premium is payable alongwith Allotment money:

(i) Share Allotment A/c. Dr.
To Share Premium A/c. 6
(ii) For Receipt of Allotment money:
Bank A/c. Dr.
6. S Ltd. issued 15,000 equity shares of Rs.10 each at a premium of Rs.2 per share
payable Rs.3 on application, Rs.6 on allotment (including premium) and the balance
on call. Pass journal entries and show how they would appear in Balance Sheet.
7. M Ltd. offered 30,000 equity shares of Rs.20 each at Rs.24 per share payable as Rs.6
on application, Rs.8 on allotment (including premium) and the balance at the end of
3rd month from the date of allotment. All the money was duly received. Prepare
a Cash Book and pass journal entries and also show them in Balance Sheet.
8. X Ltd. was registered with Rs.20,00,000 Capital divided into 20,000 shares of Rs.100
each. These shares are issued at 20% premium payable as Rs.35on 9 application
(including Rs.5 premium), Rs.45 on allotment (including Rs.15 premium) and the
balance on two equal installments after 3 months and 6 months respectively form the
date of allotment. The allotment was made on 1st April, 1998. All the money was
received.
Show Cash Book, necessary journal entries and the Balance Sheet.
ISSUE OF SHARES AT A DISCOUNT:

A Company can issue shares at a discount, i.e., at a price less than its face value.
For example, if a share of Rs.10 each is issued at Rs.9, it is said to be issued at a discount
of Re.1 per share.
Discount allowed on issue of shares is a loss of Capital nature. Hence, it is to be
debited to a separate account namely Discount on issue of Shares A/c.It appears on
the Assets side of Balance Sheet under Miscellaneous Expenditure. This is usually
written off to Profit and Loss Account over a period of 3 to 5 years.
Generally, it is allotted at the time of allotment only.

Entries :
1. When shares are issued at a discount on allotment :
For Allotment Due :
Share Allotment A/c. Dr.
Discount on issue of Shares A/c. Dr.
For Receipt :
Bank A/c. Dr.
To Share Allotment A/c. 7
9. X Ltd. offered 20,000 equity shares of Rs.20 each at a discount of 5% payable as
follows :
On Application Rs.6
On Allotment 8
On Call 5
The applications received were for 16,000 shares. All the money was duly
received. Pass journal entries and show how these transactions would appear in
Balance Sheet.
10. X Ltd. has been incorporated with Rs.20,00,000 Capital divided into 20,000 shares
of Rs.100 each. It issued 15,000 shares to public at Rs.5 discount payable as Rs.25 on
application, Rs.30 on allotment and the balance on two equal calls at Rs.20 each. The
Company received applications for 12,000 shares. All the share money was10 duly
received. Pass necessary journal entries and also show the relevant items in Balance
Sheet.
Adjustment of excess application money towards the Allotment and Calls :

Sometimes a Company may not allot all the shares for which applications have
been received. Because of over subscription, the allotment is either made of less
number of shares or on pro-rata basis (Ratio basis).
In such a case, the excess application money will be adjusted either on
allotment or calls. If there is still surplus it will be paid to shareholders in cash.
11. A Company issued Rs.5,00,000 new capital divided into Rs.10 shares at a premium
of Rs.4 per share payable Re.1 on application, Rs.6 on allotment (including Rs.2
premium) and Rs.7 on call (including premium).
Over payments on applications were to be applied towards sums due on
allotment. Where no allotment was made, application money was to be returned in
full. The issue was oversubscribed to the extent of 13000 shares. Applicants for 12000
shares were alloted only 1000 shares and applicants for 2000 shares were sent letters
of regret. All money due was received. Pass journal entries.
12. A Company issued 50,000 shares at Rs.10 each payable Rs.2 on application, Rs.3
on allotment, Rs.2 on first call and the balance on final call. The Company received
applications of 75,000 and allotment was made on pro-rata. Surplus application
money is to be adjusted to allotment and calls. All the money received. Pass journal
entries. 8
Calls in arrears and Calls in advance:

If any amount has been called by the Company either as allotment or call money
and a shareholder has not paid that money, this is known as Calls in arrears on which
5% interest is charged.
Similarly, if any call has been made but while paying that call, some
shareholders have paid the amount of the rest of calls also, then such amount is called
Calls in advance and will be credited to a separate account known as Calls in advance
A/c. Calls in advance A/c. is shown on the Liabilities side of Balance Sheet. Generally
interest is paid on such calls at 6% p.a.
13. On 01.03.1998 X Ltd. makes an issue of 20,000 equity shares of Rs.10 each payable
as follows :
On application Rs.2
On allotment 3
On first & final call 6 (3 months after allotment)
Applications were received for 26000 shares and directors made allotment in
full to the applicants demanding 10 or more shares and returned money to the
applicants for 6000 shares. One shareholder who was alloted 40 shares paid first and
final call with allotment money and another shareholder alloted 60 shares did not pay
allotment money on his shares but which he paid with the first and final call. Directors
have decided to charge 5% and allow 6% interest on Calls in arrears and Calls in
advance respectively. Give journal entries.
14. H Ltd. issued 40,000 equity shares of Rs.10 each, payable at Rs.2 on application,
Rs.4 on allotment and Rs.4 on call. All the amount payable on allotment was duly
received except in one case where the shareholder failed to pay the amount due on
allotment on his 100 shares and another shareholder paid the shares in full on
allotment itself of his 50 shares.
Pass necessary journal entries and also prepare the Balance Sheet.
15. Blue Moon Ltd. issued 50,000 shares of Rs.10 each payable as under :
Rs.2 On application
Rs.2.5 On allotment
Rs.3 On first call
Rs.2.5 On final call
The public applied for 90,000 shares. The allotment was made as follows on 1st
April, 15.
To the applicants of 45,000 shares Full
To the applicants of 20,000 shares Quarter (25%) 9
To the remaining applicants Nil
The first call was made on 1st November and the first call on 1st Feb., 16.
According to the terms of issue the surplus application money could be kept by the
Company against the money due on allotment and against subsequent calls. One
shareholder to whom 5000 shares were alloted paid on allotment the full amount due
on the shares.
The interest at 5% p.a. on Calls in advance was paid on 1st Feb.,16. Give Cash
Book and journal entries in the books of the Company assuming that all the money
was duly received. Also prepare Calls in advance A/c.
Forfeiture of Shares:
When a shareholder is called upon to pay call amount by the Company, he has
to pay on or before the date specified by the Company. If he fails to pay the call, the
Company has two remedies against the shareholder namely, (1) it may sue him for the
amount due, (2) it may forfeit his shares subject to the provision of the articles.
The Company do not generally resort to the first remedy as it involved a
lengthily procedure of litigation. They resort to the second one that is to forfeit the
shares. The implication of forfeiture is to cancel the allotment and treat the amount
already received thereon as forfeited. When shares are forfeited, the amount already
paid by the shareholder is transferred to a separate account, i.e., Forfeited Shares
Account. It is a Capital profit and so it appears on the Liabilities side of Balance Sheet.
When forfeited shares are reissued at a discount, the discount may be written off from
the Forfeited Shares A/c. If there is any further balance, it will be transferred to
Capital Reserve A/c.
(i) When shares issued at par are forfeited :

Share Capital A/c. Dr.
To Share Calls A/c.
To Forfeited Shares A/c.
(ii) When shares are issued at a premium and the premium amount not paid by the
shareholder and the shares are forfeited :
Share Capital A/c. Dr.
Share Premium A/c. Dr.
To Calls in arrears A/c.
To forfeited Shares A/c.
Note: If the premium is once collected, it should not be appropriated when the
shares are forfeited. So, It only appears in Premium A/c.
(iii) When shares issued at a discount are forfeited :
Share Capital A/c. Dr. 10
To Calls in arrears A/c.
To Discount on issue of shares A/c.
To Forfeited Shares A/c.
Reissue of Forfeited Shares:

Forfeited Shares may be reissued by the Company for any amount. If such
shares are issue at a discount, then the discount should not exceed the forfeited
amount. There is no bar to reissue of the forfeited shares at par or at premium.
(i) When the Forfeited shares are reissued at a discount:

Bank A/c. Dr.(Amount received on reissue)
Forfeited Shares A/c. Dr. (With discount allowed)
(ii) When Forfeited Shares are reissued at a premium:
Bank A/c. Dr.
To Share Premium A/c.
(iii) After reissue of Forfeited shares, the balance in Forfeited Shares A/c. if any
should be transferred to Capital Reserve by passing the following entry.
Shares forfeited A/c. Dr.
To Capital Reserve A/c.
16. A Company offered for subscription 55000 shares of Rs.10 each, payable Rs.3 on
application, Rs.4 on allotment and Rs.3 on final call. The offer was fully subscribed
and all the money called up was duly received with the exception of the call Rs.3 on
820 shares. The Company after due notice, forfeited the shares. The shares were
reissued subsequently at a price of Rs.6 per share. Give journal entries, prepare
Forfeited Shares A/c. and also Balance Sheet.
17. R.S.Ltd. having a nominal capital of Rs.20,00,000 in shares of Rs.100 each, invited
applications for 10,000 shares payable as follows:
On application Rs.25
On allotment 35
On first call 20
On final call 20
The Company received applications for 9000 shares. All the money due is
received with the exception of second and final call on 250 shares, these shares were
forfeited and reissued as fully paid at Rs.90 per share. Write journal entries and show
Balance Sheet. 11
18. A Limited Company issue 10,000 shares of Rs.10 each payable Rs.3 on application,
Rs.3 on allotment, Rs.2 on first call and Rs.2 on final call. All the shares were duly
subscribed and alloted and both the calls were made. All cash was received except
final call on 200 shares. The directors forfeited them and reissued as fully paid for
Rs.1400.
Give necessary entries.
19. Krishna Ltd. issued 10,000 equity shares of Rs.20 each and 2000 preference shares
of Rs.20 each, the latter at a premium of 5%. The amount on shares is 14
to be paid as follows: Rs.5
On application
On allotment (including premium)
and the balance on Call.
Govinda failed to pay the call due on his 100 equity shares. There were no calls
in arrears on any other shares. An amount of Rs.6000 was paid to the underwriters as
formation expenses. The 100 shares were forfeited and reissued at par. Prepare Cash
Book, pass journal entries and show the Balance Sheet.
20. G Ltd. issued 10,000 equity shares at Rs.10 each payable Rs.5 on application
(including Rs.2 premium), Rs.4 on allotment and Rs.3 on call. All the money is received
in full with the exception of allotment on 200 shares and call on 500 shares (including
the above 200 shares). The shares were forfeited and 400 (including the above 200)
shares were reissued at Rs.7 per share. Prepare Cash Book, pass journal entries and
show Balance Sheet.
21. Suvega Ltd. issued 1,00,000 shares of Rs.10 each at a premium of Rs.1 per share.
The amount payable was as follows:
Rs.2 On application
4 On allotment (including premium)
2.5 On first call
2.5 On final call
The public applied for 90,000 shares and these shares were allotted. The
directors made both the calls. The allotment and were not received on 1000 shares
and the final call on 1500 shares. The directors forfeited the shares on which
allotment and first call were not paid. 800 of these shares were reissued as fully paid
at Rs.8 per share. Give journal entries and Balance Sheet of the Company.
12
Unit II ISSUE OF DEBENTURES
The most usual form of borrowing by a Company is issue of debentures. Debenture

refers to the borrows capital from the public and is popularly known as Loan Capital.
Generally Companies which need funds for their development and expansion of long
period, issue debentures to the public. A debenture is an acknowledgement of the
borrowing made by the Company from the public.
Debentures are commonly issued in a manner similar to the issue of shares. The
Company may collect the cost of debenture on one lump sum or in instalments like on
application, allotment and calls. Debentures may be issued at par or at a premium or at a
discount.
I. Issue of Debentures at Par:

Here, we get the same entries as in case of the issue of shares.
II. Issue of Debentures at Premium:
When debentures are issued at premium and repayable at par:
Bank A/c. Dr.
To Debentures A/c.
To Debenture Premium A/c.
III. Issue of Debentures at Discount:

When debentures are issued at discount and redeemable at par:
Bank A/c. Dr.
Loss on issue of Debentures A/c. Dr.
To Debentures A/c.
Different conditions of issuing Debentures:
I. When debentures are issued at par and redeemable at premium:
Bank A/c. Dr. (with amount received)
Loss in issue of Debentures A/c.Dr. (with difference between amount received &
repayable)
To Debentures A/c. (with face value)
To Premium on redemption of Debentures A/c.
II. When debentures are issued at discount and redeemable at premium (at par):
Bank A/c. Dr. (with amount received)
Loss in issue of Debentures A/c. Dr. (with discount on issue and premium
on redemption)
To Debentures A/c. (with face value)
To Premium on redemption of debentures A/c.
Redemption of Debentures:
When debentures are redeemed in the following cases:
(a) When debentures are issued at par and repayable at par,
(b) When debentures are issued at premium and repayable at par, 18
1
(c) When debentures are issued at discount and repayable at par, the following entry
is to be passed.
Debentures A/c. Dr.
To Bank A/c.
When debentures are issued at par or at discount and repayable at premium:
Debentures A/c. Dr.
Premium on redemption of debentures A/c. Dr.
To Bank A/c.
PROBLEMS
1. A Limited Company issued 2000 debentures of Rs.100 each repayable at par at the end of
the 10th year. The debentures were payable 25% on application, 25% on allotment and the
balance on call. All the money was received by the Company in due course. Pass necessary
journal entries.
2. M Ltd. issued 5000 debentures of Rs.100 each at a premium of 10% repayable at the end
of the 5th year. The debentures were payable as 20% on application, 40% on allotment
(including premium) and the balance on call. All the money was received. You are asked to
journalise the above transactions.
3. On 1st July, 2021 Sports Ltd. issued 10000, 6% debentures of Rs.10 each at 95%
repayable on 30th June, 2021 at par. Rs.6 per debenture is payable on application and the
balance on allotment. Interest is payable on the full nominal value from 1st Sep., 2021.
Applications were received for 15000 debentures. Allotment was made for all
proportionately, oversubscriptions being applied to the balance due on allotment which
took place on 31st Aug., 2021. All sums due on allotment were received by 14th Sep., 2021.
Assuming that the discount is to be written off evenly over the whole period. You are
required to draft journal entries to record (a)the issue of debentures, (b)the charges to P&L
A/c. for the year ended 30th June, 2022.
4. A Company issued 10,000 debentures of Rs.100 each for subscription. The debenture
money is payable as follows:
Rs.30 On application
40 On allotment
20 On first call
10 On final call
A person who holds 200 debentures fails to pay the amount due at the time of
allotment. However, he pays this amount with the first call money. Another person who is
holding 400 debentures has paid all the calls in advance at the time of allotment. Give
journal entries.
19
2
5. On 01.01.05 P Ltd. issued 4000, 14% debentures of Rs.100 each at a discount of 10%
repayable in 4 years by annual equal instalments.
(a) Give journal entries on the date of issues,
(b) Show 14% debentures A/c., Discount on Debentures A/c. and
Debenture Interest A/c. till the date of redemption.
6. A Ltd. issued Rs.1,00,000 debentures, 10% on 01.04.04 at a discount of 10% repayable in

annual drawings of Rs.25000 each on 31st March every year. You are required to (a) pass
journal entry for issue and (b) show necessary ledger accounts.
7. Sunitha Ltd. issued Rs.2,00,000, 10% debentures on 01.01.02 at a discount of 5%

repayable in annual drawings of Rs.50,000 commencing from 31st December following.
Journalise the above transactions for 4 years ending 31st Dec.,05 assuming that the
Company decided to write off debentures discount during the life of the debentures. Also
show necessary ledger accounts.
8. A Limited Company has made an issue of Rs.5,00,000;9% Debentures on 01.04.04, the

terms of which include that the company must take a 4 year Sinking Fund Insurance policy
for the redemption of debentures at a premium of 5%. The annual premium is Rs.115000.
The value of the policy increases each year by 6%. Give the necessary ledger accounts to
record the above transactions for 4 years.
9. A company issued Rs.2,00,000; 6% Debentures of Rs.1000 each at par, repayable at the

end of 5 years at a premium of 5%. In terms of the Trust Deed, a Sinking Fund was to be
created for the purpose of accumulating sufficient fund for the purpose. Investments were
made yielding 5% interest received at the end of each year. All investments, including
reinvestments of interest received, were made at the end of the year. Prepare for 5 years,
(a) Sinking Fund Account; and (b) Sinking Fund Investment Account.
ISSUE AND REDEMPTION OF DEBENTURES
A Company for its extension and development may raise funds without increasing its
share capital. The Company may invite the public to lend money for a fixed period. For such
money, debentures may be issued. Debentures is an instrument in writing given by a
Company.
Differences between Shares and Debentures:

Shares Debentures
1. A Share is an indication of 1.A Debenture is an Acknowledgement of the
ownership. Shareholders are the borrowing made by the Company from public. They
owners of the Company. are Creditors to the Company.
2. Dividend on shares is payable 2.Interest on debentures has to be paid
only out of profits of the compulsorily irrespective of profits earned.
Company.
3. The rate of dividend on shares 3.The rate of interest on debentures is fixed. 20
is variable.
3
4. A shareholder is entitled to vote. 4. A debenture-holder has no right of voting.
5. Share is a part of the Capital 5.Debentures are a part of borrowings.
of a Company.
6. Shares are not redeemable 6.Debentures can be redeemed by a
during the existence of the Company after a specif period.
Company.
7. When a Company wound up, the 7. When a Company is wound up, the
right of shareholders rank only debenture-holders have prior claim
after the claims of the on the assets of the Company.
debenture-holders and other
creditors.
Issue of Debentures:
The Accounting procedure to be followed for the issue of debentures are practically
the same as for the issue of shares is concerned. Debentures may also be issued at par or at
a premium or at a discount.
Accounting Treatment:
1. When debentures are issued at par or premium or discount payable on application:
Bank A/c. Dr.
Discount on issue of debentures A/c. Dr.
To Debentures A/c.
To Premium on debentures A/c.
2. Issuing Debentures with different Conditions:

a) When debentures are issued at par and redeemable at premium:
Bank A/c. Dr.
Loss in issue of debentures A/c. Dr.
To Debentures A/c.
b) When debentures are issued at discount and redeemable at premium:

Bank A/c. Dr.
Loss in issue of debentures A/c.Dr.(with discount on issueand premium on
redemption)
To Debentures A/c. (Face value)
PROBLEMS
1. M & Co. Ltd. issued 5000 debentures of Rs.100 each at a premium of 10% repayable at
par at the end of 5th year. The debentures were payable 20% on application, 40% on
allotment (including premium) and the balance on first and final call. All the money was
received by the Company. Pass necessary journal entries in the books of Company.
21
4
2. X Ltd. issued 2000 debentures of Rs.100 each at a discount of 10% repayable at par. The
debentures were payable Rs.25 on application, Rs.15 on allotment and the balance on two
equal calls. Pass necessary journal entries.
3. Sunitha Ltd. issued 200,000; 10% debentures on 01.01.19 at a discount of 5%, repayable
in annual drawings of Rs.50,000 commencing from 31st December following. The
Company’s year ends on 31st December. Journalise the above transactions assuming that
the Company decided to write off debenture discount during the life of the debentures.
4. P Ltd. issued 14%, 4000 debentures of Rs.100 each at 10% discount repayable in 4 equal
annual installments, on 01.01.19. Show a)journal entries and b)necessary ledger accounts.
5. Naveen Ltd. issued 10% debentures for Rs.100,000 at 5% discount on 01.01.19, repayable
annually Rs.25000 on Lottery basis from the following December towards. Company closes
its accounts on 31st December annually. Pass necessary journal entries and prepare ledger
accounts up to 31.12.1997.
Redemption of Debentures:
1. When debentures are issued at par or premium or discount and repayable at par:
Debentures A/c. Dr.
To Bank A/c.
2. When debentures are issued at par or discount and repayable at premium:

Debentures A/c. Dr.
Premium on redemption of debentures A/c. Dr.
To Bank A/c.
6. X Ltd. issued 2000, 10% debentures of Rs.100 each. Give journal entries and the Balance
Sheet in each of the following cases.
a) The debentures are issued and redeemable at par.
b) Debentures issued at a discount of 5% but redeemable at par.
c) Debentures are issued at a premium of 10% but redeemable at par.
d) Debentures are issued at par but redeemable at premium of 10%.
e) Debentures are issued at a discount of 5% but redeemable at a
premium of 5%.
7. Pass journal entries relating to the issue of the following debentures.

a) 100, 8% debentures of Rs.1000 each are issued at 5% discount and
are repayable at par.
b) 100,7% Rs.1000 debentures are issued at 5% discount and are
repayable at 10% premium.
c) 100, 9% Rs.1000 debentures are issued at 5% premium.
d) 500, 8 1/2% debentures of Rs.100 are issued as collateral security
against a loan of Rs.50000. 22
5
8. Journalise the following at the time of issue and redemption.
1. Kanpur Construction Ltd. issued 1000, 3% debentures of Rs.100 each
at par for a period of 3 years, repayable at par.
2. Vikas Ltd. issued 4000, 4% debentures of Rs.100 each at par for a period of 5
years, repayable at a premium of 5%.
3. A Company issued 3000, 6% bonds of Rs.100 each at a discount of
3%, redeemable after 5 years at par.
4. National Company issued 5000, 5% debentures of Rs.500 each at a
discount of 3% for a period of 10 years, redeemable at 5% premium.
Redemption of debentures by creating Sinking Fund or Debenture Redemption Fund:

Debentures are to be redeemed on specific date. Hence, it is desirable to make some
arrangement for their redemption in a well-planned manner. Otherwise, it will be very
difficult for the Company to pay huge money on the date of redemption. Generally, a
prudent business concern take precautionary measures in a planned manner by creating a
separate fund known as Debenture Redemption Fund. This fund is created by making a
fixed provision out of Profit and Loss Appropriation Account. The funds so appropriated are
invested outside the business in marketable securities. The interest received on the
investments will be further invested. At the end of a stipulated period, a sufficient amount
would be available to redeem the debentures.
The amount to be set aside each year can be found by reference to Sinking Fund
Tables.
The following entries are to be passed at the end of the first year.
1. On setting aside the amount required to provide for the redemption of debentures:
Profit and Loss Appropriation A/c. Dr.
To Sinking Fund A/c (Debenture Redemption Fund)
2. For investing the amount :

Sinking Fund Investment A/c Dr.
To Bank A/c.
At the end of Second and Subsequent years:

1. When interest is received on Investments:
Bank A/c. Dr.
To Sinking Fund A/c.
2. When amount set aside:

Profit and Loss Appropriation A/c. Dr.
To Sinking Fund A/c. 23
6
3. When the Instalment and interest invested in Securities:
Sinking Fund Investments A/c. Dr.
To Bank A/c.
At the end of the last year:

1. When Investments are sold:
Bank A/c. Dr.
To Sinking Fund Investment A/c.
2. If there is a profit on sale of Investments:

Sinking Fund Investments A/c. Dr.
To Sinking Fund A/c.
3. When the balance of Fund Account transferred to General Reserve:

Sinking Fund A/c. Dr.
To General Reserve A/c.
4. When debentures are paid:
Debentures A/c. Dr.
To Bank A/c.
9. On 01.01.2017 Dinesh Ltd. issued 1000, 6% debentures of Rs.100 each repayable at the
end of 4th years. It has been decided to provide a Sinking Fund for this purpose. The
investment being expected to realize 4% p.a. Sinking Fund table shows that Re.0.23549 is
required at 4% interest. On 31.12.2020 the investment realized Rs.75800. The debentures
were paid off. Prepare Sinking Fund Account and Sinking Fund Investment A/c.
10. Y Ltd. issued 6% debentures for Rs.120,000 on 1st Jan., 16. These debentures were to be
redeemed on 31.12.19. For this purpose, a Sinking Fund was established. The investments
were expected to earn 5% net p.a. Sinking fund tables show that Re.0.232012 invested
annually at 5% amounts to Re.1 in 4 years. Show the necessary ledger accounts to deal with
the redemption, assuming investments realize Rs.88000 on 31.12.19 and the bank balance
on that date was Rs.49000 after receipt of interest on Sinking Fund Investments. Sinking
Fund Investments were made to the nearest Rs.100.
11. ABC Ltd. has Rs.600,000; 5% debentures outstanding on 1.4.16. On that date the
debenture redemption fund stood at Rs.500,000 represented by Rs.590,000, 3% (1992)
Government Loan. The annual installment added to the debenture redemption fund was
Rs.82300. On 31.3.17 the balance at bank was Rs.140,000. On that date the interest on
Investments was received. The investments were sold at 83% and the debentures were paid
off. Show necessary ledger accounts for the year ended 31.3.17.
24
7
12. A Company has Rs.120,000; 5% debentures outstanding on 01.01.18. On that date the
Sinking Fund stood at Rs.100,000 represented by Rs.118,000; 3% loan of Government of
India. The annual installment added to the Sinking Fund is Rs.16460. On 31.12.18 the
balance at bank (after interest on investments received) was Rs.11280. On that date the
investments were sold at 83% net and the debentures paid off. Show necessary ledger
accounts for the year 18.
13. On 01.01.10 X Ltd. issued debentures of Rs.500,000 redeemable at par on 01.01.15. It

was decided to establish Sinking Fund for the purpose of redemption. Show the ledger
accounts for 5 years assuming the annually invested amount earns 5% interest. Sinking
Fund tables show that Re.0.1809748 amounts to Re.1 at 5% in 5 years.
14. Garuda Ltd. issued 1000, 14% debentures of Rs.100 each on 01.04.11 repayable at the
end of 4 years at a premium of 5%. It has been decided to institute a Sinking Fund for the
purpose. The investments being expected to realize 6% net. Sinking Fund table shows that
Re.0.22859 invested annually amounts to Re.1 at 6% in 4 years. Investments are made in
multiples of 100s only.
On 31.03.15 the balance at the bank was Rs.50,000 and investments realized
Rs.82000. The debentures were paid off. Show necessary ledger accounts.
15. A Company issued 7% debentures of Rs.600,000 with a condition that they would be
redeemed after 3 years at 10% premium. The amount set aside for the redemption of
debentures is invested in 5% Securities. The Sinking Fund tables show that Re.0.31720856
at 5% compound interest in 3 years will become Re.1. You are required to give journal
entries for recording the transactions for 3 years.
ISSUE OF BONUS SHARES

(Capitalization of Profit)
Companies generally do not distribute whole of their profits every year. They retain a
portion of profits to strengthen the financial position of the Company or to meet
unforeseen contingencies or for some specific purpose such as Debenture Redemption
Reserve, Dividend Equalization Reserves etc. To the extent of the profits retained in the
business, the shareholders have to sacrifice their dividends.
When the reserves accumulated out of the Company’s requirements, the

management can think of benefiting the shareholders by the issue of shares out of the
accumulated reserves.
Bonus may be paid to the shareholders either by way of cash or issuing additional
shares. If bonus is to be offered in terms of cash, the liquid source of the Company may be
depleted. Hence, growth-oriented Companies generally offer bonus by way of issuing
shares freely. In this way, Companies capitalize their profits. 25
8
Source of Bonus issues:
Bonus shares can be issued out of the following:
1. Balance of P&L A/c.,
2. General Reserve,
3. Capital Profits i.e., Profit on sale of fixed assets etc.,
4. Any other Reserves,
5. Capital Redemption Reserve,
6. Share Premium
Note: Capital Redemption Reserve and Share Premium can be utilized only for issuing fully
paid bonus shares.
1. When bonus is declared:
Profit and Loss A/c. Dr.
General Reserve A/c. Dr.
Share Premium A/c. Dr.
To Bonus to shareholders A/c.
2. When bonus shares are issued:

Bonus to Shareholders A/c. Dr.
To Share Premium A/c. (If bonus shares are issued at premium)
3. If the bonus is utilized for making the partly paid shares into fully shares, the following
two additional entries are to be passed.
a) For Share Call due:
Share final call A/c. Dr.
b) When bonus is utilized for making partly paid shares into fully paid shares:
Bonus to Shareholders A/c. Dr.
To Share final call A/c.
PROBLEMS
1. Asha Ltd. has resolved to utilize Rs.500,000 out of its Reserve Fund is declaration of a
bonus to the shareholders. However, the bonus is to be applied to the extent of Rs.200,000
in payment of final call of Rs.40 per share on 5000 shares of Rs.100 each and to the extent
of Rs.300,000 for the issue of 3000 bonus shares of Rs.100 each to the existing
shareholders. Draft journal entries to the above resolution.
2. The following is the Balance Sheet of Strong Ltd. as on 31.12.19.

Liabilities Rs. Assets Rs.
5000 Equity Shares of Rs.100 Sundry Assets 1025000
each, Rs.75 paid up 375000
Share Premium 100000 26
General Reserve 200000
9
P&L A/c. 150000
Creditors 200000
1025000 1025000
It was resolved that out of the balance of P&L A/c., the partly paid shares are
converted into fully paid shares and issue of 1 bonus share for every 2 shares held out of
Share Premium and General Reserve Accounts. Share Premium Account should be used
completely. Pass necessary journal entries and prepare a Balance Sheet after the issue of
bonus shares.
3. A Company has a Share Capital of 10,00,000 equity shares of Rs.10 each, Rs.8 per share
paid up. It has accumulated large profits amounting to Rs.80,00,000 in the Reserve Fund
Account. The directors decided to utilize the whole of the Reserve Fund to make Capital
properly representative of the financial position as follows:
1. The existing shares be made fully paid without the shareholders having to pay
anything and
2. Each shareholder to be given proportionate to his holdings, bonus shares for the
remaining amount in the Reserve Fund, the shares to be valued at Rs.12 each. Pass
necessary journal entries to record the above transactions.
4. A Company has accumulated large profits in the Reserve A/c. and the directors decided to
utilize a part of this in order to make the Capital properly representative of the financial
position.
The Paid up Share Capital is Rs.10,00,000 consisting of 90,000 equity shares of Rs.10
each fully paid and 20,000 equity shares of Rs.10 each, Rs.5 paid up. The directors decided
to issue 1 bonus share at a premium of Rs.10 for every fully paid share held and to make the
partly paid shares as fully paid. At the date of the allotment of bonus shares, the market
value of the equity share stands at Rs.33. Give necessary journal entries in respect of the
above transactions.
5. The following extract is taken from the Balance Sheet of Bharat Ltd. as on 31.03.19.
Authorized Capital – 20,000 Equity Shares of Rs.10 each 2,00,000
Issued and Subscribed Capital – 7000 shares of Rs.10 each 70,000
Reserve Fund 36,000
P&L A/c. 29,000
The directors pass a resolution to capitalize a part of the existing reserves and profits
by issuing bonus shares. 1 bonus share is being issued for every 4 equity shares held at
present. For this purpose, Rs.10000 is to be provided out of Reserve Fund and the balance
out of P&L A/c. Set out the journal entries to give effect to the resolution and how they
would affect the Balance Sheet of the Company?
27
10
6. The following items appear in the Balance Sheet of a Limited Company.
Share Capital:
Authorised – 20000 shares of Rs.10 each Rs. 2,00,000
Issued & Paid up – 10000 equity shares of Rs.10 each,
Rs.8 paid up 80,000
Reserves & Surplus:
Share Premium 2,000
Capital Redemption Reserve 4,000
General Reserve 40,000
The Company passed the following resolution:

That the General Reserve be utilized in making the partly paid shares as fully paid up.
That further 1000 fully paid equity bonus shares of Rs.10 each be issued to the existing
shareholders. For this purpose, General Reserve should be utilized to the minimum extent.
You are required to pass the journal entries to record the above and show necessary
items in the Balance Sheet as would appear after giving effect to the resolution.
7. A Company with an Issued and Subscribed Capital of Rs.10,00,000 in 100,000 shares, face
value of Rs.10 each of which Rs.8 per share is paid up, has accumulated Reserve of
Rs.300,000. Out of this Reserve, Rs.200,000 is intended to be utilized in declaring a bonus at
the rate of 25% on the Paid up Capital so that the shares may become fully paid. Show the
necessary journal entries.
8. The Balance Sheet of Calm Ltd. on 31.03.2019 was as follows:

4000 Equity Shares of Rs.100 Sundry Assets 10,00,000
each, Rs.80 paid up 3,20,000
Share Premium A/c. 60,000
Capital Redemption Reserve 70,000
General Reserve 1,00,000
P&L A/c. 3,00,000
Sundry Creditors 1,50,000
10,00,000 10,00,000
The directors recommended the following with a view to capitalizing whole of Share
Premium A/c., General Reserve A/c., Redemption Reserve and Rs.50000 out of P&L A/c. The
existing shares be made fully paid without the shareholders having to pay anything. Each
shareholder to be given fully paid bonus shares at a premium of 25% for the remaining
amount in proportion to his holding. Assuming that the scheme is accepted and 28
that all formalities are gone through, give journal entries and also show to what proportion
bonus shares will be distributed among shareholders.
11
9. The Moon Ltd. has the following items in its Balance Sheet.
1. 100,000 Equity Shares of Rs.50 each, Rs.40 paid up.
2. General Reserve Rs.11,00,000.
3. Share Premium Rs.500,000.
4. Capital Reserve Rs.700,000.
The Company decided:

1. To capitalize its General Reserve to convert the existing shares to fully paid up
shares.
2. To issue out of Share Premium and Capital Reserve (both used in full) bonus shares
of Rs.10 each fully paid at 25% premium.
Pass necessary journal entries.
10. The following is the Balance Sheet of Sri Ltd. as on 31.03.19.
Share Capital – 40,000 Fixed Assets 400000
Equity Shares of Rs.10 400000 Investments 100000
General Reserve 100000 Stock 40000
Debenture Redemption Reserve 110000 Debtors 60000
Share Premium 40000 Bank 300000
P&L A/c. 90000
Current Liabilities 60000
Redeemable Debentures 100000
900000 900000
On 1.4.19 the directors of the Company decided to pay off the redeemable
debentures. The Investments realized full value. They also decided to declare Rs.200,000
bonus to the shareholders from the General Reserve and to utilize the amount of bonus by
issuing 1 bonus share of Rs.10 each for every 2 shares held in the Company. Give necessary
journal entries for the redemption of debentures and the issue of bonus shares as on
1.4.19.
11. Rao Co. Ltd. Had an authorized equity capital of Rs.20 lakhs divided into shares of
Rs.100 each. The paid up capital was Rs.12,50,000. Besides this, the Company had 9%
Redeemable Cumulative Preference Shares of Rs.10 each for Rs.2,50,000. Balances on other
accounts were: Securities Premium Rs.18000; Profit and Loss Account Rs.72000 and General
Reserve Rs.340,000. Included in Sundry Assets were investments of the face value of
Rs.30,000 carried in the books at a cost of Rs.34000.
The Company decided to redeem the Cumulative Preference Shares at 10% premium,
partly by the issue of equity shares of the face value of Rs.120,000 at a premium 29
of 10%. Investments were sold at 105% of their face value. All preference shareholders
were paid off.
12
After redemption of the Cumulative Preference Shares, fully paid bonus shares were
issued in the ratio of 1:4.
Give the necessary journal entries bearing in mind that the directors wanted a
minimum reduction in the free reserves, while effecting the above transactions. Working
should form part of your answer.
12. The Balance Sheet of Zee Ltd. As at 31.3.2019 is given below:

Rs. Rs.
Issued & Paid up Share Freehold Property 200000
Capital: Stock in Trade 120000
20,000 Equity Shares 200000 Sundry Debtors 100000
of Rs.10 each 180000 Cash & Bank balance 180000
P&L Appropriation A/c. 120000
6% Redeemable Debentures
Current Liabilities &
Provisions: 100000
Sundry Creditors
600000
600000
It was resolved at the Annual General Meeting:

1) to pay a dividend of 10%.
2) To issued one Bonus share for every 4 shares held.
3) To give existing shareholders the option to buy one Rs.10 share at Rs.14 for every
4 shares held prior to bonus distribution.
4) To repay the Debentures at a premium of 4%.
All the shareholders took up the option in (3) above. Prepare appropriate Journal
entries and draw up the Balance Sheet after the above transactions have been given effect
to. (ignore taxation)
13. The Balance Sheet of Perkins Ltd. as at 31st March, 2019 is given below:
Rs. Rs.
Share Capital: Fixed Assets:
Authorised:30,000 Equity Freehold Property 100000
shares of Rs.10 each 300000 Current Assets:
Issued & Paid up: 20,000 Stock in Trade 120000
Equity shares of Rs.10 Sundry Debtors 80000
each 200000 Cash & Bank balance 220000
Reserves & Surplus: 30
P&L A/c. (Cr.) 140000
Secured Loans:
6% Debentures 120000
13
Current Liabilities:
Sundry Creditors 60000
520000 520000
At the Annual General Meeting it was resolved:

1) To pay a dividend of 10%.
2) To issued one bonus share for every four shares held as on the date of the last
Balance Sheet,
3) To give existing shareholders the option to purchase one Rs.10 share at Rs.14 for
every four shares held prior to the issue of bonus shares,
4) To repay the debentures at a premium of 4%.
All the shareholders exercised the option in (3) above. Draft necessary journal entries
and prepare the Balance Sheet after the resolution have been given effect to. Ignore taxes.
14. The Share Capital of Mayur Industries Limited consisted of 50,000 equity shares of Rs.10
each fully paid. The Company has accumulated out of profits a Reserve Fund of Rs.5,00,000.
It issued further 10,000 equity shares during 2019 at a premium of Rs.30 per share and the
entire amount had been realized.
During 2019, an independent valuation of its assets increased the Balance Sheet
values as thus:
Rs.
Land & Buildings by 600000
Plant & Machinery by 300000
Stores & Spares by 250000
The valuation reduced the amounts of the following:

Goodwill by 150000
Patents by 100000
At the end of 1995, it was decided to redeem 3000 debentures of Rs.100 each
at 5% premium; to adopt the new valuation; and to allot the equity shares of Rs.10 each as
fully paid bonus shares for every equity share held.
It was also decided that the balance of Reserve Fund, after carrying out all the above
arrangements, was to be capitalized.
Pass journal entries to record the transactions in the books of Mayur Industries Ltd. 31
15. A Company with an issued and subscribed capital of Rs.10,00,000 in 100,000 shares face
value of Rs.10 each of which Rs.8 per share is paid up, has accumulated a Reserve of
Rs.300,000. Out of this Reserve Rs.200,000 is intended to be utilized in declaring a bonus at
the rate of 25% on the paid up capital so that the shares may become fully paid.
14
Show the necessary journal entries.
16. The Balance Sheet of Cosmos Ltd. on 31st March, 19 was as follows:
Rs. Rs.
4000 Equity shares of Sundry Assets 1000000
Rs.100 each, Rs.80
paid up 320000
Securities Premium A/c. 60000
Capital Redemption Reserve
A/c. 70000
P&L A/c. 300000
1000000 1000000
The directors recommended the following with a view to capitalizing whole of the
Securities Premium A/c., Capital Redemption Reserve A/c., General Reserve and Rs.50,000
out of P&L A/c.:
The existing shares be made fully paid without the shareholders having to pay
anything.
1) Each shareholder to be given fully paid bonus shares at a premium of 25% for the
remaining amount in proportion to his holdings. Assuming that the scheme is
accepted and that all formalities are gone through, give journal entries and also
show in what proportion bonus shares will be distributed among shareholders.
32
15
UNIT- 3 VALUATION OF GOODWILL
Name and fame of the existing business is called goodwill. Generally, the
existing business will have a circle of customers, with the help of which the
firm will get profits without any further efforts. So, goodwill is the present
value of a firm’s anticipated super normal earnings. Goodwill is an intangible
asset.
Goodwill is a valuable asset if the concern is profitable, on the other
hand, it is value less if the concern is a losing one. There-fore it can be stated
goodwill represents the value of reputation of the firm. Goodwill is a thing
easy to describe but difficult to define.
The capacity of business to earn profit in future is basically what is
meant by the term goodwill.
Need for valuation of goodwill:
Goodwill is to be valued in the following circumstances:
A. When a new partner is admitted into partnership firm.
B. When a partner retires or dies.
C. When there is change in the profit-sharing ratio.
D. When a business is taken over by a company.
E. When the companies are amalgamated or absorbed.
F. When a person wants to purchase a large no of shares of a company.
G. When the business of a company is taken over by the Government.
Features of goodwill:
Following are the features of goodwill.
1. Goodwill can be sold only with the entire business or it cannot be sold in
part or in isolation except on admission or retirement of a partner.
2. Goodwill is valuable only if it is capable of being transferred from one
person to another.
3. Goodwill represents a non-physical value over and above the physical
assets.
4. Goodwill cannot have an exact cost as its value fluctuates from time to
time due to internal and external factors.
5. The value of goodwill is based on subjective judgement of the valuer.
Methods of valuing goodwill:

The following are the methods of valuing goodwill.
1. Arbitrary method
2. Average profits method
3. Super profits method
4. Capitalization method. 1
Arbitrary method: the valuation of goodwill is arrived at by making a valuation
by one of the parties, i.e., vendor or purchaser to which the other agrees. The
parties may together estimate the value to be placed on the goodwill or an
independent party may be called in to give his opinion as to the value, it being
left to the parties to decide whether they will accept or reject such valuation.
Average profits method:

Under this method goodwill is valued on the basis of profits of previous
years. The Goodwill is then estimated to be worth so many years’ purchase of
such average profit. The no of years selected is on the basis of past experience.
Average used may be simple or weighted.
The value of goodwill is calculated by multiplying the adjusted annual profits
by the number of years purchase. Goodwill is valued as follows:
NOTE: step – 1 Calculation of adjusted profit or Future maintainable profits:

Particulars Rs. Amount
Given profits
Add:
1. Capital expenses
2. Loss on sale of assets
3. Loss due to fire or theft
4. Unrecorded incomes
5. Non-busines expenses if any
6. Future expected incomes/profits if
any
Less:
1. Remuneration of management
2. Future expenses if any
3. Expenses not allowed earlier if any
4. Non-recurring income (non-
business exps)
5. Profit on sale of assets if any
Adjusted/future maintainable
profit
Step 2: calculation of adjusted average profits:
After computing the adjusted profits, it is necessary to find out the adjusted
average profit. This can be ascertained by SIMPLE OR WEIGHTED AVERAGE PROFIT
METHOD. 2
SIMPLE AVERAGE PROFIT METHOD:
This method is applied when there is fluctuation in profits and can be
calculated by using the following formula.
Where adjusted average or
Simple average profit = total adjusted profits of all the given years / no of
years.
WEIGHTED AVERAGE PROFIT METHOD. This method is used when the given
profits are in increasing or decreasing trend or when weights are given in the
question.
Weighted average profit is calculated by using the following formula:
Weighted Adjusted Average profits = Total product/total weights.
Step - 3 calculation of goodwill:

Value of goodwill under simple average profit method is calculated as
follows:
Goodwill = adjusted average x no of years purchase (it will be given)
Value of goodwill under weighted average profit method is calculated as

follows:
Goodwill = weighted average profits x no of years purchase.
3. SUPER PROFITS METHOD:

Super profit is the excess of the average profits over the normal profits based
on normal rate of return on capital employed. For calculation of super profits,
the following three factors are required.
1. Normal rate of return the investor expects from his investment.
2. Capital employed: it may be calculated on the basis of assets side
items or liabilities side items.
Procedure to find capital employed from assets side:
Capital Employed = Fixed Assets + Trade Investments + Current Assets –
Debentures – Current liabilities.
Procedure to find capital employed from liabilities side:

Capital Employed = Paid up ES and PS capital + Reserves and Surplus +
Revaluation profit – Fictitious assets – Non-trade Assets – Revaluation loss on
assets.
3
Average Capital Employed may be calculated as follows:
= (capital employed at the beginning + Capital Employed at the end)/2 OR
= capital employed at the end – ½ of current year profits after tax or
= Capital employed at the beginning + ½ of current year profits after tax.
3. Normal Profits: it is calculated by multiplying the normal rate of

return with capital employed or average capital employed as the case
may be.
Super Profit method has three variations i.e.

a. Purchase of Super Profits Method.
b. Capitalization of Super Profits method.
c. Annuity method.
Goodwill is valued as follows:
a. Purchase of Super Profits Method:
Value of Goodwill = Super profits x no of years purchase.
b. Capitalization of Super Profits method:

Value of Goodwill = Super profits / Normal rate of return.
c. Annuity method.
Value of Goodwill = Super profits x Annuity table value.
4. CAPITALIZATION METHOD OR CAPITALISATION OF EXPECTED FUTURE NET

PROFIT:
Past adjusted profits generally provide the basis for ascertaining the
average net profit which it is expected will be earned in the future. A
reduction is made for remuneration to the management.
The following steps may be taken in computing goodwill:

a. Ascertain the average net profit which it is expected will be earned in
future.
b. Capitalize this net profit at the normal rate of return i.e.
Capitalized value (of profits) = average net profits/ normal rate of return
c. Find the value of net tangible assets used in business i.e. Net tangible assets
or
Capital employed = tangible assets – out-side liabilities 4
d. Deduct the net tangible assets as per (c) from the capitalized profits as per
(B) and the difference is goodwill.
Goodwill = Capitalized profits – Capital employed.
PURCHASE OF AVERAGE PROFITS METHOD:

A. SIMPLE AVERAGE PROTS METHOD:
1. Calculate the amount of goodwill on the basis of 3years purchase of the
average profits of last 5years. The profit for last 5years are:
Years: I II III IV V
Profits: 4,800 7,200 10,000 3,000 5,000.
2. Calculate the amount of goodwill on the basis of 2years purchase of the

average profits of last 5years. The profit for last 5years are:
Years: 2011 2012 2013 2014 2015
Profits: 10,000 4,000 6,000 10,000 20,000.
3. X, Y and Z are partners sharing profits in the ration of 2/5, 2/5 and 1/5
respectively. It was provided in the partnership agreement that on the
death or retirement of a partner, goodwill should be valued on the basis
of 4years purchase of the average profits of the preceding 7years. Z
retires on 30th June 2016. Calculate the amount of goodwill due to Z. net
profits for the 7years ended on 30th June 2016 are:
Years: 2010 2011 2012 2013 2014 2015 2016
Profits: 32,000 40,000 72,000 64,000 32,000 80,000 72,000.
4. Mohan and co. decided to purchase a busines for Rs80,000. Its profits for
the last 4years are 2016 – 20,000, 2017-25,000, 2018 – 24,000 and 2019
– 23,000. The business is looked after by the management.
Remuneration from alternative employment, if not engaged in business,
for the management comes to Rs.3,000p.a.
Find the amount of goodwill on the basis of 3yers purchase of the
average profit for the last 4years.
5. Following particulars are available in respect of the business carried on by X

ltd. Profits earned: 2014 -Rs.50,000, 2015- Rs.48,000 and 2016 – Rs. 52,000.
a. Profits of 2015 is reduced by due to stock destroyed by fire and
profits of 2014 includes a non-recurring income of Rs.3,000.
b. Profits of 2016 include Rs.2,000 income on investment. 5
c. The stock is not insured and it is thought prudent to insure the stock
in future. The insurance premium is estimated at Rs.500 p.a.
d. Fair remuneration to the proprietor (not taken in the calculation of
profits) is Rs. 10,000 p.a. You are required to compute the value of
goodwill on the basis of 2years purchase of average profits of the last
three years.
SUPER PROFITS METHOD:
8. From the following information calculate value of goodwill on the basis of
three years purchase of super profit of the business:
a. Average capital employed in the business is Rs. 18,00,000.
b. Rate of interest expected from capital having regard to the risk
involved is 10%.
c. Net trading profits of the firm of the past 3years were Rs.3,22,800,
2,72,100 and 3,37,500.
d. Fair remuneration to the partners for their services is 36,000 p.a.
9. From the following particulars of Aswani calculate value of goodwill on

the basis of three years purchase of super profit taking average of last
4years:
Fixed assets Rs. 8,00,000.
Current assets Rs. 80,000
Current liabilities Rs. 1,60,000
Normal rate of return – 15% of average capital employed.
Managerial remuneration if employed elsewhere Rs. 10,000 p.a. profits
for the last four years were Rs.1,20,000, 1,50,000 and Rs. 1,40,000
respectively.
10. Balance sheet of X ltd as on 31-1-2016 is given below:

Equity and liability Amount Assets Amount
8%, 5,000 pref shares of Rs10 Goodwill
each 50,000 Fixed assets 10,000
10,000 Equity share of Investments
10each 1,00,000 (5% Govt. 1,80,000
Reserves (including provision Loan)
for taxation Rs.10,000) Current assets
Debentures 85,000 20,000
Creditors
50,000 1,00,000
25,000
3,10,000 6 3,10,000
The average profit of the company (after deducting interest on
debentures and taxes) is Rs. 31,000. The market value of the machinery
included in fixed assets is Rs.5,000 more. Expected rate of return is 10%
on average capital employed. Calculate the value of goodwill of the
company on the basis of five years purchase of super profit.
11. Following is the Balance Sheet of Goutham Ltd as on 31-12-2015.

Liabilities Amount Assets Amount
Equity shares of 10,00,000 Fixed Assets 8,00,000
Rs.10each 4,00,000 Investments 2,00,000
General reserve 2,00,000 (6%Govt. loan)
Surplus a/c 2,00,000 Current Assets 8,00,000
Current liabilities 18,00,000 18,00,000
Net profit after tax: 2013- 2,60,000, 2014- 2,50,000 and 2015 – 3,00,000.
The goodwill may be taken as 4years purchase of average super profits.
Normal return on average capital employed is 15%. The current assets
are to be taken as Rs.8,40,000. Ascertain the value of goodwill.
12. State with reasons whether the following statement is correct or not:
Mr. A’s financial position is as follows:
a. Sundry assets Rs.9,27,342
b. Current liabilities Rs. 52,492
c. Average net profit for last four years Rs. 1,20,500
d. Average capital employed Rs. 9,00,000
e. Average annual remuneration RS. 18,000
f. The goodwill valued at four year’s purchase of super profits is Rs.
50,000
Therefore, the expected rate of return is 15%.
13. Mr. A runs a chemist shop. His net assets as on 31-3-2016 amounted
to Rs.20,00,000. After paying rent of Rs. 45,000 a year and salary of
Rs.30,000 to the manager, he earns a profit of Rs. 2,10,000. His landlord,
who happens to be an expert chemist, is interested in the purchasing the
shop. 10% is considered to be reasonable return on capital employed. What
can A expect as payment of goodwill?
Assume the value of building Rs. 1,00,000 and goodwill is valued at
3year’s purchase.
14. Mr. Mohan runs a cosmetic store. Her net assets as on 31-3-2019
(excluding building of Rs.40,000) amounted to Rs.2,00,000. 7
After paying rent of Rs. 2,000 a year and salary of Rs.10,000 to the manager,
she earns a profit of Rs.50,000. Her landlord, is interested in the purchasing
the shop. 12% is considered to be reasonable return on capital employed.
40 Calculate the value of goodwill at 3 year’s purchase of super profit.
Assume that manager will continue to manage the business.
15. Mr. Wiseman has invested a sum of Rs.2,00,000 in his own business
which is a very profitable one. The annual profit from the business is
Rs.45,000 which includes a sum of Rs.10,000 received as compensation of a
part of his business premises.
As an alternative to his engagement in his business, he could engage himself
in employment thereby getting an annual salary income of Rs.7,200.
Considering 2% as fair compensation for the risk involved in the business,
calculate value of goodwill on capitalization of super profits at the normal rate
of interest. Ignore taxation.
16.The net profit of a business after tax are:40,000, 42,500, 46,000, 52,500 and
59,000. The capital employed in the business is Rs. 4,00,000. The normal rate
of return expected in this type of business is 10%. It is expected that the
company will be able to maintain its super profit for next 5years.
Calculate value of goodwill on the basis of:
a. Five years purchase of super profits,
b. Annuity method, taking the present value of annuity of Re. 1 for
5years at 10% as 3.78 and
c. Capitalization of super profits.
17. Following particulars are available in respect of the business carried on

by a trader:
a. Profits earned: 2016 -50,000, 2017- 60,000 and 2018- 55,000.
b. Normal rate of profit - 10%
c. Capital employed - 3,00,000
d. Present value of an annuity of one rupee for five years at 10% ----
3.78
e. The profits included non-recurring profits on an average basis of
Rs.4,000 out of Which it was deemed that even non-recurring profits
had a tendency of appearing at the rate of Rs.1,000p.a.
Your required to calculate goodwill:
1. As per 5year’s purchase of super profits.
2. As per capitalization of super profits method.
3. As per annuity method. 8
UNIT IV VALUATION OF SHARES
Shares of Public Companies are freely transferable. Hence their

valuation is absolutely necessary for buying and selling. Generally the
shares of Public Limited Companies are quoted in the stock exchange. The
prices quoted in stock exchange, usually serve as a basis of value of shares.
This holds good only for ordinary transactions in respect of small lots. This
may not hold good in respect of large lot. Further all the shares are not
quoted in the stock exchange. Therefore valuation is needed for unquoted
shares of transferring from one person to another.
Shares of Private Limited Companies are not freely purchased and

sold to the public. Even though they are not freely transferable their
valuation is required when the private company is to be sold or purchased.
Further, to assess the amount due to the member of the private company,
the valuation of shares is to be taken up.
Need for valuation of Shares: The stock exchange price of a share may not
always be warranted by the financial position of the company, because
stock exchange prices are influenced by supply and demand, bank rate,
taxation, political influence, International political situation etc. Hence not
only the shares of private companies and the unquoted shares of public
companies need valuation.
The need for valuation of shares arises in the following cases:

1. When unquoted shares are to be purchased and sold.
2. For formulating schemes of Amalgamation and Absorption.
3. When a block of shares are purchased so as to acquire controlling
interest i.e., merger or take over.
4. When a block of shares is to be purchased not so much as to acquire
the controlling interest.
5. When a shareholder dies – for the purpose of assessing estate tax.
6. When shares are given as gift – for the purpose of assessing the gift tax.
7. When the company is nationalized and the shareholders are
compensated by the government.
8. For conversion of one class of shares into another class of shares.
9. When shares are to be taken as a security against loan
10. When shares are purchased by employees of a company to be
retained by them during the tenure of their service.
1
11. When partners hold shares of a company, for ascertaining the amount
to be distributed amongst them on dissolution of the firm.
Factors affecting the value of shares:

Generally the following factors affect the value of shares.
1. Profitability of the concern.
2. Demand and supply of shares.
3. Yield expected by the investors.
4. Political, economic and social conditions prevailing within and
outside the government.
5. Governmental policies.
6. Nature of business.
7. Reserves of the company.
8. Rate of proposed dividend.
9. Availability of sufficient fixed assets over outside liabilities.
10. Book value of shares.
Methods of valuation of shares: The methods of valuation of shares

depend on the purpose of valuation and factors affecting the value of
shares. The following are the important methods of valuation of shares.
1. Net Assets Method or Intrinsic Value Method.
2. Yield Method.
3. Earning Capacity Method.
4. Fair Value Method.
5. Exchange Ratio Method.
6. Simultaneous Equation Method.
1. Net Assets Method: This method is also known as Asset Backing

Method or Intrinsic Value Method or Balance Sheet Method or Break up
Value Method or Real Value Method or Net worth or Equity Method.
Under this method, the valuation of shares may be made either i)on
a Going Concern basis or ii)Break-up value basis. In the case of Going
Concern, the utility of the asset to the concern will be considered. In the
case of break-up value method, the realizable value i.e., market value of
assets will be considered for valuation of shares.
Net Assets
Value of Share =
No.of Shares
2
Note: Net assets will be ascertained as follows:
Net Assets = Assets – Liabilities
Determination of Value of Net Assets: While ascertaining the value of net

assets, care must be taken to revalue the assets and liabilities properly and
to revise the value of goodwill properly. Net assets value will be determined
as follows:
Net Assets = Realizable value of assets – Outside Liabilities payable

(Or)
Net Assets = Revalued Assets – Revalued Liabilities
(Or)
Net Assets = Equity Share Capital + Preference Share Capital +
Reserves and Surplus + Profit on revaluation of
assets including goodwill – (Miscellaneous expenses
to the extent of not written off + Profit and Loss
Account Debit balance + Loss on revaluation of
assets including goodwill)
Proforma for calculation of Net assets of the Company:

Fixed assets (Realizable value) Xxxx
Investments (Realizable value) Xxxx
Current assets (Realizable value) Xxxx
Goodwill (Realizable value) Xxxx
Cash & Cash at bank (Actuals) Xxxx
Total Assets xxxxx
Less: Current Liabilities Xxxx
Debentures Xxxx xxxx
Net assets of the business xxxxx
Less: Preference Share Capital Xxxx
Preference Share Dividend Xxxx
Share in Reserves & Surplus in case of
participating Preference Shares Xxxx xxxx
Funds available to Equity Shareholders xxxxx
Funds available to Equity Shareholders

Intrinsic value of Equity Share =
Number of Equity Shares
When there are partly paid-up shares are in the Company:
Where there are both fully and partly paid-up equity shares, the
amount uncalled on partly paid shares should be added to the total net
3
assets as Notional calls. Then, this total amount will be divided by the total
number of equity shares (both fully paid and partly paid).
Total Net assets (Funds available to equity shareholders before calling

the Notional Calls) xxxx
Add: Notional calls on partly paid up xxxx
Total funds available to equity shareholders xxxx
Total Funds available to Equity Shareholders

Intrinsic value of Equity Share =
Number of Equity Shares
(Both fully and partly paid)
Intrinsic value of each partly paid share = Intrinsic value of fully

paid equity share - Notional call made on the partly paid share(i.e.,
uncalled amount on each partly paid share)
2. Yield Method: This method is called Market Value Method. Under this
method, the future maintainable profit is estimated by reference to past
performance. This is adjusted by eliminating non-recurring incomes
deducting Income Tax, making allocation to reserves and preference
dividend. This adjusted profit is capitalized at the normal rate of return in
similar business. Alternatively the value of share under this method can be
calculated by the following formulae.
i) At first, Expected Rate of Return should be calculated:

Profit available to Equity Shareholders
Expected Rate of Return = x 100
Total Paid up Equity Share Capital
ii) Basing on the Expected Rate of Return, the value of share can be
calculated:
Expected Rate of Return x Paid up value of Share
Value of each Share =
Normal Rate of Return
Calculation of profits available to equity shareholders as dividend:

Particulars Amount
Actual or Average Profits (adjusted)/ Earnings xxx
less Transfer to reserve xx
xxx
less Preference dividend if any 49 x
4
profit available to equity share holders xx
3. Earning Capacity Method: Yield Methods fails to take into account the
financial stability and strength and as it considers only the rate of dividend
rather than earning capacity of the concern. To overcome this, Earning
Capacity Method is designed. Under this method, the value of shares is
calculated as follows:
Rate of Earning
Value of Share = X Paid up value of Share
Normal Rate of Return
The market value of Share can also be calculated by the following formula:
Dividend (in rupees) per Share
Normal Rate of Dividend
4. Fair Value Method: Some authorities are of the view that neither the
Intrinsic value nor the Yield value is correct but the proper method of
valuation is to make a mean between the Intrinsic value and Yield value. In
other words, Fair value is the average of Intrinsic value and Yield value. This
is popularly known as Dual Method or Fair Value Method. The formula for
this method is:
Intrinsic Value + Yield Value

Fair Value =
2
This Dual Method attempts to minimize the demerits of both
Earning basis and Net Assets basis method.
5. Exchange Ratio Method: This method is generally adopted in valuing the

shares at the time of Absorption and Amalgamation. The Purchase
Consideration is calculated on the basis of Exchange Ratio mutually agreed
between absorbing and absorbed Companies.
6. Simultaneous Equation Method: This method of valuing the shares is

also adopted in the problems of amalgamation and absorption where there
are inter-company investments or cross investments i.e., when the
amalgamating holds the shares of another. For example, if A and B
Companies are amalgamating, A Company investments consist of B
Company shares. Similarly B Company investments consist of the A
Company shares. In such a case, unless the shares of A Company are valued,
5
the value of investments of the B Company cannot be found out. In such a
case, the shares of Amalgamating Companies are valued by using
Simultaneous Equation Method.
PROBLEMS
I. NET ASSETS METHOD:-
1. On 31.12.19 the Balance Sheet of a Limited Company disclosed the
following position.
Issued Capital – 40,000 Fixed Assets 500000
Shares @ Rs.10 each 400000 Current Assets 200000
Reserves 30000 Goodwill 40000
Profit & Loss A/c. 80000
740000 740000
On 31.12.2019 the fixed assets were independently valued at
Rs.3,60,000 and the goodwill at Rs.50,000. Compute the value of
Company’s share by the net assets method.
Sol. VALUATION OF SHARES
NET ASSETS METHOD:
Net Assets
Value of Share =
No.of Shares
Where Net Assets = Realizable of Assets – outside liabilities
Realizable value of assets:

Particulars Rs. Amount Rs
Fixed assets 3,60,000
Goodwill 50,000
Current assets 2,00,000
total 8,10,000
less Outside liabilities:
6% Debentures 1,00,000
Sundry Creditors 1,30,000 2,30,000
Net assets 5,80,000
5,80,000
Value of Share =
40,000
= Rs.14.5
6
2. The following Balance Sheet of A Ltd. as on 31.12.17 is as follows:
3000 equity shares of Cash in hand 2000
Rs.100 each 300000 Bank 20000
8% Preference shares of Debtors 80000
Rs.100 each 150000 Stock 140000
General Reserve 40000 Land & Buildings 205000
P&L A/c. 80000 Furniture 30000
6% Debentures 50000 Goodwill 70000
Sundry Creditors 15000 Discount on issue of shares 18000
Preliminary expenses 50000
Discount on issue of
Debentures 20000
635000 635000
The value of assets is assessed as follows:

a). Furniture to be depreciated at 10%.
b). Value of Stock, Land & Buildings and Goodwill is valued at Rs.120,000;
Rs.250,000 and Rs.80,000 respectively.
c) Debtors are expected to realize 80% of book value.
Find out the value of equity shares.
3. From the following Balance Sheet, you are required to find out the
value of equity share.
2000, 6% Preference Shares 200000 Assets at the book 600000
30,000 equity shares of value
Rs.10 each 300000
Liabilities 100000
600000 600000
The market value of half of the assets is considered at 10% more than
the book value and the remaining half at 5% less than the book value. There
was a liability of Rs.5000 which remains unrecorded. Assume the
preference shares have no priority as to repayment of Capital or Dividend.
4. The following is the Balance Sheet of Vijaya Co. Ltd. as on 31.12.18.
7
35000 equity shares of Rs.10 Bank 75000
each 350000 Current Assets 230000
1500, 9% Preference Shares Fixed Assets 299000
of Rs.100 each 150000 Goodwill 55000
P&L A/c. 18000
Proposed Preference Dividend 13500
Other Liabilities 12500
659000 659000
The assets are revalued as follows:

Current Assets Rs.235,000,
Fixed Assets Rs.280,000,
Goodwill Rs. 60,000.
Calculate the value of Equity Share and Preference Share. The
Preference shares are non-participating.
5. The Balance Sheet of Limited Company disclosed the following position

as on 31.12.19.

2000 equity shares of Goodwill 55000
Rs.100 each 200000 Investments 175000
Reserve Fund 75000 Stock 220000
P&L A/c. 25000 Debtors 130000
6% Debentures 150000 Bank 20000
Workmen’s Saving A/c. 100000
600000 600000
The profit for the last 5 years were Rs.10000; Rs.15000; Rs.20000;
Rs.25000 and Rs.30000. The market value of Investments was Rs.110000.
Goodwill is valued at 2 years’ purchase of average annual profits for the last
5 years. Find the intrinsic value of each share.
6. Your client intends to invest not more than Rs.15000 in equity shares of
Iron Foundry Ltd. and wants you to advise him the maximum number of
8
shares he can expect to acquire with the said amount on the basis of the
following information available to him.
Issued and Paid up Capital:

6% Preference Shares of Rs.100 each Rs.500,000
Equity Shares of Rs.10 each 300,000
800,000
Average net profits of the business is Rs.57000. Expected normal
yield is 7% in case of equity shares.
Total tangible assets (other than Goodwill) are Rs.949000 and total
outside liabilities are Rs.95000.
Goodwill is to be calculated at 5 years’ purchase of the Super Profits,

if any. Show your workings in detail. Ignore Income Tax.
7. On the basis of the following information, calculate the value of equity

shares.
10000, 10% Preference Shares of Rs.100 each
Rs.10,00,000
60000 Equity Shares of Rs.10 each 6,00,000
Total Assets other than Goodwill 20,00,000
Total outside Liabilities 2,00,000
Average net profit after tax 1,00,000
Expected normal yield for equity shares is 7% of Capital. Goodwill is
to be taken at 5 years’ purchase of super profits.
8. The following is the balance sheet of Vishal Ltd. on 31.03.14.

10000, 6% Preference Shares 100000 Sundry Assets 510000
30000 Ordinary Shares 300000 Discount on
Debenture Redemption Fund 30000 Debentures 10000
7% Debentures 50000 Preliminary
Depreciation Fund 30000 expenses 30000
Sundry Creditors 100000 P&L A/c. 60000
610000 610000
The sundry assets were worth Rs.5.45 lakhs. Interest on debentures
and preference dividend are in arrears for 1st year. You are required to
9
value the Ordinary Shares, if Preference Shares have priority for
a)Repayment of Capital and arrears of dividend, b)Repayment of Capital
only.
9. Prosperous Ltd. has the following details:
Share Capital:
9% Preference Shares of Rs.100 each 3,00,000
1000 Equity Shares of Rs.100 each, Rs.50 paid up 50,000
1000 Equity Shares of Rs.100 each, Rs.25 paid up 25,000
1000 Equity Shares of Rs.100 each, fully paid up 1,00,000
4,75,000
Reserves & Surplus:
General Reserve 2,00,000
P&L A/c. 50,000
7,25,000
There is Rs.75,000 increase in the value of assets. As per Articles of
Association, Preference Shareholders have priority not only for their capital
but also to the extent of 10% of surplus assets at the time of dissolution of
Company. Compute the value of Preference Shares and Equity Shares.
10. Calculate the intrinsic value of each type of share.

a) 2000 equity shares of Rs.100 each, fully paid up Rs.200,000.
b) 1000 equity shares of Rs.100 each, Rs.60 paid up Rs.60,000.
c) 2000 equity shares of Rs.100 each, Rs.50 paid up Rs.100,000.
d) 8%, 1000 Pref Shares of Rs.100 each, fully paid up100,000.
e) 6%, 1000 Pref Shares of Rs.100 each, Rs.40 paid upRs.40,000.
f) General Reserve Rs.150,000.
g) Outside liabilities Rs.100,000.
h) Realisable value of tangible assets Rs.750,000.
11. Calculate the intrinsic value of an equity share.

a) 1000 equity shares of Rs.100 each, fully paid up Rs.100,000.
b) 2000 equity shares of Rs.100 each, Rs.40 paid up Rs.40,000.
c) Preference Share Capital Rs.50,000.
d) Reserves Rs.110,000.
e) Outside Liabilities Rs.150,000.
f) Realisable value of assets are equal to total liabilities.
12. Calculate value of each equity share from the following.

1000 Equity shares of 100 each fully paid 100000
10
Reserves & Surplus 80000
Fictitious Assets 5000
External Liabilities 7000
II. Yield Value Method:
13. On 31.12.18 the Balance Sheet of a Limited Company disclosed the

following position.
Issued Capital in Rs.10 Fixed Assets 500000
Shares 400000 Current Assets 200000
Reserves 90000 Goodwill 40000
P&L A/c. 20000
Current Liabilities 130000
740000 740000
On 31.12.18 the Fixed Assets were independently valued at
Rs.5,50,000 and Goodwill at Rs.50,000. The net profits for 3 years were
Rs.51,600, 52,000 and 51,650 of which 20% was placed to Reserve, this
proportion in which the Company is engaged and where a fair investment
return may be taken at 10%. Compute the value of share by the Yield
Method.
14. The following is the Balance Sheet of Desai & Co. as on 31.03.18.
10000 shares of Rs.10 each 100000 Land & Buildings less dep. 70000
General Reserve 50000 Plant & Machine less dep. 70000
Taxation Reserve 20000 Trade Marks 20000
Workmen’s Saving A/c. 20000 Stock 20000
P&L A/c. 30000 Debtors 48000
Sundry Creditors 40000 Bank 25000
Preliminary exp. 7000
260000 260000
The Plant & Machinery is worth Rs.60000 and Land & Buildings are
worth Rs.130,000 as valued by an independent values. Rs.5000 of the
debtors is to be taken as bad. The profits of the Company were:
1996 Rs.50,000
1997 60,000
1998 70,000
It is the practice of the Company to transfer 20% of the profits to
11
Reserve. Ignoring taxation, find out the value of shares of the Company on
their intrinsic basis and also on Yield basis. Shares of similar Companies
quoted in the stock exchange yield 12% on their market value. Goodwill of
the Company may be taken at Rs.100,000.
15. The following is the Balance Sheet of Rupa Co. Ltd. as on 31.12.18.
6000 Equity Shares of Cash at Bank 50000
Rs.100 each 600000 Sundry Debtors 80000
5000, 6% Debenture of Stock 120000
Rs.100 each 500000 Investments 100000
General Reserve 70000 Land & Buildings 410000
P&L A/c. 20000 Furniture 56 60000
Sundry Creditors 30000 Goodwill 70000
Other Liabilities 10000 Plant & Machinery 340000
1230000 1230000
All the assets were independently valued at Rs.14,00,000. The

Company earned net profits for the last 5 years as follows : Rs.80000,
84000, 92000, 88000 and Rs.96000. It was decided to set aside 15% of the
profits towards General Reserve. This proportion was considered
reasonable in the industry. The fair investment return may be taken at 10%.
Find out the value of equity share of the Company by the
(a) Assets Valuation Method (b) Yield Method.
16. The following is the Balance Sheet of M Ltd. as on 31.12.19.

10000 shares of Rs.5 each 50000 Land & Buildings 30000
General Reserve 15000 Plant & Machinery 30000
Taxation Reserve 10000 Trade Marks 5000
Workmen’s Saving A/c. 7500 Stock 12000
Creditors 24500 Debtors 20000
P&L A/c. 8000 Bank 15000
115000 115000
The Land & Buildings have been valued at Rs.65000 and the Plant &
Machinery at Rs.25000. Debtors to the extent of Rs.2000are to be
considered as bad. The profits for the last 3 years were: Rs.22000, Rs.26000
and Rs.23000.
It is the Company’s practice to transfer 25% of profit to Reserve.
Similar Companies give a yield of 10% on the market value of their share.
12
Goodwill may be taken at Rs.40000. Find out the value of share by Net
Assets Method and Yield Method.
17. Mr.Ramnath intends to invest Rs.66000 in equity shares of a Limited

Company and seeks your advise as to the maximum number of shares he
can expect to acquire based on
(1)Intrinsic value including Goodwill,
(2)Intrinsic value excluding Goodwill,
(3)Yield basis.
The following information is available:
Issued & Paid up Capital:
6% Preference Shares of Rs.100 each Rs.11,00,000
Add: Equity shares of Rs.10 each 7,00,000
18,00,000
Average net profits of the business is Rs.150,000. Expected normal
yield is 8% in case of such equity shares. It is observed that net assets on
revaluation are worth Rs.140,000, more than the amount at which they are
stated in the books. The Goodwill is to be calculated at the 5 years’
purchase of Super Profits, if any. Ignore taxation.
13
UNIT V FINAL ACCOUNTS OF JOINT STOCK COMPANIES
All business organizations prepare their final accounts at the end of the
accounting year. There is no statutory obligation on the part of the trading and
partnership firms to prepare final accounts but the Companies Act had made it
obligatory every Company to prepare its final accounts in accordance with the
requirements of Sec.128 of the companies Act 2013.
Section 128 of the companies Act 2013 requires that every company shall
prepare and keep at its registered office books of accounts and other relevant
books and papers and financial statements for every financial year. The books
will be kept on accrual basis and according to the double entry system of
accounting.
Important Adjustments:
1. Provision for Income Tax: Since the actual amount of Income Tax payable will
be known only after the assessment is made by Income Tax Department, the
liability for Income tax has to be estimated while preparing the P&L A/c. and
should be provided for.
1. Provision for tax as given in adjustment will appear on the debit side of
P&L A/c. and again in the Balance Sheet on the Liabilities side under the head of
Current Liabilities and Provisions.
2. When both the payment of tax and provision for tax are given in Trial
Balance, the payment of Income tax is shown on the debit side and Provision for
tax on the credit side of P&L Appropriation A/c.
2. Interest on Funds: Interest on any fund is directly shown as an addition to the

fund in Balance Sheet only. It should not be credited to P&L A/c. as an income.
3. Goods distributed as Free Samples:
a) Once it is deducted from Purchases on the debit side of Trading
Account.
b) Again it is debited to P&L A/c. as an adjustment.
4. Materials, Wages, etc., used for making Loose Tools:
a) Once these are deducted from the concerned item on the debit side of
the Trading A/c.
b) Again they appear on the Assets side under the head of Current Assets
as an asset (Loose Tools).
6. Loss of Stock:
A. If Stock is insured: 69
a) Loss of stock is shown as an addition to Closing Stock on the credit
side of Trading A/c.
b) The excess of loss over claim if any is charged to P&L A/c.
c) The amount of claim is shown on the Assets side of Balance Sheet
under the head of Current Assets.
B. If Stock is not insured:
a)Loss of stock is shown as an addition to Closing Stock in Trading
Account.
b) The total loss is charged to P&L A/c.
7. Valuation of Stocks:
I. Undervaluation:
A. Opening Stock:
a) The undervalued amount is to be added to Opening Stock in
Trading Account.
b) The same amount is also added to Surplus in Balance Sheet.
B. Closing Stock:
a) The undervalued amount is added to the Closing Stock on the
credit side of Trading A/c.
b) The increased value of stock (Original value) is shown in Balance

Sheet.
II. Overvaluation:
A. Opening Stock:
a) The undervalued amount is reduced from Opening Stock in Trading A/c.
b) The same amount is deducted from Surplus in Balance Sheet.
B. Closing Stock:
a) The overvalued amount is reduced from Closing Stock in Trading A/c.,
and
b) The original value (Reduced value) of Stock is shown in Balance Sheet.
Final accounts of a Company consist of:-

1. A statement of Profit and Loss
2. Balance Sheet.
The Profit and Loss Account is prepared to ascertain the results of business
operation of the company over accounting period. In the case of a company, the
net profit disclosed by the Profit and Loss Account is not transferred to the
capital account in the Balance Sheet as it is done in the case of sole trading
concern or a partnership concern. In the case of Companies, profit must be
utilized according to provisions of the Companies Act. For that purpose, 70
a separate account is prepared known as Profit and Loss Appropriation Account.
This account shows the manner in which the net profit earned in a particular
year is utilized or disposed off.
In the case of a Company, it is not necessary to split the Profit and Loss
Account into three sections namely Trading Account, Profit and Loss Account
and Profit and Loss Appropriation Account. Only Profit and Loss Account may be
prepared which may cover items appearing in Trading Account, Profit and Loss
Account and Profit and Loss Appropriation Account.
PART-II Form of STATEMENT OF PROFIT AND LOSS:

Name of company:----------------
Profit and loss statement for the year ended----------------- (Rs.-----)
Particulars Note Current Previous
no. year year
figures figures
I Revenue from operations
II Other income
III Total revenue (I+II) Xxxxx
IV Expenses::
1.Cost of materials consumed
2.Purchase of stock-in-trade
3.Change in inventories of
finished goods and WIP.
4.employee benefit expenses
5.finance cost
6.depreciation
7.other expenses (including
preliminary expenses)
V Total expenses Xxxx
Profit before exceptional items
VI and tax (III-IV)
Exceptional items
VII Profit before tax
Tax expenses:
1.current year tax
2.deferred tax
VIII
Profit(loss) for the period from
XXXX
continuing operations. 71
IX
Profit(loss)from dis- continuing
X operations.
Tax expenses of dis-continuing
operations.
Xxxx
Net profit/loss for the year xxx
General instructions to the financial statements:

1. Revenue from operations disclose a. sale of goods b. sale of services and
c. other operating revenues less excise duty.
2. Other income includes a. interest on investments b. dividend income c.
net gain/loss on sale of investments d. other non-operating income.
3. Finance cost includes interest on debentures and borrowings.
SURPLUS ACCOUNT:
Balance of Surplus Account at the beginning of the year xxx
Add: profit for the year xxx
Xxxx
Less: 1. previous year provision for tax
2. Transfer to general reserve
3. Proposed Dividend/Interim Dividend ----
Surplus xx
Transfer to reserves: sec 123 of the Companies Act, 2013 provides that:
No dividend shall be declared or paid by a company for any financial year out
of the profits of the company for that year arrived at after providing for
depreciation in accordance with the provisions of Schedule II, except after the
transfer to the reserves of the company a certain percentage of its profits for
that year as specified below;
Dividend proposed Profit transfer to reserve
1. When proposed dividend exceeds10% Profit transfer to reserve shall not less
but not exceeding 12.5% of Paid up than 2.5% of C.Y. profits.
capital.
2. proposed dividend exceeds 12.5% but Transfer to Reserve shall not less than
not exceed 15%. 5% of C.Y. profits.
3. proposed dividend exceeds 15% but Transfer to reserve shall not less than
not exceed 20%. 7.5% of C.Y. profits.
4. proposed dividend exceeds 20% of paid Transfer to reserve shall not less than
up capital. 10% of C.Y. profits. 72
DIVIDENDS: shareholders expect some return for the money invested by them
in the company. They get the return on their investment in the form of
dividends. Thus, dividends are the profits of the company distributed amongst
the shareholders. The company may declare dividends in general meeting, but
no dividend shall exceed the amount recommended by the board of directors.
Dividends are usually paid on paid up share capital only.
Dividends may be the following 2 types:
1. Interim Dividend
2. Final dividend.
Interim Dividend:
The dividend declared between two annual general body meetings is interim
dividend. Sec 123 of the Companies Act 2013 provides that the Board of
Directors of a company may declare interim dividend during any financial year
out of the surplus in the profit and loss a/c and out of the current year profit.
Such interim divided shall not be declared at a rate higher than the average
dividends declared by the company during the immediately preceding 3 financial
years.
Final dividend: The dividend declared at the annual general meeting of the
shareholders is called as final dividend. It is declared by the shareholders on the
recommendation of the directors. The dividend proposed by the directors is
provided for the final accounts of the company and is paid only after it has been
passed at the annual general meeting of the shareholders.
Corporate dividend tax:

As per the Finance Act, 1997 dividends paid or declared were subject to
corporate dividend tax @10% with effect from 1 June, 1997. Such corporate
dividend tax is deducted from surplus sub-head in the Balance Sheet and it is
also shown under the heading current liabilities as a provision till it is paid. But
as per the recent Finance Act, the rate of the tax is 15% plus 10% surcharge and
cess of 2%. Total percentage of corporate divided tax with surcharge and cess
comes to 17% approximately.
Accounting entries relating to Dividend:
1. When the dividend is proposed by the directors:

Surplus a/c Dr
To Proposed dividend a/c. 73
2. When the dividend recommended by the directors is passed by the
shareholders at the annual general meeting:
Proposed dividend account Dr
To Dividend a/c
To Income Tax a/c
3. On opening a separate Bank a/c for the payment of dividend
Dividend Banking a/c Dr
To Bank a/c
4. On payment of Dividends-
Dividend a/c Dr
To Dividend Banking a/c
5. When the amount of unpaid divided is transferred Unpaid Divided ac
Unpaid Divided ac (with bank) Dr
To divided banking ac
6. If the unpaid divided is not claimed by the shareholders within 3years.
Dividend ac Dr
To unpaid Dividend a/c
Balance Sheet:
Part I-form of BALANCE SHEET
Name of company------------
Balance sheet as on ---------------- (Rs.in------)
EQUITY AND LIABILITIES: Not Figures as at Figures as at
e no the end of the end of
Current year Previous Year
1. shareholders Funds:
a. share capital
b. Reserves and surplus
c. money received against share
warrants
2. share application money pending
allotment
Total
Xxxxx
3. Non-current Liabilities:
a. Long-term borrowings
b. Deferred tax liability net
c. Other long-term liability
d. Long-term provisions
Total Xxxxx 74
4. Current liabilities:
a. Short-term borrowings
b. Trade payables
c. Other current liabilities
d. Short-term provisions
Total Xxxxx
Grand total(1+2+3+4) Xxxxxx
ASSETS
1. Non-current Assets:
a. Fixed Assets:
Tangible assets
Intangible assets
Capital work-in-process
Intangible assets under development
b. Non-current Investments
c. Deferred tax asset (net)
d. Long term loans and advances
e. Other non-current assets
Total Xxxxx
2. Current assets:
a. Current investments
b. Inventories
c. Trade receivables
d. Cash and cash equivalents
e. Short term loans and
advances
f. Other current assets
Total
Grand total (1+2) Xxxx
xxxx
**Contingent liability if any
Important Adjustments:
1. Provision for Income Tax: Since the actual amount of Income Tax payable will
be known only after the assessment is made by Income Tax Department, the
liability for Income tax has to be estimated while preparing the P&L A/c. and
should be provided for.
Provision for tax as given in adjustment will appear on the debit side of
P&L A/c. and again in the Balance Sheet on the Liabilities side under the head of
Current Liabilities and Provisions. 75
PROBLEMS
1. for the year ended 31st March,2019 provision for income tax has been made
for Rs.50,00,000. Advance payment of tax for that year amounted to
Rs.45,00,000 and tax deducted at source on income earned by the company
amounted to Rs.46,000. On November15,2019, the assessment was completed
and tax liability was determined at 58,40,000. Advance payment of tax for the
year ending 31st March,2020 was Rs.62,00,000.
Show the necessary accounts for the year ending 31st March,2020
assuming Rs.70,00,000 provision for taxation for the year ending 31st
March,2020.
Ans.
PROVISION FOR INCOME TAX ACCOUNT
Date Particulars Amount Date particulars Amount
2020 To income tax ac 58,40,000 2019 By balance b/d 50,00,000
March31 April1
Tobalancec/d 70,00,000 2020 By profit and loss ac 70,00,000
(given) March By surplus ac
31 (58,40,000-50,00,000)
less amount provided 8,40,000
last year
1,28,40,000 1,28,40,000
INCOME TAX ACCOUNT

Date
2019 To advance tax ac 45,00,000 2020 By provision for tax 58,40,000
Nov 15 To income tax march a/c
deducted at source 46,000 31
To bank Bal.fig. 12,94,000

58,40,000 58,40,000
1. The following is the Trial Balance of Lakshmi Ltd. as on 31stmarch,2019.

Particulars Dr. Cr.
Rs. Rs.
st
Stock on 31 March2018 75000
Purchases & Sales 245000 350000
Wages 50000
Discount 5000
Furniture & Fittings 76 17000
Salaries 7500
Rent 4950
Sundry expenses 7050
surplus A/c. 15030
Dividends 9000
Share Capital 100000
Debtors & Creditors 37500 17500
Plant & Machinery 29000
Bank 16200
Reserve 15500
Patents & Trademarks 4830
503030 503030
Prepare final accounts after taking into account the following

adjustments.
1. Stock on 31.3.2019 was Rs.82000 but the market value Rs.90000.
2. Depreciate fixed assets at 10%.
3. Make provision for tax at 50%. 4. Ignore corporate dividend tax.
2. The following balances of Universal Trading Company on 31.12.19 are given to

you. The Company has an Authorized Capital of Rs.5,00,000, divided into 5000
equity shares of Rs.100 each. On 31.12.19, 2500 shares were issued and fully
called up.
Rs. Rs.
Stock 50000 Advertisement 3800
Sales 425000 Bonus 10500
Purchases 300000 Debtors 38700
Wages 70000 Creditors 35200
Discount allowed 4200 Plant & Machinery 80500
Discount received 3150 Furniture 17100
Insurance up to 31.03.2020 6720 Bank bal. 134700
Salaries 18500 Reserve 25000
Rent 6000 Loan from M.D. 15700
General expenses 8950 Bad debts 3200
P&L A/c. 6220 Calls in arrears 5000
Printing & Stationery 2400
You are required to prepare final accounts on 31.12.19. The following

further information is also given.
1. Cost of stock on 31.12.19 Rs.91500 and market value Rs.86500. 77
2. Depreciate Plant at 15% and Furniture at 10%.
3. O/s wages Rs.200 and Salary Rs.1200.
4. Provide 5% dividend on Paid up Capital.
3. From the following TB of Ltd. as on 31.3.2019, prepare final accounts.

Rs. Rs.
Factory Premises at cost 450000 ShareCapital: 30,000;
Plant & Machinery at cost 349160 7% Preference
Motor Lorries at cost 73000 shares of Rs.10 each 300000
Sundry Debtors 121780 60,000 Equity shares
Bad debts 2850 of Rs.10 each 600000
Rent, Rates & Taxes 28400 Surplus A/c. 16240
Advertisement 19500 G.P. for the year 246640
Bank balance 68500 RBDD 9000
Directors’ fees 3600 Sundry Creditors 129640
Audit fee 10000 Transfer fees 110
Stock on 31.3.2019 114600 Accrued wages 12840
Rent, Taxes paid in advance 7980 Staff Benevolent Fund 17900
Salaries & Wages 32000
Dividends paid:
On Preference Shares 21000
On Equity Shares (Interim) 15000
patents 15000
1332370 1332370
The provision of doubtful debts is to be made up to Rs.10200. The Factory
Premises, Plant & Machinery and Motor Lorries are to be depreciated by 3%,
15% and 20% respectively. The Authorized Capital of the Company is
Rs.10,00,000 divided into 1,00,000 shares of Rs.10 each. You are required to
prepare (a) statement of P&L., (b) Balance Sheet in the form prescribed under
the Companies Act,2013. Also ignore taxation and transfer to reserve as
required by law. You need not provide corporate dividend tax.
4. The following balances were extracted from the books of Chandra Ltd. for the
year ended 31.3.2019.
Rs. Rs.
Buildings 600000 Sundry Creditors 350000
Furniture 60000 Surplus A/c. 20000
Motor Vehicles 60000 Gross Profit 1000000
Equity shares of Companies 400000 Dividend received on
Stock in trade at cost 400000 Investments 10000
78
Sundry Debtors, unsecured Salaries & Wages 220000
considered good 280000 Directors’ fee 8000
Bank 172000 Electricity charges 25000
Advance against Rent, Taxes &
construction 130000 Insurance 10000
of Building Audit fee 15000
Share Capital –10,000 1000000
equity Shares of Rs.100
each
Prepare final accounts of the Company for the year ended 31st
March,2019 after making the following adjustments:
1. Provide 10% depreciation p.a.
2. Stock has been revalued as Rs.360000. This has not been considered yet.
3. Debts more than 6 months are Rs.80000. 4.Ignore taxation.
5. Prepare Balance Sheet as at 31st March,2016 from the particulars furnished by

Vision Ltd, as per Schedule III of the companies Act,2013.
Eq.Share capital of Rs.10each Sundry debtors 1,60,000
8,00,000 Advances(Dr) 43,160
Calls in arrears 800 Proposed dividend 48,000
Land 1,60,000 Surplus ac 80,000
Building 2,80,000 Cash at bank 1,97,600
Plant and machinery 4,20,000 Patents 10,640
Furniture 40,000 Sundry creditors 1,60,000
General reserve 1,68,000 Stock:
Loan from IDBI 1,20,000 Finished goods 1,60,000
Loans (unsecured) 96,800 Raw materials 40,000
Provision for tax 54,400
Adjustments:
a. 1,500 equity shares were issued for consideration other than cash.
b. Loan of Rs.1,20,000 from IDBI is inclusive of Rs.6,000 for interest
accrued but not due. The loan is hypothecated by plant and
machinery.
c. Debtors of Rs.50,000 are due for more than six months.
d. The cost of assets: building Rs.3,20,000; plant and machinery
Rs.5,60,000; furniture Rs.50,000.
e. Bills receivable for Rs.2,20,000 maturing on 30th June,2016 have
discounted.
f. The company had contract for the erection of machinery at
Rs.1,50,000 which is still incomplete. 79
6. On 31.3.15 The Hind Flour Mills Ltd. disclosed the following balances.
Rs. Rs.
Stock on 1.4.14: Wheat 95000 Advances for values to
Flour 160000 be 45000
Wheat purchases 4050000 received 196000
Power & Fuel 75000 Advance tax 321000
Stores consumed 220000 Book debts
Rates & Taxes 25000 Investments at cost in 340000
Repairs to Buildings 15000 Rs.350000 Govt. Loan 12000
Repairs to Machinery 65000 Cash 500000
Insurance 57000 Bank
Misc. expenses 250000 Credit Balances:
Wages & Salaries 430000 Sales 5550000
Provident Fund Interest on
Contribution 50000 Investments(Net) 9000
Staff Welfare expenses 100000 Rent 4000
Directors’ fees 2000 Surplus A/c. 60000
Land 120000 Share Capital 720000
Buildings 205000 General Reserve 830000
Machinery 305000 Capital Reserve 100000
Furniture 1000 Provision for taxation 85000
Motor Vehicles 1000 Unclaimed dividends 9000
Stores & Spare parts 383000 Employees’ deposits 16000
Trade Creditors 640000
From the foregoing balances and the subjoined information, prepare final
accounts.
1. Stocks on 31.3.15 were:- Wheat at cost Rs.149000.
Flour at market value Rs.217000.
2. Provide Rs.60000 for taxation and Rs.20000 for managerial commission.
3. O/s expenses:- Wages & Salaries Rs.56000; Misc. expenses Rs.20000 &
Rates & Taxes Rs.5000.
4. Insurance prepaid Rs.7000.
5. Depreciation provided up to 31.3.14:-
Buildings – Rs.315000; Machinery – Rs.1145000;
Furniture – Rs.19000 ; Motor Vehicles – Rs.29000.
6. Book debts of which (Rs.121000 more than 6 months old) all are
unsecured but considered good. Rs.21000 being due from a private
company in which a director is a member. 80
7. There is a claim of Rs.25000 against the Company which is not acknowledged
as yet.
8. The authorized share capital consists of 12000 shares of Rs.100 each, of which
7200 shares are issued as fully paid. A dividend of Rs.20 per share is
proposed.
6. From the following Trial Balance of M Ltd., prepare final accounts for the year
ended 31.03.18.
Particulars Dr. Cr.
Rs. Rs.
Equity Share Capital (Shares of Rs.100 each) 400000
8% Preference Shares of Rs.100 each 20000
Plant at cost 300000
Land & Buildings at cost 500000
Depreciation up to 31.03.17: On Plant 100000
On Land & Buildings 150000
Dividend Equalization reserve 10000
Investments in Shares 200000
Stock 70000
Bank 60000
Debtors 50000
Surplus A/c. 25000
Creditors 30000
Income Tax deducted at source on dividend 2200
Establishment expenses 15000
Rent & Taxes 6000
Audit fee (including Rs.1000 for other services) 2500
M.D’s minimum remuneration 12000
Directors’ fees 2000
Sundry expenses 6000
Dividend (Gross) 10000
Misc. Receipts 2300
Gross profit 304400
Income tax for previous year not provided 6000
for 1231700 1231700
You ascertain that:

1. Depreciation is to be charged on the written down value of Plant at 10%,
Land & Buildings at 5%.
2. The directors propose to recommend a dividend of 15% on equity
shares. 81
3. Provision for tax is to be made at 55%.
4. A sum of Rs.15000 is to be transferred to Dividend Equalization Reserve.
7. The following is the Trial Balance of Wholesale Traders Ltd. as on 31.3.18.

Particulars Dr. Cr.
Rs. Rs.
Issued Capital – Shares of Rs.10 each 420000
Properties at cost 800000
Motor van 25000
Provision for depreciation on 31.3.17:
Leasehold Property 21000
Other Properties 50000
Motor van 10000
Administration and Selling expenses 176500
Opening Stock 120000
M.D’s Remuneration 50000
Rent received 36000
Investments 67500
Investment Income (after deduction of 22% Income tax) 3400
Debenture Interest 10500
Bank Interest 5820
Bank O.D. 7300
Interim dividend 16800
Surplus A/c. 57520
Calls in arrears 1000
Share Suspense A/c. 3000
Unclaimed dividends 1500
Cash 15100
Bank 90000
3075720 3075720
Further Information:
1. Closing Stock Rs.167000.
2. No effect has been given to the following Board resolutions:
a) Passed on 15th July,17 forfeiting 500 shares for non-payment of call of
Rs.1000. 82
b) Passed on 18th Sep.,17 for reissuing the 500 forfeited shares of Rs.10 each as
fully paid for a consideration of Rs.3000 received and laying credited to Shares
Suspense A/c.
3. The directors have recommended the following appropriations:
a) Final dividend at Rs.5 per share including the interim dividend already
declared on 23rd Dec.,17.
b) Transfer of Rs.10000 to General Reserve.
4. Depreciation is to be provided as follows:
Motor car – 20% on W.D.V.
Properties other than Leasehold – 3% on W.D.V.
Leasehold Property purchased on 1.4.11 at a cost of Rs.140000
for a period of 40 years.
5. M.D. is entitled to a remuneration of 10% of the net profit subject to a
minimum of Rs.50000.
6. Provision of taxation to be made at 55%.
Prepare final accounts.
8. ABC Ltd. has the following Trial Balance as on 31.3.2016

Rs. Rs.
Opening Stock 150000 Equity Share Capital 750000
Purchases 800000 (Rs.10 shares)
Wages 225000 Preference Shares of Rs.10
Electric Power 37500 each 500000
Factory expenses 87500 6% Debentures 500000
Carriage on Sales 50000 (Mortgaged on assets)
Carriage on Purchases 25000 Creditors 112500
Salaries 150000 Provision for Income Tax 112500
Insurance 25000 Surplus A/c. 95000
Debtors 225000 General Reserve 250000
Bank 15000 O/s Salaries & Wages 62500
SinkingFund Investments Sales 1925000
(4% Govt. Bonds) 225000 Interest on Govt. Bonds 5000
Debenture Interest 15000 Sinking fund 225000
Buildings 750000
Machinery 1125000
Auditor’s fees 15000
Income tax paid 102500
Dividends: preference
share 15000
Interim dividend in E.Share 75000
Preliminary expenses 50000 83
Goodwill 350000
4537500 4537500
Information:
2. Make provision for tax for this year Rs.128000.
3. Provide Rs.45000 for General Reserve, Rs.15000 for Sinking fund and 10%
dividends for equity shares.
4. Depreciate Buildings at 2% and Machinery at 10%.
5. Write off preliminary expenses.
6. Bad debts were Rs.5000. Provide for RBDD at 2% on debtors and discount
reserve at 2% on creditors.
7. Interest on Govt. Bonds is due Rs.3500.
9. The following Trial Balance has been extracted from the books of XYZ Ltd. as on 31st
March,18. Prepare P&L A/c. and Balance Sheet.
Rs. Rs.
Land & Buildings 14000 Share Capital 20000
(Original cost Rs.30000) General Reserve 3000
Furniture 800 8% Debentures 10000
(Original cost Rs.1500) Bank O.D. 150
Plant & Machinery 10000 Sundry Creditors 1600
(Original cost Rs.20000) Share Premium 1000
Stock on 31.3.18 12800 Debenture
Salaries 800 Redemption Reserve 4000
Printing & Stationery 120 Gross Profit 10400
Debtors 7000 surplus A/c. 850
Investments 600
Cash 200
Bank balance 2400
Advance Income Tax 800
Interest 200
Debenture Interest 400
Rent, Rates & Insurance 280
51000 51000
Further Information:
1. Depreciation is to be provided for as under:
a) Land & Buildings at 5% on Straight Line Basis.
b) Furniture and Plant at 10% on Reducing Balance Basis.
2. Debtors worth Rs.6000 are less than 6 months old. Out of the 84
remaining debtors worth Rs.500 are considered bad.
3. Authorized capital consists of 1000 equity shares of Rs.100 each,
of which 400 shares are issued and Rs.50 per share paid up.
4. Provide for: a)Audit fees Rs.250; b) Provision for tax Rs.2400.
5. Insurance is prepaid to the extent of Rs.80.
6. The directors have recommended:
a) Transfer Rs.1000 to Redemption Reserve.
b) Transfer Rs.400 to General Reserve.
c) Equity dividend at 8% on paid up capital.
7. It has been decided to write off half of the preliminary expenses.
8. Previous year’s figures need not be given.
10. The following is the Trial Balance of Universal Earthmovers Ltd. as on 31st
March,1998.
Rs. Rs.
Opening Stock 290000 Surplus A/c. 50900
Power 10300 Sales 365000
Salaries & Wages 217000 Share Capital 500000
Purchases 232200 Provision for tax 15000
Rent & Taxes 7500 Provision for doubtful 6300
Insurance 10000 debts 125000
Prepaid expenses 27500 Secured Bank loan 100000
Repairs to Building 21000 General Reserve 1600
Managerial 11100 Unclaimed dividends 133000
Commission 475000 Creditors 1800
Land & Buildings 350000 O/s Commission 624000
Machinery 8500 Depreciation A/c. 600
Furniture 4000 Misc. Receipts 75000
Office equipment 22500 O/s expenses
Motor Vehicles 290000
Sundry Debtors 21600
Bank 1998200 1998200
Other Information:
2. Provide Rs.20000 for further taxation.
3. The depreciation written off to 31.3.17 was as follows:
Land & Buildings – Rs.289200
Machinery - 309300
Furniture - 7500
Office equipment - 3500
Motor Vehicles - 14500
4. Debtors outstanding more than 6 months Rs.6300 out of which Rs.2000 is bad
debt and the rest are doubtful. 85
5. Transfer Rs.60000 to General Reserve and provide Rs.7.50 dividend per share.
6. The authorized share capital is 10000 shares of Rs.100 each, all are issued and
subscribed and Rs.50 per share paid up.
11. RKC was registered with an authorized capital of Rs.30,00,000 in equity shares of
Rs.10 each. The following is the list of balances extracted from the books on 31.12.19.
Rs. Rs.
Purchases 925000 Cash 28750
Wages 424325 Paid up Capital 2000000
Mfg. expenses 65575 surplus A/c. (Cr.) 72500
Salaries 70000 6% Debentures 1500000
Bad debts 10550 Sundry Creditors 290000
Directors’ fees 31125 Sales 2075000
Debenture interest 45000 B/P 167500
paid 25000 Plant 1500000
Preliminary expenses 37500 Premises 1650000
Calls in arrears 84175 Interim dividend 187500
General expenses 375000 Furniture 35000
Stock on 1.1.19 100000 Sundry Debtors 436000
Goodwill 199500 General Reserve 125000
Bank
prepare final accounts after making the following adjustments.
1. Stock on 31.12.19 was Rs.455000.
2. Depreciate Plant by 10%.
3. Provide half year’s interest on debentures.
4. Write off Rs.2500 from Preliminary expenses.
5. Make provision for bad and doubtful debts Rs.4250.
12. The following is the Trial Balance of a company as on 31st March,19.

Particulars Rs. Rs.
Stock on 31.03.19 75000
Purchases and Sales 245000 340000
Productive Wages 30000
carriage 950
furniture 17000
Reserve 15500
Cash 45300
Discounts 3000
Salaries 7500
Rent 4000
General expenses including insurance 16950
surplus 15000
Debtors & Creditors 86 27500 17500
Capital (10,000 shares of Rs.10 each) 100000
Patents 4800
Bills receivable 5000
Purchase returns 10000
Bills payable 7000
508000 508000
You are required to prepare final accounts.

1. Stock on 31.03.19 Rs.88000.
2. Provide income tax at 35% and corporate tax at 10%.
3. Depreciate Machinery at 15%, furniture 10% and patents at 5%.
4. Outstanding rent Rs.800 and salaries Rs.900.
5. Provide Rs.510 for doubtful debts.
6. The board recommended the payment of divided at15%p.a.
7. Transfer the minimum required amount to general reserve.
13. The following balances appeared in the books of Krishna Flour Mills Ltd. as on 31st
March,12.
Particulars Rs. Rs.
Stock of Wheat 4500
Stock of Flour 8250
Wheat purchases 202000
Flour sales 277000
Mfg. expenses 45000
Salaries & Wages 6500
Establishment 2800
Interest 2500
Rent received 4000
surplus A/c. 17500
Dividend (2011) 4500
Land 16000
Buildings 27500
Furniture 2550
Motor Vehicles 2550
Stores and Spare parts 9150
Advances 12250
Sundry Debtors 35850
Investments 12000
Share Capital 36000
Pension Fund 11500
Dividend Equalization Fund 87 15000
Taxation Provision 4250
Unclaimed dividends 450
Deposits 1800
Trade Creditors 40000
Bills Payable 21000
Bills Receivable 5000
Bank 15600
Reserve Fund 12850
443850 443850
Prepare final accounts by taking the following into account.

1. Stock on 31.03.12: Wheat at cost – Rs.7450.
Flour at market rate – Rs.10850.
2. O/s expenses: Mfg. expenses – Rs.11250 ; Salaries – Rs.600;
Establishment – Rs.500.
3. Provide depreciation: On Buildings – 2% p.a.; On Plant&Machinery-10%
On Furniture – 10% ; Motor Vehicles-20%
4. Interest accrued on Govt. Securities Rs.500.
5. The directors propose a dividend of 20%.
6. Provision for taxation is to be made at Rs.6000.
7. B/R Rs.2000 were endorsed to Creditors on 31.03.12 but no entry has been passed.
8. The authorized capital consists of 6000 shares of Rs.10 each of which 3600 shares
are issued and fully paid.
14. The authorized capital of YK Ltd. is Rs.7,50,000 consisting of 3000; 6% cumulative

preference shares of Rs.100 each and 4500 equity shares of Rs.100 each. The
following is the Trial Balance on 31st Dec.,13.
Particulars Rs. Rs.
Paid up Capital:
3000; 6% Cumulative
Preference Shares 300000
3000 equity shares, Rs.75
paid up 225000
Goodwill 100000
5% Mortgage Debentures 210000
Freehold Property at cost 390000
Stock on 1.1.13 241500
Surplus A/c. 58500
Reserve for taxation 8800
Salaries 108500
Delivery expenses 88 33250
Rent and Rates 21000
General expenses 102000
Furniture at cost 75000
Freight & Carriage 3750
Investments 60000
Debenture Interest (Half Year) 5250
Final dividend for 2012 20250
Preference dividend (Half year
ended 30.06.13) 9000
Bank 97500
Cash 14145
Shares forfeited a/c. 2000
1941145 1941145
Other Information:
2. Depreciate Freehold Property at 2.5% and Furniture at 6%.
3. The directors propose to pay the second half year’s dividend on preference
shares and 10% dividend on equity shares.
4. 50 shares have been forfeited on non-payment of Rs.35 per share.
You are required to prepare final accounts.
15. The Bharat Mfg. Co. Ltd. has an authorized capital of Rs.3,00,000 divided into 3000
equity shares of Rs.100 each. 2000 shares were issued to the public on 01.04.18 and
the shares were paid at Rs.80 per share.
The directors made a call for the remaining Rs.20 per share on 01.01.19. The following
Trial Balance is on 31st March,19.
Particulars Dr. Cr.
Rs. Rs.
Goodwill 16000
Land & Buildings 90000
Loose Tools 9400
Furniture & Fittings 3600
Calls in arrears 2500
Cash in hand 500
5% Govt. Tax free Bonds 9880
(Face value Rs.10,000)
Motor Vehicles 89 3000
surplus A/c. on 1.4.18 8800
Reserve 15000
Bank O.D. 11180
Purchases & Returns 240000 5000
Advertisement 2540
Returns & Sales 7000 307800
Legal charges 1000
Carriage 3700
Wages 23200
Rent, Rates & Insurance 4900
Share Capital 200000
Stock on 1.4.18 47600
Income Tax 2800
Trade expenses 1500
Repairs to Plant 860
Interim dividend for half year 3500
(30-09-18)
678380 678380
Prepare final accounts.
1. Create RBDD at 5%.
2. Charge depreciation at 5% on Plant & Machinery, 7.5% on Furniture, 10%
on Loose Tools and 20% Motors.
3. The stock in trade on 31.03.19 valued at Rs.54200.
4. On 16th Nov., the directors declared on interim dividend of 5% p.a. for 6
months ending on 30th Sep.,18.
5. The directors have proposed a final dividend of 6% for the year.
16. Sankar Ltd. have an authorized capital of Rs.1,00,000 comprising of 2500, 6%
preference shares and 7500 equity shares both of Rs.10 each.
From the following balances, prepare Manufacturing A/c., P&L A/c. for the year ended
31st March,1994 and Balance Sheet as on that date.
Rs. Rs.
90
Stock on 1.4.13: Plant & Machinery 29000
Materials 27000 Office Furniture 9000
W.I.P. 3000 Sales 170000
Finished goods 24000 Sundry Income 1750
Salaries & Wages 30000 General Reserve 10000
Insurance 750 Equity Capital – 5000 shares
Purchase of materials 120000 of Rs.10 each 50000
Inward freight 10500 Preference Capital _ 1000
Electricity, Power and Fuel 3000 shares of Rs.10 each 10000
Rent, Rates & Taxes 1500 Dividend Equalization Fund 3000
Interest 3000 Secured Loans 20000
Sundry expenses 13800 Bank O.D. 35000
Calls in arrears – equity 750 Sundry Creditors 10000
Sundry Debtors 26000 Provisions for taxation 1950
Bank 13200 Unpaid dividend 8500
Land & Buildings 7500 surplus A/c. 1800
The following additional information is available:-

1. Closing Stock: Raw Material - Rs.33000
W.I.P. - 4000
Finished goods 40000
2. Depreciate Land & Buildings at 2%, Plant & Machinery at 10% and Furniture at 15%.
3. Apportion electricity and Salaries between factory and office in 2:1.
4. Out of the debtors Rs.900 are doubtful but it is decided to provide 4% on debtors
5. Transfer Rs.1000 to General Reserve.
6. Provide for 10% equity dividend on Paid up Capital.
17. The following balances are extracted from the books of Byson Jeans Ltd. as on 31st
March,15.
Rs. Rs.
Stock on 1.4.14 57600 Dividends paid 52450
Machinery 200000 Sales 987800
Carriage in 20400 Purchases 406750
Creditors 63000 Fuel & Power 47300
Salaries 150000 Wages 104800
Freehold Property 100000 Carriage on Sales 3200
Returns inward 6800 Sundry Debtors 145000
Cash 5400 Bank 26300
Insurance 6000 General expenses 30000
Returns outwards 5000 Furniture 100000
Capital (Rs.10 each) 600000 Buildings 200000
Patents 91 75000 surplus A/c. on 1.4.14 110000
1. Authorized Capital of the Company consists of 1,00,000 shares of Rs.10 each out of
which 70,000 shares were offered to public and 60,000 shares were subscribed.
2. The closing stock on 31.03.15 was valued at Rs.68000 but its market value was more
by Rs.7000.
3. Patents, Buildings, Machinery and Furniture are to be written off and provision for
doubtful debts maintained, all at 5%.
4. Wages include Rs.20,000 paid on 31.03.15 for erection of Cycle Shed for the use of
employees.
5. Transfer Rs.20,000 to General Reserve.
6. The directors proposed 10% dividend.
Prepare the Company’s final accounts.
18. From the following details of Sri Tronics Ltd., prepare final accounts as on 31.03.15.
Rs.in Rs.in
‘000s ‘000s
Authorized Capital 40,000 Debtors 59,000
Subscribed Capital 20,000 Bank 320
Stock on 01.04.14: Loans & Advances 580
Materials 50,020 Development Reserve 2,340
W.I.P. 20,080 Investment Reserve 4,250
Finished goods 99,900 General Reserve 25,800
Purchases 4,48,400 Secured Loans 13,480
Sales 6,69,700 Fixed deposits 16,000
Salaries & Wages 29,710 Depreciation Fund 28,000
Other expenses 1,17,640 Depreciation 3,550
Other incomes 2,880 Investments 190
Sundry Creditors 1,10,775 Accrued Interest 25
Fixed assets at cost 63,870
Additional Information:
1. Stock on 31.03.15: Material - Rs.3,00,00,000
W.I.P. - 2,50,00,000
Finished goods 7,59,00,000
2. Market value of Investments Rs.1,95,000.
3. Provide for dividend at 25%.
4. Transfer to General Reserve Rs.1,00,000.
5. Sundry debtors include Rs.1,00,000 outstanding for more than 6 months.
19.
Exam BU 2022 92
Q20
Exam 2018 BU 93
94
Q21.
95
Exam 2022 BU
98

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Unit 1.

A Joint Stock Company is a very important form of business organization. The

b. Non- Cumulative Preference shares:

1. Authorized Capital: This is also called Registered or Nominal Capital. The

Note: Similar call entries are to be passed for further calls.

Issue of Shares at Premium:

Premium may be collected alongwith application or allotment or alongwith call.

II. When Premium is payable alongwith Allotment money:

ISSUE OF SHARES AT A DISCOUNT:

Generally, it is allotted at the time of allotment only.

Adjustment of excess application money towards the Allotment and Calls :

Calls in arrears and Calls in advance:

(i) When shares issued at par are forfeited :

Reissue of Forfeited Shares:

(i) When the Forfeited shares are reissued at a discount:

The most usual form of borrowing by a Company is issue of debentures. Debenture

I. Issue of Debentures at Par:

III. Issue of Debentures at Discount:

6. A Ltd. issued Rs.1,00,000 debentures, 10% on 01.04.04 at a discount of 10% repayable in

7. Sunitha Ltd. issued Rs.2,00,000, 10% debentures on 01.01.02 at a discount of 5%

8. A Limited Company has made an issue of Rs.5,00,000;9% Debentures on 01.04.04, the

9. A company issued Rs.2,00,000; 6% Debentures of Rs.1000 each at par, repayable at the

ISSUE AND REDEMPTION OF DEBENTURES

Differences between Shares and Debentures:

2. Issuing Debentures with different Conditions:

b) When debentures are issued at discount and redeemable at premium:

2. When debentures are issued at par or discount and repayable at premium:

7. Pass journal entries relating to the issue of the following debentures.

Redemption of debentures by creating Sinking Fund or Debenture Redemption Fund:

2. For investing the amount :

At the end of Second and Subsequent years:

2. When amount set aside:

At the end of the last year:

2. If there is a profit on sale of Investments:

3. When the balance of Fund Account transferred to General Reserve:

13. On 01.01.10 X Ltd. issued debentures of Rs.500,000 redeemable at par on 01.01.15. It

ISSUE OF BONUS SHARES

When the reserves accumulated out of the Company’s requirements, the

2. When bonus shares are issued:

2. The following is the Balance Sheet of Strong Ltd. as on 31.12.19.

The Company passed the following resolution:

8. The Balance Sheet of Calm Ltd. on 31.03.2019 was as follows:

The Company decided:

12. The Balance Sheet of Zee Ltd. As at 31.3.2019 is given below:

It was resolved at the Annual General Meeting:

At the Annual General Meeting it was resolved:

The valuation reduced the amounts of the following:

Methods of valuing goodwill:

Average profits method:

NOTE: step – 1 Calculation of adjusted profit or Future maintainable profits:

Weighted Adjusted Average profits = Total product/total weights.

Step - 3 calculation of goodwill:

Value of goodwill under weighted average profit method is calculated as

3. SUPER PROFITS METHOD:

Procedure to find capital employed from liabilities side:

= (capital employed at the beginning + Capital Employed at the end)/2 OR

= capital employed at the end – ½ of current year profits after tax or

= Capital employed at the beginning + ½ of current year profits after tax.

3. Normal Profits: it is calculated by multiplying the normal rate of

Super Profit method has three variations i.e.