KVS RAIPUR REGION
Study Materials (MODULE) for Low Scorer Students
Subject: Accountancy – XII
Subject Co-coordinator: Sh. Kalyanraman, Principal KV Mahasamund
S.N.
Name of the Teacher’s
Desg.
Topics
KV
01 Sh. G. Shrivastava
Financial Statements Analysis
Dongargarh
02 Sh. R. K. Thakur
Admission of a Partner
Raipur No. 02
Retirement & Death of a
03 Smt. Anita Darfade
Raipur No. 01
Partner
PGT
Fundamental of Partnership,
04 Ms. Sarita Devi
Raipur No. 01
Dissolution of Firm
05 Sh. V Jaisawal
Accounting for Share Capital
Durg
06 Sh. Deepak Gupta
Accounting for Debentures
Mahasamund
……………………………………………………………………………………………………
Points to be remembered
DO IT
1. Use proper format using correct heading.
2. Write the narration for every transaction.
3. Write the amount in proper sequence (i.e. once digit number below once and so on).
4. Close particular column after every entry.
5. Do the work neat and clean.
6. Show the working note clearly.
7. Don’t draw the margin line, just fold the answer sheet from both the edges (left and right).
8. Put the answer number clearly on the middle of the page and highlight it by underlining.
9. Solve all the parts of the question together.
10. Make strategy/plan to solve the question, to avoid vesting of time for making wrong answer.
DON’T DO IT
1.
2.
3.
4.
5.
Spending time on a particular question more than its requisite time
Cramming to learn journal entries, posting to ledger etc.
Ignoring about writing of heading, narration, proper working notes, conclusion etc.
Solving some part of one question at the another place
Request to examiner for giving pass mark
…………………………………………………………………………………………………………………………………………………………….
PARTNERSHIP: FUNDAMENTALS & DISSOLUTION
Accounting for partnership firms- Fundamentals (10)
Partnership -fundamentals
Q1. What is meant by Partnership?
Q2.What is meant by Partnership Deed?
Q3.Give one difference between P & L A/c and P & L Appropriation A/c.
Q4.What are the rules applicable in absence of partnership deed?
Q5.What is the difference between fixed capital and fluctuating capital account.
Q6.Why is it necessary to have a partnership deed?
Q7.Nirupam and Sanjay were partners is a firm sharing profits in the ratio of 5 : 3 .Their fixed capitals
were Rs. 150000 and 100000 respectively. The partnership deed provides that :
(i)
Interest on capital should be allowed @ 12 % p.a.
(ii)
Nirupam should be allowed a salary of Rs. 20000 p.a.
(iii) A commission of 10 % of the net profit should be allowed to Sanjay.
(iv)
The net profit for the year ended 31-3-2001 was 100000.
Prepare profit and loss appropriation account.
Q8.X and Y are partners in a firm. The partnership deed Provides that interest on drawings will be
charged @ 6% p.a. During the year ended 31-12-2006 X withdrew Rs. 2500 at the beginning of the
every month and Y withdrew Rs.2500 at the end of each month. Calculate interest on the partner’
drawings.
Q9.L, M, and N were partners in a firm. On 1-4-2007 their capital stood at Rs. 25000; Rs.12500 and Rs.
12500 respectively. As per the partnership deed :
(i) N was entitled for a salary of Rs. 2500 p.a.
(ii)
Partners were entitled to interest on capital at 5% p.a.
(iii)
Profits were to be shared in the ratio of partners’ capital.
The net profit for the year 2007-08 of Rs.16500 was divided equally without providing for the
above terms. Pass an adjustment entry in journal to rectify the above error.
Q10.X, Y, and Z are partners sharing profits in the ratio of 5: 4: 1. Z is given a guarantee that his share
of profit in any given year would be Rs. 10000. Deficiency if any would be borne by X and Y equally.
The profits for the year 2008 amounted to Rs. 80000. Pass necessary entries in the books of the firm.
Q11.Sunny and Pinky started partnership on 01-04-2009 with capital of Rs. 125000 and Rs. 75000,
respectively. On 01-10-2009, they decided that their capitals should be Rs. 100000 each. The necessary
adjustments in the capitals are made by introducing or withdrawing cash. Interest on capital is to be
allowed @ 10 % p.a. Calculate interest on capital as on 31-03-2010.
Dissolution of partnership
Q.1. what is meant by dissolution of Firm ?
Q.2. state the circumstances when the court may order for the dissolution of the firm.
Q.3.State the ways , the firm is dissolved.
Q.4. State the difference between dissolution of partnership and dissolution of partnership firm.
Q.5. State the order of settlement of accounts on dissolution.
Q.6. on dissolution, how will you deal with partners loan, if it appears on the (a)Assets side of the balance
sheet (b)Liabilities side of the balance sheet.
Q.7. what is a realisation account.
Q.8. on what account realisation account differs from revaluation account.
Q.9. Deep and prabhat were partners in a firm sharing profits in the ratio of 3:2 their balance sheet on
28.2.2008 was as follow :
Liabilities
Creditors
Outstanding expenses
Capital Accounts :
Deep
Prabhat
90,000
1,20,000
Amount Assets
25,000 Building
5000 Plant
Stock
Debtors
2,10,000 Cash
Amount
1,00,000
40,000
30,000
45,000
25000
2,40,000
240000
On the above date the firm was dissolved. Stock was taken over by deep at a discount of 10%. Prabhat took
over debtors for Rs 40000 plant was sold for Rs 30000 and building realised Rs 80000 prabhat agreed to
pay the creditors. Deep paid outstanding expenses. Expenses of realisation amounted to Rs 7500
Prepare realisation account, cash account and capital account to close the books of the firm
Q.10. shilpa, meena and nanda decided to dissolve their partnership on march 31,2006 their profit
sharing ratio was 3:2:1 and their balance sheet was as under :
Balance sheet of shilpa meena and nanda on march 31,2006
Liabilities
Amount Assets
amount
Capitals
Land
81000
Shilpa
80000 Stock
56760
Meena
40000 Debtors
18600
Bank loan
20000 Nanda’s capital
23000
Creditors
37000 Cash
10840
Provision for doubtful debts
1200
General reserve
12000
190200
190200
The stock of value 41660 are taken over by shilpa for Rs 35000 and she agreed to discharge bank
loan .the remaining stock was sold at Rs 14000 and debtors accounting to Rs 10,000 realised Rs
8000 land is sold for Rs 110000 the remaining debtors realised 50% at their books value. Cost of
realisation amounted to rs 12000 their was a typewriter not recorded in books worth Rs 6000 which
were taken over by one of the creditors at this value. Prepare realisation account.
Q.11. sourav and utkarsh are equal partners in a firm they decided to dissolve the partnership on
December 31,2007 when the balance sheet is as under :
BALANCE SHEET
Liabilities
Amount Particulars
amount
Sundry creditors
27000 Cash on Bank
11000
Reserve fund
10000 Sundry Debtors
12000
Loan
40000 Plants
47000
Capital
Stock
42000
Sourav
60000
Leasehold land
60000
Utkarsh
60000
120000 Furniture
25000
197000
The assets were realised as under :
Leasehold Land
72000
Furniture
22500
Stock
40500
Plant
48000
Sundry Debtors
10500
197000
The creditors were paid Rs 25500 in full settlement. Expenses of realisation amount to Rs 2500
prepare Realisation Account, Bank Account, partners Capital Accounts to close the books of the
firm.
Q.12. Ashu and Harish are partners sharing profit and losses as 3:2 they decided to dissolve the
firm on December 31,2009. Their balance sheet on the above date was :
Balance sheet of Ashu and Harish
Liabilities
Amount Assets
Amount
Capitals :
Building
80000
Ashu
108000
Machinery
70000
Harish
54000
162000 Furniture
14000
Creditors
88000 Stock
20000
Bank Overdraft
50000 Investments
60000
Debtors
48000
Cash in hand
8000
300000
300000
Ashu is to take over the building at Rs 95000 and machinery and Furniture is taken over by Harish at value
of Rs 80000 Ashu agreed to pay creditors and Harish agreed to meet Bank overdraft. Stock and
Investments are taken by both partners in profit sharing ratio. Debtors Realised for Rs 46000 expenses of
Realisation amounted to Rs 3000.Prepare necessary ledger account.
Q.13. Sanjay, Tarun and Vineet shared profit in the ratio of 3:2:1 on December 31,2009their balance sheet
was as follow :
Balance sheet of Sanjay Tarun and Vineet
Liabilities
Amount Assets
Amount
Capitals :
Plant
90000
Sanjay
100000
Debtors
60000
Tarun
100000
Furniture
32000
Vineet
70000
270000 Stock
60000
Creditors
80000 Investments
70000
Bills payable
30000 Bills receivable
36000
Cash in Hand
32000
380000
380000
On this date the firm was dissolved. Sanjay was appointed to realise the assets. Sanjay was to
receive 6% commission on the sale of asset and was to bear all expenses of realisation.
Sanjay realised the assets as follow : plant Rs72000, debtors Rs 54000, furniture Rs 18000, Stock
90% of the book value, investments Rs 76000, and bills received Rs 31000. Expenses of realisation
amounted to bRs 4500.
Prepare Realisation account, capital accounts and cash accounts.
Q.14. the following is the balance sheet of Tanu and Manu, who shared profit and losses in the ratio of 5:3
on December 31, 2010
.
Balance sheet of Tanu and Manu
Liabilities
Amount Assets
Amount
Sundry creditors
62000 Cash on Bank
16000
Bills payable
32000 Sundry Debtors
55000
Bank Loan
50000 Stock
75000
Reserve Fund
16000 Motor Cars
90000
Capital :
Machinery
45000
Tanu
110000
Investment
70000
Manu
90000
200000 Fixtures
9000
360000
360000
On the above date the firm is dissolved and the following agreement was made :
Tanu agree to pay the bank loan and took away the sundry debtors. sundry creditors accepts stock
and paid Rs 10000 to the firm. Machinery is taken over by manu for Rs 40000 and agreed to pay of
bills payable at a discount of 5%. Motor car was taken over by Tanu for Rs 60000. Investment
realised Rs 76000 and fixtures Rs 4000. The expenses of dissolution amounted to Rs 2200.
Prepare realisation account, bank account and Partners Capital Accounts.
Q15 Journalise the following transactions in connection with the dissolution of partnership firm of walia
and kalia.
i.
Realization expenses paid Rs. 1,000
ii.
Realization expenses paid by walia Rs. 1,000
iii. Walia was asked to took into the dissolution of firm for which he was allowed a commission of Rs.
1,000
iv.
Realisation expenses are to be born by for which he will be paid Rs. 1,000.the actual expenses
incurred by walia were 1,200
v.
Walia to get Rs. 1,000 for dissolution work. But the actual expenses Rs.1,200 paid from the firm.
Q 16
X and Y sharing profits in the ratio of 2:2:1 agreed upon dissolution of their partnership on 31st march ,
2009 on which date their balance sheet was as under.
Liabilities
Amount
Assets
Amount
Capital
x
40,000 Fixed assets
50,000
Y
30,000 Joint life policy
10,000
Reserve fund
10,000 (at surrender value
J l p reserve
10,000 Debtors
10,000
Creditors
18,500 -provision
-500
9,500
Salary o/s
2,000 Stock
8,000
Provident fund
10,000 Investment
7,500
Z’s capital
2,000
bank
33,500
1,20,500
1,20,500
Investment were taken over by x at Rs. 6,000 creditors of Rs. 10,000 were taken over by y who agreed to
settle account with them at Rs. 9,900 remaining creditors were paid at Rs.7,500.joint life policy was
surrendered and fixed assets realised Rs.70,000 stock and debtors realised Rs.70,000 and Rs.9,000
respectively.onr customer where a/c was written off as bad, now paid Rs.2,00 which is not included in
Rs.9,000 above there was one unrecorded assets handed over to an un-recorded liability of Rs.5,000 in full
settlement of claim of Rs.2,500 and remaining half was sold in the market which realised Rs.200 less. Y
took over the responsibility of completing dissolution . he is granted a commission of Rs.1600 actual
realization expenses is Rs. 1100
Dissolution was completed and final payment were made on 31st July,2009
You are required to prepare ledger accounts in the books of the firm.
Q17 X, Y, and Z commenced business on jan.1, 2004 with capital of Rs.1,00,000 Rs.80,000 and Rs.60,000
respectively. Profit and losses were shared in the ratio of 4:3:3 respectively capital carried interest at 5%
p.a.
During 2007 and 2008 they made profits of Rs.40,000 and Rs.50,000 before allowing interest on capitals.
drawings of each partner were Rs.10,000 per year .
On 31st Dec. 2008 the firm was dissolved .creditors on that date were 24,000.the assets realized a net
amount of 2,60,000
Prepare capital account of partner for two year till the books are finally closed and the realization account.
1.
2.
3.
4.
5.
6.
7.
8.
Partnership is a relationship between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.
A written agreement which contains the various terms and conditions as to the relationship of the
partners to each other is called the Article of Partnership of Partnership deed.
P & L A/c includes all charges against profits whereas P & L Appropriation A/c includes all
appropriations of profits.
In the absence of partnership deed following rules will be applied for governing the partnership:(1) Profit sharing ratio will be equal. (2) No interest will be given on partners’ capitals
(3) No interest will be charged on partners’ drawings (4) No partner will be entitled to any salary,
fees, commission or remuneration.
Following are the differences between Fixed capital method and Fluctuation capital method.
Basis
Fixed capital method
Fluctuation capital method.
1.No.of
Each partner has two accounts, capital
Each partner has only one account, capital
Accounts
and current account.
account.
2.Change
The capital account remains unchanged
The balance of capital account keeps on
in balance
unless there is an addition to or
changing from time to time.
withdrawal of capital.
3.Negative The fixed capital account of a partner
The fluctuation capital account of a
balance
can never show a negative balance.
partner can show a negative balance.
The three reasons for having a written agreement (partnership deed) are as follows:(i)
In case of dispute it will serve as evidence in the court of law.
(ii)
Accounts of partnership firm are regulated by those contents.
(iii)
It regulates the rights, duties and responsibilities of each partner.
Dr.
P & L Appropriation A/c
Cr.
To Interest on capital:By P & L A/c (Net profit for the
100000
-Nirupam 150000 X 12 %
18000 year)
-Sanjay 100000 X 12 %
12000
To partner’s salary
- Nirupam
20000
To Partner’s commission
-Sanjay (100000-50000) 10 %
5000
To partners’ capital (divisible profit)
-Nirupam 45000 X 5/8
28125
-Sanjay 45000 X 3/8
16875
100000
100000
Interest on X’s drawings :Interest on Y’s drawings :(2500 X 12) 6.5/12 X 6/100 = 975
(2500 X 12) 5.5/12 X 6/100 = 825
M’s capital a/c
Dr.
2000
To L’s capital
1500
To N’s capital
500
(For rectifying the past errors.)
10. (i) P & L Appropriation a/c
Dr.
80000
To X’s capital a/c
40000
To Y’s capital a/c
32000
To Z’s capital a/c
8000
(For distribution of profit)
(ii) A’s capital a/c
Dr.
1000
B’s capital a/c
Dr.
1000
To C’s capital a/c
2000
(For deficiency of C)
9.
11. Interest on :Sunny’s capital = 45000
Pinky’s capital = 35000
SOLUTIONS FOR DISSOLUTION OF PARTNERSHIP
Ans 1 Dissolution of firm means closure of partnership between all the partners of the firm. In the
other words it means discontinuing.
According to section 39 of the partnership Act 1932 the dissolution of partnership between all the
partners of a firm is called the dissolution of firm. As said above no business is transacted after
dissolution except the activities related to closing of the firm as the against of the firm are to be
wound up by selling firms assets and paying its liabilities and discharging the claims of the
partners.
Ans. 2.
(1) When a partners become insane
(2) When a partner becomes permanently incapable of performing his duties as a partner.
(3) Admission of a new partner
(4) Retirement of a partner
(5) Death of partner
(6) Insolvency of partner
(7) Completion of the venture, if partnership is formed for that.
Ans.3 There are different ways in which firm can be dissolved.
(1) Dissolution by agreement. Firm may be dissolved with the consent of all partners.
(2) Compulsory dissolution. As stated in the above questions
(3) On the happening of certain contingencies.
a. Expiry of the period for which it was formed.
b. Completion of the venture for which it was formed.
c. On the becoming one partner insolvent
(4) Dissolution by notice.
(5) By order of court.
Ans4. Distinction between dissolution of partnership and dissolution of firm :
Basis
Dissolution of partnership
Dissolution of firm
1. Continuity of
1. The business continue
1. The business is
business
2. Assets are Liabilities
closed.
2. Treatment for assets
are revalued if desired
2. Assets and liabilities
and liabilities
3. It is dissolved by
are to be sold and
3. Court
mutual agreement
paid off.
4. The relationship
3. It can be dissolved by
4. Relationship
among partners
the intervention of
changes.
court.
5. Books
5. The books are not
4. The relationship
closed because
among partners
business continues
comes to an end.
5. The books arre closed
because business is
closed.
Ans5 In the absence of any specific agreement between the partners as to the mode of settlement of account
after dissolution of the partnership firm. The provision of sec.48,49 and 55 shall apply. These are as follow :
1. Losses including deficiencies of capital share be paid first out of profits, next out of capital and lastly is
required by the partners individually in the proportion to which they were entitled to share profits.
2. The assets of the firm, including any sums contributed by the partners to make up deficiency of capital
shall be applied in the following manner and order :
a. In paying the debts of the firm to third parties.
b. In paying to each partner rateably what is due to him from the firm for advances as distinguished
from capital.
c. The residue, if any, would be divided among the partners in the proportion, in which they were
entitled to share profits.
Ans. 6
(a) Partner Loan Appearing on the assets side of the balance sheet : this loan is an assets to the dissolution
firm so it is transferred to the debit of realisation account as other assets are transferred and cash realised
against this is credited to realisation account.
(b) Partner Loan appearing on the Liability side of the balance sheet : this as per sec 48 of the Indian
Partnership Act 1932 will be paid off after paying debts of the firm to the parties.
So partners Loan appearing on assets side is transferred to realisation account partners loan appearing on
the liability side is not transferred to realisation account.
Ans7 Realisation account is an account prepared at the time of dissolution of firm, to record the assets and
liabilities at balance value to record sale disposal or realisation of various assets and payment of liabilities,
find out net or loss on realisation of assets and payment / disposal of liabilities.
Ans8. Difference between Realisation account and revaluation account.
Basis
Revaluation account
Realisation account
Time of
It is prepared when there is
It prepared when there is
preparation
reconstitutions of partnership i.e. new
dissolution of firm.
partner.
Contents
It records the increase or decrease in the It records sale/disposal of
value of assets and Liabilities of the
various assets and disposal of
firm.
liabilities of the firm.
Objectives
Its objects is to ascertain net profit or
Its object is to find out profit
loss on revaluation of assets and
or loss on realisation of assets
liabilities.
and payment / disposal of
liabilities.
Ans. ; 9
Realisation Account
Particulars
Amount Particulars
amount
Building
100000 Creditors
25000
Plant
40000 Outstanding Expenses
5000
Stock
30000 Deep’s capital account
27000
Debtors
45000 Prabhat’s capital account
40000
Prabhat’s capital
25000 Cash
110000
Deep’s capital
5000 Realisation Loss T/F to
cash
7000 Deep’s Capital
27300
Prabhat’s capital
18200
45500
Particulars
To realisation a/c
To realisation A/c
To cash
252500
PARTNER’S CAPITAL ACCOUNT
Deep
Prabhat Particulars
27000
40000 By balance b/d
27300
18200 By Realisation A/c
40700
86800
95000
145000
252500
Deep
90000
5000
prabhat
120000
25000
95000
145000
Particulars
To Balance b/d
CASH ACCOUNT
Amount Particulars
25000 By realisation A/c
110000 Deep’s capital a/c
Prabhat’s capital a/c
Particulars
To Land
To Stock
To Debtors
To Shilpa capital (BANK LOAN)
ToCash (expenses)
To Cash(creditors)
To Profit on realisation
Shilpa
10470
Meena
6980
Nanda
3490
amount
7500
40700
86800
135000
135000
Ans 10.
Rs
Particulars
81000
By Bank Loan
56760
By Creditors
18600
By Provision for doubtful debts
20000
By Shilpa capital( stock)
1200
By Bank(stock)
31000
By Bank (debtors)
By Bank(land)
By Bank(debtors)
Rs
20000
37000
1200
35000
14000
8000
110000
4300
20940
229500
229500
CAPITAL ACCOUNT
Particulars
Shilpa Meena Nanda Particular
Shilpa
meena Nanda
Balance b/d
23000 Balance b/d
80000
40000
General reserve
6000
4000
2000
Realisation a/c
35000
Realisation(Bank)
20000
Profit on
10470
6980
3490
Cash
81470 50980
Realisation
17510
Cash (Nanda)
116470 50980
23000
116470
50980 23000
CASH ACCOUNT
Particulars
Rs Particulars
Rs
Balance b/d
10840 Realisation expenses
1200
Realisation (stock)
14000 Realisation (Cr.)
31000
Realisation (Debtors)
8000 Shilpa Capital
81470
Realisation (Land)
110000 Meena Capital
50980
Realisation (Debtors)
4300
Nanda Capital
17510
164650
164650
Ans. :
11
REALISATION ACCOUNT
Particulars
Rs Particulars
Rs
Debtors
12000 Sundry creditors
27000
Plant
47000 Loan
40000
Stock
42000 Bank
Leasehold Land
60000
Leasehold Land
72000
Furniture
25000
Furniture
22500
Cash Creditors
25500
Stock
40500
Cash (Expenses)
2500
Plant
48000
Cash (Loan)
40000
Debtors
10500 193500
Profit on realisation
Sourav
Utkarsh
particulars
Bank
Particulars
Balance b/d
Realisation (assets)
Ans . 12
Particulars
Building
Machinery
Furniture
Stock
Investment
Debtors
Ashu Capital (Crs.)
Harish Caqpital (B.O.)
Cash (Expenses)
Profit on Realisation
Ashu
Harish
Particulars
Balance b/d
Realisation (debtors)
Harish Capital
3250
3250
6500
260500
PARTNER’S CAPITAL ACCOUNTS
Sourav Utkarsh Particulars
68250
68250
Balance b/d
Reserve Fund
Profit on realisation
260500
Sourav
60000
5000
3250
Utkarsh
60000
5000
3250
68250
68250
68250
BANK ACCOUNT
Rs Particulars
11000 Realisation (Cr)
193500 Realisation ( Exp.)
Realiusation (loan)
Sourav capital
68250
Utkarsh capital
68250
204500
Realisation Account
Rs Particulars
80000 Creditors
70000 Bank overdraft
14000 Ashu Capital (building)
20000 Harish Capital (mach. & furniture)
60000 Bank (Debtors)
48000
Ashu Capital
48000
88000
Harish Capital
32000
50000
3000
68250
Rs
25500
2500
40000
136500
204500
Rs
88000
50000
95000
80000
46000
80000
3600
2400
6000
439000
Cash Account
Rs Particulars
8000 Realisation (Exp.)
46000 Ashu Capital
5600
59600
Partner’s Capital Account
Particulars
Ashu
Harish Particulars
Realisation (Building) 95000
Balance b/d
Realisation
80000
Realisation (Crs)
(machinery)
Realisation (B.O.)
Realisation (stock &
48000
32000
Profit on realisation
investment)
Bank
Bank
56000
199600
112000
439000
Rs
3000
56600
59600
Ashu
108000
88000
Harish
54000
3600
50000
2500
5600
199600
112000
Ans. :13
Particulars
Plant
Debtors
Furniture
Stock
Investment
Bills receivable
Sanjay capital
Cash creditors
Cash (B/P)
Particulars
Loss on
realisation
Bank
Sanjay
30650
Realisation Account
Rs
Particulars
90000
Creditors
60000
Bills payable
32000
Bank :
60000
Plant
72000
70000
Debtors
54000
36000
Furniture 18000
18300
Stock
54000
80000
Investment 76000
30000
B/R
31000
Loss of Realisation
Sanjay
Tarun
Vineet
476300
Capital account
Tarun
Vineet Particulars
Sanjay Tarun
20434
10216
Balance b/d
100000 100000
87650
79566
118300
100000
Particulars
Balance b/d
Realisation (S. Assets)
59784
Realisation
(expenses)
Rs
80000
30000
305000
61300
476300
Vineet
70000
18300
70000
118300 100000
Cash account
Rs Particulars
32000 Realisation (Creditors)
Sanjay Capital
87650
305000 Tarun Capital
79566
Vineet Capital
59784
337000
70000
Rs
80000
227000
337000
Ans :14
Particulars
Sundry Debtors
Stock
Motor Cars
Machinery
Investment
Ixtures
Tanu Capital
Manu capital
Bank (Expenses)
Realisation account
Rs Particulars
55000 Sundry Creditors
75000 Bills Payable
90000 Bills Loan
45000 Tanu Capital (Debtors)
70000 Bank
9000 Manu Capital (machinery)
50000 Tanu Capital (Motor Cars)
30400 Bank :
2200 Investment
76000
Fixtures
4000
Loss on Realisation :
Tanu
23500
Manu
14000
426600
Rs
62000
32000
50000
55000
10000
40000
60000
80000
37600
426600
Partner’s Capital Account
Particulars
Tanu
Manu
Particulars
Tanu
Manu
Realisation
55000
Balance b/d
110000
90000
Realisation (Car)
60000
40000
Reserve Fund
10000
6000
Loss on Realisation 23500
14100
Realisation (Loan)
50000
Bank
31500
72300
Realisation (B/P)
30400
170000
126400
170000
126400
Bank Account
Particulars
Rs Particulars
Rs
Balance b/d
16000 Realisation (expenses)
2200
Realisation
10000
Tanu capital
31500
Realisation (Investment)
76000
Manu capital
72300
103800
Realisation (Fixtures)
4000
106000
106000
Solution :-15
JOURNAL ENTRIES
Date
Particulars
DR. (Rs.)
Cr.(Rs.)
i.
Realisation a/c
Dr.
1,000
To bank
1,000
(being realization expenses paid)
ii. Realisation a/c
Dr.
1,000
To walia’s capital
1,000
(being realisation expenses paid by walia )
iii. Realisation a/c
Dr.
1,000
To walia’s capital
1,000
(being commission allowed to walia for lookin
dissolution affairs)
iv.
Realisation a/c
Dr. 1,000
To walia’s capital
1,000
(realisation expenses to be paid to walia )
v.
Walia’s capital a/c
Dr.
1,200
To bank
1,200
(dissolution expenses paid by firm)
Note :- actual expenses paid by walia will not be recorded in case (4)but are recorded in case (5) because
Expenses are paid by the firms.
Solution:-16
Realisation A/C
Particulars
Amount
Particulars
Amount
To fixed assets
50,000 By provision for bad-debts
500
To joint life policy
10,000 By provident fund
10,000
To debtors
10,000 By JLP reserve
10,000
To stock
8,000 By creditors
18,500
To Y’s capital (creditors)
9,900 By salary o/s
2,000
To bank
19,500 By X’s capital a/c
6,000
Creditors
7,500
(investment)
Salary O/s
2,000
By bank a/c
97,500
Prov. fund
10,000
Fixed assets
70,000
To Y’s capital
1,600 Stock
7,000
(realization expense)
Debtors
9,000
To capital a/c
Debtors (recovered )
200
To profit on realization
28,000 Unrecorded assets
1,300
X2/5
11,200
10,000
Y 2/5
11,200
Z 1/5
5,600
1,45,000
Particulars
To balance
b/d
To
realization
a/c
To bank
X
-
Y
-
6,000
-
49,200
55,200
Particulars
To Balance b/d
To Realization a/c
(assets Realised)
1,45,000
PARTNER’S CAPITAL A/C
Z
Particulars
X
2,000 By balance b/d
40,000
- By reserve
4,000
By realization
56,700
5,600 By realization
By realization
11,200
56,700
7,600
55,200
BANK A/C
Amount
Particulars
33,500 By Realization (liabilities)
97,500 By X’s capital
By Y’s capital
By Z’s capital
1,31,000
Y
30,000
Z
-
4,000
9,900
1,600
11,200
56,700
2,000
5,600
7,600
Amount
19,500
49,200
56,700
5,600
1,31,000
Solution:-17.
Particulars
To interest on capital
X
5,000
Y
4,000
Z
3,000
To profit Trans. to
X
11,200
Y
8,400
Z
8,400
Particulars
To interest on capital
X
5,310
Y
4,120
Z
3,070
To profit Trans. to
X
15,000
Y
11,250
Z
11,250
P &L Appropriation A/c 2007
Amount
Particulars
Amount
40,000
By P& L a/c
12,000
28,000
40,000
P & L Appropriation 2008
Amount
Particulars
By p& l a/c
40,000
Amount
50,000
12,500
37,500
50,000
MEMORANDUM BALANCE SHEET (AS ON 31ST DEC.2008)
Liabilities
Amount
Assets
Creditors
24,000 Sundry assets
Capitals:X
1,16,510
Y
87,770
Z
65,720
2,70,000
50,000
[
2,94,000
amount
2,94,000
2,94,000
Realisation Account
amount
Particulars
Amount
2,94,000 By creditors
24000
24,000 By bank a/c
260000
By loss t f d to capital
X
13600
Y
10200
Z
10200
34000
3,18000
318000
CAPITAL ACCOUNT
Particulars
X
Y
Z
Particulars
X
Y
Z
To Real a/c
13600 10200 10200 By balance b/d
116510 87770
65720
To Cash
102910 77570 55520
116510 87770 65720
116510 87770
65720
CASH A/C
Particulars
Amount
Particulars
Amount
To Realisation
260000
By Realisation
(realized value of assets)
(payment of liabilities)
24000
By X’s capital
102910
By Y’s capital
77570
By Z’s capital
55520
260000
260000
Solution:-17.
P &L Appropriation A/c 2007
Particulars
Amount
Particulars
Amount
To interest on capital
40,000
X
5,000
By P& L a/c
Y
4,000
Z
3,000
12,000
To profit Trans. to
X
11,200
Y
8,400
Z
8,400
28,000
40,000
40,000
P & L Appropriation 2008
Particulars
Amount
Particulars
Amount
To interest on capital
By p& l a/c
50,000
X
5,310
Y
4,120
Z
3,070
12,500
Particulars
To sundry assets
To bank a/c
(payment to creditors )
To profit Trans. to
X
15,000
Y
11,250
Z
11,250
37,500
50,000
50,000
Liabilities
Creditors
Capitals:X
1,16,510
Y
87,770
Z
65,720
MEMORANDUM BALANCE SHEET
AS ON 31ST DEC.2008
Amount
Assets
amount
24,000 Sundry assets
2,94,000
2,70,000
2,94,000
2,94,000
Realization Account
Particulars
amount
Particulars
To sundry assets
2,94,000 By creditors
To bank a/c
24,000 By bank a/c
(payment to creditors )
By loss t f d to capital
X
13600
Y
10200
Z
10200
3,18000
CAPITAL ACCOUNT
Particulars
X
Y
Z
Particulars
X
Y
To Real a/c
13600 10200 10200 By balance b/d
116510 87770
To Cash
102910 77570 55520
116510 87770 65720
116510 87770
CASH A/C
Particulars
Amount
Particulars
To Realisation
260000
By Realisation
(realized value of assets)
(payment of liabilities)
By X’s capital
By Y’s capital
By Z’s capital
260000
Important formulas and / Treatments
1. Interest in capital
Interest on capital is always provided on the opening capitals of the partners.
Interest is allowed Only when there is profit in the firm .
Calculation of Opening Capital
Particulars
X
Y
z
Closing capital
Xxx
Xxx
Xxx
(+)Drawings
Xxx
Xxx
Xxx
(+)Loss during the
Xxx
Xxx
Xxx
year
(-)Profits already
Xxx
Xxx
Xxx
Credited
(-) additional Capital
xxx
xxx
xxx
(if any)
Opening capital
xxx
xxx
xxx
Interest on Capital = Opening Capital X Rate/ 100
2. Interest on Drawings :
=Total Drawings X Rate/100 X Months for interest/12
Amount
24000
260000
34000
318000
Z
65720
65720
Amount
24000
102910
77570
55520
260000
1) Table showing interest on drawings charged under different aspects
Particulars
For 12 months
For 6 months
1.
When fixed amount is withdrawn at 6 ½ months interest
3 ½ months interest
the beginning of each month.
charged
charged
2.
3.
When fixed amount is withdrawn at
the end of each month
When fixed amount is withdrawn at
the middle of each month.
5 ½months interest
charged
6 months interest
charged
2 ½hs interest
months charged.
3 month interest
charged
2)When no date of withdrawal is given in the question –6 months interest is charged
3)Interest on drawings on the basis of quarter / half year end.
a) when fixed amount is withdrawn at the beginning of each quarter—7 ½ months interest charged.
b) when fixed amount is withdrawn at the end of each quarter 4 ½
months interest charged
c)when fixed amount is withdrawn at the middle of each quarter -6 months interest charged .
d) when fixed amount is withdrawn at the end of each half year- 3 months interest charged
4)when unequal /irregular amount is withdrawn on different dates then interest on drawings is
charged by using product method by following ways;
Interest on Drawings = Total of product X Rate/100 X1/12
IMPORTANT FORMATS
(1) Profit and Loss Appropriation Account
For the year ended……………..
Dr.
Cr.
Particulars
Rs.
Particulars
Rs.
To Interest on Capital
By net profit (after interest on partners
To partners salaries
loan
To Partners commission
By interest on Drawings
To Reserve (Transfer from Net profit if
By net divisible loss transferred to
required )
partners capital a/c (bal fig)
To Managers commission (
To net divisible profit transferred to
partners capital a/c(bal fig)
(2) Partners capital account
(a)
When capital accounts are fixed
Dr
Partners capital account
Particulars
A
B
Particulars
To cash/Bank (withdrawal of
By bal b/d (opening bal)
capital)
By Cash/bank(additional
To bal c/d
capital introduced)
Dr
Partners’ Current Account
Particulars
A
B
Particulars
To bal b/d (in case
By bal b/d (in case of credit
of debit opening bal)
opening bal )
To Drawings
By salaries
To interest on
By interest on capital
Drawings
By profit & loss appropriation a/c
To profit & Loss
By commission
appropriation a/c
To bal c/d
Cr
A
B
Cr.
A
B
(b)when Capital account is fluctuating
Dr.
Partners capital account
Particulars
A
B
Particulars
To bal b/d
By bal b/d (in case of credit opening
To drawings
bal)
To interest on drawings
By cash /bank (additional capital
To profit &loss
introduced)
appropriation a/c(loss)
By interest on capital
To bal c/d
By profit &loss appropriation a/c
(profit)
By salaries
By commission
cr
A
B
VALUATION OF GOODWILL
IMPORTANT FORMULAS
1.Average profit method ;
a)Average profit =
Total profit+ abnormal losses- abnormal gains- normal expenses /total number of years
Where abnormal loss—loss of stock by fire/theft.
Abnormal gain= profit on sale assets ,income on investment etc.
Normal expenses= salary (remuneration rent commission insurance premium etc.
b) goodwill=Average profits xNo. Of years purchase
2.Super Profit Method:
a)Average profit= total profit +abnormal losses-abnormal gain – normal expenses/ total no. of years.
b)Normal Profits= capital investment x rate/100
where capital investment/capital employed= Assets- Liabilities
c)Superprofit= Average profit- normal profit
d) goodwill= Super profits X No. of years purchases
3. Capitalisation Method
a)capitalization of average profit method
1)total capitalized value of the firm=
Average profit or Actual profit X100/ Rate of return
2)Net Assets of the firm = Total assets (excluding fictitiou assets and goodwill )-total liabilities
3)Goodwill= Total capitalized value of the firm – Net Assets of the firm
b)capitalization of super profit
1)Average profit= Total profits/ no. of years or given average profit
2)Normal profit = capital employed x rate/100
Where capital investment /capital employed =Total assets- total liabilities
3)super profit=Average profit- Normal profit
4)Goodwill= Superprofit X100/Rate of return
Weighted Average profit method
1)weighted average profit = total product of profit / total weight
2)goodwill= weighted average profit x no. of years purchases
DISSOLUTION OF PARTNERSHIP FIRM
1. SETTLEMENT OF ACCOUNTS (SECTION 48)
A)TREATMENT OF LOSSES
1) firstly paid out of profit.
2)secondly paid out of capital
3)lastly paid by the partners individually in their profit sharing ratio.
2.Application /utilization of assets
1)payment of expenses on dissolution
2)payment of the firms debt to the third parties.
3)payment of partners loan if any advanced by any partner.
4)any balance if any will be distributed among partners in their profit sharing ratio.
IMPORTANT NOTES/ TREATMENTS
Meaning of external / outside liability eg: Creditors, bills payable bank loan ,bank overdraft, outstanding
expenses, employees provident fund, workmens compensation fund
Treatment : Transfer in the Cr.side of realization account and compulsorily paid.
Meaning of internal liabilities/special reserves eg: provision for bad debts ,provision for depreciation ,
investment fluctuation fund ,joint life policy fund.
Treatment: Transfer in the Cr.side of realization a/c only and no payment is to be done.
IMPORTANT FORMATS
Dr.
Realization a/c
cr
Particulars
Rs
Particulars
Rs
To sundry assets a/c
By sundry liabilities
transfer(all the assets except
transfer(all the external
cash in hand and at bank)
/outside liabilities except
reserves and partners loan)
To partners capital a/c
By sundry liabilities transfer
(liabilities taken over by a
(All the internal liabilities)
partner)
By partners capital a/c(assets
To bank a/c(payment of
taken over by a partner)
outside external and
By bank (assets sold
unrecorded liabilities)
/realized)
To bank a/c (realization
By loss on realization (bal
expenses)
fig)
To profit on realization (bal
fig)
Dr.
Partners capital a/c
A B C
Particulars
To realization
a/c(assets taken
over by a partner)
To Realisation
a/c (realization
loss)
To profit &loss
a/c (dr. bal given
in assets side of
balance sheet )
To deferred
revenue
expenditure(given
in the b/s)
To bank a/c
(surplus capital
withdrawn by
partner)(bal fig)
Cr
Particulars
By bal b/d (opening bal )
By realization a/c
By realization a/c (realization
profit )
By general reserve(old ratio)
By profit &loss a/c (cr.bal given
in liabilities side of b/s) (old
ratio)
By workmens compensation
fund (old ratio)
By bank (bal fig) deficiency in
capital brought by a partner )
A
B
C
Dr.
Cash /Bank a/c
Particulars
Rs
To bal b/d (opening bal)
To realization a/c (assets sold
/realized)
To partners capital a/c
(deficiency brought by a partner)
Cr.
Particulars
By realization a/c(liabilities paid
by firm )
By realization a/c (realization
expenses paid by firm)
By partners loan a/c (loan
advanced by a partner)
By partners capital a/c
(surplus withdrawn by a partner )
Rs.
POINTS TO REMEMBER:
1) Make sure that all accounts are closed. NO account should remain opened.
2) If nothing is mentioned about payment of liabilities it is assumed that the amount is fully paid.
3) If nothing is mentioned about realizations of assets, it is assumed that nothing is realized.
4) Goodwill shown in balance sheet is treated like any other asset .
5) In case of unrecorded assets and unrecorded liabilities, only the amount realized and paid is written
in the Realization account.
ADMISSION OF PARTNERSHIP
2007
Q1.Arti and Bharti are partners in a firm sharing profits in 3 : 2 ratio. They admitted Sarthi
as a new partner and the new profit sharing ratio will be 2:1:1. Sarthi brought
Rs. 10,000 for her share of goodwill. Goodwill already appeared in the books of Arti and
Bharti at Rs. 5,000.
Pass necessary journal entries in the books of the new firm for the above transactions. 4
Q2. X and Y were partners in a firm sharing profits in 3 : 1 ratio. They admitted Z as a new
partner for 1/4 share in the profits. Z was to bring Rs. 20,000 as his capital and the
capitals of X and Y were to be adjusted on the basis of Z’s capital in the profit sharing
ratio. The Balance Sheet of X and Y on 31.3.2006 was as follows :
Balance Sheet of X and Y on 31.3.2006
Amount
Assets
Amount
18,000
Cash
5,000
10,000
Debtors
16,000
12,000
Stock
13,000
Machinery
21,000
Building
20,000
35,000
75,000
75,000
Other terms of agreement on Z’s admission were as follows :
(i) Z will bring Rs. 6,000 for his share of goodwill.
(ii) Building will be valued at Rs. 25,000 and machinery at Rs. 19,000.
(iii) A provision at 5% on debtors will be created for bad debts.
(iv) Capital Accounts of X and Y were adjusted by opening Current Accounts.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of X, Y and Z. 8 2008
Q4.
Liabilities
Creditors 1
Bills Payable
General Reserve
Capitals :
X 25,000
Y 10,000
Q5. Q3.A and B are partners in a firm sharing profits in 2 : 1 ratio. They admitted C for 1/4th
share in profits. C was to bring Rs. 30,000 as capital and capitals of A and B were to be
adjusted in the profit sharing ratio on the basis of C’s capital. The Balance Sheet of A
and B as on March 31, 2006 (before C’s admission) was as under :
Liabilities
Amount
Assets
Amount
Rs.
Rs.
Creditors
20,000
Cash
2,000
Bills Payable
19,000
Debtors
50,000
General Reserve
6,000
Stock
10,000
Capitals :
82,000
Machinery
25,000
A 50,000
Building
40,000
B 32,000
1,27,000
1,27,000
Other terms of agreement were as under:
(i) C will bring Rs. 12,000 for his share of goodwill.
(ii) Building was valued at Rs. 45,000 and Machinery at Rs. 23,000.
(iii) A provision of bad debts was created @ 6% on debtors.
(iv) Capital Accounts of A and B were adjusted by opening Current Accounts.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of A, B and C. 8
Q.5
2009
Q.6
2010
Q8.
Q9.
Q.10 X and Y were partners in a firm sharing profits in the ratio of 3 : 2. On 31. 2. 2005 their balance
sheet was as follows:
Liabilities
Amount
Assets
Amounts
Rs.
Rs.
Sundry Creditors
50,000
Land and Building
1,00,000
Bills payable
20,000
Machinery
80,000
Reserve
10,000
Stock
1,00,000
Outstanding Expenses
10,000
Bills Receivable
5,000
Capital account
X
1,80,000
Debtors
40,000
Y
70,000
Cash
15,000
3,40,000
3,40,000
On the above date Z was admitted as a new partner in a firm for ¼ share in the profits on the
following terms:
(i)
Z will bring Rs. 1,20,000 for his capital and Rs. 20,000 for his share as premium for
goodwill.
(ii)
Machinery was to be depreciated by 10% and Land and building was to be appreciated by
Rs. 30,000.
(iii) Stock was overvalued by Rs. 20,000.
(iv)
A provision of 5% was to be created for doubtful debts.
(v)
Salary outstanding was Rs. 5,000.
(vi)
Capital of all partners to be adjusted in new profit sharing ratio; Current Accounts to be
opened for this purpose.
Prepare Revaluation Account, Partner’s capital Accounts and the Balance sheet of the new firm.
2011
Q11.
2012
Q13.
Q15. State the meaning of sacrificing ratio.
1
Q16.
P0INTS TO BE REMEMBERED;
1.ALL LOSSES ON REVALUATION SHOULD BE RECORDED IN THE DEBIT SIDE AND ALL
LOSSES SHOULD BE RECORDED IN THE CREDIT SIDE OF THE REVALUATION ACCOUNT.
REVALUATION ACCOUNT
Dr
PARTICULAR
AMOUNT
ALL LOSSES ON
REVALUATION(increase
in assets &decrease in
liabilities)
-
PARTICULAR
Cr.
AMOUNT
ALL PROFITS ON
REVALUATION(decrease
in assets &increase in
liabilities)
-
2.RESERVES,P/L ACCOUNT,EXISTING GOODWILL ARE DISTRRIBUTED AMONG OLD
PRTNERS IN THEIR OLD RATIO BY TRANSFERRING THEIR BALANCE IN OPPOSITE
DIRECTION.
3. ASSETS & LIABILITIES GIVEN IN BALANCE SHEET ARE PRESENTED IN NEW BALANCE
SHEET BY MODIFYING THEIR OLD VALUE.
4.Formula;
SACRIFICING RATIO=OLD RATIO-NEW RATIO.
NEW RATIO=OLD RATIO-SACRIFICE.
MARKING SCHEME
ANS.1. SAC.RATIO=OLD RATIO-NEW RATIO
ANITAs =3/5-2/4=2/20
Bharti=2/5-1/4=3/20
S.R=2;3
(2 MARKS)
1CASH A/C
DR
10,000
TO PREMIUM
10,000
2 PREMIUM
DR.10,000
TO ARTI
4,000
TO BHARTI
6,000
3. ARTI
DR
3,000
BHARTI
DR
2,000
TO GOODWILL
5,000
(2MARKS)
ANS.2
REVALUATION ACCOUNT
DR
REVLUATION A/C
PARTICULAR
AMOUNT
PARTICULAR
MACHINE
2,000 BUILDING
PRO.FOR B.D.D
800
PARTNERS CAPITAL;
X;1650
Y;550
2200
5,000
CAPITAL ADJUSTMENT;
Z BRINGS 20,000 FOR 1//4 SHARE
THEREFORE TOTAL CAPITAL=20,000X4=80,000
LESS; X CAPITAL
20,000
COMBINED CAPITAL
60,000
X CAPITAL=60,000X3/4=45,000
Y CAPITAL=60,000X1/4=15,000
Partners
capital
CR
AMOUNT
5,000
5,000
PARTICULAR
current a/c
BALANCE C/D
a//c
Y
X
4850
45,000
45,000
BALANCESHEET
LIABILITIES
CREDITORS
B/P
CAPITAL;
X;45,000
Y;15,000
Z;20,000
CURRENT A/C;
X;4850
Y;50
50
15,000
15,050
AMOUNT
18,000
10,000
80,000
Z
PARTICULAR
BALANCE B/D
CASH
GEN,RES.
REVALUATION
PREMIUM
20,000
20,000
45,000
ASSETS
CASH
DEBTORS;16,000
PRO;800
STOCK
BUILDING
MACHINERY;21,000
LESS;2,000
50
1,08,050
X
Y
Z
25,000 10,000
20,000
9,000
3,000
1650
550
4,500
1,500
15050
20,000
AMOUNT
31,000
15,200
13,000
25,000
19,000
4,850
1,08,050
(2+3+3=8 MARKS)
(ANS3. (1) TO DISTRIBUTE PROFITS/LOSS ON REVALUATION AMONG OLD PARTNERS.
2. TO ASCERTAIN TRUE VALUE OF ASSETS. (1 MARKS EACH)
ANS 4.
REVLUATION A/C
PARTICULAR
AMOUNT
PARTICULAR
AMOUNT
MACHINE
8,000 BUILDING
30,000
PRO.FOR B.D.D
2000
STOCK
20,000
OUT.SALARY
5,000
PARTNERS CAPITAL;
X;3,000
Y;2,000
5,000
35,000
PARTICULAR
PARTNERSCAPITALA/C
X
Y
Z
35,000
PARTICULAR
BALANCE B/D
CASH
GEN,RES.
REVALUATION
PREMIUM
X
Y
Z
1,80,000
70,000
1,20,000
6,000
4,000
3000
2000
12,000
8,000
BALANCE C/D
BALANCE SHEET
LIABILITIES
CREDITORS
B/P
CAPITAL;
X;216000
Y;144,000
Z;120,000
OUT.SALARY
2,16,000
1,44,000 1,20,000 current a/c
2,16,000
1,44,000 1,20,000
AMOUNT
50,000
20,000
4,80,000
5000
555000
(2+3+3=8 MARKS)
ANS.5
SAC.RATIO=OLD RATIO-NEW RATIO
L =4/7-3/10=19/70
Y=3/7-3/10=9/70
S.R=19;9
(2 MARKS)
Os G/W=70000X4/10=28000 (2 MARKS)
1CASH A/C
DR
28,000
TO PREMIUM
28,000
2 PREMIUM
DR.28,000
TO X
19,000
TO Y
9,000
ANS.6.
NEW RATIO=OLD RATIO-SACRIFICE.
A=5/9-(1/2X1/10)=91/180
B=4/9-(1/2X1/10)=71/180
ASSETS
CASH
DEBTORS;40,000
PRO;2000
STOCK
BUILDING
MACHINERY;80,000
LESS;8,000
BR
CURRENT A/C;
X;15000
Y;60000
15,000
60,000
2,16,000 1,44,000 1,20,000
AMOUNT
1,55,000
38,000
80,000
1,30,000
72,000
5,000
75000
5,55,000
(2MARKS)
NEW RATIO=91;71
ANS.7
REVLUATION A/C
PARTICULAR
PRO.FOR LEGAL CLAIM
PRO.FOR B.D.D
STOCK
PARTNERS CAPITAL;
JAIN;3300
GUPTA;2200
PARTN
ERS
AMOU PARTICULA
NT
R
1,800 BUILDING
700
6,000
5,500
14,000
AMOU
NT
14,000
14,000
CAPIT
AL A/C
PARTIC JAI
ULAR
N
GU MIS
PTA HRA
PARTIC
ULAR
BALAN
CE B/D
JAI GU MIS
N
PTA HRA
70, 60,0
000
00
53,5
CASH
00
GEN,RE
9,0 6,00
S.
00
0
REVALU 330 220
ATION
0
0
PREMIU
6,0 4,00
M
00
0
BALAN
CE C/D
88, 72,2 53,5
300
00
00
88, 72,2 53,5
88, 72,2 53,5
300
00
00
300
00
00
CAPITAL ADJUSTMENT;
COMBINED CAPITAL=
88,300 +72,200=
160500
COMBINEDSHARE=1-1/4
=3/4
TOTAL
CAPITAL=160500X4/3=214000
MISHRA s
CAPITAL=214000X1/4=53500
BALANCE SHEET
LIABILITIES
AMOUNT
ASSETS
CREDITORS
20,000
CASH
BOD
17,000
DEBTORS;20500
CAPITAL;
PRO;1000
JAIN;88300
STOCK
GUPTA;72200
BUILDING
MISHRA;53500
2,14,000
MACHINERY
OUT.LEGAL CLAIM
1800
B/P
3,000
MOTOR
2,55,800
(2+3+3=8 MARKS)
AMOUNT
78,300
19,500
14,000
84,000
40,000
20,000
2,55,800
ANS.8
RESERVES & SURPLUS ARE PART OF PAST PROFIT WHICH BELONGS TO OLD
PARTNERS,WHICH CAN NOT BE SHARED WITH NEW PARTNER OR IN PROFIT SHARING
RATIO.
ANS.9
EFFICIENCY OF MANAGEMENT LEADS TO HIGHER PRODUCTIVITY & HIGHER PROFIT
WHICH RESULTS IN INCREASED GOODWILL.
ANS.10
REVLUATION A/C
PARTICULAR
MACHINE
PRO.FOR B.D.D
STOCK
OUT.SALARY
AMOUNT
8,000
2000
20,000
5,000
PARTICULAR
BUILDING
AMOUNT
30,000
PARTNERS CAPITAL;
X;3000
Y;2000
30,000
CAPITAL ADJUSTMENT;
Z BRINGS 120,000 FOR 1//4 SHARE
THEREFORE TOTAL CAPITAL=120,000X4=480,000
LESS; X CAPITAL
120,000
COMBINED CAPITAL
3 60,000
X CAPITAL=360,000X3/5=216,000
Y CAPITAL=360,000X2/5=144,000
PARTNERS
CAPITAL A/C
PARTICULAR
X
Y
Z
PARTICULAR
REVALUATION
3000
2000
BALANCE B/D
CASH
GEN,RES.
REVALUATION
PREMIUM
BALANCE C/D
BALANCE SHEET
LIABILITIES
CREDITORS
BOD
CAPITAL;
X;216000
Y;144000
Z;120000
OUT.EXP.
2,16,00
0
2,19,00
0
1,44,00
0
1,46,00
0
AMOUNT
50,000
20,000
4,80,000
15000
5,65,000
(2+3+3=8 MARKS)
Q.11
REVLUATION A/C
PARTICULAR
STOCK
PRO.FOR B.D.D
5,000
30,000
X
Y
Z
1,80,00
0
70,000
1,20,00
0
6,000
4,000
3300
2200
12,000
8,000
1,20,00
0
1,20,00
0
ASSETS
CASH
DEBTORS;40000
PRO;2000
STOCK
BUILDING
MACHINERY
B/R
CURRENT A/C;X
Y
21000
2,19,00
0
64000
1,46,00
0
AMOUNT
1,55,000
38,000
80,000
1,30,000
72,000
5,000
21,000
64,000
5,65,000
AMOUNT
PARTICULAR
5,000 MACHINE
300
PARTNERS CAPITAL;
AMOUNT
5,000
1,20,00
0
W;180
R;120
5,300
B BRINGS 30,000 FOR 4/15 SHARE
THEREFORE TOTAL CAPITAL=30,000X15/4=112500
LESS; X CAPITAL
30,000
COMBINED CAPITAL
82500
X CAPITAL=82500X3/5=49500
Y CAPITAL=82500X2/5=33000
PARTNERS
CAPITAL A/C
PARTICULAR
X
Y
Z
PARTICULAR
REVALUATION
180
120
BALANCE B/D
CASH
P/L A/C
BALANCE C/D
BALANCE SHEET
LIABILITIES
CREDITORS
CAPITAL;
W;49500
R'33000
B;30000
CURRENT A/C;W
R;
5920
49,500
55,600
7280
33,000
40,400
AMOUNT
20,000
1,12,500
5920
7,280
PREMIUM
30,000
30,000
ASSETS
CASH
DEBTORS;20000
PRO;1000
STOCK
PATENTS
MACHINERY
B/R
300
5,300
X
Y
Z
40,000 30,000
30,000
9,000
6,000
6,600
4,400
55,600
40,400
30,000
AMOUNT
46,000
19,000
20,000
20,700
35,000
5,000
1,45,700
1,45,700
(2+3+3=8 MARKS)
Q.12
NEW PARTNER CONTRIBUTES GOODWILL AT THE TIME ADMISSION BECAUSE HE
ACQUIRES SHARE OF PROFIT OF OLD PARTNERS. IT IS A WAY OF COMPENSATION.
Q.13
REVLUATION A/C
PARTICULAR
AMOUNT
PARTICULAR
AMOUNT
PARTNERS CAPITAL;
D;17100
LAND
20000
E;5700
PRO.B.D
800
CREDITORS
2000
22,800
27,800
27,800
PARTNERS
CAPITAL A/C
PARTICULAR
CURRENT A/C
BALANCE C/D
D
E
55600
90,000
1,45,60
0
F
55200
30,000
85,200
PARTICULAR
BALANCE B/D
CASH
GEN.RES.
REVALUATION
40,000 PREMIUM
40,000
D
E
F
1,00,00
0 70,000
40,000
24,000
8,000
17100
5700
4,500
1,500
1,45,60
0
80,000
85,200
40,000
BALANCE
SHEET
LIABILITIES
CREDITORS
CAPITAL;
D;90000
E;30000
F;40000
CURRENT A/C;D
E;
AMOUNT
52,000
1,60,000
55600
55,200
3,22,800
ASSETS
CASH
DEBTORS;40000
PRO;2200
STOCK
INVESTMENT
MACHINERY
LAND
AMOUN
T
90,000
37,800
15,000
50,000
60,000
70,000
3,22,800
(2+3+3=8 MARKS)
Q.14SACRIFICING RATIO IS THAT RATIO IN WHICH OLD PARTNERS SACRIFICE THEIR
SHARE IN FAVOUR OF NEW/OTHER PARTNERS.
Q15.
SACRIFICING RATIO IS APPLICABLE AT THE TIME OF ADMISSION WHEREAS GAINING
RATIO IS APPLICABLE AT THE TIME OF RETIREMENT
Retirment & Death of a Partner (Mrs. Anita Darfade)
2007(CBSE BOARD QUESTIONS YEAR WISE)
Q1. A, B and C were partners in a firm sharing profits in proportion of their capitals. On 31.3.2006 their
Balance Sheet was as follows :
Balance Sheet of A, B and C as on 31.3.2006
Liabilities Amount
Assets Amount
Rs. Rs.
Creditors
16,000
Building 1,40,000
Reserve
12,000
Machinery 60,000
Capitals :
Stock
8,000
A 40,000
Debtors
12,000
B 60,000
Cash
8,000
C 1,00,000
2,00,000
2,28,000
2,28,000
B died on 30.6.2006. Under the partnership agreement the executors of a deceased
partner were entitled to :
(i) Amount standing to the credit of partner’s capital account.
(ii) Interest on capital at 12% per annum.
(iii) Share of goodwill. The goodwill of the firm on B’s death was valued at Rs. 2,40,000.
(iv) Share of profit from the closing of last financial year to the date of death on the
basis of last year’s profit. Profit for the year ended 31.3.2006 was Rs. 15,000.
Prepare B’s Capital Account to be rendered to his executors. 6
Q2.Vijay, Vivek and Vinay were partners in a firm sharing profits in 2 : 2 : 1 ratio. On
31.3.2006 Vivek retired from the firm. Qn the date of Vivek’s retirement the Balance
Sheet of the firm was as follows :
Balance Sheet of Vijay, Vivek and Vinay as on 31.3.2006
Liabilities
Amount
Assets
Amount
Rs. Rs.
Creditors
54,000
Bank
55,200
Bills Payable
24,000
Debtors
12,000
Outstanding Rent
4,400
Less Provision for
doubtful debts
800
11,200
Provision for legal claims 12,000
Stock
18,000
Capitals :
Furniture
8,000
Vijay 92,000
Premises
1,94,000
Vivek 60,000
Vinay 40,000
1,92,000
2,86,400
2,86,400
On Vivek’s retirement it was agreed that :
(i) Premises will be appreciated by 5% and furniture will be appreciated by Rs. 2,000.
Stock will be depreciated by 10%.
(ii) Provision for bad debts was to be made at 5% on debtors and provision for legal
damages to be made for Rs. 14,400.
(iii) Goodwill of the firm was valued at Rs. 48,000.
(iv) Rs. 50,000 from Vivek’s Capital Account will be transferred to his loan account and
the balance will be paid by cheque.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of Vijay
and Vinay after Vivek’s retirement. 8
Q3.Following is the Balance Sheet of P, K and B as on 31.3.2006. They shared profits in the
ratio of their capitals.
Liabilities
Amount
Assets
Amount
Rs. Rs.
Creditors
4,600
Building
23,000
Reserve
5,400
Machinery
13,000
Capitals :
Stock
4,700
P 24,000
Debtors
6,500
K 12,000
Cash
6,400
B 8,000
44,000
54,000
54,000
P died on 30.6.2006. Under the terms of partnership the executors of a deceased
partner were entitled to :
(i) Amount standing to the credit of the Partner’s Capital Account.
(ii) Interest on capital at 12% per annum.
(iii) Share of goodwill of the firm which was valued at Rs. 36,000 on P’s death.
(iv) Share of profit from the closing of last financial year to the date of death on the
basis of last year’s profit. Profit for the year ended 31.3.2006 was Rs. 7,000.
Prepare P’s Capital Account to be rendered to his executors.
Q4.P, Q and R were partners in a firm sharing profits in the ratio of 3 : 2 : 1. On
31.3.2006 Q retired from the firm. On the date of Q’s retirement the Balance Sheet of
the firm was as follows :
of P, Q and R as on 31.3.2006
Liabilities
AmountBalance SheetAssets
Amount
Creditors
27,000
Bills Payable 12,000
Outstanding Rent 2,200
Provision for
legal claims 6,000
Capitals :
P 46,000
Q 30,000
R 20,000
96,000
1,43,200
Bank
27,600
Debtors
6,000
Less Provision for doubtful debts 400 5,600
Stock
Furniture
Premises
9,000
4,100
96,900
1,43,200
On Q’s retirement it was agreed that :
(i) Premises will be appreciated by 2% and furniture will be appreciated by Rs. 1,700.
Stock will be depreciated by 10%.
(ii) 5% provision for doubtful debts was to be made on debtors and Rs. 7,200 for legal
damages.
(iii) Goodwill of the firm was valued at Rs. 24,000.
(iv) Rs. 20,000 from Q’s Capital Account will be transferred to his loan account and the
balance will be paid to him by cheque.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of P and R
after Q’s retirement. 8
Q 5.
2009
Q6.
Q7.
2010
Q8.
Q9.
Q10.
2012
Q11.
Q12.
Q13.
Q14.
Q15.
Q17.
Q18.
Q19.
`
--------------------------------------------------------Marking Scheme-----------------------------------------------------------Ans 1 . B’s Executors A/c – 1,38,525
Interest on capital – 1800
Goodwill – A’s cap. A/c Dr. 20,571
C’s cap. A/c Dr. 51,429
P/L Suspense A/c - 1125
Reserver – 3600
Ans 2. Revaluation Loss – 4300 (Vijay 1720, Vivek -1720, Vinak – 860)
Capital A/c (vijay – 77480, Vinay – 32740 )
Vivek loan A/c 50,000 , Amount paid to Vivek -27480
Total of Balance sheet – 2.69,020
Ans 3. P’s Executors A/c – 48,256
Ans 4. Revaluation loss – 4,362 ( P – 2,181, Q 1,454, R – 727)
P’s loan A/c – 20,000, Amount paid to P by Cheque – 16,546
Capital Balance P- 37,189 , R- 17,273
Balance sheet Total – 1,29,492
Bank Balance – 11,054
Ans 5. Revaluation loss – 16,800 (R- 6720 , S - 6720, T – 3360)
S’s Loan A/c – 33600
Capital Balance – R – 73,680 T – 36,840
Total of Balance sheet – 1,81,920
Ans 6. 1 . Dr. Z’s Capital A/c ; Cr. Z’s Executors A/c by Rs. 80,250
2. Dr. Z’s Executors A/c ; Cr. Bank A/c by Rs. 80250
Ans 7. Revaluation profit 3,000 (A – 1500 , B – 1000 , C – 500)
Partners balance profit ( A- 90,000, C – 30,000) B’s loan A/c 66,0000 (Deficit brought in cash A- 4500 , C1500 )
Balance sheet 2,02,800
Ans 8 . C’s share of Goodwill = 24,000
Gaining ratio 5: (-1)
A’s Capital A/c Dr. 30,000
To Capitak A/c Dr. 6000
To C’s Capital A/c Dr. 24,000
Ans 9. By Cash 12,500
To Cash 10,500
Ans 10. To N’s Executors A/c 1,52,743
Ans 11. 1. Goodwill A/c Dr.
1,80,000
To Ram
90,0000
To Laxman
60.000
To Bharat
30,000
2. Ram A/c Dr.
Bharat A/c Dr.
42,000
42,000
To Laxman’s A/c
84,000
3. P/L Suspence A/c Dr. 1,20,000
To Ram A/c
60,000
To Bharat A/c
60,000
Ans 12. Revaluation profit 3500
Capital A/c
Balance sheet
Ans 13. At the time of retirement of a partner he is entitled to get his share of goodwill of the firm.
Ans 14. A firm can be reconstituted in the following two cases
1. Admission of a partner
2. Retirement of a partner
Ans 15. Goodwill 50,000
Goodwill A/c Dr.
75,000
To Arjuns’s Capital A/c
42,000
To Bhim Capital A/c
15,000
To Nakul Capital A/c
18,000
(old Goodwill written off in old ratio)
P/L A/c Dr.
To Arjun’s Capital A/c
To Nakul Capital A/c
(Profit shared by A and N in new profit sharing ratio )
Ans 16.
Ans. 17.(1) Goodwill A/c Dr.
4,50,000
To A’s Capital A/c
1,35,000
To B’s Capital A/c
1,35,000
To C’s Capital A/c
90,000
To D’s capital A/c
90,000
(2) A’s Capital A/c Dr 1,20,000
B’s Capital A/c Dr.
20,000
To C’s Capital A/c
1,20,000
To D’s Capital A/c
20,000
(3) P/L Suspense A/c
Dr. 1,20,000
To A’s Capital A/c
6,00,000
To B’s capital A/c
4,00,000
To C’s Capital A/c
2,00,000
(1 Mark for each entry and 1 mark for working notes)
POINTS TO BE REMEMBER:
Meaning of the retirement of a partner
A partner may wish to withdraw from a firm for various reasons like old age. Change of residence, on
health ground misunderstanding with other partners or nay other reason. Such a situation is called
retirement of a partner.
1. Calculation of Amount due to retiring partner
The amount due to a retiring partner will be the total of:
1. His capital in the firm.
2. His share in firm’s undistributed profits or losses.
3. His share of profit or loss on revaluation of assets and liabilities.
4. His share of profit till the date of retirement (if any).
5. His salary or interest on capital or interest on drawings if any tills the date of retirement.
6. His share in firm’s goodwill.
7. His drawing till the date of retirement.
2. Adjustments at the time of retirement of a partner
On the retirement of a partner, various accounting adjustments are to be done to calculate the current
account payable retiring partner which is as follow:
1. New profit sharing ratio of continuing (remaining) partner.
2. Gaining ration of continuing (remaining) partner.
3. Accounting treatment of goodwill.
4. Accounting treatment for revaluation of assets and liabilities.
5. Accounting treatment of accumulated profits (or reserves ) and liabilities.
6. Accounting treatment of Joint Life Policy.
7. Settlement of the Amount due to the Retirement Partner.
8. Adjustment of Partner’s Capital ion New Profit Sharing Ration.
3. New profit sharing ratio of continuing (Remaining) partners .
Meaning: The new profit sharing ratio in which the continuing (remaining) partners will share future profit
after outgoing (retiring) partner leaves the firm.
Formula: New share = Old share + Acquired Gaining Share
4. Gaining ratio of continuing (Remaining ) partners
Meaning: The ratio in which the continuing (remaining) partner has acquired the share from the outgoing
partner is called as gaining ratio (or benefit ratio).
Formula: Gaining Ratio = New Ratio – Old Ratio
5. Accounting Treatment of Goodwill
Retiring partner along with his share in the profit or losses entitled to his share of goodwill of the firm.
Retiring partner’s share of goodwill is calculated as follows:
Value of firm’s goodwill X Share of profit scarifies
Journal entry:
Continuing Partner’s Capital/Current A/cs
(In gaining ratio)
To Retiring Partner’s Capital/Current A/cs
(Share of goodwill)
Note:
1. If goodwill account already appears in the old balance sheet, it is to be written off by making the following
entry:
All Partner’s Capital/ Current A/cs
Dr.
To Goodwill account
(For existing goodwill off in old ratio)
2. If any of the remaining partner sacrifice / or gain in the profits of the firm on the retirement of partner, the
following entry should be recorded:
Continuing Partners Capital/ Current A/cs
Dr. (Who have gained)
To Retiring Partner’s Capital A/c
(Who have sacrificed)
To Continuing Partner’s Capital A/c
(Who have sacrificed)
Format of Revaluation Account
Particulars
To Decrease in the value of assets
To increase in the value of Liabilities
To increase in the provisions
To unrecorded Liabilities
To Profit on revaluation transferred
to
Old Partners Capital A/cs (in old
ratio)
Amount
-------------------
Particulars
By increase in the value of Assets
By Decrease in the value of Liabilities
By Decrease in the provisions
By Unrecorded Assets
By Loss on revaluation transferred to
Old Partners Capital A/cs (in old
ratio)
Amount
-------------------
Death of a Partner
1. Calculation of share of profit upto Date of Death
Following are the two Methods:
1. On the basis of time
a. On the basis of last year profit
b. On the basis of average profit
Formula: Decreased partner’s share of the profit
= Privious year’s of profit or Average profit X Time till death/12 or 365 X Deceased partner’s
proportion of profit
2. On the basis of turnover (or sales)
Formula : Decreased partner’s share of profit = Last Year profit/ Last year sale X sale till death X
Deceased partner’s profit share
2. Accounting Treatment of goodwill
3. Assertainment of the amount due ti the Deceased Partner
The share of the deceased partner can be ascertained by preparing his capital account.
Dr.
To undistributed losses
Deceased Partner’s Capital A/c
Rs.
By Balance B/D
Cr.
Rs.
-
To revaluation A/c
To Goodwill A/c written off
To Drawing A/c
To intrest on Drawing A/c
To P/L suspense A/c
To Deceased partner’s Executor’s A/c
-
By Interest on capital A/c
By salary and commission A/c
By undistributed profits
By Revaluation A/c
By Gaining partner/s capital A/c
By joint life policy A/c
By P/L suspense A/c
-
-
4. Settlement of deceased Partners Executors A/c
The amount due to executor of deceased partner is either paid off immediately with or without
interest as per agreement.
1. If amount is paid in cash
Deceased partner’s executor’s A/c
Dr.
To Cash / Bank A/c
2. When the settlement is made in installments –
a. For interest dueInterest on deceased partner’s executor’s A/c
Dr.
To Deceased partner’s executor’s A/c
b. For payment of installment with interest
Deceased partner’s executor’s A/c
To cash/ bank A/c
Dr.
Accounting for Company
BASIC THEORY
Company
“A company is an artificial person created by law, having separate entity with a perpetual succession and a
common seal.”
- Prof. Haney
Features of a Company
(1) Voluntary Association,
(2) Separate Legal Entity,
(3) Limited Liability,
(4) Perpetual Succession,
(5) Common Seal,
(6) Transferability of Shares,
(7) May Sue or be Sue
Kinds of a Company
(A) On the basis of liability of its members
(a) Companies Limited by Shares
(b) Companies Limited by Guarantee (c) Unlimited Companies
(B) On the basis of the number of members
(a) Public Company
(b) Private Company
Capital of Company
A company usually raises its capital in the form of shares (called share capital) and debentures (debt
capital.) This chapter deals with the accounting for share capital of companies.
A company, being an artificial person, cannot generate its own capital which has necessarily to be collected
from several persons. These persons are known as shareholders and the amount contributed by them is
called share capital. Since the number of shareholders is very large, a separate capital account cannot be
opened for each one of them. Hence, innumerable streams of capital contribution merge their identities in a
common capital account called as ‘Share Capital Account’.
Categories of Share Capital
Authorized Capital:
Authorized capital is the amount of share capital which a company is authorised to issue by its
Memorandum of Association. The company cannot raise more than the amount of capital as specified in
the Memorandum of Association. It is also called Nominal or Registered capital. The authorised capital can
be increased or decreased as per the procedure laid down in the Companies Act.
Issued Capital
It is that part of the authorized capital which is actually issued to the public for subscription including the
shares allotted to vendors and the signatories to the company’s memorandum.
Subscribed Capital
It is that part of the issued capital which has been actually subscribed by the public.
Called-up Capital
It is that part of the subscribed capital which has been called up on the shares.
Paid-up Capital
It is that portion of the called up capital which has been actually received from the shareholders.
Uncalled Capital
That portion of the subscribed capital which has not yet been called-up.
Reserve Capital
A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the
company. Such uncalled amount is called ‘Reserve capital’ of the company.
* Capital Reserve
Any reserve which is created out of Capital Profits and not readily available for distribution as dividend
among the shareholders is called Capital Reserve.
Calls-in-Arrear
Calls-in-Arrear is that part of the called-up Share Capital that remains unpaid by the subscribers.
Calls-in-Advance
Sometimes some shareholders pay a part or the whole of the amount of the calls not yet made. The amount
so received from the shareholders is known as “Calls in Advance”.
Nature and Classes of Shares
Preference Shares:
According to Section 85 of The Companies Act, 1956, a preference share is one, which fulfils the
following conditions :
a) That it carries a preferential right to dividend to be paid as a fixed amount payable to preference
shareholders before any dividend is paid to the equity shareholders.
b) That with respect to capital it carries or will carry, on the winding-up of the company, the preferential
right to the repayment of capital before anything is paid to equity shareholders.
Equity Shares
According to Section 85 of The Companies Act, 1956, an equity share is a share which is not a preference
share. In other words, shares which do not enjoy any preferential right in the payment of dividend or
repayment of capital, are termed as equity shares. The equity shareholders are entitled to share the
distributable profits of the company after satisfying the dividend rights of the preference share holders. The
dividend on equity shares is not fixed and it may vary from year to year depending upon the amount of
profits available for distribution. The equity share capital may be (i) with voting rights; or (ii) with
differential rights as to voting, dividend or otherwise in accordance with such rules and subject to such
conditions as may be prescribed.
Minimum Subscription
It means the minimum amount that, in the opinion of directors, must be raised to meet the needs of
business operations of the company relating to:·(a) the price of any property purchased, or to be purchased,
which has to be met wholly or partly out of the proceeds of issue; (b) preliminary expenses payable by the
company and any commission payable in connection with the issue of shares; (c) the repayment of any
money borrowed by the company for the above two matters; (d) working capital; and (e) any other
expenditure required for the usual conduct of business operations.
It is to be noted that ‘minimum subscription’ of capital cannot be less than 90% of the issued number
of shares according to SEBI (Disclosure and Investor Protection) Guidelines, 2000 [6.3.8.1 and 6.3.8.2].
If this condition is not satisfied, the company shall forthwith refund the entire subscription amount
received. If a delay occurs beyond 8 days from the date of closure of subscription list, the company shall be
liable to pay the amount with interest at the rate of 15% [Section 73(2)].
Issue of Shares:
Issue of shares at Par: When shares are issued at its face value, then it is known as issue of shares at Par.
For example: 1,000 shares of Rs. 100 are issued at par.
Issue of shares at Premium: When shares are issued at a value more than its face value, then it is known
as issue of shares at Premium. For example: 1,000 shares of Rs. 100 are issued at Rs. 120.
Utilization of Security Premium (Reserve):
Provision of Sec 77A – in purchasing of its own shares.
Provisions of Sec 78 – (1) issuing fully paid bonus shares to the members.
(2) writing off preliminary expenses of the company
(3) writing off preliminary expenses of the company
(4) writing off the expenses incurred / commission paid / discount allowed on any
issue of securities or debentures of the company.
(5) Providing the premium payable on the redemption of any redeemable pref.
share or debentures of the company.
Issue of shares at Discount: When shares are issued at a value less than its face value, then it is known as
issue of shares at Premium. For example: 1,000 shares of Rs. 100 are issued at Rs. 90.
Provisions of Sec. 79: Conditions for issue of shares at discount:
(a) The issue of shares at a discount is authorised by an ordinary resolution passed by the company at its
general meeting and sanctioned by the Company Law Board now Central Government.
(b) The resolution must specify the maximum rate of discount at which the shares are to be issued but the
rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be
more than 10 per cent if the Government is convinced that a higher rate is called-for under special
circumstances of a case.
(c) At least one year must have elapse since the date on which the company became entitled to commence
the business.
(d) The shares are of a class which has already been issued.
(e) The shares should be issued within two months from the date of receiving sanction for the same from
the Government or within such extended period as the Government may allow.
(f) If the offer prospectus at the date of issue must mention particulars of the discount allowed on the issue
of shares. Whenever shares are issued at a discount, the amount of discount is brought into the books at the
time of allotment by debiting an account called ‘Discount on the Issue of Shares Account’.
Oversubscription:
Preferential Allotment of shares:
When a listed company doesn't want to go for further public issue and the objective is to
raise huge capital by issuing bulk of shares to selected group of people, preferential allotment is a good
option. A preferential allotment means allotment of shares at predetermined price to the predetermined
people who are interested in taking a strategic stake in the company such as promoters, venture capitalists,
financial institutions, buyers of company’s products or its suppliers.
Private placement of shares:
A private placement is an issue of shares or of convertible securities by a company to a select group of
persons under Section 81 of the Companies Act, 1956, which is neither a rights issue nor a public issue.
This is a faster way for a company to raise equity capital.
Right Issue:
The existing shareholders, under Section 81 of the Companies Act, have a right to subscribe to fresh issue
of share capital made by the company in proportion to their existing shareholding. They may subscribe to
the offer in full or in part or may reject it or may renounce the right.
Sweat Equity:
Sweat equity shares are equity shares issued by a company to its employees or directors at a discount, or as
a consideration for providing know-how or a similar value to the company.
A company may issue sweat equity shares of a class of shares already issued if these conditions are met:
The issue of sweat equity shares should be authorized by a special resolution passed by the company in a
general meeting The resolution should specify the number of shares, current market price, consideration, if
any, and the section of directors /employees to whom they are to be issued As on the date of issue, a year
should have elapsed since the company was entitled to commence business.
Employee Stock Option Scheme:
Employee Stock Option Scheme means the option given to the Whole Time Directors, Officers and
Employees of the Company which gives them a right or benefit to purchase or subscribe the securities
offered
by
the
Company
at
a
predetermined
price
at
a
future
date.
Eligibility to participate in ESOS:- Option shall be granted only to the eligible permanent employees of
the Company subject to the following:- An employee who is a promoter or belongs to the promoter group
shall not be eligible to participate in the ESOS. A director who either by himself or through his relative or
through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of
the company shall not be eligible to participate in the ESOS.
Employee Stock Purchase Scheme:
Employee Stock Purchases Scheme means a scheme under which a company offers shares to its employees
as part of public issue or otherwise.
In respect of shares issued under Employees Stock Purchase Scheme during any accounting period, the
following Journal entry is passed:
Cash/Bank A/c
Dr.
(Issue Price x No. of shares)
Employees Compensation Expense A/c
Dr.
(Accounting value of option
To Share Capital A/c
(No. of shares x face value)
To Security Premium (Res.) A/c
[No. of shares x (Market Price – face value)]
Example:
On 1st June, 2012, Tata Power Ltd. issued 500 shares under ESPS @ Rs. 40 when the market price was Rs.
100. Record the Journal entry assuming that nominal value of a share is Rs. 10.
Amount
Amount
Date
Particular
LF Dr.
Cr.
Cash/Bank
A/c
Dr.
20,000
Employees Compensation Expense A/c
Dr.
30,000
To Share Capital A/c
5000
To Security Premium (Res.) A/c
45000
(Being issue of 500 shares of Rs. 10 under
ESPS at a price of Rs. 40 each when market
price is Rs. 100)
Buy-Back of Shares:
Buy-Back of Shares means purchasing of own shares by the company, sources of Funds for Buy-Back
[Section 77A(ii)]. A company can buy-back its shares out of:
(i) free reserves or
(ii) the Security Premium (Res.) Account or
(iii) The proceeds of any shares or other specified securities.
Accounting Treatment of Issue of Shares in consideration other than Cash (Purchase of Fixed
Assets)
Case-1
If payment is made by issue of shares at (on a
value equal than its face value)
Case-2
If payment is made by issue of shares at
discount (on a value less than its face value)
Case-3
If payment is made by issue of shares on
Premium (on a value more than its face value)
1. Assets (Name) A/c
Dr
To Vendor’s (Name) A/c
(With the amount of purchase consideration)
------------------------------------2. Vendor’s (Name) A/c Dr.
To Share Capital A/c
(For issuing shares in the name of vendor in
consideration of purchase of assets)
------------------------------------Number of shares =
As in Case -1
As in Case – 1
------------------------------------2. Vendor’s (Name) A/c Dr
Disc. on Issue of Sh. A/c Dr
To Share Capital A/c
------------------------------------Number of shares =
------------------------------------2. Vendor’s (Name) A/c Dr
To Share Capital A/c
To Sec. Premium (Res.) A/c
-----------------------------------Number of shares =
Amount to be paid
face value of share
Amount to be paid
Amount to be paid


 face value of share  
 dicount





 face value of share  
 Pr emium



Accounting Treatment of Issue of Shares in consideration of Cash:
Share can be issued ‘At Par ’ or ‘At Discount’ or ‘At Premium’
– treatments will be made as under:
At Par
At Discount
(allowed on allotment if not specified)
At Premium
(allowed on allotment if not specified)
1. Bank A/c
Dr
To Share Application A/c
(With the amount received on application)
------------------------------------2. Share Application A/c Dr
To Share Capital A/c
(For transferring the amount received on application to
Sh. Capital A/c)
------------------------------------3. Share Allotment A/c Dr
To Share Capital A/c
(For due of allotment amount)
------------------------------------4. Bank A/c
Dr
To Share Allotment A/c
(With the amount received on allotment)
------------------------------------5. Share Ist & Final A/c Dr
To Share Capital A/c
(For due of call amount)
------------------------------------6. Bank A/c
Dr
To Share I & Final Call A/c
(With the amount received on call)
1. Bank A/c
Dr
To Share Application A/c
------------------------------------2. Share Application A/c Dr
To Share Capital A/c
1. Bank A/c
Dr
To Share Application A/c
------------------------------------2. Share Application A/c Dr
To Share Capital A/c
------------------------------------3. Share Allotment A/c Dr
Disc. on Issue of Sh. A/c Dr.
To Share Capital A/c
------------------------------------4. Bank A/c
Dr
To Share Allotment A/c
-----------------------------------3. Share Allotment A/c Dr
To Share Capital A/c
To Sec. Premium (Res.) A/c
-----------------------------------4. Bank A/c
Dr
To Share Allotment A/c
------------------------------------5. Share Ist & Final A/c Dr
To Share Capital A/c
------------------------------------5. Share Ist & Final A/c Dr
To Share Capital A/c
------------------------------------6. Bank A/c
Dr
To Share I & Final Call A/c
------------------------------------6. Bank A/c
Dr
To Share I & Final Call A/c
A Shareholder failed to pay (Calls-in-Arrears) allotment or calls
Interest will be charged on Call-in-Arrears @ 5 % p.a.
* If failed to pay Allotment money
* If failed to pay Calls money
# Treatment on allotment received Bank A/c
Dr
Calls-in-Arrears A/c
Dr
To Share Allotment A/c
# Treatment on calls received Bank A/c
Dr
Calls-in-Arrears A/c
Dr
To Share I &/or Final Call A/c
A Shareholder paid in advance (Calls-in-Advance) of any calls
Interest will be allowed on Call-in-Advance @ 6 % p.a.
* If paid advance on Allotment
* If paid Advance on Call
# Treatment on allotment received Bank A/c
Dr
To Share Allotment A/c
To Call-in-Advance A/c
# Treatment on calls received Bank A/c
Dr
To Share I or II Call A/c
To Calls-in-Advance A/c
Treatment on Forfeiture of Shares
WHEN ALL THE MONEY TOWARDS SHARE CAPITAL IS CALLED
If Shares issued
at par
If Shares issued
at Discount
If Shares issued
at Premium
Share Capital A/c
Dr
(Face Value x No. of Share)
To Share Forfeiture A/c
(Amount Received)
To Calls in Arrear A/c
Share Capital A/c
Dr
(Face Value x No. of Share)
To Discount on issue A/c
To Share Forfeiture A/c
(Amount Received)
To Calls in Arrear A/c
Share Capital A/c
Dr
(Face Value x No. of Share)
To Share Forfeiture A/c
(Amount Received)
To Calls in Arrear A/c
( If Premium duly received)
OR
Share Capital A/c
Dr
(Face Value x No. of Share)
Security Premium A/c
Dr
To Share Forfeiture A/c
(Amount Received)
To Calls in Arrear A/c
(If Premium don't received)
Treatment on Forfeiture of Shares
WHEN SOME CALL YET TO BE MADE TOWARDS SHARE CAPITAL IS
If Shares issued at par
If Shares issued at Discount
If Shares issued at Premium
Share Capital A/c
Dr
(Called Value x No. of Share)
To Share Forfeiture A/c
(Amount Received)
To Calls in Arrear A/c
Share Capital A/c
Dr
(Called Value x No. of Share)
To Discount on issue A/c
To Share Forfeiture A/c
(Amount Received)
To Calls in Arrear A/c
Share Capital A/c
Dr
(Called Value x No. of Share)
To Share Forfeiture A/c
(Amount Received)
To Calls in Arrear A/c
( If Premium duly received)
OR
Share Capital A/c
Dr
(Face Value x No. of Share)
Security Premium A/c
Dr
To Share Forfeiture A/c
(Amount Received)
To Calls in Arrear A/c
(If Premium don't received)
Shares issued and forfeited which were issued at par
1000 shares of Rs 10 each issued, of which Rs 3 per share
application were paid; forfeited due to non payment of
allotment Rs 4 per share and first & final call Rs 3 per share.
Pass entries for issue and forfeiture of shares.
Sol:
1. Bank A/c
Dr
(1000 x 3)
To Share Application
2.
Share Application
To Share Capital
3.
3000
Calls-in-Arrears
5.
Share I & Final Call
Dr
( 1000 X 3 )
To Share Capital
------ 3000
Dr
Share Allotment
(1000 X 4)
To Share Capital
4.
----
3000 -------- 3000
6. Calls-in-Arrears
Dr
3000 ----------- 3000
3000 ----
(Due but not received)
To Share Allotment
---- 3000
Share Capital
Dr
( 1000 X 10)
To Calls-in-Arrears
To Share Forfeiture
10000 -----
Dr 4000 ---7.
---- 4000
Dr
4000 ----
-----------
7000
3000
(Due but not received)
To Share Allotment
---- 4000
Shares issued and forfeited which were issued at par
1000 shares of Rs 10 each issued, of which Rs 3 per share
application were paid; forfeited due to non payment of
allotment Rs 4 per share. The first & final call Rs 3 per share
yet to be made.Pass entries for issue and forfeiture of shares.
Sol:
1.
Bank A/c
Dr
(1000 x 3)
To Share Application
2.
Share Application
To Share Capital
3000
----
4.
-----Dr
Share Allotment
(1000 X 4)
To Share Capital
Dr
4000 ----
(Due but not received)
To Share Allotment
3000
----
4000
3000 -------- 3000
5.
3.
Calls-in-Arrears
Dr
4000
----
----
Share Capital
Dr
( 1000 X 7 )
To Calls-in-Arrears
To Share Forfeiture
7000
-----
-----------
4000
3000
4000
Shares issued and forfeited which were issued at discount
1000
1000 shares
shares of
of Rs
Rs 10
10 each
each issued
issued,at
of10%
which
discount,
Rs 3 per
ofshare
which
application
Rs 3 per share
were
application
paid; forfeited
weredue
paid;
toforfeited
non payment
due to
ofnon
payment
allotment
of
Rs
allotment
4 per share
Rs 4
and
perfirst
share
& final
and first
call Rs
& final
3 per
call
share.
Rs
Pass
3 per
entries
share.
for
Pass
issue
entries
and forfeiture
for issueof
and
shares.
forfeiture of shares.
Sol:
1. Bank A/c
Dr
(1000 x 3)
To Share Application
2. Share Application
To Share Capital
3000 --------- 3000
Dr
3000 -------- 3000
3. Share Allotment
Dr 3000 ---(1000 X 3 )
Discount on issue
Dr 1000 ---( 1000 X 1 )
To Share Capital
---- 4000
4. Calls-in-Arrears
Dr
3000 ----
(Due but not received)
To Share Allotment
---- 3000
5. Share I & Final Call
Dr
( 1000 X 3 )
To Share Capital
6. Calls-in-Arrears
Dr
3000 ----------- 3000
3000 ----
(Due but not received)
To Share Allotment
---- 3000
7. Share Capital
Dr 10000 ----( 1000 X 10
10))
To Discount
Calls-in-Arrears
on issue ----------- 7000
1000
To Calls-in-Arrears
Share Forfeiture
-----3000
6000
To Share Forfeiture
-----3000
Shares issued and forfeited which were issued at discount
1000 shares of Rs 10 each issued at 10% discount, of which
Rs 3 per share application were paid; forfeited due to non
payment of allotment Rs 4 per share. The first & final call
Rs 3 per share yet to be made. Pass entries for issue and
forfeiture of shares.
Sol:
1. Bank A/c
Dr
(1000 x 3 )
To Share Application
3000
------
----
2.
Share Application
To Share Capital
Dr 3000 -------- 3000
3.
Share Allotment
(1000 X 3 )
Discount on issue
( 1000 X 1 )
To Share Capital
Dr
3000
Dr
4.
----
Calls-in-Arrears
Dr
3000 ----
(Due but not received)
3000
To Share Allotment
5.
1000 ------- 4000
Share Capital
Dr
( 1000 X 7 )
To Discount on issue
To Calls-in-Arrears
To Share Forfeiture
---- 3000
7000
----------------
----1000
3000
3000
Shares issued and forfeited which were issued at premium
1000 shares of Rs 10 each issued at 10%Premium called on
application, of which Rs 3 per share application were paid;
forfeited due to non payment of allotment Rs 4 per share and
first & final call Rs 3 per share. Pass entries for issue and
forfeiture of shares.
Sol:
1. Bank A/c
Dr
4000 ---(1000 x 4 )
To Share Application A/c ------ 4000
2.
3.
4.
Share Application A/c Dr 4000 --To Share Capital A/c ----- 3000
To Sec.Premium(Res) A/c --- 1000
Share Allotment A/c
Dr 4000 ---(1000 X 4 )
To Share Capital A/c
---- 4000
Calls-in-Arrears A/c
Dr
4000 ----
(Due but not received)
To Share Allotment A/c
5.
Share I & Final Call A/c Dr
( 1000 X 3 )
To Share Capital A/c
6. Calls-in-Arrears A/c
Dr
3000 ----------- 3000
3000 ----
(Due but not received)
To Share Allotment A/c
7.
Share Capital A/c
Dr
( 1000 X 10 )
To Calls-in-Arrears A/c
To Share Forfeiture A/c
---- 3000
10000
-----------
----7000
3000
---- 4000
Shares issued and forfeited which were issued at premium
1000 shares of Rs 10 each issued at 10%Premium called on
allotment, of which Rs 3 per share application were paid;
forfeited due to non payment of allotment Rs 4 per share and
first & final call Rs 3 per share. Pass entries for issue and
forfeiture of shares.
Sol:
1. Bank A/c
Dr
3000 ---(1000 x 3 )
To Share Application A/c ------ 3000
2. Share ApplicationA/c Dr 3000 ---To Share Capital A/c
----- 3000
3. Share Allotment A/c
Dr 5000 ---(1000 X 5 )
To Share Capital A/c
---- 4000
To Sec. Premium (Res) A/c ----1000
4. Calls-in-Arrears A/c Dr 5000 ---(Due but not received)
To Share Allotment A/c ---- 5000
5. Share I & Final Call A/c Dr 3000 -----( 1000 X 3 )
To Share Capital A/c
------ 3000
6. Calls-in-Arrears A/c
Dr
3000 ----
(Due but not received)
To Share I & Final Call A/c ---- 3000
7. Share Capital A/c
Dr 10000 ----( 1000 X 10 )
Sec. Premium (Res.)A/c Dr 1000 ----To Calls-in-Arrears A/c -----8000
To Share Forfeiture A/c ------ 3000
Shares issued and forfeited which were issued at premium
1000 shares of Rs 10 each issued at 10%Premium called on
allotment, of which Rs 3 per share application were paid;
forfeited due to non payment of allotment Rs 4 per share. The
first & final call Rs 3 per share yet to be made. Pass entries
for issue and forfeiture of shares.
Sol:
1. Bank A/c
Dr
3000 ---(1000 x 3 )
To Share Application A/c ------ 3000
2.
Share Application A/c Dr 3000 ---To Share Capital A/c
----- 3000
3.
Share Allotment A/c
Dr 5000 ---(1000 X 5 )
To Share Capital A/c
---- 4000
To Security Premium A/c ---- 1000
4.
Calls-in-Arrears A/c
Dr
5000 ----
(Due but not received)
To Share Allotment A/c
---- 5000
5. Share Capital A/c
Dr
7000 ----( 1000 X 7 )
Security Premium A/c Dr 1000
------To Calls-in-Arrears A/c -----5000
To Share Forfeiture A/c -----3000
Pro-rata Allotment of Share Capital
At Par
1.
Bank A/c
Dr
To Share Application A/c
------------------------------------2. Share Application A/c Dr
To Share Capital A/c
To Share Allotment A/c
if &
To Share Calls A/c
------------------------------------3. Share Allotment A/c
Dr
To Share Capital A/c
------------------------------------4. Bank A/c
Dr
To Share Allotment A/c
------------------------------------5. Share I & Final A/c
Dr
To Share Capital A/c
------------------------------------6. Bank A/c
Dr
To Share I & Final Call A/c
At Discount
(if allowed on allotment)
1.
Bank A/c
Dr
To Share Application A/c
------------------------------------2. Share Application A/c Dr
To Share Capital A/c
To share Allotment A/c
if & To Share Calls A/c
------------------------------------3. Share Allotment A/c
Dr
Discount on issue A/c Dr
To Share Capital A/c
------------------------------------4. Bank A/c
Dr
To Share Allotment A/c
------------------------------------5. Share I & Final A/c
Dr
To Share Capital A/c
------------------------------------6. Bank A/c
Dr
To Share I & Final Call A/c
At Premium
(if allowed on allotment)
1.
Bank A/c
Dr
To Share Application A/c
------------------------------------2. Share Application A/c Dr
To Share Capital A/c
To Share Allotment A/c
if &
To Share Calls A/c
------------------------------------3. Share Allotment A/c
Dr
To Share Capital A/c
To Security Premium A/c
------------------------------------4. Bank A/c
Dr
To Share Allotment A/c
------------------------------------5. Share I & Final A/c
Dr
To Share Capital A/c
------------------------------------6. Bank A/c
Dr
To Share I & Final Call A/c
Sunrise Company Ltd offered for public subscription 10,000
shares of Rs10 each at Rs11 per share. Money was payable
as follows: Rs 3 on application, Rs 4 on allotment (including
premium) and Rs 4 on first & final call.
Application were received for 15,000 shares and the
directors made pro-rata allotment on 12,000 applicants.
Mr. Ahmad an applicant for 120 shares, could not pay the
allotment and call money, and Mr. Basu, a holder of 200
shares, failed to pay the call. All these shares were forfeited.
Out of the forfeited shares, 150 shares (the whole of
Mr. Ahmad’s shares being included) were issued at Rs 8
per share.
Record journal entries for the above transactions .
1. Bank A/c
Dr
(15,000 x 3)
To Share Application
2.
45,000 ----
Share Application Dr
To Share Capital
To Share Allotment
To Bank A/c
45,000 -------- 30,000
----- 6,000
----- 9,000
Share Allotment
Dr 40,000 ---(10,000 X 4)
To Share Capital
---- 30,000
To Securities Premium ---- 10,000
Bank A/c
Calls-in-Arrears
Dr 33,660 ---Dr 340
----
(Due but not received)
To Share Allotment
5.
---- 40,000
Share I & Final Call Dr 40,000 ----( 10,000 X 3 )
To Share Capital
----- 40,000
Transfer to Capital Reserve
Rs. 360
---------
(Due but not received)
------ 45,000
3.
•
6. Bank A/c
Dr 38,800
Calls-in-Arrears Dr 1,200
To Share I & Final Call
----
7.
Share Capital
Dr
( 300 X 10)
Securities Premium Dr
To Calls-in-Arrears
(340 + 1,200)
To Share Forfeiture
8. Bank A/c
Dr
Share Forfeiture Dr
To Share Capital A/c
40,000
3,000
------
100 ----------- 1,500
------
1,560
1,200
300
----
--------1,500
9. Share Forfeiture A/c Dr
(15,000 x 3)
To Capital Reserve
360
-----
------ 360
Ahmad’s forfeited amount
Add: Basu’s forfeited amount
(1200X50 / 200)
Less: Adjusted on re-issue
= 360
= 300
------660
300
-------
Calculation of amount received on allotment
Total allotment money due ( 10,000 X 4)
Less: Excess application money received
on application & adjusted with allotment
= 40,000
=
6,000
----------34,000
yet to be received
Less: Due but not received from an applicant
of 120 shares, who was allotted only 100
shares.
DUE (100X4) = 400
Less: Excess application money
adjusted on allotment.
= 60
[(120-100)X3]
--------Amount received on allotment
Rs.
Allotted no. Applied shares 120 X Allotted proportion 10
of shares = ---------------------------------------------------------------Applied Proportion 12
(340)
----------33,660
---------= 100 shares
PRESENTATION OF BALANCE SHEET:
1.
The authorized capital of Shyam Ji Lal Mehta Ltd. is Rs. 20,00,000 divided into 2,00,000 equity
shares of Rs. 10 each. Out of these 1,00,000 equity shares issued. The amount is payable as under:
On Application – Rs. 2;
On Allotment – Rs. 5;
Balance on final call
The public applied for 90,000 shares. All the money was duly received. How will you show ‘Share Capital
Account’ in the balance sheet of the company. Also prepare “Notes to Accounts” for the same.
Solution:
Balance Sheet of Shyam Ji Lal Mehta Ltd.
Amount
Particulars
Note No.
Current Year
Rs.
I(1) Equity and Liability
Share holder's Fund
(a) Share Capital
1
900000
Amount
Previous Year
Rs.
Note No. 1
Share Capital
Authorized Capital
2,00,000 equity shares of Rs. 10 each
2000000
Issued Capital
1,00,000 equity shares of Rs. 10 each
1000000
Subscribed Capital
90,000 equity shares of Rs. 10 each
900000
Called Up & Paid Up Capital
90,000 equity shares of Rs. 10 each
900000
2.
The authorized capital of Babu Motors. is Rs. 20,00,000 divided into 2,00,000 equity shares of Rs.
10 each. Out of these 1,00,000 equity shares issued at discount of 10%. The amount is payable as under:
On Application – Rs. 3;
On Allotment – Rs. 4;
Balance on final call
The public applied for 1,20,000 shares. Allotment was made on pro-rata basis. All the money was duly
received. How will you show ‘Share Capital Account’ in the balance sheet of the company. Also prepare
“Notes to Accounts” for the same.
Solution:
I(1)
Balance Sheet of Babu Bhai Motors Ltd.
Amount Current
Particulars
Note No.
Year Rs.
Equity and Liability
Share holder's Fund
(a) Share Capital
1
1000000
(b) Reserve and Surplus
2
(100000)
Amount Previous
Year Rs.
Note No. 1
Share Capital
Authorized Capital
2,00,000 equity shares of Rs. 10 each
Issued Capital
1,00,000 equity shares of Rs. 10 each
Subscribed Capital
1,00,000 equity shares of Rs. 10 each
Called Up & Paid Up Capital
1,00,000 equity shares of Rs. 10 each
Note No. 2
Reserve and Surplus
Profit and Loss Account (Discount on issue of shares)
1,00,000 equity shares of Rs. 10 each at 10% discount
2000000
1000000
1000000
1000000
(100000)
3.
The authorized capital of Babu Motors. is Rs. 20,00,000 divided into 2,00,000 equity shares of Rs.
10 each. Out of these 1,00,000 equity shares issued at discount of 10%. The amount is payable as under:
On Application – Rs. 3;
On Allotment – Rs. 4;
Balance on final call
The public applied for 1,20,000 shares. Allotment was made on pro-rata basis. Company did not made call
till the date of balance sheet. All the money was duly received. How will you show ‘Share Capital
Account’ in the balance sheet of the company? Also prepare “Notes to Accounts” for the same.
Solution:
I(1)
Balance Sheet of Babu Bhai Motors Ltd.
Amount Current
Particulars
Note No.
Year Rs.
Equity and Liability
Share holder's Fund
(a) Share Capital
1
1000000
(b) Reserve and Surplus
2
(100000)
Amount Previous
Year Rs.
Note No. 1
Share Capital
Authorized Capital
2,00,000 equity shares of Rs. 10 each
Issued Capital; Subscribed
1,00,000 equity shares of Rs. 10 each
Subscribed Capital
1,00,000 equity shares of Rs. 10 each
Called Up & Paid Up Capital
1,00,000 equity shares of Rs. 10 each
Note No. 2
Reserve and Surplus
Profit and Loss Account (Discount on issue of shares)
1,00,000 equity shares of Rs. 10 each at 10% discount
2000000
1000000
1000000
1000000
(100000)
4.
The authorized capital of Kan Ji Lal Mehta Ltd. is Rs. 50,00,000 divided into 3,00,000 equity
shares of Rs. 10 each and 20,000 6%Preference shares of Rs. 100 each. Out of these 2,00,000 equity shares
issued at a premium of 15%. The amount is payable as under:
On Application – Rs. 2.5;
On Allotment – Rs. 6.5 (including Premium);
Balance on final call
The public applied for 2,50,000 shares. Allotment was made on pro-rata basis. All the money was received
except 1000 eq. shares on which call money was not paid by Mr. Manohar. These shares were reissued to
Shyam @ Rs. 8 fully paid up.
How will you show ‘Share Capital Account’ in the balance sheet of the company. Also prepare “Notes to
Accounts” for the same.
Solution
Particulars
Balance Sheet of Babu Bhai Motors Ltd.
Amount Current
Amount Previous
Note No.
Year Rs.
Year Rs.
Equity and Liability
Share holder's Fund
(a) Share Capital
(b) Reserve and Surplus
1
2
2002000
150000
Note No. 1
Share Capital
Authorized Capital
3,00,000 equity shares of Rs. 10 each
20,000 6% Preference Shares of Rs. 100 each
3000000
2000000
Issued Capital
2,00,000 equity shares of Rs. 10 each
Subscribed Capital
2,00,000 equity shares of Rs. 10 each
Called Up Capital
2,0,000 equity shares of Rs. 10 each
Less: Calls in Arrear (1000 eq. share @ Rs. 3 final call not received)
Paid up capital
Add: Share forfeiture A/c
Amount received - amount adjusted on reissue
(1000 x 7) - (1000 x 2) = 5000
Share capital A/c to be shown in balance sheet
2000000
2000000
2000000
3000
1997000
5000
2002000
Note No. 2
Reserve and Surplus
Security Premium
1,00,000 equity shares of Rs. 10 each at 15% Premium
150000
Questions Asked in previous Years – 2007 (Delhi) : Set - 1
2. State the conditions according to Sec. 79 of Company Act 1956 for the issue of shares at discount. 2
Hint: see basic theory
3. What is meant by ‘Preferential Allotment of Shares’?
2
Hint: see basic theory
13. Shakti Ltd. invited applications for issuing 2,00,000 equity shares of Rs. 100 each at a premium of Rs.
10 per share. The amount was payable as follows : On application Rs. 40 per share (including premium) on
allotment Rs. 30 per share and the balance on first and final call. Applications for 3,00,000 shares were
received. Applications for 40,000 shares were rejected and pro-rata allotment was made to the remaining
applicants. Over payments on applications were adjusted towards sums due on allotment. Manoj who was
allotted 2,000 shares failed to pay the allotment and first and final call money. His shares were forfeited.
The forfeited shares were re-issued at Rs. 90 per share fully paid up. Pass necessary journal entries in the
books of Shakti Ltd. showing the working clearly. 6 (Difficult)
Or
Pass necessary journal entries in the books of Raman Ltd. for the following transactions :
6
(i) 400 equity shares of Rs. 100 each issued at a discount of 10% were forfeited for the non-payment of
final call of Rs. 20 per share. The forfeited shares were re-issued for Rs. 38,000 fully paid up.
(ii) 300 equity shares of Rs. 100 each were forfeited for the non-payment of the allotment money of Rs. 40
per share. The first and final call of Rs. 20 per share was not made. The forfeited shares were re-issued for
Rs. 29,000 fully paid up.
Solution: OR
Date
(i)
Particular
Eq. Share Capital A/c (400 x 100)
Dr.
To Discount on issue of share A/c
(400x10)
To Share Forfeiture A/c(400x70)
To Calls in Arrear A/c(400x20)
LF Amount Dr.
Amount Cr.
MS
40000
4000
28000 1
8000
(400 eq. shares of Rs. 100 issued at
10% discount were forfeited for non
payment of final call of Rs. 20)
Bank A/c
Dr.
Discount on Issue of Share A/c
Dr.
To Eq. Share Capital A/c
(Forfeited shares were reissued at Rs.
38000 fully paid up)
Share Forfeiture A/c
Dr.
To Capital Reserve A/c
(Balance of share forfeiture a/c is
transferred to capital reserve a/c)
(ii)
Eq. Share Capital A/c (300 x 80)
Dr.
To Share Forfeiture
A/c(300x40)
To Calls in Arrear A/c(300x40)
(300 eq. shares of Rs. 100, on which
final call of Rs. 20 was not made
were forfeited for non payment of
allotment money of Rs. 40 each)
Bank A/c
Dr.
Share Forfeiture A/c
Dr.
To Eq. Share Capital Capital A/c
(Forfeited shares were reissued at Rs.
29000 fully paid up)
Share Forfeiture A/c
Dr.
To Capital Reserve A/c
(Balance of share forfeiture a/c is
transferred to capital reserve a/c)
38000
2000
40000 1
Since
4000038000
= 2000 is <
than the
discount
credited
28000
28000 1
24000
12000 1
12000
29000
30000 1
3000029000=1000
300x100
11000 1
120001000=11000
1000
11000
Questions Asked in previous Years – 2007 (Foreign) : Set - 1
3. What is meant by ‘Preferential Allotment of Shares’?
2
Hint: see basic theory
11. Raja Ltd. purchased building from Ashoka Ltd. for Rs. 36,00,000. The vendors were paid by issue of
equity shares of Rs. 10 each. Pass necessary entries in the books of Raja Ltd. when
(i) shares were issued at par,
(ii) shares were issued at 20% premium and
(iii) shares were issued at 10% discount.
4
Solution:
Date
1
Particular
Common entry for all the cases:
Building A/c
To Ashoka Ltd.
Amount
LF Dr.
Dr.
(Being purchase of Building from
Ashoka Ltd.)
2(i) Ashoka Ltd.
Dr.
To Eq. Share Capital A/c
(Being Payment is made by issuing
3,60,000 Eq. Shares of Rs. 10 each)
2(ii) Ashoka Ltd.
Dr.
To Eq. Share Capital A/c
To Security Premium (Res.) A/c
(Being Payment is made by issuing
3,00,000 Eq. Shares of Rs. 10 each at
premium of 20%)
(2iii) Ashoka Ltd.
Dr.
Discount on Issue of share A/c
Dr.
To Eq. Share Capital A/c
(Being Payment is made by issuing
4,00,000 Eq. Shares of Rs. 10 each at
discount of 10%)
Amount
Cr.
3600000
Calculation
1
3600000
No. of shares =
Amount to be paid
/ value of one
share
3600000
3600000 1
36,00,000 / 10 =
3,60,000 shares
3600000
3000000 1
600000
36,00,000 / (10 +
2) = 3,00,000
shares
3600000
400000
1
4000000
36,00,000 / (10 1) = 4,00,000
shares
13. Laxmi Ltd. invited applications for issuing 10,00,000 equity shares of Rs. 100 each at a premium of Rs.
25 per share. The amount was payable as follows:
On Application Rs. 50 (including premium)
On Allotment Rs. 50
On First and Final call — Balance
Applications for 17,50,000 shares were received. Applications for 2,50,000 shares were rejected and prorata allotment was made to the remaining applicants. Overpayments received on application were adjusted
towards sums due on allotment. Victor, to whom 1,000 shares were allotted, failed to pay allotment and
first and final call. His shares were forfeited. The forfeited shares were reissued for Rs. 11,000 fully paid
up.
Pass necessary journal entries in the books of Laxmi Ltd. 6 (Difficult)
OR
Pass necessary journal entries in the books of a company for the following transactions
6
(i) 400 equity shares of Rs. 100 each issued at a discount of 10% were forfeited for the non-payment of
final call of Rs. 20 per share. The forfeited shares were re-issued for Rs. 40,000 fully paid up.
(ii) 13,000 equity shares of Rs. 50 each issued at a premium of Rs. 8 per share, were forfeited for the nonpayment of allotment money (including premium) of Rs. 23 per share. Application money of Rs. 15 per
share had been received on these shares and the first and final call of Rs. 20 per share was not made. The
forfeited shares were re-issued at Rs. 55 per share fully paid up.
Solution: OR
Amount Amount
Date
Particular
LF Dr.
Cr.
Calculation
Eq. Share Capital A/c (400 x 100)
Dr.
40000
(i)
(ii)
To Discount on issue of share A/c
(400x10)
To Share Forfeiture A/c(400x70)
To Calls in Arrear A/c(400x20)
(400 eq. shares of Rs. 100 issued at 10%
discount were forfeited for non payment of
final call of Rs. 20)
Bank A/c
Dr.
To Eq. Share Capital A/c
(Forfeited shares were reissued at Rs.
40000 fully paid up)
Share Forfeiture A/c
Dr.
To Capital Reserve A/c
(Balance of share forfeiture a/c is
transferred to capital reserve a/c)
Eq. Share Capital A/c (13000 x 30)
Dr.
Security Pre (Res.) A/c (13000 x 8)
Dr.
To Share Forfeiture A/c(13000x15)
To Calls in Arrear A/c(13000x23)
(13000 eq. shares of Rs. 50 issued at
premium of Rs. 8, on which final call of
Rs. 15 was not made were forfeited for non
payment of allotment money of Rs. 23 each
including premium)
Bank A/c
(13000 x 55)
Dr.
To Eq. Share Capital A/c (13000 x 50)
To Security Pre. (Res) A/c (13000 x 5)
(Forfeited shares were reissued @ Rs. 55
fully paid up)
Share Forfeiture A/c
Dr.
To Capital Reserve A/c
(Balance of share forfeiture a/c is
transferred to capital reserve a/c)
4000
28000 1
8000
40000
40000 1
28000
28000 1
390000
104000
195000 1
299000
715000
650000
65000 1
195000
195000 1
Questions Asked in previous Years – 2007 (Outside Delhi) : Set-1
2. Give the meaning of ‘Authorised Capital’.
Hint: See Basic Theory
3. What is meant by ‘Preferential Allotment of Shares’?
Hint: See Basic Theory
2
2
11. Vimal Ltd. purchased machinery of Rs. 9,90,000 from Kamal Ltd. The payment to Kamal Ltd. was
made by issuing equity shares of Rs. 100 each. Pass necessary journal entries in the books of Vimal Ltd.
for purchase of machinery and the issue of shares when
(i) shares were issued at par.
(ii) shares were issued at 10% discount.
(iii) shares were issued at 25% premium.
4
Hint: solve as per Question no. 11 asked in 2007 (Foreign) : Set - 1
13. Janata Ltd. invited applications for issuing 1,00,000 equity shares of Rs. 100 each at a discount of 5%.
The amount was payable as follows:
On Application Rs. 30
On Allotment Rs. 40
Balance on First and Final Call
Applications for 1,30,000 shares were received. Applications for 10,000 shares were rejected and pro-rata
allotment was made to the remaining applicants. Overpayments received on applications were adjusted
towards sums due on allotment. Vinod, to whom 500 shares were allotted, failed to pay allotment and first
and final call. His shares were forfeited. The forfeited shares were re-issued for Rs. 55,000 fully paid up.
Pass necessary journal entries in the books of Janata Ltd., showing the workings clearly. 6 Difficult
OR
Pass necessary journal entries in the books of Arjun Ltd. for the following transactions:
6
(i) 600 8% preference shares of Rs. 100 each issued at a discount of Rs. 5 per share were forfeited for the
non-payment of final call of Rs. 30 per share. The forfeited shares were reissued for Rs. 66,000 fully paid
up.
(ii) 1500 equity shares of Rs. 100 each issued at a premium of Rs. 20 per share were forfeited for the nonpayment of allotment money (including premium) of Rs. 30 per share. Application money of Rs. 30 per
share had been received on these shares. The first and final call of Rs. 60 per share was not made. The
forfeited shares were re-issued for Rs. 75,000 fully paid up.
Solution: OR
Amount Amount
Date
Particular
LF Dr.
Cr.
Calculation
Eq. Share Capital A/c (600 x 100)
Dr.
60000
To Discount on issue of share A/c
(i)
(600x5)
3000
To Share Forfeiture A/c(600x65)
39000 1
To Calls in Arrear A/c(600x30)
18000
(600 eq. shares of Rs. 100 issued at 5%
discount were forfeited for non payment of
final call of Rs. 30)
Bank A/c
Dr.
66000
To Eq. Share Capital A/c (600 x 100)
60000
To Security Premium (Res) A/c (600 x 10)
6000 1
(Forfeited shares were reissued at Rs.
66000 fully paid up)
Share Forfeiture A/c
Dr.
39000
To Capital Reserve A/c
39000 1
(Balance of share forfeiture a/c is
transferred to capital reserve a/c)
(ii)
Eq. Share Capital A/c (1500 x 40)
Dr.
Security Pre (Res.) A/c (1500 x 20)
Dr.
To Share Forfeiture A/c(1500x30)
To Calls in Arrear A/c(1500x30)
(1500 eq. shares of Rs. 100 issued at
premium of Rs. 20, on which final call of
Rs. 60 was not made were forfeited for non
payment of allotment money of Rs. 30
each including premium)
Bank A/c
Dr.
Share forfeiture A/c
Dr.
Discount On Re-issue of share A/c
Dr.
To Eq. Share Capital A/c (1500 x 100)
(Forfeited shares were reissued at Rs.
75000 fully paid up. It is assumed that
company has made necessary approval for
re-issue of shares at discount when these
are originally not issued at discount.)
60000
30000
45000 1.5
45000
75000
45000
30000
150000 1.5
Questions Asked in previous Years – 2008 (Delhi) : Set-2
1.
Give the meaning of minimum subscription.
1
Hint: See the basic Theory.
8.
Samta Ltd. Forfeited 800 equity shares of Rs. 100 each for the non-payment of first call of Rs. 30
per share. The final call of Rs. 20 per share was not yet made. Out of the forfeited shares 400 were reissued at the rate of Rs. 105 per share fully paid up.
Pass necessary journal entries in the books of Samta Ltd. for the above transactions.
3
Solution:
Amount Amount
Date
Particular
LF Dr.
Cr.
Calculation
Eq. Share Capital A/c (800 x 80)
Dr.
64000
To Share Forfeiture A/c(800x50)
40000 1
To Calls in Arrear A/c(800x30)
24000
(800 eq. shares of Rs. 100 each, on which
final call of Rs. 20 was not made, were
forfeited for non payment of first call 30
each)
Bank A/c (400 x 105)
Dr.
42000
To Eq. Share Capital A/c (400 x 100)
To Security Premium (Res) A/c (400 x
40000
5)
2000 1
(400 Forfeited shares were reissued at Rs.
Since
105 each fully paid up)
800=400+400
Share Forfeiture A/c
Dr.
20000
So, 40000 =
To Capital Reserve A/c
20000 1 20000 + 20000
(Balance of share forfeiture a/c in respect
of re-issued shares is transferred to capital
reserve a/c)
10.
Sagar Ltd. was registered with an authorised capita of Rs. 1,00,00,000 divided into 1,00,000 equity
shares of Rs. 100 each. The company offered for public subscription 60,000. Application for 56,000 shares
were received and allotment was made to all the applicants. All the calls were made and were duly received
except the second and final call of Rs. 20 per share on 700 shares. Prepare the Balance sheet of the
company showing the different types of shares capital.
4
Solution:
Particulars
Balance Sheet of Sagar Motors Ltd.
Amount Current
Note No.
Year Rs.
Equity and Liability
Share holder's Fund
(a) Share Capital
Amount Previous
Year Rs.
1
1
55,86,000
Note No. 1
Share Capital
Authorized Capital
1,00,000 equity shares of Rs. 100 each
Issued Capital
60,000 equity shares of Rs. 100 each
Subscribed Capital
56,000 equity shares of Rs. 10 each
Called Up Capital
56,000 equity shares of Rs. 10 each
Less: Calls in Arrear (700 eq. share @ Rs. 20 final call not received)
Paid up capital
1,00,00,000
3
60,00,000
56,00,000
56,00,000
14000
55,86,000
16.
Janata Ltd invited applications for issuing 70,000 equity shares of Rs. 10 each at a premium of Rs.
2 per share. The amount was payable as follows:
On application
Rs. 4 per share (including premium)
On allotment
Rs. 3 per share
On first and final call
Balance
Applications for 1,00,000 shares were received. Applications for 10,000 shares were rejected.
Shares were rejected. Shares were allotted to the remaining applicants on pro-rata basis. Excess money
received with applications were adjusted towards sums due on allotment. All calls were made and were
duly received except first and final call on 700 shares allotted to Kanwar. His shares forfeited. The
forfeited shares were re-issued for Rs. 7,700 fully paid up.
Pass necessary journal entries in the books of the company for the above transactions.
8
Solution:
Amount Amount
Date
Particular
LF Dr.
Cr.
MS Calculation
Bank A/c (1,00,000 x 4)
Dr
4,00,000
To Eq. Share Application A/c
4,00,000
(Being Application money received on
1,00,000 equity share @ Rs. 4 each
including premium)
0.5
Eq. Share Application A/c
Dr.
4,00,000 1,40,000
To Eq. Share Capital A/c (70,000 x 2)
1,40,000 1.5
To Security Premium (Res) A/c
(70,000 x2)
To Eq. Share Allotment A/c (20,000 x 4)
To Bank A/c (10,000 x 4)
(Being applications for 10,000 shares
were rejected and remaining were allotted
on pro-rata basis)
Eq. Share Allotment A/c (70,000 x 3)
Dr.
To Eq. Share Capital A/c
(Being Allotment money due on 70,000
Eq. shares @ Rs. 3 per share)
Bank A/c
Dr.
To Equity Share Allotment A/c
(Being allotment money received)
Eq. Share First & Final Call A/c (70,000 x
5) Dr.
To Eq. Share Capital A/c
(Being First & Final Call money due on
70,000 eq. shares @ Rs. 5 each)
Bank A/c (69300 x 5)
Dr.
Calls in Arrear A/c (700 x 5)
Dr.
To Eq. Share First & Final Call A/c
(Being first & final call money received
on 69300 eq. shares @ Rs. 5 each)
Eq. Share Capital A/c (700 x 10)
Dr.
To share forfeiture A/c
To Calls in Arrears A/c
(Being 700 eq. shares of Rs. 10 each
forfeited due to non payment of first and
final call of Rs. 5 per share)
Bank A/c
Dr.
To Eq. Share Capital A/c
To Security Premium (Res.) A/c
(Being forfeited shares were re-issue for
Rs. 7,700 )
Share forfeiture A/c
Dr
To Capital Reserve A/c
(Balance of share forfeiture a/c in respect
of re-issued shares is transferred to capital
reserve a/c)
80,000
40,000
2,10,000
2,10,000
.5
1,30,000
1,30,000
1
3,50,000
3,50,000
.5
3,46,500
3,500
3,50,000
1
7,000
3,500
3,500
1
7,700
7,000
700
1
3,500
3,500
1
OR
Shubham Ltd. invited applications for the allotment of 80,000 equity shares of Rs. 10 each at a
discount of 10%. The amount was payable as follows:
On application
Rs. 2 per share
On allotment
Rs. 3 per share
On first and final call
Balance
Applications for 1,10,000 shares were received. Applications for 10,000 shares were rejected.
Shares were allotted on pro-rata basis to the remaining applications. Excess application money received on
application was adjusted towards sums due on allotment. All calls were made and were duly received.
Manoj who had applied for 2000 shares failed to pay the allotment and first and final call. His shares were
forfeited. The forfeited shares were re-issued for Rs. 24,000 fully paid up.
Pass necessary journal entries in the books of the company for the above transactions.
8
Questions Asked in previous Years – 2009 (Delhi) : Set-1
5. Why would an investor prefer to invest in the Debentures of a Company rather than in its shares? 1
Hint: Because of regular and certain income in the form of interest on debentures.
7. The Directors of a Company forfeited 200 shares of Rs. 10 each issued at a premium of Rs. 3 per share,
for the non-payment of the first call money of Rs. 3 per share. The final call of Rs. 2 per shares has not
been made. Half the forfeited shares were reissued at Rs. 1,000 fully paid. Record the Journal Entries for
the forfeiture & reissue of shares.
3
Solution:
Amount Amount
Date
Particular
LF Dr.
Cr.
Calculation
Eq. Share Capital A/c (200 x 8)
Dr.
1600
To Share Forfeiture A/c(200x5)
1000 1
To Calls in Arrear A/c(200x3)
600
(200 eq. shares of Rs. 10 each, on which
final call of Rs. 2 was not made, were
forfeited for non payment of first call 3
each)
Bank A/c
Dr.
1000
To Eq. Share Capital A/c (400 x 100)
1000 1
(100 Forfeited shares were reissued at for
Since
Rs. 1000 fully paid up)
200=100+100
Share Forfeiture A/c
Dr.
500
So, 1000 =
To Capital Reserve A/c
500 1 500 + 500
(Balance of share forfeiture a/c in respect
of re-issued shares is transferred to capital
reserve a/c)
8. Meena Ltd., issued 60,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as Rs. 3 on
application, Rs. 5 (Incl. Premium) on allotment and the balance on 1st and Final call. Applications were
received for 1,02,000 shares. The Directors resolved to allot as follows:
(A) Applicants of 60,000 shares
30,000 shares.
(B) Applicants of 40,000 shares
30,000 shares.
(C) Applicants of 2,000 shares
Nil
Nikhil who had applied for 1,000 shares in category A, and Vish who was allotted 600 shares in
Category B failed to pay the allotment money. Calculate the amount received on allotment.
3
Solution:
Amount Received on Application
1,02,000 x 3
= Rs. 3,06,000
Application money transferred to Sh. Capital A/c 60,000 x 3
= Rs. 1,80,000
Applications rejected and money returned
2,000 x 3
Balance Amount transferred to Share Allotment A/c
Amount due on Allotment 60,000 x 5
Amount adjusted with Application
Amount to be received on allotment
Less:
(i) Amount not paid by Nikhil:
Applied for 1000 shares in category A
So, Allotted shares = 1000 x 3 / 6 = 500 shares
Allotment due for 500 shares = 500 x 5 = 2500
Less: Amount received with application =
(1000 – 500) x 2 =
1000
(ii) Amount not paid by Vish:
600 Shares Allotted to Vis in category B
So, applied shares = 600 x 4 / 3 = 800 shares
Allotment due for 600 shares = 600 x 5 = 3,000
Less: Amount received with application =
(800 – 600) x 2 =
400
Amount received on allotment
/
= Rs.
6,000
= Rs. 1,20,000
= Rs. 3,00,000
= Rs. 1,20,000
= Rs. 1,80,000
= Rs.
1,500
= Rs.
2,400
= Rs. 1,76,100 Ans
15.
A Co. issued to the public for subscription 40,000 shares of Rs. 10 each at a discount of 10%
payable as Rs. 2 each on application, Allotment and First call and Rs. 3 on the Final call. Applications were
received for 60,000 shares and allotment was made pro-rata to 80% of applicants. R to whom 1,600 shares
were allotted paid only the application money, and S who had applied for 2,400 shares paid the entire call
money due along with the allotment. Pass necessary Journal entries to record the above transactions.
8
Solution:
Amount Amount
Date
Particular
LF Dr.
Cr.
MS Calculation
Bank A/c (60,000 x 2)
Dr
To Eq. Share Application A/c
1,20,000
(Being Application money received on
1,20,000
60,000 equity share @ Rs. 2 each
including premium)
0.5
Eq. Share Application A/c
Dr.
1,20,000
To Eq. Share Capital A/c (40,000 x 2)
80,000
To Security Premium (Res) A/c
16,000
(8,000 x2)
24,000
To Bank A/c (12,000 x 2)
(Being applications for 12,000 shares
were rejected and remaining were
allotted on pro-rata basis)
1.5
Eq. Share Allotment A/c (40,000 x 3)
40,000x2 = 80,000
Dr.
Less:
16000
Discount on Issue of shares A/c (40,000
To be recd=64000
x 1)
80,000
Less:RCall-inTo Eq. Share Capital A/c (40,000 x
40,000
arreas
4)
1,20,000
1600x48/40=1920sh
(Being Allotment money due on 40,000
1600x2=3200 Eq. shares @ Rs. 2 per share along with
(1920-1600)x2
discount or Rs. 1)
1
=3200-640= 2560
Bank A/c
Dr.
Call in Arrears A/c
Dr.
To Equity Share Allotment A/c
To. Call in Advance A/c
(Being allotment money received)
Eq. Share First call A/c (40,000 x 2) Dr.
To Eq. Share Capital A/c
(Being First Call money due on 40,000
eq. shares @ Rs. 2 each)
Bank A/c (38000 x 2)
Dr.
Calls in Advance A/c (2000 x 2)
Dr.
To Eq. Share First & Final Call
A/c
(Being first call money received on
38000 eq. shares @ Rs. 2 each)
Eq. Share Second & final call A/c
(40000 x 3)Dr.
To Eq. Share Capital A/c
(Being Second & Final Call money due
on 40,000 eq. shares @ Rs. 3 each)
Bank A/c
(38,000 x 3)
Dr.
Calls in Advance A/c (2000 x 3)
To Eq. Share Capital A/c
(Being Second & Final call money
received on 38000 eq. shares @ Rs. 3
each )
71,440
2,560
64,000
10,000
1.5
80,000
Add: R (adv)
2400x40/48=2000sh
2000x(2+3)=10000
Net rec.=
64000-2560+10000
=71440
80,000
.5
76,000
4,000
80,000
1
1,20,000
1,20000
.5
1,14,000
6,000
1,20,000
1
OR
Petromax Ltd., issued 50,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as Rs. 3 on
application Rs. 5 including premium on allotment and the balance in equal installments over two calls.
Applications were received for 92,000 shares and the allotment was done as under:
A:
Applicants of 40,000 shares
Allotted 30,000 shares
B:
Applicants of 40,000 shares
Allotted 20,000 shares
C:
Applicants of 12,000 shares
Nil
Suresh who had applied for 2,000 shares (Category A) did not pay any money other than
application money.
Chandar who was allotted 800 shares (Category B) paid the call money due along with allotment.
All other allottees paid their dues as per schedule.
Pass necessary journal entries in the Books of Petromax Ltd. to record the above.
8
Questions Asked in previous Years – 2009 (Outside Delhi) : Set-1
5. Why would an investor prefer to invest in the Debentures of a Company rather than in its shares? 1
Hint: See Basic Theory
7. The Directors of a Company forfeited 500 shares of Rs. 10 each issued at a premium of Rs. 3 per share,
for the non-payment of the first call money of Rs. 3 per share. The final call of Rs. 2 per shares has not
been made. Half the forfeited shares were reissued at Rs. 2,500 fully paid. Record the Journal Entries for
the forfeiture & reissue of shares.
3
Hint: Solve as per previous set question (2009 Delhi set)
8. Meena Ltd., issued 30,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as Rs. 3 on
application, Rs. 5 (Incl. Premium) on allotment and the balance on 1st and Final call. Applications were
received for 42,000 shares. The Directors resolved to allot as follows:
(A) Applicants of 20,000 shares
10,000 shares.
(B) Applicants of 20,000 shares
20,000 shares.
(C) Applicants of 2,000 shares
Nil
Balu who had applied for 1,000 shares in category A, and Ganesh who was allotted 600 shares in
Category B failed to pay the allotment money. Calculate the amount received on allotment.
3
Hint: Solve as per previous set question (2009 Delhi set)
15.
Alpha Co. issued to the public for subscription 40,000 shares of Rs. 10 each at a discount of 10%
payable as Rs. 2 each on application, Allotment and First call and Rs. 3 on the Final call. Applications were
received for 60,000 shares and allotment was made pro-rata to 80% of applicants. R to whom 2,000 shares
were allotted paid only the application money, and S who had applied for 3,000 shares paid the entire call
money due along with the allotment. Pass necessary Journal entries to record the above transactions.
8
Hint: Solve as per previous set question (2009 Delhi set)
OR
Petromax Ltd., issued 50,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as Rs. 3 on
application Rs. 5 including premium on allotment and the balance in equal installments over two calls.
Applications were received for 92,000 shares and the allotment was done as under:
A:
Applicants of 40,000 shares
Allotted 30,000 shares
B:
Applicants of 40,000 shares
Allotted 20,000 shares
C:
Applicants of 12,000 shares
Nil
Suresh who had applied for 2,000 shares (Category A) did not pay any money other than
application money.
Chandar who was allotted 800 shares (Category B) paid the call money due along with allotment.
All other allottees paid their dues as per schedule.
Pass necessary journal entries in the Books of Petromax Ltd. to record the above.
8
Questions Asked in previous Years – 2009 (Foreign) : Set-1
5. Why would an investor prefer to invest in the Debentures of a Company rather than in its shares? 1
Hint: See Basic Theory
7. The Directors of a Company forfeited 300 shares of Rs. 10 each issued at a premium of Rs. 3 per share,
for the non-payment of the first call money of Rs. 3 per share. The final call of Rs. 2 per shares has not
been made. Half the forfeited shares were reissued at Rs. 1,500 fully paid. Record the Journal Entries for
the forfeiture & reissue of shares.
3
Hint: Solve as per previous set question (2009 Delhi set)
8. Hari Ltd., issued 50,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as Rs. 3 on
application, Rs. 5 (Incl. Premium) on allotment and the balance on 1st and Final call. Applications were
received for 92,000 shares. The Directors resolved to allot as follows:
(A) Applicants of 40,000 shares
20,000 shares.
(B) Applicants of 50,000 shares
30,000 shares.
(C) Applicants of 2,000 shares
Nil
Prashant who had applied for 1,500 shares in category A, and Sundar who was allotted 1200 shares in
Category B failed to pay the allotment money. Calculate the amount received on allotment.
3
Hint: Solve as per previous set question (2009 Delhi set)
15.
Alpha Co. issued to the public for subscription 40,000 shares of Rs. 10 each at a discount of 10%
payable as Rs. 2 each on application, Allotment and First call and Rs. 3 on the Final call. Applications were
received for 60,000 shares and allotment was made pro-rata to 80% of applicants. R to whom 1,600 shares
were allotted paid only the application money, and S who had applied for 2,400 shares paid the entire call
money due along with the allotment. Pass necessary Journal entries to record the above transactions.
8
Hint: Solve as per previous set question (2009 Delhi set)
OR
Petromax Ltd., issued 50,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as Rs. 3 on
application Rs. 5 including premium on allotment and the balance in equal installments over two calls.
Applications were received for 92,000 shares and the allotment was done as under:
A:
Applicants of 40,000 shares
Allotted 30,000 shares
B:
Applicants of 40,000 shares
Allotted 20,000 shares
C:
Applicants of 12,000 shares
Nil
Suresh who had applied for 2,000 shares (Category A) did not pay any money other than
application money.
Chandar who was allotted 800 shares (Category B) paid the call money due along with allotment.
All other allottees paid their dues as per schedule.
Pass necessary journal entries in the Books of Petromax Ltd. to record the above.
8
Questions Asked in previous Years – 2010 (Outside Delhi) : Set-1
8.
DN Ltd. issued 50,000 shares of Rs. 10 each at a discount of 10% payable as Rs. 2 per share on
application, Rs. 3 on allotment and Rs. 2 each on first and final call. Applications were received for 70,000
shares. It was decided that
(a)
refuse allotment to the applicants of 10,000 shares,
(b)
allot 10,000 shares to Mohan who had applied for a similar number, and
(c)
allot the remaining shares on a pro-rata basis.
Mohan failed to pay the allotment money and Sohan who belonged to category (c) and was allotted
3,000 shares, paid both the calls with allotment. Calculate the amount received on allotment. 3
Hint: Solve as per previous set question (2009 Delhi set)
15.
X Ltd. issued 50,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows:
Rs. 3 on Application
Rs. 6 on Allotment (including premium) and
Rs. 3 on call.
Application were received for 75,000 shares and pro-rata allotment was made as follows:
To the applicants of 40,000 shares, 30,000 shares were issued and for the rest 20,000 shares were
issued. All moneys due were received except the allotment and call money from Ram who had applied for
1,200 shares (out of the group of 40,000 shares). All his shares were forfeited. The forfeited shares were reissued for Rs. 8 per share fully paid up.
Pass necessary journal entries for the above transactions.
8
OR
Janata Ltd. invited applications for issuing 2,00,000 equity shares of Rs. 10 each at a discount of
10%. The amount was payable as follows:
On Application – Rs. 2 per share
On Allotment – Rs. 3 per share
On First and final call – Balance amount
The issue was undersubscribed to the extent of 20,000 shares. Shares were allotted to all the
applicants. All calls were made and were duly received. ‘A’ to whom 1,500 shares were allotted, failed to
pay allotment and call money and ‘B’ to whom 1,200 shares were allotted paid the full amount due at the
time of allotment. The shares on which allotment and call money was not received were forfeited. The
forfeited shares were re-issued at Rs. 8 per share fully paid up.
Pass necessary journal entries in the books of Janata Ltd. for the above transactions.
8
Questions Asked in previous Years – 2011 (Delhi) : Set-1
7.
Goodluck Ltd. purchased machinery costing Rs. 10,00,000 from Fair Deals Ltd. The campany paid
the price by issue of Equity shares or Rs. 10 each at a premium of 25%.
Pass necessary journal entries for the above transactions in the books of Goodluck Ltd. 3
15.
Dinesh Ltd. invited applications for issuing 10,000 Equity shares of Rs. 10 each. The amount was
payable as follows:
On Application Rs. 1
On Allotment Rs. 2
On First call Rs. 3
On Second and Final Call – Balance
The issue was fully subscribed. Ram to whom 100 shares were allotted, failed to pay the allotment
money and his shares were forfeited immediately after allotment. Shyam to whom 150 shares were allotted,
failed to pay the first call. His shares were also forfeited after the first call. Afterwards the second and final
call was made. Mohan to whom 50 shares were allotted failed to pay the second and final call. His shares
were also forfeited. All the forfeited shares were re-issued at Rs. 9 per share fully paid up. Pass necessary
journal entries in the books of Dinesh Ltd.
8
OR
Moti Ltd invited applications for issuing 10,00,000 Equity shares of Rs. 10 each at a premium of Rs. 2 per
share. The amount was payable as follow:
On Application Rs 5 (including premium)
On allotment Rs. 4
On First and Final Call Rs. 3
Applications for 15,00,000 shares were received. Applications for 3,00,000 shares were rejected and prorata allotment was made to the remaining applications, Excess application money was utilized towards
sums due on allotment. Giri who had applied for 24,000 shares failed to pay the allotment and call money.
His shares were forfeited. Out of the forfeited shares 10,000 shares were reissued for Rs. 8 per shares fully
paid up. Pass necessary journal entries in the books of Moti Ltd.
8
Questions Asked in previous Years – 2011 (Outside Delhi) : Set-1
7.
Y Ltd. purchased furniture costing Rs. 1,35,000 from A.B. Ltd. The payment was made by issue of
Equity shares of Rs. 10 each at a discount of Rs. 1 per shares. Pass necessary journal entries in the books of
Y Ltd.
3
15.
X Ltd. issued 40,000 Equity Shares of Rs. 10 each at a premium of Rs. 2.50 per share.
The amount was payable as follows:
On Application
Rs. 2 per share
On Allotment
Rs. 4.50 per share (including premium)
And on call
Rs. 6 per share
Owing to heavy subscription the allotment was made on pro-rata basis as follows:
(a) Applicants for 20,000 shares were allotted 10,000 shares.
(b) Applicants for 56,000 shares were allotted 14,000 shares.
(c) Applicants for 48,000 shares were allotted 16,000 shares.
It was decided that excess amount received on applications would be utilized on allotment and the
surplus would be refunded.
Ram, to whom 1,000 shares were allotted, who belong to category (a) failed to pay allotment
money. His shares were forfeited after the call.
Pass necessary journal entries in the books of X Ltd. for the above transactions.
8
OR
Give Journal entries to record the following transactions of forfeiture and re-issue of shares and
open share forfeited account in the books of the respective companies.
8
(i)
C Ltd. forfeited 1000 shares of Rs. 100 each issued at a discount of 8% on theses shares the first
call of Rs. 30 per share was not received and the final call of Rs. 20 per share was yet to be called. These
shares were subsequently re-issued at Rs. 70 per shares Rs. 80 paid up.
(ii)
L Ltd. forfeited 470 Equity shares of Rs. 10 each issued at a premium of Rs. 5 per share for nonpayment of allotment money of Rs. 8 per shares (including share premium Rs. 5 per share) and the first and
final call of Rs. 5 per share. Out of these 60 Equity Shares were subsequently re-issued at Rs. 14 per share.
Questions Asked in previous Years – 2011 (Foreign) : Set-1
5.
Give the meaning of ‘Registered Capital’ of a company.
1
7.
Jain Ltd. Purchased machinery Rs. 10,00,000 from Ayer Ltd. 50% of the payment was made by
cheque and for remaining 50% the company issued Equity Shares of Rs. 100 each at a premium of 25%.
Pass necessary journal entries in the books of Jain Ltd. for the above the above transactions.
15.
Hema Ltd. invited applications for issuing 30,000 Equity shares of Rs. 100 each at a premium of
Rs. 20 each. The amount was payable as follows:
On Application and Allotment Rs. 40 (including premium Rs. 10) per share
On First call Rs. 50 (including premium Rs. 10) per share
On Second and Final Call – Balance
Applications for 75,000 shares were received. Applications for 15,000 shares were rejected and the
money received from them was refunded. Shares were allotted on pro-rata basis to the remaining
applicants. All calls were made. A who had applied for 2,000 shares failed to pay the first call and second
& final call on the shares allotted to him. B who was allotted 1,000 shares failed to pay the second and final
call. The shares of both A and B were forfeited. The forfeited shares were re-issued at Rs. 160 fully paid.
Pass necessary journal entries in the books of company for the above the above transactions.
8
OR
Shakti Ltd. invited applications for issuing 1,00,000 Equity shares of Rs. 10 each. The amount was payable
as follows:
On Application Rs. 3 per share
On Allotment Rs. 2 per share
On First and Final Call Rs. 5 per share.
Applications were received for 2,20,000 shares. Applications for 20,000 shares were rejected and their
application money was refunded. Shares were allotted to the remaining applicants as follows:
(i)
Allotted 50% shares to Raman who had applied for 40,000 shares.
(ii)
To allot in full to Akbar who had applied for 20,000 shares.
(iii)
To allot balance of the shares on pro-rata basis to the other applicants.
Excess application money was utilized in payment of allotment and final call. All calls were made and
were duly received except the first and final call on 600 shares allotted to an applicant in III Category. His
shares were forfeited. The forfeited shares were re-issued for Rs. 9 per shares fully paid up.
Pass necessary journal entries in the books of Shakti Ltd. for the above the above transactions. 8
Questions Asked in previous Years – 2012 (Delhi) : Set-1
5.
What is meant by calls in advance?
1
7.
Sundram Ltd. purchased Furniture for Rs. 3,00,000 from Ravindram Ltd. Rs. 1,00,000 were paid by
drawing a promissory Note in favour of Ravindram Ltd. The balance was paid by issue of Equity Shares of
Rs. 10 each at a Premium of 25%.
Pass necessary Journal entries in the books of Sundram Ltd.
3
Solution:
Journal of Sundram Ltd.
Amount Amount
Date
Particular
LF Dr.
Cr.
MS Calculation
Furniture A/c
Dr
3,00,000 3,00,000
To Ravindram Ltd
1
(Being Furniture purchased from
Ravindram Ltd.)
Ravindram Ltd.
Dr.
To Promissory Note A/c
To Eq. Share Capital A/c
To Security Premium (Res) A/c
(Being Ravidram Ltd. was paid Rs.
1,00,000 by issuing promissory note and
Rs. 2,00,000 by issuing 16,000 eq. shares
of Rs. 10 each issued at 25% premium)
3,00,000
1,00,000
1,60,000
40,000 2
300000-100000
=
200000/(10+25%)
= 16000 eq.
shares
8.
R.K. Ltd. invited applications for issuing 70,000 Equity Shares of Rs. 10 each at a premium of Rs.
35 per share. The amount was payable as follows:
On Application Rs. 15 (including Rs. 12 Premium)
On Allotment Rs. 10 (including Rs, 8 Premium)
On First and Final call – Balance
Applications for 65,000 shares were received and allotment was made to all the applicants. A
shareholder, Ram who was allotted 2,000 share, failed to pay the allotment money. His shares were
forfeited immediately after allotment. After wards, the first and final call was made. Sohan, who had 3000
shares, failed to first & final call. His shares were also forfeited. Out of the forfeited shares, 4,000 shares
were re-issued at Rs. 50 per share fully paid up. The Re-issued shares included all the shares of Ram.
Pass necessary journal entries for the above the above transactions in the books of R.K. Ltd.
8
Solution:
Amount
Amount
Date
Particular
LF Dr.
Cr.
MS Calculation
Bank A/c (65,000 x 15)
Dr
To Eq. Share Application A/c
9,75,000
(Being Application money received
9,75,000
1
on 65,000 equity share @ Rs. 15
each including premium of Rs. 12 per
share)
0.5
Eq. Share Application A/c
Dr.
To Eq. Share Capital A/c
(65,000 x 3)
To Security Premium
9,75,000
2
(Res)A/c(65,000x12)
1,95,000 1
(Being applications money
7,80,000
transferred to Eq. sh. Capital A/c and
Sec. Premium Res. A/c)
Eq. Share Allotment A/c (65,000 x
10) Dr.
To Eq. Share Capital A/c (65,000 x 2)
6,50,000
To Security Premium
1,30,000
3
(Res)A/c(65,000x8)
5,20,000
(Being Allotment money due on
65,000 Eq. shares @ Rs. 10 per share
including premium of Rs. 8 per share)
0.5
Bank A/c
Dr.
6,30,000
Call in Arrears A/c
Dr.
20,000
4
To Equity Share Allotment A/c
6,30,000
(Being allotment money received on
63,000 eq. shares @ Rs. 10 each)
1
5
6
7
8
9
10
Eq. Share Capital A/c (2000 x 5)
Dr.
Security Premium (Res) A/c (2000 x
8)
Dr.
To Share Forfeiture A/c (2000x3)
To Share Calls-in-Arrears A/c
(2000x10)
(2,000 Eq. Shares forfeited for non
payment of allotment money)
Eq. Share First & Final call A/c
(63,000x20)Dr.
To Eq. Share Capital A/c (63000 x 5)
To Security Premium (Res) A/c
(63000x15)
(Being First and final Call money
due on 63,000 eq. shares @ Rs. 20
each including premium of Rs. 15 per
share)
Bank A/c (60000 x 20)
Dr.
Calls in Arrear A/c (3000 x 20)
Dr.
To Eq. Share First & Final Call
A/c
(Being first call money received on
38000 eq. shares @ Rs. 2 each)
Eq. Share Capital A/c (3000 x 10)
Dr.
Security Premium (Res) A/c (3000 x
15) Dr.
To Share Forfeiture A/c (3000x5)
To Share Calls-in-Arrears A/c
(3000x20)
(3,000 Eq. Shares forfeited for non
payment of First and Final Call)
Bank A/c (4,000 x 50)
Dr.
To Eq. Share Capital A/c (4000
x 10)
To Sec. Premium (Res.) A/c
(4000 x 40)
(Being 4,000 forfeited shares were reissued at Rs. 50 per share)
Sh. Forfeiture A/c
Dr.
To Capital Reserve A/c
(Being Proportionate amount of reissued forfeited shares A/c is
transferred to Capital Reserve A/c )
10,000
16,000
6,000
20,000 1
12,60,000
3,15,000
9,45,000 0.5
12,00,000
60,000
12,60,000 1
30,000
45,000
15,000
60,000
1
2,00,000
40,000
1,60,000 .5
16,000
16,000
1
Ram:2000 =
Rs6000
Sohan:
3000sh =Rs.15000
2000 sh =
Rs.10000
1000 sh = Rs.5000
Reissued shares=
Ram = 2000=6000
Sohan=2000=10000
Tr.To cap res= Rs.
16000
OR
Ashish Ltd. invited applications for issuing 75,000 Equity shares of Rs. 10 each at a discount of 10%. The
amount was payable as follows:
On Application Rs. 2 per share
On allotment Rs. 2 per share
On First & Final Call – Balance
Applications for 1,50,000 shares were received. Applications for 25,000 shares were rejected and
application money of these applicants was refunded. Shares were allotted on pro-rata basis to the remaining
applicants. Excess money received with these applications was adjusted towards sums due on allotment.
Suman, who had applied for 1250 shares, failed to pay allotment and first and final call money. Dev did not
pay the first and final call on his 1000 shares. All these shares were forfeited and later on 1000 of these
shares were re-issued at Rs. 17 per share fully paid up. The re-issued shares included all the shares of
Suman.
Pass necessary journal entries in the books of Ashish Ltd. for the above the above transactions. 8
Questions Asked in previous Years – 2012 (Delhi) : Set-1
7.
Jain Ltd. purchased Building for Rs. 10,00,000 from Gupta Ltd. 10% of the payable amount was
paid by a cheque drawn in favour of Gupta Ltd. The balance was paid by issue of Equity Shares of Rs. 10
each at a discount of 10%.
Pass necessary Journal Entries in the books of Jain Ltd.
3
Hint: Solve as per the previous questions.
16.
Shyam Ltd invited applications for issuing 80,000 Equity Shares of Rs. 10 at a premium of Rs. 40
per share. The amount was payable as follows:
On Application Rs. 35 per share (including Rs. 30 Premium)
On Allotment Rs. 8 per share (including Rs. 4 Premium)
On First and Final Call – Balance
Applications for 77,000 shares were received. Shares were allotted to all the applicants. Sundram to
whom 7,000 shares were allotted failed to pay the allotment money. His shares were forfeited immediately
after allotment. Afterwards the first and final call was made. Satyam the holder of 500 shares failed to pay
the first and final call. His shares were also forfeited. Out of the forfeited shares 1,000 shares were reissued at Rs. 50 per share fully paid up. The re-issued shares included all the shares of satyam.
Pass necessary journal entries in the books of Shyam Ltd. for the above the above transactions. 8
Hint: Solve as per the previous questions.
OR
Jain Ltd. invited applications for issuing 35,000 Equity shares of Rs. 10 each at a discount of 10%. The
amount was payable as follows:
On Application Rs. 5 per share.
On Allotment Rs. 3 per share.
On First and Final Call-Balance.
Applications for 50,000 shares were received. Applications for 8,000 shares were rejected and the
application money of these applicants was refunded. Shares were allotted on pro-rata basis to the remaining
applicants and the excess money received with applicants was adjusted towards sums due on allotment.
Jeevan who had applied for 600 shares failed to pay allotment and first and final call money. Naveen the
holder of 400 shares failed to pay first and final call money. Shares of Jeevan and Naveen were forfeited.
Of the forfeited 800 shares were re-issued at Rs. 15 per share fully paid up. The re-issued shares include all
the shares of Naveen.
Pass necessary journal entries in the books of Jain Ltd. for the above the above transactions.
Questions Asked in previous Years – 2012 (Foreign) : Set-1
5.
What is meant by ‘Over Subscription’?
1
Hint: See Basic Theory
7.
X Ltd. purchased machinery for Rs. 5,00,000 from Y Ltd. Half of the amount was paid by
accepting a Bill of Exchange drawn by Y Ltd. payble after three months. The balance was paid by issue of
Equity Share of Rs. 10 each at a Premium of 25%.
Pass necessary Journal Entries in the books of X Ltd. for these transactions.
Hint: Solve as per previous questions.
16.
Gupta Ltd. invited applications for issuing 30,000 Equity Shares of Rs. 10 each at a premium of Rs.
30 per share. The amount was payable as follows:
On Application Rs. 10 per share (including Rs. 8 premium)
On allotment Rs. 12 (including Rs. 9 premium)
On First and final call – Balance
Applications for 27,000 shares were received. All the calls were made and were duly received
except on 3,000 shares held by Shiva who failed to pay the Allotment and First and Final call money and
on 2,000 shares of Girdhar who did not pay the First and final call. Share of Shiva and Girdhar were
forfeited. Out of the forfeited shares, 4,000 shares were re-issued, including all the shares of Girdhar at Rs.
17 per share fully paid up.
Pass necessary Journal Entries in the books of Gupta Ltd. for these transactions.
Hint: Solve as per previous questions.
OR
Firdos Ltd. invited applications for issuing 70,000 shares of Rs. 10 each at a discount of 10%. The amount
was payable as follows:
On Applications Rs. 4 per share
On Allotment Rs. 3 per share
On First and Final call – Balance
Applications for 80,000 shares were received. Applications for 5,000 shares were rejected and the shares
were allotted on pro-rata basis to the remaining applicants. Excess money received with applications was
utilized towards sums due on allotment. Johney, who had applied for 1,500 shares, failed to pay the
allotment money. His shares were forfeited immediately after allotment. Afterwards the First and Final call
was made. First and final call was not received on 700 shares held by Rommy. Her shares were also
forfeited. 1,500 forfeited shares were re-issued at Rs. 13 per share fully paid up. The re-issued shares
included all the shares of Jonney.
Pass necessary Journal Entries in the books of Firdos Ltd. for these transactions.
8
Issue and Redemption of Debentures
1. Sundram Ltd. Purchased Furniture for Rs.3,00,000 from Ravindram Ltd. Rs. 1,00,000 were paid by
drawing a Promissory Note in favour of Ravindram Ltd. The balance was paid by issue of Equity Shares of
Rs. 10 each at a Premium of 25%.
(2012----6----3)
2.
(2012----8---3)
3.
(2012---11---4)
4.
(2012---12—6)
5
(2008---6----3)
6
(2008---14—6)
7.
(2010—7—3)
8.
(2010—11—4)
9.
(2010—14—6)
10. Give the meaning of 'Issue of Debentures as a collateral security'.
(2011—5—1)
11. X Ltd. Redeemed 1000,6% Debentures of Rs.100 each by converting them into equity shares of Rs.
100 each.The 6% Debentures were redeemed at a premium of 5% for which the equity shares were issued
at a premium of 25%. Pass the necessary journal entries for the redemption of the above mentioned
debentures in the books of X Ltd. (2011—8—3)
12. Pass the necessary journal entries for the issue and redemption of Debentures in the following cases:
(i) 15000, 9% Debentures of Rs.250 each issued at 5 % premium and repayable at 15% premium.
(ii) 2,00,000 ,12% Debentures of Rs.10 each issued at 8% premium,repayable at par.
(2011—11—4)
13. On 1.01.2007 a public Ltd. Company issued 15,000 , 10%Debentures of Rs.100 each at par which were
repayable at a premium of 15% on 31.12.2011. On the date of maturity,the company decided to redeem the
above mentioned 10% Debentures as per the terms of issue,out of profits.The Profit & Loss A/c shows a
credit balance of Rs.20,00,000 on this date.The offer was accepted by all debentureholders and all
debentures were redeemed.
Pass necessary journal entries in the book of company only for the redemption of debentures, if the
company follows section 117C of the companies act.
(2011—14—6)
14. Mona Ltd. Has issued 20,000 ,9% Debentures of Rs.100 each of which half the amount is due for
redemption on March 31st 2008. The company has in its Debenture Redemption Reserve Account a balance
of Rs.4,40,000.Record the necessary journal entries at the time of Redemption of Debentures.
(2009—11—4)
15.Mohit Ltd. Took over assets of Rs.8,40,000 and liabilities of Rs.80,000 of Radha Ltd. At an agreed
value of Rs.7,20,000.Mohit Ltd. Paid to Ram Ltd., by issue of 9% debentures of Rs.100 each at a premium
of 20%.
Pass necessary journal entries to record the above transactions in the books of Mohit Ltd.
(b) Give Journal entries in each of the following cases if the face value of a Debentures is Rs.100.
(i) A debenture issued at Rs.110 repayable at Rs.100
(ii) A debenture issued at Rs.100 repayable at Rs.105.
(iii) A debenture issued at Rs.105 repayable at Rs.105.
(2009—14--6)
16. On 1st January,2010, Rhythm Ltd. issued 1000, 10% Debentures of Rs.500 each at par. Debentures are
redeemable after 7 years. However, the company gave an option to debenture holders to get their
debentures converted into equity shares of Rs.100 each at a premium of Rs.25 per share anytime after the
expiry of one year.
Shivansh,holder of 200 debentures,informed on Jan.1,2012 that he wanted to exercise the option of
conversion of debentures into equity shares.
The company accepted his request and converted debentures into equity shares.
Pass necessary journal entries to record the issue of debentures on Jan 1,2010 and conversion of
debentures on Jan.1,2012. (S.P. 2013—9—3)
17. Pass necessary journal entries for issue of debentures for the followings:
(i) Jatin Ltd. issued 750,12% Debentures of Rs.100 each at a discount of 10% redeemable at a premium of
5%.
(ii) Sohan Ltd. issued 800,9% Debentures of Rs.100 each at a premium of Rs.20 per Debentures
redeemable at a premium of Rs.10 per Debenture.
(S.P.2013—10—3)
Marking Scheme
1. 1 mark for each entry
1
Furniture A/c Dr.
3,00,000
To Ravindram Ltd.
3,00,000
2.
3.
Ravindram Ltd. A/c Dr.
To Bills Payable A/c
1,00,000
Ravindram Ltd. A/c Dr.
To Equity Share Capital A/c
To Security Premium A/c
= 2,00,000
=16,000 shares
10+2.5=12.5
2,00,000
1,00,000
1,60,000
40,000
2. 1 mark for 1st entry and 2marks for 2nd entry
1
Bank A/c Dr.
To 12%Debenture App.& Allot. A/c
6,00,000
2
6,00,000
12% Debentures App.& Allot. A/c Dr.
To 12% Debentures A/c
To Security Premium Reserve A/c
To Bank A/c
3. 2marks for each type of redemption
1.
Own Debenture A/c Dr.
To Bank A/c
6,00,000
3,00,000
1,50,000
1,50,000
81600
81,600
85000
2.
12% Debentures A/c Dr.
To Own Debentures A/c
To Profit on Redemption A/c
40,000
3.
12% Debenture A/c Dr.
To Debenture holder A/c
Debenture holder A/c Dr.
To Bank A/c
40,000
4.
5.
Debenture Red. Reserve A/c Dr.
To General Reserve A/c
81600
3400
40,000
40,000
62500
62,500
4. (i) 1 mark for 1st entry and 2 marks for 2nd entry
1.
12% Debenture A/c Dr.
To Debenture holder A/c
2.
Debenture holder A/c Dr.
Discount on issue of shares A/c Dr.
To Equity Share Capital A/c
No. of shares =96,000 = 1000 share
100-4=96
96,000
96,000
96,000
4,000
1,00,000
(ii) 1 mark for 1st entry and 2 marks for 2nd entry
1.
12% Debenture A/c Dr.
To Debenture holder A/c
4,80,000
2.
4,80,000
Debenture holder A/c Dr
To 13% Debenture A/c
To Security Premium Reserve A/c
No.of new Deb.=4,80,000 =3840 deb.
100+25=125
4,80,000
3,84,000
96,000
5. ½ mark for 1st entry, ½ mark for 2nd entry and 2 marks for 3rd entry
1.
Furniture A/c Dr.
2,20,000
To M/s Furniture Mart. A/c
2.
3.
M/s Furniture Mart. A/c Dr.
To Bills Payable A/c
1,10,000
M/s Furniture Mart. A/c Dr.
To 9% Debentures A/c
To Security Premium Reserve A/c
No.of Deb.=1,10,000 = 1000 Deb.
100+10=110
1,10,000
1,10,000
1,00,000
10,000
6.(i) ½ mark for 1st entry and 1 ½ marks for 2nd entry
1.
9% Debentures A/c Dr.
To Debenture holder A/c
74,000
2.
74,000
Debenture holder A/c Dr.
To Equity Share Capital A/c
To Security Premium Reserve A/c
No.of shares=74000 = 592 shares
100+25=125
(ii)1 mark for each entry
2,20,000
74,000
59,200
14,800
1.
2.
Bank A/c Dr.
To 8% Deb.App.& Allot.A/c
2,06,250
8% Deb.App.& Allot. A/c Dr.
To 8% Debentures A/c
To Security Premium Reserve A/c
2,06,250
2,06,250
1,87,500
18,750
(iii) 1 mark for each entry
1.
Own Debentures A/c Dr.
To Bank A/c
76,000
2.
80,000
76,000
9% Debentures A/c Dr.
To Own Debentures A/c
To Profit on Redemption of Deb.A/c
76,000
4,000
7. 1 mark for balance sheet and 2 marks for note
1.
Bank A/c Dr.
To Bank Loan A/c
2.
4,00,000
4,00,000
5,00,000
Debenture Suspense A/c Dr.
To 9% Debenture A/c
5,00,000
Balance Sheet
Note Amt.
Non Current Liabilities
Note 1
Bank loan
4,00,000
(Deb.of Rs.5,00,000 issued as collateral security)
8. 1 mark for each entry
1.
P & L App. A/c
Dr.
To Deb.Red.Res. A/c
2.
9% Debenture A/c Dr.
To Debenture holder A/c
3.
Debenture holder A/c Dr.
To Bank A/c
4
Deb.Red.Res.A/c Dr.
To General Reserve A/c
9. 3 marks for 1st 2 entries and 3 marks for last 4 entries
1
Amt.
4,00,000
4,00,000
86,000
86,000
10,00,000
10,00,000
10,00,000
10,00,000
5,00,000
5,00,000
1.
2.
3.
4.
5.
6.
Sundry Assets A/c Dr.
Goodwill A/c
Dr.
To Sundry Liabilities A/c
To P & Co. A/c
P & Co. A/c
Dr.
Loss on Issue of Debenture A/c Dr.
To 12% Debenture A/c
To Security Premium A/c
To Premium on Redemption A/c
P & L App. A/c
Dr.
Deb.Red.Res. A/c
6,00,000
30,000
12% Debenture A/c Dr.
Premium on Redemption A/c Dr.
To Debenture holder A/c
5,00,000
25,000
Debenture holder A/c Dr.
To Bank A/c
Deb. Red.Res. A/c Dr.
To General Reserve A/c
70,000
5,50,000
5,50,000
25,000
5,00,000
50,000
25,000
2,50,000
2,50,000
5,25,000
5,25,000
5,25,000
2,50,000
2,50,000
10. 1 mark
It means Issue of debenture as additional security against bank loan so that bank can be a
debenture holder when company is not able to pay the dues.
11. 1 mark for 1st entry and 2 marks for 2nd entry
1.
6% Debentures A/c
Dr.
1,00,000
Premium on Redemption A/c Dr.
5,000
1,05,000
To Debentureholder A/c
2.
Debenture holder A/c
Dr.
To Equity Share Capital A/c
To Security Premium A/c
No.of shares=1,05,000 = 840 shares
100+25=125
12.(i) ½ mark for each entry
1.
Bank A/c Dr.
To 9% Deb. App.& Allot.A/c
2.
9% Deb. App.& Allot.A/c Dr.
Loss on Issue of Debenture A/c Dr.
To 9% Debentures A/c
To Security Premium Reserve A/c
To Premium on Redemption A/c
3.
9% Debentures A/c
Dr.
Premium on Redemption A/c Dr.
ToDebentur holder A/c
4.
Debenture holder A/c Dr.
To Bank A/c
1,05,000
84,000
21,000
39,37,500
39,37,500
39,37,500
5,62,500
37,50,000
1,87,500
5,62,500
37,50,000
5,62,500
43,12,500
43,12,500
43,12,500
(ii) ½ mark for each entry
1.
Bank A/c Dr.
To 12% Deb. App.& Allot.A/c
21,60,000
2.
9% Deb. App.& Allot.A/c Dr.
To 9% Debentures A/c
To Security Premium Reserve A/c
21,60,000
20,00,000
1,60,000
3.
9% Debentures A/c
Dr.
ToDebentur holder A/c
20,00,000
20,00,000
Debenture holder A/c
To Bank A/c
20,00,000
20,00,000
4.
Dr.
13. 3 marks for issue and 3 marks for redemption
1.
Bank A/c Dr.
To 12% Deb. App.& Allot.A/c
2.
3.
4.
5.
21,60,000
15,00,000
15,00,000
12% Deb. App.& Allot.A/c Dr.
Loss on Issue of Debenture A/c Dr.
To 10% Debenture A/c
To Premium on Redemption A/c
P & L App. A/c
Dr.
To Deb.Red.Res. A/c
15,00,000
2,25,000
10% Debenture A/c
Dr.
Premium on Redemption A/c Dr.
To Debenture holder A/c
15,00,000
2,25,000
Deb.Red.Res. A/c Dr.
To General Reserve A/c
15,00,000
2,25,000
15,00,000
15,00,000
17,25,000
15,00,000
15,00,000
14. 1 ½ marks for 1st two entries and 1 mark for last entry
1.
P & L App. A/c
Dr.
To Deb.Red.Res. A/c
5,60,000
2.
10,00,000
3.
9% Debenture A/c
To Debenture holder A/c
Debenture holder A/c
To Bank A/c
Dr.
15.(a) 1 ½ marks for each entry
Dr.
5,60,000
10,00,000
10,00,000
10,00,000
1.
2.
Sundry Assets A/c Dr.
To Sundry Liabilities A/c
To Radha Ltd.
To Capital Reserve A/c
Radha Ltd. A/c Dr.
To 9 % Debentures A/c
To Security Premium Reserve A/c
No. of Deb.=7,20,000 =6000 Deb.
100+20=120
8,40,000
80,000
7,20,000
40,000
7,20,000
6,00,000
1,20,000
(b)(i) ½ mark for each entry
1.
2.
Bank A/c
Dr.
To Deb. App.& Allot. A/c
Deb. App. & Allot. A/c Dr.
To Debenture A/c
To Security Premium Reserve A/c
(b)(ii) ½ mark for each entry
1.
Bank A/c
Dr.
To Deb. App.& Allot. A/c
2.
Deb. App.& Allot. A/c Dr.
Loss on Issue of Deb. A/c Dr.
To Debenture A/c
To Premium on Redemption A/c
(b)(iii) ½ mark for each entry
1.
Bank A/c
Dr.
To Deb. App.& Allot. A/c
2.
Deb. App.& Allot. A/c Dr.
Loss on Issue of Deb. A/c Dr.
To Debenture A/c
To Security Premium Reserve A/c
To Premium on Redemption A/c
16. 1mark for issue and 2 marks for redemption
1.
Bank A/c
Dr.
To 10% Deb. App.& Allot. A/c
2.
Deb. App.& Allot. A/c Dr.
To Debenture A/c
3.
10% Debenture A/c Dr.
To Debenture holder A/c
4.
Debenture holder A/c Dr.
To Equity Share Capital A/c
To Security Premium Reserve A/c
No.of Deb.=1,00,000 = 800 Deb.
100+25=125
17. (i) ½ mark for 1st entry and 1 mark for 2nd entry
110
110
110
100
10
100
100
100
5
100
5
105
105
105
5
100
5
5
5,00,000
5,00,000
5,00,000
5,00,000
1,00,000
1,00,000
1,00,000
80,000
20,000
1.
2.
Bank A/c
Dr.
To 12% Deb. App.& Allot. A/c
12% Deb. App.& Allot. A/c Dr.
Loss on Issue of Deb. A/c Dr.
To 12% Debenture A/c
To Premium on Redemption A/c
(ii) ½ mark for 1st entry and 1 mark for 2nd entry
1.
Bank A/c
Dr.
To Deb. App.& Allot. A/c
2.
Deb. App.& Allot. A/c Dr.
Loss on Issue of Deb. A/c Dr.
To Debenture A/c
To Security Premium Reserve A/c
To Premium on Redemption A/c
67,500
67,500
67,500
11,250
75,000
3,750
96,000
96,000
96,000
8,000
80,000
16,000
8,000
Points to Remember:
1.Loss on issue of Debenture A/c will be opened only when redemption of debenture is made on premium.
2. No requirement of opening Discount on issue of Debenture A/c separately when redemption is made on
premium because it will also be shown in loss on issue of debenture a/c.
3.Payment of Interest
(i) Interest on Debenture A/c Dr.
To Debentureholder A/c
To Tax Payable A/c
(ii)Debentureholder A/c
Dr.
Tax Payable A/c
Dr.
To Bank A/c
These two entries will be passed how many times the interest is paid
(iii) P & L A/c
Dr.
To Interest on Debenture A/c
This entry will be passed one time in a year.
4.Debenture issued as collateral security are only as additional security to bank for which bank can be a
debenture holder when the company is not able to pay the dues.
5. Amount of Debentures issued as collateral security can be different from amount of bank loan.
6. No. of Debentures issued should be calculated
= Amount Payable to Vendor =No. of Debentures Issued
Issued Value of Debenture
7. Before starting the redemption of debenture atleast 50% amount of total debenture should be
transferred to Debenture Redemption Reserve.But if the debenture are redeemed out of profit them 100%
amount will be transferred to D.R.R.
8.The entry of creating D.R.R. will be passed, howmany instalments are there to create D.R.R.
9.The entry for redemption will be passed, howmany times the debentures are redeemed.
10.To convert the debentures into another security
(i)Firstly calculate the amount payable to debenture holders
i.e. at par,at premium or with deducting discount
(ii)New issue will be made as following
Amount payable to Debenture holder =No. of New Securities
Issued Value of New Security
ANALYSIS OF FINANCIAL STATEMENTS
(A) Financial Statements of a Company
(01) List the items which are shown under heading ‘Current Liabilities & Provision’ as per schedule VI
Part I of the Companies Act 1956. (2011)
Ans.: (a) Short term borrowings (b) Trade payables (c) Other current liabilities (d) Short term
provisions.
(02) List the major headings on the assets/liabilities side of the Balance Sheet of a company as per Shedule
VI Part I of the Companies Act 1956. (2008)
Ans.:
EQUITY & LIABILITIES
(1) Shareholders’ Funds
(2) Share application money pending allotment
(3) Non – current liabilities
(4) Current liabilities
ASSETS
(1) Non-Current Assets
(2) Current Assets
(03) State any three items which are shown under the heading ‘Reserves & Surplus’ in the Balance Sheet of
a company as per revised Schedule VI, Part I of the Companies Act, 1956. (AI 2002, D 2006)
Ans.: (i) Capital Reserve
(ii) Securities Premium (Reserve)
(iii) Capital Redemption Reserve.
(iv) Debenture Redemption Reserve
(v) Revaluation Reserve
(vi) Share Options Outstanding Account
(vii) Other reserves (a) General/Tax/Subsidy Reserve/Amalgamation Reserve
(viii) Surplus i.e., balance in Statement of Profit and Loss.
In case the final balance of the Statement of profit and loss shows a debit balance the same
should be shown as deduction from the totals of reserves.
(04) State the major headings under which the following items will be put as per Schedule VI, Part I of the
Companies Act 1956: (AI 2011: Set I & II)
Ans.:
S.N. Name of item
Sub-Head
Major Head
01
Sundry Creditor
Trade Payables
Current Liabilities
02
Provision for Tax
Short-term Provision
Current Liabilities
03
Unclaimed Dividend Short-term Provision
Current Liabilities
04
Loose Tools
Inventories
Current Assets
05
Securities Premium Reserve & Surplus
Share holder’s Fund
06
Goodwill
Fixed Assets
Non-current Assets
07
Long-term Investment Non-current Investments
Non-current Assets
08
Unpaid Dividend
Other Current Liabilities
Current Liabilities
09
Motor Car
Fixed Assets
Non-current Assets
10
Discount on issue
Other Long-term Liabilities Non-current Laibilities
Expected Questions:
(05) List the items which are presented under the major head „Current Assets‟ as per Revised Schedule VI
Part I of the Companies Act 1956.
Solution:
The items which are presented under the major head „Current Assets‟ as per Revised
Schedule VI Part I of the Companies Act 1956, are given below:
(a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents
(e) Short-term loans and advances. (f) Other current assets.
(06) List the different items which are presented under the major head. „Non-current Assets‟ as per revised
Schedule VI Part I of the Companies Act 1956.
Solution:
Non-Current Assets
(a) Fixed Assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development.
(b) Non-current investments
(c) Deferred tax assets (Net)
(d) Long term loans and advances
(e) Other non-current assets.
(07) Under what heads and sub-heads the following items will appear in the Balance sheet of a company as
per revised schedule VI:
(i) Computer Software
(ii) Share Forfeiture Account
(iii) Security deposit for telephones
(iv) Employees Earned leave payable on retirement
(v) Proposed dividend
(vi) Profit & Loss Account (Dr.)
Solution:
S.N. Name of item
01
Computer Software
02
Share Forfeiture Account
03
Security deposit for telephones
04
05
06
Employees Earned leave payable on
retirement
Proposed Dividend
Profit & Loss Account (Dr.)
Sub-Head
Fixed Assets
Share Capital
Long-term loans &
advances
Long-term provisions
Short-term Provision
Reserve & Surplus
Major Head
Non-current Assets
Shareholder’s Fund
Non-current Assets
Non-current
Liabilities
Current Liabilities
Shareholders Fund
This year drastic changes has been done into the format and presentation
of major heads and sub-heads of Financial Statements of a company,
therefore, be careful and must be follow as mentioned in this study
materials.
I. EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share capital
(i) Number and amount of shares authorized.
(ii) Number of shares issued, subscribed and fully paid up and subscribed but not fully paid up.
(iii) Par value per share.
(iv) A reconciliation of the number of shares outstanding at the beginning and at the end of the
reporting period.
(v) Shares in the company held by each share holder holding more than 5% shares specifying the
number of shares held.
(vi) Aggregate number and class of shares allotted or fully paid up for consideration other than
cash.
(vii) Aggregate number and class of shares allotted as fully paid upby way of bonus shares.
(viii) Calls unpaid showing aggregate value of calls unpaid by directors and officers.
(ix) Share forfeited amount.
(b) Reserves and surplus
(i) Capital Reserve
(ii) Securities Premium (Reserve)
(iii) Capital Redemption Reserve.
(iv) Debenture Redemption Reserve
(v) Revaluation Reserve
(vi) Share Options Outstanding Account
(vii) Other reserves (a) General Reserve (b) Tax Reserve (c) Subsidy Reserve (d)Amalgamation
Reserve
(viii) Surplus i.e., balance in Statement of Profit and Loss.
In case the final balance of the Statement of profit and loss shows a debit balance the same
should be shown as deduction from the totals of reserves.
(c) Money received against share
warrants
(2) Share application money pending
allotment
(3) Non – current liabilities
(a) Long term borrowings (Debentures, Long Term Loans etc.)
(b) Deferred tax liabilities (net)
(c) Other long term liabilities (Trade payables on account of purchase of Fixed Assets and interest accrued
there on, Provisional Fund contribution)
(d) Long term provisions (Provision for employee benefits, Provision for Warranties).
(4) Current liabilities
(a) Short term borrowings (Loans repayable on demand from banks and other parties, Deposits, Loans and
advances from related parties)
(b) Trade payables (A trade payable refers to the amount due on account of goods purchased or services
received in the normal course of business.)
(c) Other current liabilities (Unpaid dividends, Interest accrued and due/ not due on borrowings,
income received in advance, Calls in advance and interest thereon.)
(d) Short term provisions (Provision for doubtful debts, Provision for tax, proposed dividend.)
II. ASSETS
(1) Non-Current Assets
(a) Fixed assets
(i) Tangible assets (Land, Building, Plant and Equipment, Furniture & Fixture, Vehicles, Office
Equipments, Others)
(ii) Intangible assets (Goodwill, Brands/trademarks, Computer Software, Mastheads and Publishing Titles,
Mining Right, Copyrights and patents and other intellectual property rights, Recipes, formulae, models,
designs, Licenses and franchise, Others.)
(iii) Capital work in progress
(iv) Intangible assets under development – like patents, intellectual property rights, etc. which are being
developed by the company
(b) Non-current investments (Investment property, Equity Instrument, Preference shares, Government
Securities, Debentures, Mutual Funds etc).
I Deferred tax assets (net)
(d) Long term loans and advances – Capital Advances, Security Deposits, etc.
(e) Other non-current assets
(2) Current Assets
(a) Current investments (Investments in Equity Instrument, Preference shares, Government Securities,
Debentures, Mutual Funds etc.)
(b) Inventories
(i) Raw material
(ii) Work-in-progress
(iii) Finished goods
(iv) Goods acquired for trading
(v) Stores and spares
(vi) Loose tools.
I Trade receivables
(d) Cash and cash equivalents
(e) Short term loans and advances
(f) Other current assets (Prepaid expenses, and advance taxes)
(B) Financial Statement Analysis: Objectives and Limitations
(01) Briefly explain the interest of investors and management in the analysis of financial statements.
(2007F)
Ans.: Investors are interested in analyzing financial statements to assess the safety of their
investment & ensuring of returns regularly. Management is interested in analyzing financial
statements to know the performance of business as a whole (profitability) and short-term & longterm solvency position of the business firm.
(02) Explain the meaning of analysis of financial statements. (2007D)
Ans.: Analysis of financial statements is a systematic process for the critical examination of
financial information contained in the financial statements in order to understand and make
decisions regarding the operations in the firm. OR
Analysis of financial statements is a systematic process of identifying the financial strengths and
weaknesses of the firm by establishing relationship between the items of the Balance Sheet and
Income Statement.
(03) Explain briefly any three limitations of analysis of financial statements. (3 marks: 2007)
Ans.: (a) Limitations of Financial Statements: as influence of accounting concepts, disclosure of
only monetary facts etc.
(b) Not Free from Bias: personal judgment & discretion of the account and management.
I Ignores Price level Changes: fails to disclose current worth of the enterprise as the financial
statements are merely historical facts.
(d) Window Dressing: manipulation of accounts to conceal vital facts and presentation of the
financial statements so as to show a position better than what it actually is.
(04) What is the importance of Financial Statement Analysis? (2009)
Ans.: (a) Assessing the Profitability (b) Judging the Efficiency (c) Judging the Liquidty
(05) State one limitation of Financial Statement Analysis. (2010)
Ans.: As the answer of question no. 03.
(06) State the significance of Analysis of Financial Statements to the ‘Lenders/Creditors/Managers’. (2012)
Ans.: As the answer of question no. 01.
(07) What is Horizontal Analysis? / What is Vertical Analysis? (D 2009, AI 2009)
Ans.: Horizontal analysis shows comparison of financial data for several years against a chosen
year. Example – Comparative financial statements.
Vertical analysis is made to review and analyze the financial statements of one particular year only.
Example – Ratio Analysis
(08) State how qualitative aspects are ignored in Financial Statement Analysis? (D 2011 C)
Ans.: Financial statements produces the performance & position of a firm in monetary terms only
and excluded the things which cannot be expressed or recorded in monetary terms like quality of
management, quality of labour force, public relations etc.
(09) State one objective of Financial Statement Analysis. (D 2010)
Ans.: As the answer of question no. 04.
(10) How is ‘window dressing’ a limitation of Financial Statement Analysis?
Ans.: As the answer of question no. 03 (d).
Expected Questions:
(11) What is Intra-firm Analysis?
Ans.: A comparison of financial variables of a firm over a period of time. In other words,
comparison of one year’s of performance with previous years’ performance is called intra-firm
comparison.
(12) What is Inter-firm Analysis?
Ans.: It analyses and compares financial variables of two or more firms to determine the
competitive position of these firms.
I Tools for Financial Statement Analysis:
Preparation of Comparative Statement: 2007, 2008, 2009, 2010, 2011
Preparation of Common Size Statement: 2012
(01) Prepare Comparative Income Statements from the following:
Particulars
Revenue from operations
Expenses
Other income
Income Tax
31-3-2011
10,00,000
6,00,000
2,00,000
50%
31-3-2012
15,00,000
10,50,000
1,80,000
50%
Solution:
Comparative Statement of Profit & loss for the year ended 31st March, 2012
Absolute figures
Change (base year 2010-12)
Particulars
31.3.2011
31.3.2012
Absolute Figures
(%)
(Rs)
(Rs)
(Rs)
I Revenue from Operations
10,00,000
15,00,000
5,00,000
50%
II Add: Other Incomes
2,00,000
1,80,000
(20,000)
10%
Total Revenue (I+II)
12,00,000
16,80,000
4,80,000
40%
III Less: Expenses
6,00,000
10,50,000
4,50,000
75%
Profit before Tax
6,00,000
6,30,000
30,000
5%
Less: Tax (50%)
3,00,000
3,15,000
15,000
5%
IV Profit after Tax
3,00,000
3,15,000
15,000
5%
 ½ mark for each correct row up to the calculation of correct percentage.
(02) From the following Statement of Profit & Loss of Star Ltd., for the year ended 31st march, 2012,
prepare a Comparative Statement of Profit & Loss:
Particulars
Note No.
2010-11 (Rs)
2011-12 (Rs)
Revenue from Operations
16,00,000
20,00,000
Employee benefits expenses
8,00,000
10,00,000
Other expenses
2,00,000
1,00,000
Tax rate 40%
Solution: Comparative Statement of Profit & loss for the year ended 31st March, 2012
Absolute figures
Change (base year 2010-12)
31.3.2011
31.3.2012
Absolute Figures
(%)
(Rs)
(Rs)
(Rs)
I Revenue from Operations
16,00,000
20,00,000
4,00,000
25%
II Less: Empl. B. Expenses
8,00,000
10,00,000
2,00,000
25%
Less: Other Expenses
2,00,000
1,00,000
(1,00,000)
(50%)
III Profit before Tax
6,00,000
9,00,000
3,00,000
50%
Less: Tax (40%)
2,40,000
3,60,000
1,20,000
50%
IV Profit after Tax
6,00,000
9,00,000
3,00,000
50%
½ mark for each correct row up to the calculation of correct percentage.
Particulars

(D) Accounting Ratios: Objectives and Classification
(01) The Current Ratio of a company is 3:1. State with reason whether the payment of Rs 20,000 to the
creditors will increase, decrease or not change the ratio. (AI 2009 C)
Ans.: The Current Ratio will increase due to payment to the creditors, current assets and current
liabilities will be reduced by the same amount.
(02) Quick Ratio of a company is 3:1. State with reason whether the ratio will improve, decline or not
change on payment of dividend by the company. (2008 D)
Ans.: Quick Ratio will improve as both liquid assets and current liabilities will decrease by the
same amount.
(03) The Stock Turnover Ratio of a company is 3 times. State, giving reason, whether the ratio improves,
decline or does not change because of increase in the value of closing stock by Rs 5,000. (AI 2008)
Ans.: Stock Turnover Ratio will decline because the amount of average stock will increase but cost
of goods sold will remain same.
(04) The GP Ratio of a company is 50%. State with reason whether the decrease in rent received by Rs
15,000 will increase, decrease or not change the ratio. (D 2009C)
Ans.: Decrease in rent received will not change the gross profit ratio because rent received neither
effects the gross profit or the net sales.
(05) The Quick ratio of a company is 1:1. State giving reasons, (for any four) which of the following would
improve, reduce or not change the ratio? (AI 2011 C)
(a) Purchase of machinery for cash
(b) Purchase of goods on credit
(c) Sale of furniture at cost
(d) Sale of goods at a profit
(e) Redemption of debentures at a premium
(a) Decrease. As Quick assets decreased but current liabilities remain unchanged.
(b) Decrease. As current liabilities increased but quick assets remain unchanged.
(c) Improve. As Quick assets increased but current liabilities remain unchanged.
(d) Improve. As Quick assets increased but current liabilities remain unchanged.
(e) Decrease. As Quick assets decreased but current liabilities remain unchanged.
(06) The Debt-Equity ratio of a company is 0.8:1. State whether the long term loan obtained by the
company will improve, decline or not change the ratio. (2008)
Ans.: Debt-Equity Ratio will improve as the long-term debts will increase but total shareholders’
funds remain unchanged.
(07) What will be the operating profit ratio, if operating ratio is 83.64%? (2009)
Ans.: Operating Profit Ratio = 100 – 83.64 = 16.36 %
(08) OM Ltd has Current Ratio is 3.5:1 and Quick Ratio is 2:1. If the excess of Current Assets over the
Quick Assets as represented by Stock is Rs 1,50,000.
Calculate Current Assets and Current Liabilities. (2012)
Ans.:
Let’s Current Liabilities be X, therefore, Current Assets = 3.5X and Quick Assets = 2X
Stock = Current Assets – Quick Assets;
1,50,000 = 3.5X – 2X;
1.5X = 1,50,000;
X = 1,00,000
Current Assets = 3.5 X 1,00,000 = 3,50,000; Current Liabilities = 2,00,000.
(09) (a) A business has a Current ratio of 3:1 and a Quick ratio of 1.2:1. If the Working capital is Rs
1,80,000, calculate the total current liabilities value of stock. (2 marks 2010)
Ans.:
Let’s Current Liabilities be X, therefore, Current Assets = 3X and Quick Assets = 1.2X
Working Capital = Current Assets – Current Liabilities
1,80,000 = 3X – X; 2X = 1,80,000;
X = 90,000 i.e. current liabilities
Current Assets = 2,70,000; Quick Assets = 1,08,000;
Stock = Current Asset – Quick
Assets
Stock = 2,70,000 – 1,08,000 = 1,62,000.
(b) From the given information calculate the Stock turnover ratio: Sales Rs 2,00,000; GP 25% on cost;
Stock at the beginning is 1/3 of the stock at the end which was 30% of Sales. (2 marks 2010)
Ans.:
Cost = X; Gross Profit = 25% on X; GP = X/4
Sales = Cost + Gross Profit; 2,00,000 = X + X/4; 2,00,000 = 5X/4; 5X = 8,00,000; X(Cost) =1,60,000.
Stock at the end = 30% on Sales; = 60,000; Opening Stock = 1/3 of 60,000 = 20,000
Average Stock = (60,000 + 20,000) / 2 = 40,000
Stock Turnover Ratio = Cost of goods sold / Average Stock
STR = 1,60,000 / 40,000 = 4 Times.
(10) Assuming that the debt-Equity ratio is 2. State giving reasons whether this ratio would increase,
decrease or remain unchanged in the following cases (Any four): (2010)
(a) Purchase of fixed asset on a credit of 2 months.
(b) Purchase of fixed asset on a long-term deferred payment basis.
(c) Issue of new shares for cash.
(d) Issue of bonus shares.
(e) Sale of fixed asset at a loss of Rs 3,000.
Solution:
(a) No change. Neither equity nor the debts are affected.
(b) Increase. As the debts are increasing.
(c) Decrease. As Shareholders’ Funds will increase.
(d) No change. Neither the total long-term debt nor the total shareholders’ funds are affected.
(e) No change. Shareholders’ funds are decreased by loss but LT debts remain unchanged.
(11) (a) Net profit after interest but before Tax Rs 1,40,000. 15% long term debts Rs 4,00,000, Share
holders funds Rs 2,40,000; Tax Rate 50%. Calculate Return on Capital Employed (Investment) (2009)
ROI = Net Profits before Interest, Tax & Dividend / Capital Employed X 100
NPBI&T = 1,40,000 + 60,000 = 2,00,000
Capital Employed = Shareholders’ funds + Lon-term Debts + Reserve & Surplus
= 2,40,000 + 4,00,000 + (1,40,000 – 70,000 Tax) = 6,40,000 + 70,000 = 7,10,000.
Return on Investment = 2,00,000 / 7,10,000 X 100; = 28.17 %.
(b) Opening Stock Rs 60,000; Closing Stock Rs 1,00,000; Stock turn over ratio 8 times; Selling price
25% above cost. Calculate the Gross Profit Ratio. (2009) {2+2=4 marks}
Gross Profit Ratio = Gross Profit / Net Sales X 100; Gross Profit = Sales – Cost of goods sold
Stock Turnover Ratio = Cost of goods sold / Average Stock
Average Stock = Opening stock + Closing stock / 2; = 60,000 + 1,00,000 / 2 = 80,000
8 = Cost of goods sold / 80,000; Cost of goods sold = 6,40,000
Selling price 25% above cost, therefore Gross profit = 25% of 6,40,000 = 1,60,000
Selling Price = 6,40,000 + 1,60,000 = 8,00,000.
Current Ratio:
Current Assets
Current Liabilities
This ratio shows short-term financial position of the firm. Higher the
ratio shows greater short-term solvency but a very higher ratio shows
idleness of working capital. Standard (ideal) ratio is 2:1.
Liquid/Quick Ratio:
This ratio is based on those current assets which are highly liquid.
Higher the Liquid/Quick/Acid-Test ratio better the short-term
financial position of the firm. Standard ratio is 1:1.
Quick Assets
Current Liabilities
Debt-Equity Ratio:
This ratio judges the long-term financial position & soundness of longterm financial policies of the firm. Lower the ratio provides higher
Long-term Debt
degree of protection to lender. Standard Ratio – 2:1.
Equity/Shareholders Fund
Equity = Paid-up sh.capital+Pref.Sh.Cap.+Reserves – Fict.Assets
Total Asset to Debt Ratio: This ratio measures the safety margin available to the suppliers of
Total Assets
long-term debts.
Lon-Term Debts
Proprietary Ratio
This ratio shows the extent to which the total assets have been
financed by the proprietor. Higher the ratio, greater the satisfaction
Shareholder Funds X 100
for lenders and creditors. Standard Ratio – 2:1.
Total Assets
Stock Turnover Ratio:
Cost of Goods Sold
Average Stock
Debtors Turnover ratio:
Net Credit Sales
Average Accts Receivables
Payable Turnover Ratio:
Net Credit Purchases
Average Payable
This ratio measures how fast the stock is moving through the firm and
generating sales. Higher the ratio, the more efficient management of
inventories and vice-versa. It is expressed in times.
This ratio indicates economy and efficiency in the collection of
amount due from debtors. Higher the ratio, better it is since it
indicates that debts are being collected more quickly.
It indicates the number of times the creditors are turned over in
relation to purchases. A higher turnover ratio or shorter payment
period shows the availability of less credit or yearly payments.
Working Capital Turnover:
COGS / Net Sales
Net working Capital
COGS=Cost of Goods Sold
Fixed Assets Turnover:
Net Sales
Net Fixed Assets
Gross Profit Ratio;
Gross Profit X 100
Net Sales
Operating Ratio:
COGS + Operating Exp. X 100
Net Sales
Net Profit Ratio:
Net Profit X 100
Net Sales
Return on Investment:
(Capital Employed)
PBIT & D X 100
Capital Employed
This ratio shows the number of times the working capital has been
employed in the process of carrying on of business. Higher the ratio,
better the efficiency in the utilization of working capital.
If, COGS & Net Sales both are given than COGS should be used.
A higher ratio indicates efficient utilization of fixed assets and viceversa. Net Fixed Assets = Fixed Assets – Depreciation.
This ratio indicates the relationship between gross profits and net
sales. Higher ratio shows low cost of goods sold.
This ratio is calculated to judge the operational efficiency of the
business. A decline in the ratio, is better because it would leave a high
margin, which means more profits.
It indicates overall efficiency of the business. Higher the ratio, better
the business.
It judges the overall performance of the business. It measures, how
efficiently the sources entrusted to the business are used.
Capital Employed = Share Capital + Reserves + Long-Term Loans –
Fictitious Assets – Non-operating Assets. OR
= Fixed Assets + Investments + Working Capital.
♫ Current ratio is 2:1. State whether ratio will improve, decline or no change if a creditor of Rs
5,000 has been paid.
Ans. & Hints: Assumed as the Current Assets is 20,000 & Current Liabilities Rs 10,000.
Payment to creditor of Rs 5,000 will reduce the current assets and current liabilities too.
Therefore, the proportion between them will be 15,000 : 5,000. Thus, the new Current ratio will be
3:1. Hence, Current Ratio will be Improve.
(1)
(2)
(3)
(4)
HINTS
Only Numerator increased or only Denominator decreased than ratio will improve.
Only Numerator decreased or only Denominator increased than ratio will decline.
Numerator and Denominator increased with same figures, ratio will decline.
Numerator and Denominator decreased with same figures, ratio will improve.
Current Assets are Numerator & Current Liabilities are Denominator in Current Ratio.
(E) Cash Flow Statement: Objectives & Preparation
(01) What is meant by a Cash Flow Statement? (D 2005, AI 2005, 2006C)
Ans.: Cash flow statement shows inflows (receipts) and outflows (payments) of cash and cash
equivalents of an enterprise during a specified period of time.
(02) State any two objectives of preparing a cash flow statement. (2007D)
Ans.: (a) it provides information about cash flow from operating, investing and financing activities
during a specific period.
(b) It enables the users to assess the ability of the enterprise to generate cash and cash equivalents.
(03) X Ltd. is a Mutual Fund Company. The company invested Rs. 50 lakhs in the shares of Y Ltd. State
with reason whether the dividend received on the shares of Y Ltd. will be cash flow from operating
activities or from investing activities. (2007 F)
Ans.: A Mutual fund company is a financial enterprise and investing of funds into profitable securities
is an operation activity, therefore X Ltd investment of Rs 50 lakhs in the shares of Y Ltd is an
Operating activity for preparing the cash flow statement.
(04) Fine Garments Ltd. is engaged in the export of readymade garments. The company purchased a
machinery of Rs. 10,00,000 for the use in packaging of such garments. State giving reason whether the
cash flow due to the purchase of machinery will be cash flow from operating activities, investing
activities or financial activities? (2007D)
Ans.: Fine Garments Ltd is a manufacturing company therefore to produce the garments; purchase of
machinery is an investment activity for preparing the cash flow statement.
(05) State whether depreciation charged by a company will result in inflow, outflow or not flow of cash.
(2008)
Ans.: Depreciation charged by a company is non-cash charge therefore, no flow of cash.
(06) Interest paid by an investment company will come under which activity while preparing cash flow
statement? (2008)
Ans.: Interest paid by an investment company will come under Operating activity while preparing cash
flow statement.
(07) State why non-cash transactions are ignored while preparing a cash flow statement? (2009)
Ans.: No any flow of cash from non-cash transaction, therefore, it must be ignored while preparing a
cash flow statement.
(08) When Dividend is received considered as operating activity? (2009)
Ans.: Dividend received considered as Operating activity when it has been received by Financial company.
(09) Under which type of activity will you classify ‘Proceeds from sale of Buildings’ while preparing cash
flow statement? (2010)
Ans.: Proceeds from sale of Buildings will be classified under Investing activity while preparing cash
flow statement.
(10) Redemption of debentures would results in inflow, outflow or no flow of cash? Give your answer with
reason. (2010)
Ans.: Redemption of debentures would results in Outflow of cash due to repayment of debentures in
cash to its holders.
(11) Why is Cash Flow Statement prepared? (D2010C) * Follow the answer for objectives of CFS.
(12) Give the meaning of Cash Flow. (2011) * Follow the answer as stated above.
(13) State the reason whether deposit of cash into bank will result in inflow, outflow or no flow of cash.
(2011)
Ans.: Deposit of cash into bank will no flow of cash because it’s part of ‘cash & cash equivalents’.
[[
(14) Define the Cash Equivalents & Cash as per Accounting Standard – 3. (AI 2008C, AI 2011 C)
Ans.: As per Accounting Standard – 3, Cash Equivalents & Cash shall be classified as:
(a) Balance with banks (b) Cheques, drafts on hand (c) Cash on hand.
(15) Distinct between Operating and Investing / Financing Activities. (F 2010, AI 2010 C)
Operating Activity is the principal revenue producing activity of the enterprise, Financing Activity is
that activity which changes the size & composition of owner’s capital & borrowing of the enterprise
whereas Investing Activity include the acquisition and disposal of long-term assets.
(16) Under which type of activity will you classify ‘sale of shares of another company’ while preparing the
cash flow statement? (F 2010)
Ans.: ‘Sale of shares of another company’ will be classified under Investing Activity while preparing
the cash flow statement.
(17) State whether cash withdrawn from bank for office use will use result in inflow, outflow or no flow of
cash. (F 2011)
Ans.: Cash withdrawn from bank for office use result in no flow of cash.
(18) State the purpose of preparing a Cash Flow Statement. (2012). As the answer of the question of 02.
(19) While preparing a cash flow statement what type of activity is, ‘Payment of cash to acquire debentures
by an Investment Company’? (2012)
Ans.: Payment of cash to acquire debentures by an Investing Company will be classified under
Operating Activity while preparing cash flow statements.
Preparation of Cash Flow Statement:
Cash Flow from Operation: 2007, 2008, 2009. Cash Flow Statement: 2010, 2011, 2012
(20) Following are the Balance Sheets of Mittal Ltd., as on 31st March 2011 and 2012:
Particulars
Note No. 2010-11 (Rs)
2011-12 (Rs)
EQUITY AND LIABILITIES
(1) Shareholders Funds
(a) Share capital
10,00,000
14,00,000
(b) Reserves & Surplus
1
4,00,000
5,00,000
(2) Non Current Liabilities
Long Term borrowings
2
2,00,000
6,00,000
(3) Current Liabilities
Short Term provision
3
60,000
80,000
Total
16,60,000
25,80,000
ASSETS
(1) Non Current Assets
(a) Fixed assets
(i) Tangible assets
4
9,00,000
16,00,000
(ii) Intangible assets
5
2,00,000
1,40,000
(2) Current Assets
(a) Inventories
2,00,000
2,50,000
(b) Trade Receivables
3,00,000
5,00,000
(c) Cash & Cash equivalents
60,000
90,000
Total
16,60,000
25,80,000
Notes to Accounts:
Prepare a Cash Flow Statement after taking into account the following adjustments:
(a) The company paid interest Rs 45,000 on its Deposits.
(b) Depreciation provided on machinery during the year Rs 2,00,000.
Solution:
Cash Flow Statement for the year ended March 31st, 2012
A: 3 ½ marks; B: 1 mark and C: 2 ½ marks.
(21) From the following summarized balance sheets of a company, calculate cash flow from operating
activities:
Particulars
31.3.2011 (Rs)
31.3.2012 (Rs)
I. Equity and Liabilities
Share holder’s funds:
Equity Share Capital
1,00,000
1,00,000
Reserves & Surplus (Profit & Loss Balance) 30,000
60,000
Non Current Liabilities:
6% Debentures
60,000
80,000
Current Liabilities:
Creditors
30,000
35,000
Bills Payable
30,000
10,000
Other Current Liabilities
40,000
45,000
Total
2,90,000
3,30,000
II. Assets
Non Current Assets: Fixed assets
1,50,000
1,90,000
Non Current Investments
40,000
30,000
Current Assets
Stock
40,000
30,000
Debtors
40,000
45,000
Cash
20,000
10,000
Total
2,90,000
3,30,000
Additional Informations:
(1) A piece of machinery costing Rs 5,000, on which depreciation of Rs 2,000 had been charged was
sold for Rs 1,000. Depreciation charged during the year was rs 17,000.
(2) New debentures have been issued on 1st August, 2011.
Solution:
Sample Format for Cash Flow from Operating Activity
Statement showing computation of Cash Flow from Operating Activities (Indirect Method)
Net Profits before Tax
Note No.
----------
Adjustment for Non-Cash & Non-Operating Items:
Add: Depreciation
---------
Add: Transfer to General Reserve
---------
Add: Goodwill Written Off
---------
Add: Loss on sale of Fixed Asset
--------
Less: Gain on sale of Fixed Asset
(-------)
Operating Profit before change in working capital
------------------
Adjustment for working capital changes:
---------
Add: Increase in Current Liabilities
---------
Add: Decrease in Current Assets
---------
Less: Increase in Current Assets
(--------)
Less: Decrease in Current Liabilities
(--------)
------------
Less: Income Tax Paid
Net Cash From/To Operating Activities
(----------)
--------------
Some Peculiar Items and their Application
1. Depreciation: Depreciation is a non-cash item and hence, charged as depreciation not result in any cash
flow. Therefore, this amount must be added back to the net profit.
2. Interest & Dividend:
In case of a financial enterprise:
Interest paid, interest received & dividend received are classified as operating activities while dividend
paid is the financial activity.
In case of a non-financial enterprise:
Payment of interest and dividend paid are classified as financial activities whereas receipt of interest and
dividends are classified as investing activities.
3. Tax on Income & Gain:
* Income Tax (tax in operating profit) should be classified as operating cash flow.
* Capital Gain Tax (tax on capital gain) should be classified under investing activities.
* Dividend Tax (tax paid on dividend) should be classified as financing activities.
4. Provision for Tax:
If provision for tax is given in the two Balance Sheets and no information about tax paid is given, the
amount of previous year’s Balance Sheet is treated as tax paid during the year. It involves an out flow of
cash.
The current year’s provision for tax represents the amount of tax provided for the current year. It is added
back to the current year’s profits.
5. Provision for Tax:
If the provision for tax is given in the two Balance Sheets and also given information about tax paid during
the year or tax provided during the year than there is need to prepare the ‘Provision for Tax Account’.
Provision for Tax Account
Particulars
(Rs.)
Particulars
XXX By Balance b/d
To Bank A/c
(Tax paid or Balancing figure)
By Profit & Loss A/c
To Balance c/d
XXX (Provision made during year or Balancing figure)
XXX
(Rs.)
XXX
XXX
XXX
6. Proposed Dividend & Dividend paid:
If Proposed/Provision for Dividend is given in the two Balance Sheets and no information about dividend
paid is given, the amount of previous year’s Balance Sheet is treated as dividend paid during the current
year. It involves an out flow of cash.
The current year’s proposed/provision for a dividend represents the amount of dividends provided for the
current year. It is added back to the current year’s profits.
If an additional information is given as dividend paid in the current year than, the same amount will
be added back to net profits as well as it involves out flow of cash.

From the following information, calculate the cash flow from Investing Activities.’
Particulars
Opening Balance (Rs) Closing Balance (Rs)
Furniture (At cost)
20,000
28,000
Accumulated Depreciation on Furniture
6,000
9,000
During the year, furniture costing Rs. 4,000 was sold at a profit of Rs. 3,000. Depreciation on furniture
charged during the year amounted to Rs. 5,000. OR
During the year, furniture costing Rs. 4,000 (accumulated depreciation thereon Rs. 2,000) was sold at Rs.
5,000.
# There is need to prepare ‘Furniture a/c’ & ‘Prov. for Dep. a/c’.
# ‘Furniture A/c is required to ascertain the amount of furniture Purchase during the year.
# ‘Provision for Depreciation A/c is required to ascertain the depreciation provided during the year.
Solution:
Furniture Account
Particulars
To Balance b/d
To Profit & Loss A/c (Gain on Sale)
To Bank A/c
(Balan. fig. being furniture purchased)
(Rs.)
Particulars
20,000 By Bank A/c (Sale of Furniture)
3,000 By Accumulated Dep. A/c
12,000 By Balance c/d
35,000
(Rs.)
5,000
2,000
28,000
35,000
Provision for Depreciation Account
Particulars
To Furniture A/c
(Balancing figure being accumulated
depreciation on sold furniture)
To Balance c/d
(Rs.)
Particulars
2,000 By Balance b/d
By Depreciation A/c
9,000
11,000
(Rs.)
6,000
5,000
11,000
Computation for Gain or Loss on Sale of Furniture
Cost of sold furniture
4,000
Less: Accumulated Depreciation
2,000
Value of the sold furniture on the date of sale
2,000
Less: Sale price
Gain on sale of furniture
5,000
3,000
# 1: Gain on sale Rs. 3,000 subtract from net profit under Operating Activity.
# 2: Purchase of furniture Rs. 12,000 is involves an outflow of cash under Investing Activity.
# 3: Sale of Rs. 5,000 is involves an inflow of cash under Investing Activity.
# 4: Depreciation charged on furniture during the year Rs. 5,000 added back to net profit under operating
activity.
* X Ltd, made a profit of Rs. 1,00,000 after considering the following items: CBSE – 2009.
(a) Depreciation on fixed assets Rs. 20,000 (b) Writing off preliminary expenses Rs. 10,000.
(c)Loss on sale of furniture Rs. 1,000. (d) Provision for taxation Rs. 1,60,000.
(e) Transfer to General Reserve Rs. 14,000. (f) Profit on sale of machinery Rs. 6,000.
Items
Debtors
Creditors
Bills Receivable
Bills Payable
Prepaid Expenses
Solution:
31/03/2007 (Rs.) 31/03/2008 (Rs.)
24,000
30,000
20,000
30,000
20,000
17,000
16,000
12,000
400
600
Calculation of Cash Flow from Operating Activities
Particulars
(Rs.)
Net Profit before Tax
2,74,000
Net Profit
1,00,000
Provision for Taxation
1,60,000
Transfer to General Reserve
40,000
Adjustment for:
Add: Depreciation on Fixed Assets
Witting off Preliminary Expenses
Loss on Sale of Furniture
Less: Profit on Sale of Machinery
Operating Profit before Working Capital Changes
Add: Increase in Creditors
Decrease in Bills Receivable
Less: Increase in Debtors
Decrease in Bills Payable
Increase in Prepaid Expenses
Net Cash Flow from Operating Activities
20,000
10,000
1,000
(6,000)
2,99,000
10,000
3,000
(6,000)
(4,000)
(200)
3,01,800
3,01,800
Net Flow of Cash = Inflow of Cash – Outflow of Cash