2003 ICFAI University M.B.A Financial Accounting (MB131) : October 2003 Question paper
Question Paper
Financial Accounting (MB131) : October 2003
Section A : Basic Concepts (40 Points)
•?This section consists of questions with serial number 1 - 40.
•?Answer all questions.
•?Each question carries one point.
1. If a Company believes that some of its debtors may "default", it should act on this by making sure that
sufficient provision is created in the books. This is an example of
a. Matching concept
b. Money measurement concept
c. Consistency concept
d. Conservatism concept
e. Business entity concept.
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2. Which of the following best describes a trial balance?
a. It is a special type of account
b. It shows the double entries made
c. It is a list of balances in accounts in the books
d. It shows the financial position of the business
e. It is a special type of subsidiary book.
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3. Manoj Ltd. forfeited 200 shares of Rs.10 each, Rs.8 called up, for non-payment of call money of Rs.2 per
share. Application money of Rs.2 per share and allotment money of Rs.4 per share have already been received
by the company. The company has the practice of transferring the money due to Calls in arrears account. The
journal entry for forfeiture involves
a. Debit to Share capital account of Rs.2,000
b. Credit to Share Final call account of Rs.400
c. Credit to Share Forfeiture account of Rs.1,600
d. Credit to Calls in arrears account of Rs.400
e. (a), (b) and (c) above.
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4. Which of the following is not an error of commission?
a. Recording of wrong amount in the subsidiary books
b. Wrong totaling of subsidiary books
c. Not recording of a transaction in the subsidiary books
d. Posting on the wrong side of an account
e. Posting of wrong amount in an account.
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5. The credit balance as per pass book as on March 31, 2003 of Madhu Ltd. was Rs.10,000. As on that date it
was further revealed that cheques issued but not presented for payment amounted to Rs.8,000 and cheques
deposited but not yet cleared amounted to Rs.20,000. The bank balance as per Cash book stood at
a. Rs.38,000 (favorable)
b. Rs.22,000 (favorable)
c. Rs. 2,000 (unfavorable)
d. Rs.18,000 (unfavorable)
e. Rs.20,000 (unfavorable).
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6. Dividend recommended by the Board of Directors till it is adopted in the Annual General Meeting by the
shareholders is
a. Shown in Balance Sheet as proposed dividends under the head of current liabilities
b. Shown in Balance Sheet as proposed dividends under the head of provisions
c. Shown in Balance Sheet as declared dividends under the head of provisions
d. Shown in Balance Sheet as a deduction under profit and loss account
e. Shown in Balance Sheet as unclaimed dividends under current liability.
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7. Mannu Ltd. forfeited 200 equity shares of Rs.10 each fully paid up for non-payment of final call of Rs.2 per
share. These shares were originally issued at a discount of 10%. Application, allotment, and first call money of
Rs.2, Rs.3 and Rs.2 respectively in respect of each share were received in time. The journal entry for the
forfeiture of shares is
Rs. Rs.
a. Equity Shares Capital A/c Dr. 2,000
To Equity Share final call A/c 400
To Forfeited shares A/c 1,600
b. Equity Shares Capital A/c Dr. 2,200
To Equity share final call A/c 400
To Forfeited shares A/c 1,600
To Discount on issue of shares A/c 200
c. Equity Share final call A/c Dr. 400
Forfeited shares A/c Dr. 1,600
To Equity shares Capital A/c 2,000
d. Equity Shares Capital A/c Dr. 2,000
To Equity share final call A/c 400
To Forfeited shares A/c 1,400
To Discount on issue of shares A/c 200
e. Equity share final call A/c Dr. 400
Forfeited shares A/c Dr. 1,400
Discount on issue of shares A/c Dr. 200
To Equity shares Capital A/c 2,000
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8. If the shares are re- issued at a price which is more than the face value of the shares, the excess amount will be
credited to
a. General Reserve
b. Share premium account
c. Share forfeiture account
d. Profit & Loss account
e. Share capital account.
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9. The journal entry to record the replenishment of a petty cash fund involves
a. A debit to office expenses account
b. A credit to petty cash account
c. A debit to miscellaneous expenses account
d. A credit to cash account
e. A debit to cash account.
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10. The amount on shares actually demanded by the company is called
a. Nominal capital
b. Issued capital
c. Subscribed capital
d. Called up capital
e. Reserve capital.
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11. Manish Ltd. maintains its current ratio at 2.5. If the working capital as on March 31, 2003 stood at Rs.60,000,
then the current liabilities as on that date stood at
a. Rs. 24,000
b. Rs.1,00,000
c. Rs. 40,000
d. Rs. 60,000
e. Rs.1,50,000.
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12. In a Funds flow statement, the excess of uses of funds over sources of funds is known as
a. Net profit
b. Funds from operations
c. Increase in working capital
d. Decrease in working capital
e. Net Loss.
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13. Which of the following concepts is not considered as basic principle of accounting?
a. Materiality concept
b. Substance over form
c. Consistency concept
d. Matching concept
e. Cost concept.
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14. Which of the following factors are not primarily considered for determination of life of the useful asset?
a. Asset usage
b. SEBI guidelines
c. Consumption or extraction
d. Physical deterioration
e. Obsolescence.
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15. ‘Outstanding salaries’ represents
a. A personal account
b. A real account
c. A nominal account
d. A deferred expense account
e. An asset.
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16. If closing stock appears in the trial balance, it should be
a. Credited to the trading account
b. Credited to the profit and loss account
c. Deducted from the purchases in the trading account
d. Credited to the trading account and shown on the assets side of the Balance sheet
e. Shown on the assets side of the Balance sheet.
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17. Calls in advance account is shown on
a. The assets side of the balance sheet
b. The liabilities side of the balance sheet as a deduction from paid up share capital
c. The liabilities side of the balance sheet as an addition to the paid up share capital
d. The liabilities side of the balance sheet separately from the paid up share capital
e. The liabilities side of the balance sheet as a contingent liability.
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18. The main objective of providing depreciation is to
a. Calculate the true net profit
b. Compute the actual cash profit
c. Create funds for replacement of fixed assets
d. Reduce tax burden
e. Value the equity shares of a company.
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19. On July 01, 2003 a company purchased 200 of its own 12% Debentures of Rs.100 each at the rate of Rs.97 (ex
-interest). The company pays interest on March 31 and September 30 every year. At the time of purchase the
amount debited to own debenture account was
a. Rs.20,000
b. Rs.19,400
c. Rs.20,600
d. Rs.18,800
e. Rs.19,200.
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20. The maximum commission allowable to underwriters on issue of shares is
a. 5% of issue price of the shares
b. 10% of nominal value of the shares
c. 6 % of issue price of the shares
d. 5 % of the nominal value of the shares
e. 2.5 % of the issue price of the shares.
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21. The logic behind the creation of Capital Redemption Reserve is that
a. It is required under the Companies Act, 1956
b. It is required to facilitate the redemption of preference shares
c. It is required to maintain the capital intact
d. It is required to protect the creditors’ interest
e. Both (c) and (d) above.
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22. Mega Ltd. proposed a dividend of 12.5 %. The called-up equity share capital of Mega Ltd. is Rs.5,00,000; the
share premium account is Rs.50,000. If the amount of calls-in-arrears is Rs.15,000, the amount of dividend
payable by the company is
a. Rs.62,500
b. Rs.60,625
c. Rs.68,750
d. Rs.56,250
e. Rs.64,375.
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23. Manasa Ltd. offers 5 right shares to its existing shareholders for every 3 shares held by them. If the price of
right issue is Rs.150 per share and its market value is Rs.220 per share, then the value of a right is
a. Rs. 26.25
b. Rs. 40.00
c. Rs. 43.50
d. Rs. 43.75
e. Rs.176.25.
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24. Which of the following statements pertaining to revaluation of assets of the subsidiary company revalued at
the time of acquisition of shares in the subsidiary is false?
a. The upwards revaluation of the asset will be treated as pre acquisition profit and treated accordingly
b. The downward revaluation of the asset will be treated as pre acquisition loss and treated accordingly
c. Share of minority shareholders is added or deducted to the minority interest depending on whether
there is an upward or downward revaluation
d. The Holding company’s share of revaluation is adjusted in the Cost of Control
e. The depreciation in respect of the revalued asset is treated as pre acquisition expense and adjusted
in the pre acquisition profits or losses.
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25. If the holding company receives dividend out of pre-acquisition profits of the subsidiary company it will be
a. Credited to the investment account
b. Debited to the investment account
c. Credited to the consolidated profit and loss account
d. Debited to the consolidated profit and loss account
e. Ignored completely.
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26. Mitra and Mayura, two underwriters, underwrite 10,000 shares and 15,000 shares of a company. The company
received applications for 12,000 equity shares of which marked applications were as follows:
Mitra –– applications in respect of 4,000 shares
Mayura –– applications in respect of 6,000 shares
The liability of the two underwriters for unsubscribed shares were
a. Mitra 6,000 shares and Mayura 9,000 shares
b. Mitra 9,000 shares and Mayura 6,000 shares
c. Mitra 5,200 shares and Mayura 7,800 shares
d. Mitra 7,800 shares and Mayura 5,200 shares
e. Mitra 7,000 shares and Mayura 8,000 shares.
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27. If machinery account is debited with the amount of repairs incurred on the machine, this is an example of
a. Compensating error
b. Error of principle
c. Error of commission
d. Error of omission
e. Error of partial omission.
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28. Mishra Ltd. has furnished the following data for the month of September 2003:
Credit purchases Rs.3,00,000
Opening balance of sundry creditors Rs. 75,000
Closing balance of sundry creditors Rs. 50,000
Discount received Rs. 5,000
Cash paid to creditors by Mishra Ltd. during the month was
a. Rs.3,30,000
b. Rs.3,25,000
c. Rs.3,20,000
d. Rs.3,00,000
e. Rs.2,85,000.
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29. Maple Ltd. has furnished the following data for the year 2002-2003:
Salary for the year Rs.2,90,000
Salary outstanding on March 31, 2002 Rs. 40,000
Salary outstanding on March 31, 2003 Rs. 20,000
Salary paid in advance on March 31, 2003 Rs. 15,000
The amount of salary paid during the year 2002-2003 was
a. Rs.3,65,000
b. Rs.3,25,000
c. Rs.3,10,000
d. Rs.2,85,000
e. Rs.2,20,000.
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30. The starting point of the financial forecasting exercise is the
a. Sales forecast
b. Forecast of labor cost
c. Forecast of material cost
d. Forecast of operating expenses
e. Cash flow statement.
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END OF PART A
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Part B : Problems (50 Points)
•?This part consists of questions with serial number 1 – 5.
•?Answer all questions.
•?Points are indicated against each question.
•?Detailed workings should form part of your answer.
•?Do not spend more than 110 - 120 minutes on Part B.
1. Manisha & Co., a sole proprietorship concern, is in the business of manufacturing chemicals. The enterprise has a
current account with Bank of Baroda. It records transactions with the bank in the bank column of a three column cash
book . On March 31, 2003, the bank balance as per cash book showed a favorable balance of Rs.42,800, and did not tally
with the balance as per bank statement. On scrutiny the following facts were revealed:
i. The total of cheques sent to bank for collection during the month of March 2003 amounted to
Rs.1,25,600. Of these, cheques amounting to Rs.74,600 were credited in the bank statement upto March 31, 2003.
ii. Rent for building taken on lease by the proprietor for business amounting to Rs.28,000 was paid by the
bank as per standing instructions on March 28, 2003. There was no entry in the cash book.
iii. The total of cheques issued to creditors amounted to Rs.95,000 for the month of March 2003. Of these,
cheques amounting to Rs.92,500 were debited in the bank statement upto March 31, 2003.
iv. On March 30, 2003, Rs.220 were debited by the bank in respect of bank charges. No entry was made in
the cash book.
v. A cheque amounting to Rs.4,000 was received from a customer on March 30, 2003, the same was
recorded in the bank column of the cash book, but was deposited in bank on April 01, 2003.
vi. Interest and dividends on investments amounting to Rs.12,300 was directly collected by the bank on
March 30, 2003.
You are required to prepare a Bank reconciliation statement and arrive at the bank balance as per bank statement as
on March 31, 2003.
(9 points) < Answer >
2. Matrushri Petrochemicals is the largest manufacturer of petrochemicals in India. The company is capital intensive
and has been in operation for the last ten years. The capital employed is Rs.3,40,00,000 which is represented by
Particulars Amount in Rs.
Equity Share Capital & Reserves 2,00,00,000
Long term borrowings on debentures 1,00,00,000
Cash credit from banks 40,00,000
The Gross Working Capital of the company is Rs.170,00,000 and is made up of
Particulars Amount in Rs.
Inventory 60,00,000
Stores 28,00,000
Debtors 70,00,000
Advances and deposits 12,00,000
The annual sales for the year 2002-03 is Rs.1,60,00,000.
The management of Matrushri Petrochemicals Ltd. is undertaking an analysis of the long term solvency and the short term
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solvency position of the company.
You are required to calculate four financial ratios from the above data for use of the management. (Students are required
to quote the ratios and all workings should form part of the solution.)
(8 points) < Answer >
3. Mirinda Ltd. is one of the country’s leading industrial houses, focusing on the niche areas of Telecommunications,
Metallurgicals and Electricals. The company in its pursuit for new businesses, acquiring special expertise acquired 3,000
equity shares of Namrutha Ltd. The Balance sheets of Mirinda Ltd., and Namrutha Ltd as on March 31, 2003 stood as
follows:
Liabilities Mirinda Ltd.
Rs.
Namrutha
Ltd. Rs. Assets Mirinda Ltd. Rs Namrutha
Ltd. Rs
Share Capital:
Land & Building at cost
31,00,000 16,00,000
10% Preference shares of
Rs.1,000 each
-- 10,00,000
Machinery less 10%
depreciation
27,00,000 13,50,000
Equity shares of Rs.1,000 each 100,00,000 40,00,000
3,000 Shares in
Namrutha Ltd.
45,00,000
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General Reserve
10,00,000 5,00,000
Stock at cost
22,00,000 15,00,000
Profit & loss A/c.
Balance on 1-4-2002
4,00,000 3,00,000Sundry Debtors 15,50,000 9,00,000
Profit for 2002-03
20,00,000 8,00,000
Cash & Bank Balance
8,50,000 19,50,000
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Creditors
15,00,000 7,00,000
149,00,000 73,00,000
149,00,000 73,00,000
Additional Information:
i. Mirinda Ltd. acquired Equity shares in Namrutha Ltd. on October 01, 2002.
ii. On the date of acquisition, Mirinda Ltd. found that the value of land and buildings and machinery of
Namrutha Ltd. should be Rs.15,00,000 and Rs.19,25,000 respectively.
iii. Provide for preference dividends on 10% Preference shares for 2002-2003.
You are required to prepare the consolidated Balance Sheet of Mirinda Ltd. and its subsidiary Namrutha Ltd. as on
March 31, 2003, taking into consideration the fact that assets are to be taken at their proper values.
(12 points) < Answer >
4. Minerva Ltd. is one of the largest industrial corporations in India. Its shares are listed on the Bombay stock
exchange only. The company at its General Meeting decided to redeem its preference shares. The balance sheet of a
company on March 31, 2003 stood as follows:
Liabilities Amount
in Rs.Assets Amount in Rs.
Equity share capital (Rs.10) 40,00,000Plant 25,00,000
Preference share capital (Rs.20) 12,00,000Furniture 9,00,000
Securities Premium 20,000Investment 3,50,000
Profit and Loss Account 6,80,000Stock 15,00,000
Creditors 11,00,000Debtors 14,00,000
Bank 3,50,000
70,00,000 70,00,000
Additional information:
i. Preference shares are redeemed on April 01, 2003, at a premium of 10%.
ii. To provide cash for redemption, investments are sold for Rs. 3,00,000.
iii. Minimum balance of Rs. 2,10,000 is required in profit and loss account after redemption of preference shares.
iv. 80,000 Equity shares of Rs. 10 each are issued at 10% premium for the purpose of redemption.
You are required to pass journal entries to give effect to the above transactions.
(8 points) < Answer >
5. Mrudula Ltd. a wholly owned subsidiary of Mrudula International Ltd. is an export house recognised by the
Government of India. The company has its presence in almost every continent. The company was registered with an
authorised capital of Rs. 10,00,00,000 divided into shares of Rs. 10 each, of which 40,00,000 shares had been issued and
fully paid:
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The companies Trial Balance as on March 31, 2003 stood as follows:
Particulars Debit
Rs.
Credit
Rs.
Stock (as on April 01, 2002) 1,86,42,000
Purchase returns and Sales returns 12,68,000 9,85,000
Sundry manufacturing expenses 19,24,000
Purchases and Sales 7,18,21,000 11,69,90,000
Manufacturing Wages 1,09,74,000
Carriage Inward 4,91,000
18% Bank loan(secured) (availed on 01.04.01) 50,00,000
Office salaries and expenses 17,87,000
Directors remuneration 26,25,000
Freehold Premises 1,64,21,000
Interest on Bank loan 4,50,000
Auditors fees 8,60,000
Preliminary expenses 6,00,000
Plant and Machinery 1,28,40,000
Furniture 5,00,000
Debtors and Creditors 1,05,40,000 62,22,000
Cash at Bank 96,86,000
Loose tools 12,50,000
Cash in hand 19,53,000
Advance payment of Tax 84,29,000
Profit and Loss Account of April 01, 2002 38,64,000
Share capital 4,00,00,000
17,30,61,000 17,30,61,000
Additional information:
i. On March 31, 2003 outstanding manufacturing wages and outstanding office salaries stood at Rs. 1,89,000
and Rs. 1,20,000 respectively.
ii. On the same date stock was valued at Rs 1,24,84,000 and loose tools at Rs. 10,00,000.
iii. Depreciation on plant and Machinery is to be provided @15 % p.a. while on Office furniture it is to be
provided @10% p.a.
iv. Make a provision for income tax @ 50%
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v. Write-off one-third of preliminary expenses
vi. The directors are recommended dividend @15% for the year ending March 31, 2003 after a transfer of 5% of
net profits to General Reserve.
After taking into consideration the above Trial Balance and additional information, you are required to prepare Profit and
Loss Account of Mrudula Ltd. for the year ended March 31, 2003 and a Balance Sheet as at that date.
(13 points) < Answer >
END OF PART B
Part C : Applied Theory (20 Points)
•?This part consists of questions with serial number 6 - 7.
•?Answer all questions.
•?Points are indicated against each question.
•?Do not spend more than 25 -30 minutes on Part C.
6. Inventory is one of the largest current assets of a business concern, hence inventories should be properly valued
periodically and recorded in the books of accounts for proper measurement of periodic profit and for inclusion in the
Balance sheet. Accounting for inventories involves numerous problems including choice in the selection of inventory
system. In this respect discuss the two types of inventory systems and differentiate between them.
(10 points) < Answer >
7. ‘Customer loyalty and a reputation for quality are unidentifiable intangibles which cannot be realized without selling
the entire enterprise’. However value needs to be placed on the goodwill of the business. In this respect identify and
discuss the circumstances in which there may be a need to value such unidentifiable intangible. Also enlist a few factors
having a bearing on the unidentifiable intangible
(10 points) < Answer >
END OF PART C
END OF QUESTION PAPER
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