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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
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2004 ICFAI University M.B.A Suggested Answers Financial Accounting (MB131) : January 2004 Question paper
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Suggested Answers Financial Accounting (MB131) : January 2004
You are required to
a. Pass the journal entries for rectification of the above errors.
b. Prepare suspense account.
(5 + 2 = 7 marks) < Answer >
5. ABC Ltd. issued 10,000 equity shares of Rs.100 each at a premium of 10% per share. The amount is payable as
follows:
The applications were received for 9,000 shares and these were allotted in full. All moneys due were received
except the first and final call money on 200 shares, which were forfeited. Out of these shares, 100 shares were
subsequently re-issued @ Rs.90 per share as fully paid.
You are required to pass journal entries for recording the above transactions in the books of ABC Ltd.
(10 marks) < Answer >
END OF SECTION B
Section C : Applied Theory (20 Marks)
??This section consists of questions with serial number 6 - 8.
??Answer all questions.
??Marks are indicated against each question.
??Do not spend more than 25 -30 minutes on Section C.
6. The concepts of capital and revenue are of fundamental importance to the correct determination of accounting
profit for a period. Discuss the basic principles which would guide you in allocating expenditure as capital
expenditure, revenue expenditure and deferred revenue expenditure.
(9 marks) < Answer >
7. The Chief Accounts Officer of Shriya Ltd., found that Priya Ltd. who owes a large amount to the company is
rumored to be going into liquidation. As a prudent Accounts Officer of the company, you are required to explain
the concept which you consider in making suitable amount of provision for bad and doubtful debts.
(6 marks) < Answer >
8. A company which has built up substantial reserves decides to capitalize a part of these retained earnings by
issuing bonus shares to the existing shareholders. In this context, explain the provisions relating to the issue of
bonus shares under the SEBI guidelines.
(5 marks) < Answer >
END OF SECTION C
END OF QUESTION PAPER
Rs.
On application 25
On allotment (including premium) 35
On first call 20
On final call 30
1. Answer : (e)
Reason : Personal accounts deal with accounts of individuals like creditors, debtors, banks etc. It shows the
balance due to these individuals or due from them on a particular date and representative personal
accounts represent the amounts due on account of accrual concept like accrued expenses and prepaid
expenses or accrued incomes and pre-received incomes. By virtue of this, the accounts stated in
alternatives (a) sundry creditors, (b) Bank account, (c) outstanding wages and (d) prepaid insurance
represent personal accounts.
< TOP >
2. Answer : (a)
Reason : The basis for pricing inventory is either cost of production or cost of acquisition. FIFO method of
identifying inventory is based on the assumption that costs are charged against revenue in the order in
which they occur. In case of other methods i.e. LIFO (b) method matches the most recent costs incurred
with current revenue, leaving the first cost incurred to be included as inventory. Weighted-Average
method (c) assumes that costs are charged against revenue based on an average of the number of units
acquired at each price level. Moving average method (d) can be used only with a perpetual inventory.
The cost per unit is recomputed after every addition to the inventory. The ending inventory is valued at
the last moving average unit cost for the period. Base stock method (e) wherein a minimal level of it is
a permanent investment, which is necessary for the normal business activities. Base stock would be
carried at historical cost. Thus, FIFO method is the correct answer.
< TOP >
3. Answer : (c)
Reason : Revenue expenditure is incurred for day to day running of the business. Any item of expenditure which
improves the earning capacity of a business entity or the expenditure incurred till the asset is ready for
use is capital expenditure. From the viewpoint of this, the customs duty paid in connection with the
import of equipment (c) is not revenue expenditure. The expenses mentioned in other alternatives
Interest on deposits accepted (a) Annual insurance premium (b) repairs and maintenance (d)
Expenditure on assets like paperweight etc. are items of revenue expenditure.
< TOP >
4. Answer : (e)
Reason : A trial balance in which the total of the debits does not equal to the total of credits due to errors
committed in the process of accounting. One among the errors is Partial omission of an entry If the
debit or credit aspect of a transaction has been omitted to be recorded, the trial balance will disagree.
For example, if a cash sales of Rs.800 is omitted to be recorded in the Sales account then the total
debits will exceed the total credits by Rs.800. Thus, results in a mismatch in the trial balance. But, in
case of errors mentioned in alternatives (a), (b), (c) and (d) the agreeing of trial balance is not affected
as explained hereunder:
Omission of the recording of a transaction from the books of accounts: If the withdrawal of goods
worth Rs.1,200 by the proprietor is omitted to be recorded in the books, the trial balance will still agree
as both the debit and the credit aspects have been omitted to be recorded.
Compensating errors: These are quite difficult to detect. If a cash discount of Rs.215 allowed to a
customer has been posted to the credit of his account as Rs.251 and a cash sale of Rs.2,851 has been
posted to sales account as Rs.2,815, then the excess credit caused by the first error would be exactly
compensated by the lower credit recorded by the second error and the trial balance will be in
agreement.
Errors of principle: If the machinery account is debited for an amount of repair charges incurred for
the machinery, the error will not be disclosed by the trial balance. This is because that both machinery
account and repairs account are debit accounts and it is a question of principle that repair charges
should not be debited to the machinery account. Hence, the total effect will be the same and hence the
trial balance will tally.
Recording both aspects of a transaction more than once in the books of accounts: If a sale of
Rs.3,500 made to PQR Ltd. is entered in the sales book twice, the error will not cause a mismatch in the
totals of the trial balance.
< TOP >
5. Answer : (e)
Reason : Value of machine Rs.10,00,000
Less: Salvage value Rs. 40,000
Depreciable value Rs. 9,60,000
Life of the machine 8 years
Depreciation = = Rs.1,20,000
9,60,000
8
< TOP >
Rate of depreciation = = 12%
1, 20,000 100
10, 00,000
?
6. Answer : (c)
Reason : If purchase day book is overcast, it shows higher cost of production or goods sold. It reduces gross
profit which in turn reduces net profit. It cannot increase gross profit and net profit. Therefore, (c) is the
correct answer.
< TOP >
7. Answer : (e)
Reason : If a debtor pays his dues, debtors balance will decrease and cash balance will increase. Thus, the
composition of assets will change. But there is no change in the total assets or liabilities and hence (e) is
true.
< TOP >
8. Answer : (b)
Reason : If the owner withdraws goods from the business, journal entry will be
Drawings account ……… Dr
To Purcahses account
Other options, given in a, c, d and e, relating to drawings are not correct.
< TOP >
9. Answer : (d)
Reason : Let the rate of depreciation = x
The depreciated value of machine = Rs.1,20,000 (1 – 3x) = Rs.66,000
1 – 3x = = 0.55
3x = 1 – 0.55 = 0.45
x = 0.45 ??3 = 0.15 or 15%.
Thus, the rate of depreciation = 15%.
Alternatively
Cost Price Rs.1,20,000
WDV Rs.66,000
Total depreciation for 3 years 54,000; Depreciation per year Rs. = Rs.18,000
Rate of Depreciation = Rs. = 15%
Rs.1,20,000
Rs.66,000
54,000
3
18, 000 x 100
1, 20, 000
< TOP >
10. Answer : (a)
Reason :
and the amounts mentioned in other alternatives are not correct.
Credit balance as per bank column of cash book Rs.13,500
Add: Bank interest on overdraft debited in pass book Rs. 2,100
Cheques deposited but not collected by bank Rs. 5,000
Debit balance as per pass book Rs.20,600
< TOP >
11. Answer : (e)
Reason :
Opening balance of Sundry debtors Rs. 45,000
Add: Credit sales Rs.4,25,000
Rs.4,70,000
Less: Cash collected Rs.4,00,000
Rs. 70,000
Less: Closing balance of sundry
debtors Rs. 50,000
Bad debts Rs. 20,000
< TOP >
12. Answer : (c) < TOP >
Reason :
Opening stock Rs. 40,000
Add: Purchases Rs.2,00,000
Rs.2,40,000
Less: Closing stock Rs. 50,000
Cost of goods sold Rs.1,90,000
13. Answer : (d)
Reason :
Particulars Rs.
Balance as per banks statement (overdraft) 12,500
Less: Cheque returned but not entered in the cash book 2,800
Balance as per cash book (overdraft) 9,700
< TOP >
14. Answer : (c)
Reason : Let the profit = 100%
Commission = 5%
105%
Amount of commission payable to manager = Rs.1,89,000 ??= Rs.9,000
105%
5%
< TOP >
15. Answer : (d)
Reason : The conservatism concept states that the revenues are to be recognized when they are certain and losses
are to be considered when they are probable. Thus, the statement in alternative (d) is true. The
statements in other alternatives are false since, The losses from the sale of capital assets are to be
deducted from revenue to ascertain the net income (a) Going concern pre-supposes that the assets are
categorized into fixed and current and the non-monetary assets are to be recorded at the historical cost
and not at market value (b) The consistency concept facilitates the comparison of the results of one
accounting period with that of the past (c) and the system of recording transactions based on dual aspect
concept is double entry system and not the double account system (e). Hence, the correct answer is (d).
< TOP >
16. Answer : (c)
Reason : Acid test ratio or quick ratio is a liquidity ratio which is an indicator of short term solvency of a
business. Hence © is the correct answer. The ratios mentioned in other alternatives do not indicate the
short term solvency of a business and are not the correct answers.
< TOP >
17. Answer : (b)
Reason : Called up capital is the amount on the shares which is actually demanded by the company to be paid.
However, there may be some shareholders who may make default in the payment. The money due from
them is called calls-in-arrears. This amount should be deducted from the called up capital to arrive at
the paid-up capital. Thus, (b) is the correct answer.
< TOP >
18. Answer : (a)
Reason : Forfeited shares can be re-issued at a premium. Thus, the statement in alternative (a) is false. The
statements in other alternatives are true-, if share premium is already received, share premium account
cannot be debited with the amount of premium on forfeiture of shares; Shares can be issued a discount,
only after one year from the commencement of business; Share premium can be utilized only specific
purposes as per the provisions of section 78 of the Companies Act and it cannot be utilized to redeem
preference shares; The forfeited shares cannot be reissued for a loss more than the gain on those shares.
< TOP >
19. Answer : (d)
Reason : If accrued commission is shown on the debit side list of balances in the trial balance, it indicates that it
is already adjusted in the commission received /receivable and it does not require any adjustment in the
profit and loss account. It directly appears as a current asset in the balance sheet. Hence (d) is true
< TOP >
20. Answer : (c)
Reason : The maximum amount beyond which a company is not allowed to raise funds by issue of shares is
called nominal capital or authorized capital. The issued capital is that part of the nominal capital issued
to the public and subscribed capital is that part of the issued capital which is subscribed by the public.
Paid up capital is the amount which is paid-up by the shareholders. Reserve capital is that capital which
< TOP >
will be called-up only in case of liquidation. Thus, alternative (c) is the correct answer.
21. Answer : (e)
Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot be
debited to discount on re-issue of shares, since there is no such account maintained, it is not a usual
discount to be debited to (b) Profit and loss account. The share premium account (c) can be debited
only for the purposes as per the provisons of the Compnaies Act. The discount on issue of shares (d)
can be debited only in the event of issue of shares at a discount originally. Thus, (e) is the correct
answer.
< TOP >
22. Answer : (c)
Reason : The company may receive from the shareholders the amount uncalled on the shares held by them even
though the amount is not called for. In such a case the company is compelled to pay interest on the calls
in advance at prescribed rate from the date of receipt of advance to the date of appropriation i.e. the date
when the call is made and the advance received is appropriated from calls in advance account to the
relevant call account.
< TOP >
23. Answer : (a)
Reason : Sinking fund is created out of profit. It is the part of profit and should be listed under the heading
“Reserves and Surplus” and not under “unsecured loans”. Loans and advances from subsidiaries, short
term loans and advances from banks, loans and advances from others and fixed deposits are unsecured
loans.
< TOP >
24. Answer : (b)
Reason : Share premium should not be used for redemption of preference shares whereas they can be used to
provide for premium on redemption of preference shares or debentures, to issue bonus shares, to writeoff
preliminary expenses and discount on issue of shares.
< TOP >
25. Answer : (b)
Reason : The shares were issued at a discount of 10% i.e. they were issued for Rs.90 per share.
Rama failed to pay the final call of Rs.30. Hence he has paid Rs.60 (Rs.90 – Rs.30).
The amount to be credited to shares forfeited account is Rs.60 x 300 shares = Rs.18,000
< TOP >
26. Answer : (c)
Reason : Value of right =
Where r = No of rights issued
N = No. of existing shares
M = Market price
S = Issue price of rights= Rs.100 + 160% premium = Rs.100 + Rs.160 = Rs.260
?Value of rights = = Rs.80
r (M S)
N r
??????????-
4 (440-260)
4+5
???
???
???
< TOP >
27. Answer : (c)
Reason : The share capital of the subsidiary company does not appear in the Consolidated Balance Sheet (c) is
the correct statement and the share capital of the subsidiary company is not shown in the consolidated
balance sheet. and other statements are not true. A company will be deemed to be a holding company of
another if it holds more than 50 percent of both equity and preference share capital is not true because
it should hold share only in equity capital and preference share capital will not be considereed for
deciding the cost of control. and (a) is not the correct answer.
b. The financial year of the holding company and its subsidiary company must end on the same date
is not the correct answer because it need not be on the same date.
d. The inter company owing will be shown in the Consolidated Balance Sheet is incorrect because
intercompany owing are eliminated in the consolidated balance sheet and hence it is not the
correct answer.
e. Minority of the subsidiary is entitled to proportionate share in capital profits only is incorrect
because they are entitled for both capital profits and revenue profit and there is no difference
between the two profits in computation of minority interest. Thus, alternative © is the correct
answer.
< TOP >
28. Answer : (d)
Reason : Profit for the year 2002-2003 = Rs.1,50,000 – Rs.90,000 = Rs.60,000
Profit for 8 months (from April 01, 2002 to December 01, 2002)=
Share of capital profit of H Ltd. = (90,000 + 40,000) x 60% = Rs.78,000.
60,000 8 Rs.40,000
12
???
< TOP >
29. Answer : (d)
Reason : The profit on cancellation of debentures transferred to capital reserve is Rs.13,000
On purchase of debentures, the journal entry to be made is
On cancellation of the debentures, the journal entry to be made is
Rs. Rs.
Own debentures a/c Dr 1,87,000
Interest on debentures a/c Dr 9,000
To Cash a/c 1,96,000
Rs. Rs.
18% Debentures a/c Dr 2,00,000
To Own debentures 1,87,000
To Capital Reserve 13,000
< TOP >
30. Answer: (b)
Reason: Weighted average profit
?Weighted average profit = Rs.26,10,000 ??6 = Rs.4,35,000
Year 1 Rs.3,30,000 ??1 Rs. 3,30,000
Year 2 Rs.4,20,000 ??2 Rs. 8,40,000
Year 3 Rs.4,80,000 ??3 Rs.14,40,000
6 Rs.26,10,000
< TOP >
Section B : Problems (MB131)
Majestic Ltd.
1. Average trading capital employed
Land & Building Rs. 2,60,000
Plant & Machinery Rs. 3,50,000
Stock Rs. 80,000
Sundry debtors Rs. 90,000
Cash & Bank Rs. 30,000
Rs. 8,10,000
Less: Current Liabilities
Sundry creditors
Rs.80,000
Provision for taxation
Rs.40,000
Rs. 1,20,000
Rs. 6,90,000
Less: Half of current year’s profit (See note below) Rs. 37,500
Average capital employed Rs. 6,52,500
Note: Profit for the year Rs. 1,60,000
Less: Non-trading income Rs. 10,000
Rs. 1,50,000
Less: Income tax (50%) Rs. 75,000
Current year’s profit Rs. 75,000
Super Profit
Value of Goodwill = Rs.9,750 ??3 years = Rs.29,250.
< TOP >
2.
Sneha Associates
Machinery Account
Dr.
Cr.
Working Notes: Calculation of Depreciation
*1/2 year, ** 20% of Rs.2,00,000 Rs.(3,00,000 – 1,00,000 machinery sold).
(2)
Rs.
Rs.
Profit for the year 1,60,000
Less: Income from investments 10,000
1,50,000
Less: Income tax (50%) 75,000
75,000
Less: Normal return – 10% on average capital employed of Rs.6,52,500 65,250
Super profit 9,750
Date Particulars Rs. Date. Particulars Rs.
2000 Oct
01
To Bank A/c (Purchase price) 1,60,000 2001
March 31
By Depreciation A/c (1/2
year)
30,000
To Bank A/c (Customs Duty and
Freight)
To Erection charges
80,000
60,000
By Balance c/d 2,70,000
3,00,000
3,00,000
2001
April 01
To Balance b/d 2,70,000 2002
March 31
By Depreciation A/c (Note
2)
80,000
To Bank A/c New machine 1,00,000 By Balance c/d 2,90,000
3,70,000 3,70,000
2002
April 01
To Balance b/d 2,90,000 2002
Oct 01
By Depreciation A/c ½ year
By Bank sale Proceeds
By Profit and Loss a/c
10,000
34,800
25,200
To Bank A/c New machine 50,000 2003
March 31
By Depreciation A/c (Note
1)
65,000
By Balance c/d 2,05,000
2003 3,40,000 3,40,000
April 01 To Balance b/d 2,05,000
2000-01 2001-02 2002-03
Acquired Rs. Rs. Rs. Rs.
1st Machinery 1-10-2000 3,00,000 30,000 60,000 **40,000
2nd Machinery 1-04-2001 1,00,000 – 20,000 20,000
3rd Machinery 1-04-2002 50,000 – – *5,000
Total 30,000 80,000 65,000
< TOP >
3. Maithrei Ltd.
Profit & Loss account for the year ended March 31, 2003
Dr. Cr.
Balance Sheet as at March 31, 2003
Calculation of 1/3 of W.D.V on machinery purchase on Oct 01, 2000
Original cost 01-10-2000 (without depreciation for 2000 - 2001 1,00,000
Less: Depreciation for 2000-2001 (1/2 year) 10,000
90,000
Less Depreciation for 2001-2002 20,000
70,000
Less sale proceeds 34,800
Less: Depreciation for 2002-03 (1/2 year) 10,000
Loss on sale of one third of machine 25,200
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 40,000 By Sales 9,60,000
To Purchases 6,64,000 Less Sales return 80,000 8,80,000
Less Purchases returns 84,000 5,80,000
To Wages 50,000
To Carriage inward 27,800 By Closing stock 42,500
To Gross Profit 2,24,700
9,22,500 9,22,500
To Rent & taxes 12,000
To Interest on bank Loan
(12%)
4,000 By Gross Profit 2,24,700
Add: Accrued 800 4,800
To Advertisement 24,000
Less: Unexpired
(1/4 of the Rs.24,000)
6,000 18,000 By Income from investments 4,000
To Bad debts 2,000 By Discount received 2,800
To Discount allowed 4,050 By Net loss 40,700
To Audit fee 5,400
To Insurance 2,400
To Travelling expenses 2,200
To Salaries - 1,37,550
Add: Outstanding 12,450 1,50,000
To Depreciation
Furniture & fittings (10%) 4,500
Plant & Machinery (20%) 30,000
Building (10%) 25,000
To Provision for doubtful debts. (5% on
Rs.2,37,000)
11,850
2,72,200 2,72,200
< TOP >
4. a. Jay Ltd.
Journal Entries
b. Suspense Account
Dr.
Cr.
< TOP >
Liabilities Rs. Rs. Assets Rs. Rs.
Share Capital Fixed Assets
Authorised Capital By Furniture & Fittings 45,000
1,00,000 shares of Rs.10
each
10,00,000 Less: Depreciation (10%) 4,500 40,500
Issued called-up and By Building - 2,50,000
Paid-up Capital Less: Depreciation (10%) 25,000 2,25,000
60,000 share @Rs.10 each 6,00,000 By Plant & Machinery 1,50,000
Less Depreciation (20%) 30,000 1,20,000
Bank Loan 40,000 Investments 40,000
Add Interest 800 40,800 Current Assets, Loans & advances
Current Assets
Current Liabilities & Provision Closing Stock 42,500
A. Current Liabilities Sundry debtors 2,40,000
Sundry Creditors 1,16,000 Less: Mr. Amar 3,000
Less Due to Mr. Amar 3,000 1,13,000 2,37,000
Outstanding salaries 12,450 Less: Provision for doubtful
debenture (5%)
11,850
2,25,150 2,25,150
Cash at Bank 21,000
Cash in hand 5,400
Unexpired expenses
Advertisement expenses unexpired 6,000
Miscellaneous Expenditure –
Profit & loss a/c. 40,700
7,66,250 7,66,250
Particulars Dr.
(Rs.) Cr. (Rs.)
a. Suspense a/c Dr. 42,000
Mr. Rohan account 42,000
(Sales to Mr. Roshan wrongly credited to his account, now rectified)
b. Suspense account Dr. 12,000
To Mr. Kanithkar 12,000
(Purchase from Mr. Kanithkar omitted to be posted to his account in
the ledger, now rectified)
c. Office Furniture account Dr. 21,000
To Profit and loss adjustment account 21,000
(Purchase of office furniture wrongly passed through the purchase day
book, now rectified)
d. Profit and loss adjustment account Dr. 8,500
To Office car account 8,500
(Repairs to office car wrongly debited to office car account, now rectified)
Particulars Amount Particulars Amount
By Diff. In trial balance 54,000
To Kanithkar 12,000
To Rohan 42,000
54,000 54,000
5.
In the books of ABC ltd.
Journal Entries
Here, securities premium on the forfeited shares has already been realized, so securities premium should not
be debited at the time of forfeiture of shares.
Working Note: (1) Calculation of Amount to be Transferred to Capital Reserve
Amount forfeited per share= Rs.10,000 /200 = Rs.50; Less: Loss per share = Rs.10; Surplus per share Rs.40;
Amount to be transferred = 100 ??Rs.40 = Rs.4,000 and Rs.50 ??100 = Rs.5,000 should be shown as an addition to
share capital.
< TOP >
Particulars Dr.
(Rs.)
Cr.
(Rs.)
Bank A/c. Dr. 2,25,000
To Share Application A/c. 2,25,000
(Being application money on 9,000 shares @ Rs.25 each received
Share Application A/c. Dr. 2,25,000
To Share Capital A/c. 2,25,000
(Being application money on 9,000 shares @ Rs.25 each transferred to
Share Capital Account as per Board’s Resolution No….dated…)
Share Allotment A/c Dr. 3,15,000
To Share Capital A/c 2,25,000
To Securities Premium A/c 90,000
(Being allotment money due on 9,000 shares @ Rs.35 each as per Board’s
Resolution No…dated)
Bank A/c Dr.` 3,15,000
To Share Allotment A/c 3,15,000
(Being allotment money received on 9,000 shares @ Rs.35 each)
Share First Call A/c Dr. 1,80,000
To Share Capital A/c 1,80,000
(Being first call money due on 9,000 shares @ Rs.20 each as per Board’s
Resolution No…dated…)
Bank A/c Dr. 1,76,000
To Share First Call A/c 1,76,000
(Being first call money received on 8,800 shares @ Rs.20 each)
Share Final Call A/c Dr. 2,70,000
To Share Capital A/c 2,70,000
(Being final call money due on 9,000 shares @ Rs.30 each as per Board’s
Resolution No…. dated….)
Bank A/c 2,64,000
To Share Final Call A/c 2,64,000
(Being final call money received on 8,800 share @ Rs.30 each)
Share Capital A/c Dr. 20,000
To Share First Call A/c 4,000
To Share Final Call A/c 6,000
To Forfeited Shares A/c 10,000
(Being forfeiture of 200 shares of Rs.100 each for non-payment of first and
final call money as per Board’s Resolution No…dated..)
Bank A/c Dr. 9,000
Forfeited Shares A/c Dr. 1,000
To Share Capital A/c 10,000
(Being re-issue of 100 shares of Rs.100 each @ Rs.90 each as fully paidup
as per Board’s Resolution No… dated…)
Forfeited Shares A/c 4,000
To Capital Reserve A/c 4,000
(Being profit on re-issue transferred to Capital Reserve Account)
Section C: Applied Theory
6. Expenditure incurred with respect to the operating activities in the normal course of the business is termed as
revenue expenditure. Expenditure which results in the additional capacity or increase in the utility or operating
efficiency of the fixed assets is termed as capital expenditure. Expenditure of an exceptional magnitude relative to
the size of the enterprise and which is expected to extend its benefit for a period exceeding the year of incurrence
is termed as deferred revenue expenditure.
The benefit of revenue expenditure expires in the year of its incidence (within one year) is charged off to the Profit
and Loss account of that year. The benefit arising as a result of capital expenditure lasts for a longer tenure and is
added to the gross block of fixed assets. It is in the case of capital expenditures that a suitable and reasonable
amount is charged to the Profit and Loss account in the form of depreciation, amortization etc., to account for the
utilization of the fixed assets. In the case of deferred revenue expenditures the classification is dependent on
customs, usage and generally accepted accounting practices as it is often a cumbersome task of christening an
expenditure of such a nature to be a capital expenditure or a deferred revenue expenditure. Once determined, a
portion of direct relevance to the current year is charged to the Profit and Loss account and the balance is carried
forward as deferred revenue expenditure in the assets side of the Balance Sheet under a separate heading
“Miscellaneous expenditures to the extent not yet adjusted”.
Examples of revenue expenditure include administrative expenses, salaries, depreciation, provisions, interest
charges etc.
Examples of capital expenditures are installation costs, wages/insurance/freight and other incidental expenses
incurred with respect to the capital assets etc.
Examples of deferred revenue expenditures include advertisement, preliminary expenses, discount on the issue of
shares or debentures, research & development costs etc.
< TOP >
7. Conservatism concept is the concept to be considered in making provision for all possible losses. This is the
policy of playing safe. It takes into consideration all prospective losses and recognizes revenues only when they
are reasonably certain.
The principle behind this concept is that the recognition of revenue requires better evidence than recognition of
expenses. The principle of conservatism is applied when there is an uncertainty inherent in the activity like the
useful life of an asset, occurrence of loss, realization of income and estimated liability. Making provision for
doubtful and discount on debtors in anticipation of actual bad debts and discount is a citing example of
conservatism. The accounts officer of Shriya Ltd. comes to know that Shriya Ltd. is rumored to be going into
liquidation, as a prudent officer of the company, the CAO should advice the company to make suitable provision
for the amounts owed by them keeping in view the conservatism concept provide for all probable losses.
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8. Bonus shares are allotted to the existing shareholders without any consideration being received from them, if
authorized by the articles of association. They are issued to capitalize the profits of the company. Bonus shares can
be issued only out of free reserves built out of the genuine profits or share premium collected in cash.
Issue of Bonus Shares shall be subject to the prescribed SEBI guidelines which inter alia provide for the
following.
i. Bonus issue shall not be made within 12 months of any public/rights issue.
ii. Bonus issue shall be made out of reserves built out of genuine profits or share premium collected in cash.
iii. Reserves created out of revaluation of fixed assets shall not be capitalized.
iv. Bonus issue shall not be made in lieu of dividend.
v. Bonus issue shall not be made unless partly paid shares, if any existing are made fully paid-up.
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