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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
|
2004 ICFAI University M.B.A Suggested Answers Financial Accounting (MB131) : April 2004 Question paper
Suggested Answers Financial Accounting (MB131) : April 2004
1. Answer : (d)
Reason : Discount allowed on issue of shares appears under the head ‘miscellaneous expenditure’ on the asset side
of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and
income tax paid in advance appears under current assets of the balance sheet. Directors’ remuneration
will be entered in the debit side of profit and loss account. Hence (d) is correct.
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2. Answer : (d)
Reason : Dividends may be termed as the share of profits that is payable to the shareholders of a company. The
Companies Act lays down the do’s and don’ts associated with declaration/payment of dividends. As per
the Companies Act, that dividends are paid on paid up capital which is part of the called up capital that
has been paid up by the shareholders and made available with the company for utilization. Hence, it is
proper to pay dividends on paid-up capital. Thus, alternative (d) is the correct answer.
The other alternatives–
(a) Authorized capital is the capital authorized to issue by its memorandum. It is only nominal in
nature unless and until the entire amount is issued, called up and paid up. Since the entire amount is
not made available for utility, dividends cannot be declared on authorized capital.
(b) Issued capital is the part of nominal capital that is offered to the public for subscription and the
entire amount is not available for claiming dividend.
(c) Called-up capital is that part of the subscribed capital which has been called-up and cannot be a
base for calculation of dividend.
(e) Reserve capital is that part of uncalled capital, which is to be called up in the event of winding up
of a company and under any circumstances, dividend cannot be declared on it.
Thus, the statements (a), (b), (c) and (e) are not correct.
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3. Answer : (a)
Reason : Preference shares are redeemed from the proceeds of fresh issue of shares. It cannot be redeemed out of
the proceeds of issue of debentures, fixed deposit and the sale proceeds of investment. Hence, (a) is
correct answer.
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4. Answer : (e)
Reason : All costs incurred to maintain production or to promote sales of existing products are excluded from the
research and development costs. Any routine or promotional costs of market research of existing products
cannot be called as research and development costs. The cost of materials consumed in the process of
research and development (a), amortization of patents and licenses related to research and development
(b), depreciation of premises that is used for carrying the work of research (c), salaries and wages paid to
personnel engaged in the research and development activities (d) can be considered as research and
development expenses, and hence they are not the correct answers. Therefore, alternative (e) is the correct
answer.
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5. 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 (c). Thus, alternative (e) is the correct answer. The issued capital (a)
is that part of the nominal capital issued to the public and subscribed capital (d) is that part of the issued
capital which is subscribed by the public, Paid up capital (e) is the amount which is paid-up by the
shareholders, and Reserve capital (b) is that capital which will be called-up only in case of liquidation.
Therefore, alternative (c) is the correct answer.
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6. Answer : (b)
Reason : Consolidated financial statements should reflect the economic activities of a business enterprise
measured without regard to the boundaries of the legal entity. A parent and subsidiary are legally separate
but are treated as a single business enterprise in consolidated statements, in recognition of Business entity
concept (b). The other concepts do not explain about consolidation of financial statements. The Going
concern concept (a) assumes that the business entity will continue to operate or an indefinite period of
time. Materiality concept (c) requires reporting the information that has a value significant enough to
affect decisions of those using the financial statements. Cost concept (d) explains how the assets are to be
recorded in the books of accounts. According to this, fixed assets are to be recorded at cost less
accumulated depreciation. Periodicity (e) explains that the financial accounting process is meant to
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provide the information about the economic activities of the business enterprise at regular intervals. It does not
speak about consolidation of financial statements. Therefore, alternative (b) is the correct answer.
7. Answer : (c)
Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not issued
by a newly formed company (a).They are not the shares issued to the public at large (b). They are issued
only to the existing shareholders. It does not indicate the right of redemption of shares issue (d). These
are not the shares with cumulative dividend right (e). Therefore, alternative (c) is the correct answer.
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8. Answer : (e)
Reason : Under intrinsic value method the value per share is arrived by valuing the assets of a company and
deducting therefrom all the liabilities and claims of preference shareholders and dividing the net assets by
the number of shares. The value of net assets is nothing but the net equity. Therefore, the information
regarding net equity is essential for calculating the value of equity share under intrinsic value method.
Thus, alternative (e) is the correct answer.
Value per share =
Net equity
No.of shares
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9. Answer : (c)
Reason : Premium on redemption of debentures account represents the additional amount payable to debenture
holders at the time of redemption of debentures and is a personal account. It is not an asset (d) and
therefore it cannot be a real account (a). It is not a an expenditure for the current year and therefore it
cannot be a nominal account (b). It is not a capital reserve (e). Thus, alternative (c) is the correct answer.
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10. Answer : (c)
Reason : A company cannot issue shares at a discount except as provided in Section 79 of the Companies Act.
According to the said section the maximum rate of discount at which the shares can be issued is 10%. If
it exceeds 10%, an approval from the Company Law Board is required. These conditions are intended to
ensure that the discount is not unreasonable.
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11. Answer : (e)
Reason : A trade discount is not at all recorded in books of accounts (e). It will be reduced from the invoice price
and the net amount after deducting the trade discount will be recorded as purchases. Thus, alternative (e)
is the correct answer. when it is not recorded in the books at all, the other four alternatives are incorrect.
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12. Answer : (c)
Reason : Repayment of short term loan is shown as a decrease in cash (c). Therefore, alternative (c) is the correct
answer. It is not a source of working capital. Therefore, alternative (a) is not the correct answer. It is
shown as increase in cash (b), is also not a correct answer. Does not affect the working capital (d) is also
not a correct answer, since it is affecting the working capital. Is not shown either as a source or a use of
funds (e) is also not the correct answer. Therefore, alternative (c) is the correct answer.
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13. Answer : (a)
Reason : Debt-Equity ratio is also called as leverage ratio. Thus, alternative (a) is the correct answer. Current ratio
(b) and Quick ratio (c) are liquidity ratios and not leverage ratios. Earning power (d) and Inventory
turnover ratio (e) are not leverage ratios. Therefore, alternative (a) is the correct answer.
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14. Answer : (d)
Reason : A prospectus (d) means any document described or issued as a prospectus and includes any notice,
circular, advertisement or other document inviting deposits from the public or inviting offers from the
public for the subscription or purchase of shares or debentures of a body corporate. Total capital of a
company is divided into units of small denominations which are called as shares. Share certificate (a) is
an ownership security. Debenture (b) is a formal document constituting acknowledgement of a debt
given under the seal of the company. Fixed deposit receipt (c) is the acknowledgement of deposit of a
certain sum of money repayable after a fixed tenure as per the contract and share warrant (e) is a financial
instrument that gives the holder the right to acquire equity shares. Thus, alternatives (a), (b), (c) and (e)
are not correct. (d) is the correct answer.
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15. Answer : (c)
Reason : Stock of stationery (a), Goodwill (b), Accounts receivable (d) and cash at bank (e) are the assets and not
the correct answers. Profit and loss account (credit balance) (c) is the amount belongs to the owner of the
business and it is a liability to the business. Hence it is not an asset and (c) is the correct answer.
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16. Answer : (a) < TOP
Reason : The portion of the acquisition cost of the asset yet to be allocated is known as written down value (a)
Accumulated value (b) is the value of a thing accumulated over a period of time and not the correct
answer. Realizable value (c) is the value which can be realized in the event of sale and is not correct
answer. Salvage value (d) is the value of an asset that remains as scrap value after its usage over a period
of time and is not the correct answer. Residual value (e) is the value remaining as residue and is not the
correct answer. Alternative (a) is the correct answer
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17. Answer : (b)
Reason : The Accounting Standard-2 deals with regard to accounting for inventory. According to the statement,
Work in progress of a manufacturing industry is covered. Thus, the alternative (b) is the correct answer.
The items of inventory stated in other alternatives are not covered under AS-2 Financial instruments held
as stock-in-trade, Work in progress arising under construction contracts and Work in progress of service
providers. Hence, alternatives (a) reflecting statement (I); (c) combination of statements (I) and (II);
alternative (d) combination of statements (III) and (IV) and alternative (e) combination of statements II,
III and IV are incorrect.
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18. Answer : (b)
Reason : Prepaid rent account is a personal account is the correct statement and alternative (b) is the correct
answer. The alternative (a) is incorrect because drawings is not a nominal account and it is a personal
account of the owner which indicates the value of money or goods withdrawn by him for personal
consumption. The alternative (c) is incorrect because it is the combination of wrong statement (II)
Capital account is a personal account and not a real account with statement (III), which is a correct
statement. The alternative (d) is incorrect because the statement (IV) is incorrect as outstanding salaries
is a representative personal account and not a nominal account and the statement (V) is incorrect as
patents account is a real account and not personal account and the combination of (II), (IV) and (V) is not
the correct answer. The alternative (e) is incorrect because the combination of one correct statement (III)
with incorrect statements (I), (II) and (IV). Thus, the correct answer is (b).
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19. Answer : (d)
Reason : In recognition of money measurement concept, the events and transactions which are of monetary in
nature are recorded in the books of a business. The statement in alternative (b) i.e., death of a chief
executive, though significant cannot be expressed in terms of money as such does not finds place in the
books. The statement in alternative (c) the Government investigation into the pricing activities of the
business does not involve any monetary treatment to be made as such does not find place in the books.
Thus, the alternative (d) the combination of (b) and (c) is the correct answer. The significant monetary
events after the balance sheet date (a) are to be recorded in the books of the business hence is not the
correct answer. Alternative (e), i.e., combination of an incorrect answer and two correct answers is also
not the correct answer. Thus, alternative (d) is the correct answer.
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20. Answer : (b)
Reason : Interest on debentures, provision for taxation, provision for bad debts and penalty for defective works are
charged to profit and loss account, it means these are all charged against profit. Dividend is the part of
profit and not a charge against profit, so it appears in the profit & loss appropriation account.
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21. Answer : (a)
Reason : FIFO method is based on the assumption that costs are charged against revenue in the order in which
they occur. It means, the first unit in stock is the first unit to be out. The closing inventory consists of the
units purchased last. If the prices are rising, goods are issued at lower price and closing stocks are valued
at higher price. It will help to create more profit. Other inventory methods stated in Last in first out
method (b), under this method, the last unit in the stock is the first unit to be out and the costs are charged
against revenue in the reverse order of the FIFO method and during the periods of rising prices, the
closing stock consists of stock with remote prices. Under Weighted average method (c), the stocks are
valued with certain weights as per the movement of stocks and the prices are restated at every stage of
purchase. Under simple average method (d) the stock procured at various prices is computed on the
average price of the stock. Under specific identification method (e), the physical stock is verified on daily
basis where the stock dealt is of high value Hence, (a) is true.
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22. Answer : (b)
Reason : Bad debts recovered is a wind fall gain and it is transferred to profit and loss account at the time of
preparation of final accounts. If provision for bad and doubtful account is maintained in the books of
accounts it will be transferred to provision account and the balance if any in the provision account will be
transferred to profit and loss account. It is recovery of bad debt written off and hence it is not transferred
to debtor’s account. It is not transferred to profit and loss adjustment account. It is not an appropriation
to be transferred to profit and loss appropriation account. Provision for discount on debtors is the account
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created to record the discount allowed to debtors and not to record either the bad debts or bad debts recovered. Thus,
the answer is (b).
23. Answer : (d)
Reason : An accounts receivable is not an intangible asset. It is the amount that the business has to receive from
its debtors. The other assets mentioned in alternatives (a), (b), (c), and (e) i.e., goodwill, trademark,
franchises and secret processes are intangible assets. Hence, the correct answer is (d).
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24. Answer : (b)
Reason : Error of principle denotes wrong classification of expenditure or revenue. If a company pays for repairs
on a machine, it should be debited to repairs account. If it is charged to machinery account, it is an error
of principle. Compensating error (b) is the one where one error is compensated by another error or series
of errors and the debit to machinery account on account of repairs is neither compensated by another
error or by series of errors and hence it is incorrect. Error of commission (c) is incorrect because this is an
error made in recording the amount involved in a transaction while journalizing or posting to ledger
accounts. Error of omission may be partial or complete. Under complete omission, the recording of an
entry is completely omitted and it is incorrect answer. Error of partial omission is result of omission one
aspect of a transaction and it is not the correct answer (e). Thus, (b) is the correct answer.
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25. Answer : (d)
Reason : If the opening inventory of a business was undercast it will increase the gross profit and net profit (d).
The opening stock plus net purchases are the cost of goods sold for a given period and its understatement
will result in increase in gross profit and ultimately increases net profit. The alternative (a) is incorrect
because, the increase in gross profit as a result of understatement of opening stock will not decrease the
net profit. The alternative (c) and (e) are incorrect because opening stock is not reflected in balance
sheet of a business either to increase assets or decrease the value of assets. The alternative (b) is incorrect
because the decrease in cost of goods sold will not decrease gross profit and net profit.
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26. Answer : (e)
Reason : Trial Balance (e) is not a financial statement. It is a list of all accounts showing outstanding balances at
the end of the accounting period. It helps in the preparation of financial statements. The Profit and Loss
account (a); Profit and Loss appropriation account (b) Balance Sheet (c) and Funds flow statement (d) are
the financial statements prepared by a business entity. Funds flow statement is categorized as one of the
financial statements, but its preparation is not mandatory. Thus, (e) is the correct answer.
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27. Answer : (a)
Reason : Share capital is the contribution made by the owner(s) and is regarded as a liability to the business in the
nature of owner’s equity. The underlying feature for this treatment is the distinction between the owner(s)
and that of the business owned by them. According to business entity concept whenever an owner brings
capital into the business, the business in turn is deemed to owe the capital to the owner. As such the share
capital account is treated as a liability to the business and shown under liabilities. The other concepts are
not correct because
(b) Money measurement concept explains that in financial accountancy, a record is made only of
information that can be expressed in monetary terms and ignores other events, however significant
they may be. It is silent about the treatment of share capital account.
(c) Cost concept implies that in accounting all transactions are generally recorded at cost and not at
market value. It does not explain why share capital account is to be treated as liability.
(d) The Going concern concept assumes that the business entity will continue to operate or an
indefinite period of time It does not deal with the treatment of share capital account.
(e) Conservatism concept: The theme behind this principle is that recognition of revenue requires
better evidence than recognition of expenses. It deals with revenues and expenses and not the share
capital account.
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28. Answer : (e)
Reason : The credit balance in bank column of cashbook (e) represents overdraft and it is a liability of a business.
Thus, (e) is the correct answer. Debit balance of analytical petty cash book(a), Credit balance of bank
pass book (b), debit balance of bank column of the Cashbook (c) and debit balance of cash column of the
Cashbook (d) represent assets and therefore not the correct answers. Therefore, alternative (e) is the
correct answer.
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29. Answer : (b)
Reason : Under casting or over casting of subsidiary book is the example of error of commission. Hence (b) is the
correct answer. Inventory valuation affects not only income statement, but also balance sheet. If capital
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expenditure is treated as revenue expenditure, it is an error of principle but not the error of commission. The sum
total of assets is equal to the sum total of equity and outside liabilities but not the sum total of liabilities
alone. Inventories should be valued at lower of historical cost and market value but not replacement cost.
All these statements given in (a), (c), (d) and (e) are false. Therefore, alternative (b) is the correct answer.
30. Answer : (a)
Reason : Conservatism concept means the early recognition of unfavorable events. Under this concept, the
business must provide all expected losses but does not account for anticipated profit. In the given
situation, provision for bad debt made out of profit for future bad debt loss is as per the conservative
approach. Thus, alternative (a) is the correct answer. Cost concept implies that in accounting all
transactions are generally recorded at cost and not at market value (b), Consistency concept states that all
the accounting policies should be followed consistently from one accounting period to another, the Going
concern concept (d) assumes that the business entity will continue to operate or an indefinite period of
time and Time period concept (e) states that all the transactions pertaining to one accounting period
should be accounted for and these four alternatives does not deal with provision for bad debts. Therefore,
alternative (a) is the correct answer.
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31. Answer : (d)
Reason : Purchase of fixed assets on credit is entered in journal proper (d) and subsequently posted into the ledger.
Hence (d) is the correct answer. It is not recorded in purchases book (a) as only purchase of goods will be
recorded in purchases book. Ledger (b) is not original book of entry and therefore, is not the correct
answer. In cash book (c), only cash transactions will be recorded. As the fixed assets were purchased on
credit, this transaction will not be recorded in the cashbook. Alternative (e), which is the combination of
one correct answer and one incorrect answer is also not the correct answer. Therefore, alternative (d) is
the correct answer.
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32. Answer : (a)
Reason : The fundamental principle is that every transaction has dual aspect, an aspect of giving and an aspect of
receiving. Under double entry system of accounting, both these aspects of receiving and giving are
recorded in terms of account. Thus, the receiving and giving entries are being made in the business books,
which are equal and opposite of one another because every debit has equal, and opposite credit. Hence
alternative (a) is the correct answer. Alternative (b) is incorrect because double entry does not involve
keeping two sets of books for the business. Alternative (c) is incorrect because business bookkeeping
being kept by more than one person is not the principle of double entry system of accounting. Alternative
(d) is incorrect because whether double entry or single entry business books may be checked twice.
Double entry system of accounting does not involve in checking of the entries once or twice. Alternative
(e) is incorrect because under double entry system of accounting if an entry is recorded once in the cash
book it will not find its place in any other subsidiary book. If it is recorded in the journal it will not be
recorded again in the cash book. Hence correct answer is (a).
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33. Answer : (d)
Reason : Current assets are the assets which can be converted into cash with in an accounting period i.e., usually
twelve months. Stock (II), debtors (III), pre-paid expenses (III) and accrued income (IV) are current
assets of a business and therefore alternative (d), which is the combination of the above four statements is
the correct answer. Income received in advance is a liability of a business and is not a current asset.
Therefore, alternative (d) is the correct answer.
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34. Answer : (d)
Reason : If by the terms of issue, the price payable is above the par value of shares, it is called an issue at
premium. The amount so received is to be credited to securities premium account.
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35. Answer : (c)
Reason : The claims against the company not acknowledged as debts represent contingent liabilities and should be
included in the notes to balance sheet. They are neither current liabilities (a) nor can be categorized under
Loans and advances (b). it should not shown in Directors’ report (d). Alternative (e), i.e., no separate
disclosure is required is also not a correct answer. Therefore, alternative (c) is the correct answer.
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36. Answer : (b)
Reason : The mistake made by recording the amount incorrectly, either wholly or partly is known as error of
commission. Hence the correct answer is (b). If any transaction is omitted to be recorded, it is known as
error of omission (a). If the principles of accounting are not followed in recording the transaction, it is
known as error of principle (c). If two or more errors are made and the amount compensates in such a
way that the error is not disclosed by trial balance, such errors are compensating errors (d). If any mistake
is made in calculation (like the calculation of depreciation), such error is known as error of computation
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(e). thus alternatives (a), (c), (d) and (e) are not the correct answers. Therefore, alternative (b) is the correct answer.
37. Answer : (e)
Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot be
debited to general reserve account, capital reserve account, revaluation reserve account and capital
redemption reserve account
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38. Answer : (b)
Reason : Under cash basis of accounting, revenue is recognized when cash is received (b). Revenue is recognized
under accrual basis when sale is made (a) or goods are delivered (c) or services are rendered (d) when
there is reasonable certainty regarding the amount of consideration and is not under cash basis of
accounting and therefore not the correct answers. Therefore, alternative (b) is the correct answer.
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39. Answer : (c)
Reason : Number of years’ purchase is the factor with which the super profits will have to be multiplied in order to
arrive at the value of goodwill.
Super profits : Average annual profits – (Average capital employed x Normal rate of return)
Goodwill : Number of years’ purchase x super profits
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40. Answer : (b)
Reason : The proposed dividend is classified as a provision (a) and shown on the liability side of the balance sheet.
The dividend finally decided by the shareholders in the annual general meeting as payable is termed as
Declared Dividend. Any dividend declared must be paid with thirty days from the date of declaration.
Hence, a declared dividend must be classified as a current liability (b) in the balance sheet of the
company. Thus the answer is (b). Declared dividend is not a reserve(c), not a current asset (d) and also
not a miscellaneous expenditure (e). Therefore, alternative (b) is the correct answer.
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41. Answer : (b)
Reason :
Amount debited to own debenture investment account is Rs.68,500.
01.07.2003
400 ??Rs.96 ex. interest Rs.38,400
01.12.2003
300 ??Rs.102 cum. Interest = Rs.30,600 – Rs.500
(Interest for 2 months 30,000 ?
= Rs.500)
2 10
12 100
?
Rs.30,100
Rs.68,500
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42. Answer : (e)
Reason : (No.
of shares)
Particulars Anil Vimal Sunil Total
Liability 30,000 40,000 30,000 1,00,000
Less: Unmarked
applications in the ratio of
3:4:3
4,800 6,400 4,800 16,000
25,200 33,600 25,200 84,000
Less: Marked (Stamped)
applications
22,000 24,000 28,000 74,000
3,200 9,600 (2,800) 10,000
Less: Division of Sunil’s surplus
(in the ratio of 3:4)
1,200
1,600
2,800
–
Final liability of each underwriter 2,000 8,000 Nil 10,000
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43. Answer : (c)
Reason : Amount transferred to capital reserve is Rs.800.
Working Note:
Amount lying in share forfeiture account Rs.500
Particulars Rs.
Amount received on 300 shares that were cancelled 300 x Rs.5 = 1500
Amount received on 200 forfeited shares which were reissued (200 x Rs.5) 1,000
Less: Amount of discount allowed on 200 shares which were reissued (200 x
Re1.)
200
Amount to be transferred to Capital Reserve 800
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44. Answer : (a)
Reason : Value of right =
Where r = No of rights issued
N = No of old shares
M = Market price
S = Issue price of rights
??Value of rights = = Rs.60
r (M S)
N r
??????????-
2 (Rs.560 Rs.410)
3 2
??????????-
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45. Answer : (a)
Reason : Depreciation =
The cost as on March 31, 2002 is irrelevant (cost concept).
Rs.1,85,000 Rs.5,000 Rs.18,000
10 years
-
?
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46. Answer : (c)
Reason : The impact on net profit:
Salaries overstatement – net profit is reduced by Rs.15,000
Repairs understatement – net profit is increased by Rs.7,000
Income understatement – net profit is reduced by Rs.7,000
Net impact on net profit is understatement by Rs.15,000
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47. Answer : (a)
Reason : Bank Reconciliation Statement
Particulars Rs. Rs.
Favourable balance as per Pass book 20,000
Add: Cheque deposited, yet to be realised 15,000 15,000
35,000
Less: Cheques issued to Mr. Y but not presented for
payment 4,000
Rent deposited by Mr. Z directly into the bank 10,000
Interest on debentures directly collected by bank 10,000 24,000
Favourable balance as per cash book 11,000
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48. Answer : (a)
Reason : Dr. Provision for Bad debts Account Cr.
Date Particulars Rs. Date Particulars Rs.
March 31,
2004
To A 12,000
April 01, 2003 By Opening
balance 30,000
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To B 10,000 March 31,
2004 By P & L a/c 34,000
To C 7,000
To Closing
balance 35,000
64,000 64,000
49. Answer : (e)
Reason : Rate of depreciation = 1 –
= 1 –
= 1 – 0.85 = 15%.
n S
C
2 43,350
60,000
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50. Answer : (b)
Reason :
Since FIFO method of valuation is followed, the stock in hand will be that purchased on the latest date.
i.e 26-03-2004.
Hence closing stock = 150 Units ??Rs.40 per Unit
= Rs.6,000
Particulars Units
Total
Purchases 750
Opening stock 150
900
Less Sales 750
Closing stock 150
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51. Answer : (a)
Reason : Trading account and Profit and loss account for the year ended March 31, 2003.
Dr. Cr.
Particulars Rs. Particulars Rs.
To Opening stock 30,000 By Sales 5,10,000
To Purchases 4,50,000 Less: Returns
inward 10,000 5,00,000
Less: Returns
outward 15,000 4,35,000
To Salaries and wages 10,000
To Rent paid 5,000
To Insurance 4,000
To freight inward 5,500
To Manager’s commission 500 By Net loss 4,500
To depreciation 12,550
To provision for bad debts 1,750
To bad debts 200
5,04,500 5,04,500
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52. Answer: (b)
Reason:
Balance sheet of Krishnan as on March 31st, 2004
Liabilities Rs. Rs. Assets Rs. Rs.
Capital 2,00,000 Fixex assets 1,25,500
Less net loss 4,500 Less
depreciation
12,550
1,95,500 1,12,950
Sundry
creditors
45,500 Land 60,000
Sundry
debtors
35,000
Less
provision
1,750
33,250
Prepaid
insurance
1,000
Closing stock 10,000
Cash in hand 23,800
2,41,000 2,41,000
53. Answer : (b)
Reason :
Particulars Rs.
Original cost of furniture 5,000
Less Depreciation at the rate of
20%
Year – 1 1,000
4,000
Year – 2 800
3,200
Year – 3 640
2,560
Year – 4 512
Residual Value 2,048
Useful life – 4 years
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54. Answer : (b)
Reason :
Particulars Rs.
Cash Sales 6,80,000
Issue of shares 5,00,000
Amount received from bank by way of
short-term loan
1,00,000
12,80,000
Less: Purchase of fixed assets 4,00,000
Short tem loan repaid 25,000
Payment towards expenses 3,50,000
Cash purchases 1,50,000
Amount deposited in bank 2,00,000
Cash balance as on March 31, 2004 1,55,000
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55. Answer : (b)
Reason : Maximum underwriting commission Permissible under the companies Act, 1956 is 5% of issue price of
shares.
= 10,000 shares x Rs.115 X 5% = Rs.57,500.
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56. Answer : (c)
Reason : The correct entry which must have been recorded is
Returns inward account Dr. Rs.7,850
To Prakash account Rs.7,850
Whereas, Prakash’s account is debited with Rs.7,850. Hence the rectification entry is
Suspense account Dr. Rs.15,700
To Prakash account Rs.15,700
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57. Answer : (d)
Reason :
Particulars Rs. Rs.
Overdraft balance as per bank column of cash book 3,400
Add:
Cheques deposited not yet collected 6,300
Bank and interest charges not recorded in cash book 910
7,210
Less: 10,610
Cheques issued not yet presented for payment 5,650
Interest directly collected by bank 5,200 10,850
Credit balance as per pass book 240
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58. Answer : (d)
Reason : According to the basic accounting equation, assets = liabilities + owners equity.
Hence owners equity = assets – liabilities.
Capital = Rs.2,45,000 + Rs.1,85,000 + Rs.95,000 + Rs.80,000 – (Rs.1,20,000 + Rs.40,000)
= Rs.6,05,000 – Rs.1,60,000 = Rs.4,45,000
Profit for the year 2003-2004 = Capital as on March 31, 2004 – Capital as on April 01, 2003
= Rs.4,45,000 – Rs.3,40,000 = Rs.1,05,000
Alternatively,
Profit for the year 2003-2004 = Capital as on March 31, 2004 – Capital as on April 01, 2003
= Rs.4,45,000 – Rs.3,40,000 = Rs.1,05,000
Liabilities Rs. Assets Rs.
Capital
(balancing figure)
4,45,000 Fixed Assets 2,45,000
Loan from bank 1,20,000 Inventory 1,85,000
Sundry Creditors 40,000 Sundry Debtors 95,000
Cash & Bank 80,000
6,05,000 6,05,000
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59. Answer : (a)
Reason : Trial balance as on March 31, 2004
Particulars
Dr.
Amount (Rs)
Cr.
Amount (Rs)
Sales 5,65,000
Purchases (balancing figure) 2,21,000
Carriage inward 28,000
Other expenses 31,000
Fixed assets 10,90,000
Sundry debtors 1,25,000
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Trading account for the year ended March 31, 2004
Sundry creditors 95,000
Cash and bank 65,000
Capital 9,00,000
15,60,000 15,60,000
Particulars Rs. Particulars Rs.
To Purchases 2,21,000 By Sales 5,65,000
To Carriage inward 28,000 By Closing stock 50,000
To Gross profit 3,66,000
6,15,000 6,15,000
60. Answer : (b)
Reason :
Particulars Rs.
Total of debit side of trial balance 2,45,000
Add: Advertisement expenses 15,000
Less: Opening stock (excess taken) 100
Total of trial balance (Debit side) 2,59,900
Particulars Rs.
Total of credit side of trial balance 2,68,900
Add: Interest on investments (less taken) 6,000
2,74,900
Less: Advertisement expenses (wrongly taken) 15,000
Total of trial balance (credit side) 2,59,900
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61. Answer : (c)
Reason :
Particulars
Amount
(Rs.)
Amount
(Rs.)
Petty cash 1,000
Less: Stamps 145
Conveyance 186
Repairs 228
Stationery 154
Other office
expenses
93 806
194
Amount reimbursed 806
1,000
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62. Answer : (c)
Reason : Since share money is called in full, the share capital account will be debited with Rs.50,000
i.e. No. of shares x Face value of share
= 500 x Rs.100 = 50,000.
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63. Answer : (b)
Reason :
Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr.
Particulars Rs. Particulars Rs.
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Balance sheet as on March 31, 2004
To Opening stock 90,000 By Sales 6,35,000
To Purchases 4,56,000 By closing stock 75,000
To Gross profit 1,64,000
7,10,000 7,10,000
To Salaries 86,000 By Gross profit 1,64,000
To other expenses 73,000 By Net loss 70,000
To Depreciation 75,000
2,34,000 2,34,000
Liabilities Rs. Assets Rs.
Share capital 6,00,000 Fixed assets 4,25,000
Sundry creditors 32,000 Sundry debtors 45,000
Short tem loan 36,000 Closing stock 75,000
Cash and bank 53,000
Net loss 70,000
6,68,000 6,68,000
64. Answer : (a)
Reason : Costs that improve the revenue earning capability of an asset should be capatilised as part of the cost of
the asset (for example, Rs.40,000 paid for additional component for increasing the earning capacity).
However, costs that maintain the revenue earning capability (such as the maintenance charges and the
replacement parts) should be treated as revenue expenses and they are to be charged to the Profit and
Loss Account. The correct figure for depreciation calculation is therefore, as under:
Particulars Rs. Rs.
Cost less discount 4,70,000
Delivery charges 10,000
Erection charges 20,000
Customs duty 40,000 5,40,000
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65. Answer : (a)
Reason :
Trial Balance of John Vicky as at March 31, 2004
Sl.No Heads of Account
Debt Balance
(Rs.)
Credit Balance
(Rs.)
1. Capital (1st April, 2002) 89,000
2. Drawings 10,000
3. Stock (1st April, 2002) 37,000
4. Purchases 2,31,250
5. Sales 3,94,000
6. Motor Vehicles 14,500
7. Cash in Hand 1,350
8. Sundry Creditors 49,760
9. Sundry Debtors 139,700
10. Bank Overdraft 9,000
11. Administrative expenses 76,360
12. Office Equipment 35,000
13. Carriage Outward 2,310
14. Returns Inward 2,050
15. Provision for Bad Debts 4,250
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16. Returns Outward 3,160
17. Discount Allowed 2,800
18. Discount Received 3,150
TOTAL 5,52,320 5,52,320
66. Answer : (d)
Reason : Average profit =
= = Rs.4,50,000
3
Rs.4,38,000 ??Rs.4,62,000 ??4,50,000
3
Rs.13,50,000
Average profit Rs.4,50,000
Normal rate of return on capital employed 12% on
Rs.35,00,000
Rs.4,20,000
Super profit Rs. 30,000
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67. Answer : (a)
Reason : Debtors as per trail balance Rs.40,600
Less: Bad debts written-off Rs. 600
Rs.40,000
Less: Provision for bad debts@ 5% Rs. 2,000
Rs.38,000
Provision for discount on sundry debtors will be
2 Rs.38,000 Rs.760
100
???
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68. Answer : (c)
Reason : Valuation of closing stock under Weighted Average Method
Date Mar. 2004
Purchases Issues Balance
Quantity Rate Value
(Rs.) Quantity Rate Value
(Rs.) Quantity Rate Value
(Rs.)
1 Opening
Stock
1,000 20 20,000
10 500 23 11,500 1,500 21 31,500
15 750 21 15,750 750 21 15,750
20 1,000 26.25 26,250 1,750 24 42,000
31 750 24 18,000 1,000 24 24,000
Value of closing stock 1,000 24,000
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69. Answer : (c)
Reason : Whenever trade discount is given, the same will not be separately disclosed and the sales will be shown
at net figure. However, cash discount should be taken to discount account. Hence cash account should be
debited with actual cash received (Rs.850), discount account should be debited with cash discount
allowed (Rs.50) and sales should be credited with catalogue price less trade discount (i.e Rs.900).
Cash a/c Dr. Rs.850
Discount a/c Dr. Rs. 50
To Sales a/c Rs. 900
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70. Answer : (a)
Reason : Book value of the machinery = Rs.5,00,000
Value of machinery on revaluation = 20% above book value
Profit on revaluation = 20% of Rs.5,00,000
= Rs.1,00,000
Share of H. Ltd. = 80% of Rs.1,00,000
= Rs.80,000 (Capital profit)
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If the value of assets of the subsidiary company are revalued at the time of acquisition of shares, profit
or loss on such revaluation is treated as capital profit or capital loss and is divided among minority
shareholders and holding company according to their share.
There is no revenue profit in the instant problem.
71. Answer : (a)
Reason : If the proposed dividend exceeds 15% but less than 20%, the minimum percentage of current profits that
will have to be transferred is 7.5% of current profits.
Rs.2,25,000 x 7.5% = Rs.16,875.
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72. Answer : (b)
Reason :
Weighted average profit
??Weighted average profit = Rs.26,10,000 ??6 = Rs.4,35,000
The alternative amounts of (a), (c), (d) and (e) are not correct.
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
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73. Answer : (d)
Reason : Quick ratio =
Hence, option (d) is the correct choice.
Current assets other than inventories 3 5 2.5.
Current liabilities 3.2
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