2005 ICFAI University M.B.A Suggested Answers Financial Accounting (MB131): January 2005 Question paper
Suggested Answers Financial Accounting (MB131): January 2005
1. Answer : (b )
Reason : Accrual basis is used under hybrid system of accounting for expenses and cash basis is used for revenue
used.
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2. Answer : (b)
Reason : Financial accounting principles assume the going concern concept and hence the fixed assets will be
valued at cost less depreciation. However, in the given case, the concern decided to close its operations.
Hence, the fixed assets should be indicated in the balance sheet at net realizable value. Hence the answer
is (b). The assets are not recorded at historical cost. Cost or market value, whichever is lower is used to
record stock-in-trade but not fixed assets. The replacement cost is irrelevant when the firm is going to
discontinue its operations.
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3. Answer : (d)
Reason : Incurring liability is a source of fund but not a use of fund. Acquiring assets, incurring expenses,
incurring losses and paying dividends are all uses of funds.
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4. Answer : (d)
Reason : Real accounts represent the assets and properties of a business is the correct statement and (d) is the
correct answer.
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5. Answer : (b )
Reason : The losses from sale of capital assets should be deducted fom the revenue to ascertain the net income
The convention of disclosure implies that all material information should be disclosed in the accounts
In keeping with the principle of materiality unimportant items are either left out or merged with other
items. The comparison of the results of one accounting period with that in the past is possible when the
convention of consistency is adhered to by the business. The income or loss of business is always
computed with relevance to a specific period called the accounting period.
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6. Answer : (e )
Reason : Prior period items are to be debited to Profit &Loss A/c and its impact on the current year profit should
be shown in the notes to the accounts.
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7. Answer : (b)
Reason : Dr. Sundry Creditors Cr.
Date Particulars Rs. Date Particulars Rs.
2003-2004 To Cash
1,80,000 April 01, 2003 By Balance b/d 80,000
To discount 8,000
March 31, 2004 To Balance c/d 90,000
2003-2004 By Purchases
(balancing figure)
1,98,000
2,78,000 2,78,000
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8. Answer : (e)
Reason : Rs.
Payment made to creditors 10,00,000
Discount received 10,000
Closing balance 40,000
10,50,000
Less : Credit purchases 9,25,000
Opening balance 1,25,000
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9. Answer : (c)
Reason : Cost of goods = Purchases – Returns outward + Freight in
= Rs.2,10,000 – Rs.22,000 + Rs.30,000 = Rs.2,18,000
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10. Answer : (d)
Reason : A mistake of overcasting of purchases day book increases cost of sales and decreases gross profit. (d) is
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the correct answer. >
11. Answer : (d)
Reason : The thumb rule is that all expenses and assets are showing debit balances and incomes and liabilities
credit balances. Carriage outward being an expense should be listed in debt column of the Trial Balance.
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12. Answer : (b)
Reason : Bank Reconciliation Statement
Particulars Rs. Rs.
Overdraft balance as per Pass book 20,000
Add : 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
44,000
Less :
Cheque deposited, yet to be realised 15,000 15,000
Overdraft balance as per cash book 29,000
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13. Answer : (a)
Reason : The withdrawal of cash from the bank will figure in both and cash columns of a cash book and such
entries are called contra entries. (a) is the correct answer.
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14. Answer : (c)
Reason :
Particulars Profit increased
(Rs.)
Profit decreased
(Rs.)
Salaries overstated (Profit understated) 15,000
Repairs understated (Profit overstated) 7,000
Income of investment understated (Profit
understated)
7,000
7,000 22,0000
Net profit understated/decreased 15,000 --
22,000 22,000
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15. Answer : (b)
Reason : i. Difference in sales a/c because of taking Rs.58,726 instead of Rs.58,762=Rs.36 whereby credit is
less by the amount
ii. Discount not debited Rs.52 on account of which debit balance is less by the amount
iii. Sale of old furniture credited to machinery a/c instead of furniture is not affecting the agreement of
trial balance
iv. Sale twice debited to S a/c has increased the debit balance by Rs.250
So excess debit Rs.250 plus short credit of Rs.36 minus short debit Rs.52 makes debit total more by
Rs.234 of the Trial balance
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16. Answer : (c)
Reason : A credit sale of Rs.2,000 was wrongly entered in the purchases book. This mistake will result in a
decrease in the gross profit of Rs.4,000.
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17. Answer : (a)
Reason :The mistake of posting of an item to the correct side of a wrong account will not affect the agreement of a
trial balance . Thus, the total of credit side will be the total of debit side too. Thus, before and after
rectification the total of the debit side will be Rs.43,570. (a) is the correct answer.
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18. Answer : (c)
Reason : Net Profit of Joy Ltd. for the year ending March 31, 2004 :
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Purchases 2,85,000 By Cash sales 4,00,000
Add : Omitted to be recorded
15,000 3,00,000
Less : Wrong Credit 51,000
3,49,000
To Decrease in inventory 40,000
To Gross Profit 9,000
3,49,000 3,49,000
To Sales Commission 12,000 By Gross Profit 9,000
+ Accrued 6,000 18,000 By Rent received 55,000
To Depreciation 30,000 Less : received in advance 2,500 52,500
To Net Profit 13,500
61,500 61,500
The net profit is Rs.13,500
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19. Answer : (e)
Reason : When goods are lost and insurance company accepts the claim only to a certain extent, profit and loss
account should be debited with net loss, Trading account will be credited with cost of goods lost and
insurance company account will be debited with the amount of claim accepted. Thus the entry is
Profit and Loss account Dr. Rs.2,000
Insurance company account Dr. Rs.8,000
To Trading account Rs. 10,000
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20. Answer : (c)
Reason : The net profit Rs.1,70,000 – Rs.15,000(Profit on sale of building which is carried to P& L account
(Rs.45,000 –Rs.30,000) = Rs.1,55,000. The profit from operations will be Rs.1,55,000.
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21. Answer : (c)
Reason : Balance Sheet of Nilgir Ltd as on March 31, 2003.
Liabilities Rs. Assets Rs.
Share Capital 5,76,900 Land & building 4,36,000
Profit and loss account 1,33,731 Office equipment 1,99,700
12% Bank Loan 1,50,000 Less : depreciation 19,970 1,79,730
Add : Outstanding interest
15,000
1,65,000
Furniture 2,00,000
Sundry creditors 50,000 Less : depreciation 30,000 1,70,000
Less : Closing stock 38,000
Debtors set off 8,000 Sundry debtors 55,000
Provision for discount
on creditors 720 41,280
Less : Provision for discount
on debtors
779
Creditors set off 8,000 46,221
Bills payable 10,000 Bills receivable 9,000
Cash at bank 23,500
Petty cash 210
Accrued commission 13,000
Prepaid printing charges 1,850
Cash on hand 9,400
9,26,911 9,26,911
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22. Answer : (b)
Reason : Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr.
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Particulars Rs. Particulars Rs.
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
Balance sheet as on March 31, 2003
Liabilities Rs. Assets Rs.
Share capital 6,00,000 Fixed assets
5,00,000
Less : depreciation
75,000
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
23. Answer : (c)
Reason : Dividends represent the amount earmarked to distribute to the shareholders. Hence (c) is the answer.
The amount of taxes is to be deducted from profit before tax and the amount to be transferred to reserves
and other appropriations, if any, need to be made from profits after tax. Operating profit is the amount of
profit other than non-operating surplus. Interest, taxes, other appropriations should be made to operating
profit. Hence this is not the amount earmarked for distribution to shareholders.
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24. Answer : (c)
Reason : Computation of inventory :
Particulars Rs. Rs.
Inventory value as per books 1,50,000
Add Purchases received but not accounted 10,000
Sales yet to be delivered 30,000 40,000
1,90,000
Less Returns outward 5,000
Amount overcast in stock sheet 6,000 11,000
Inventory as per physical stock 1,79,000
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25. Answer : (d)
Reason :
Particulars Rs.
Opening balance of sundry debtors 47,000
Add : Credit sales 6,75,000
7,22,000
Less : Closing balance of Sundry debtors 70,000
Cash collected from customers 6,52,000
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26. Answer : (d)
Reason :
Particulars Rs.
Opening Provision 4,000
Bad debts to be written off 10,000
Shortfall of provision 6,000
Provision required 5% of Rs.1,40,000 (Rs.1,50,000 – Rs.10,000) 7,000
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Provision required 5% of Rs.1,40,000 (Rs.1,50,000 – Rs.10,000) 7,000
Charge against profit and loss account 13,000
27. 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
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
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28. Answer : (d)
Reason : For valuation of relatively expensive items whose physical identification at various stages is possible,
Specific Identification method is most suited. Where the inventories are vast and physical identification
is difficult, the method is not advisable.
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29. Answer : (e)
Reason : Advance payment made to suppliers for materials is not classified as inventory. Other items mentioned
in (a), (b), (c) and (d) are classified as inventory in the financial statements as they are the components
of inventory.
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30. 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
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31. 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 = Rs.1,20,000
Rs.66,000
= 0.55
3x = 1 – 0.55 = 0.45
x = 0.45 ÷ 3 = 0.15 or 15%.
Thus, the rate of depreciation = 15%.
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32. Answer : (e)
Reason :
Dr. Sundry Debtors Account Cr.
Date Particulars Rs. Date Particulars Rs.
April 01, 2003 To Balance b/d 10,000 March 31, 2004 By Returns inward a/c 1,000
March 31, 2004 To Sales a/c 1,00,000 March 31, 2004 By Cash a/c 90,000
March 31, 2004 By Bad debts a/c 500
March 31, 2004 By Discount allowed a/c 400
March 31, 2004 By Balance c/d 18,100
1,10,000 1,10,000
Dr. Provision for Bad Debts Account Cr.
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Date Particulars Rs. Date Particulars Rs.
March 31, 2004 To Bad Debts 500 April 01, 2003 By Balance b/d 400
To Balance c/d 1,095 March 31, 2004 By Profit & Loss a/c 1,195
1,595 1,595
On March 31, 2004 the balance of sundry debtors is Rs.18,100. This amount includes Rs.200 due from a debtor
who has been declared bankrupt. Therefore, provision for doubtful debts is to be created 100% on Rs.200 and 5%
on Rs. 17,900 (Rs.18,100 – Rs.200)
The total provision on March 31, 2004 = Rs.200 + Rs.895 + 500 = Rs.1,595 and less existing provision of Rs.400
and amount debited to profit and loss account is Rs.1,195.
33. 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) Going concern concept explains that the resources of the concern would continue to be used for the
purposes for which they are meant to be used. The very categorization of assets into fixed and
current presupposes the going concern concept. It does not deal about 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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34. Answer : (a)
Reason :
Particulars 2000-01 2001-02 2002-03 2003-04
(Rs.) (Rs.) (Rs.) (Rs.)
Post-tax profits 1,50,000 1,65,000 2,20,000 2,50,000
Pre-tax profits 3,00,000 3,30,000 4,40,000 5,00,000
Add: Excessive depreciation – – 10,000 –
Abnormal loss – 20,000 – –
3,00,000 3,50,000 4,50,000 5,00,000
Average pre-tax profits =
3,00,000 3,50,000 4,50,000 5,00,000
4
+ + +
= Rs. 4,00,000
Less: Additional salaries Rs. 20,000
Rs. 3,80,000
Less: Tax @50% Rs. 1,90,000
Future maintainable profits Rs. 1,90,000
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35. Answer : (b)
Reason : Valuation of goodwill according to purchase of super profits method.
a. Calculation of Capital Employed :
Rs. Amount (Rs.)
Assets
Land and Buildings 1,75,000
Plant and machinery 90,000
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Plant and machinery 90,000
Stock 1,15,000
Book debts 98,000
Less : Provision 3,000 95,000
Cash at bank 7,000
Gross total assets 4,82,000
Less : Sundry creditors 71,000
Provision for taxation 55,000 1,26,000
Capital employed 3,56,000
b. Calculation of Normal Profits :
(Normal rate of return x Capital Employed)/100
12/100 X Rs.3,56,000 = Rs.42,720.
c. Calculation of Future Maintainable Profits (based on profits of previous year) :
Actual profit after providing tax Rs.55,000.
(As the provision for taxation @ 50% is Rs.55,000, the profits would be Rs.l,10,000 and the profits
after providing for taxation also would be Rs.55,000.)
d. Calculation of Super Profits
Rs.
Actual profits 55,000
Less : Normal profits 42,720
Super profits 12,280
Valuation of goodwill on five years purchase of super profits = Rs.12,280 x 5 = Rs.61,400.
36. Answer : (a)
Reason :
1999-2000
Rs.
2000-01
Rs.
2001-02
Rs.
2002-03
Rs.
2003-04
Rs.
Total
Rs.
Profit 75000 300000 375000 450000 742500
Less: repair expenses - 30000
Add: Depreciation 1500 3000 3000
Less: profit on sale of plant
22,500
Adjusted profits 75000 300000 346500 453000 723000
Weights 1 2 3 4 5
Profits × weights 75000 600000 1039500 1812000 3615000 7141500
Weighted average profits = Rs.71,41,500 / 15 = Rs.4,76,100
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37. Answer : (e)
Reason :
Debenture amount–500 units × Rs.100 Rs.50,000
Less: Discount – 10% Rs. 5,000
Rs. 45,000
These Rs.45,000 debentures are converted into equity shares of Rs.100 each at a premium of Rs.20.
So, the amount of equity share per unit = Rs.100 + Rs.20 = Rs.120
No. of equity shares to be issued =
Rs.45, 000
Rs.120 = 375 shares.
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38. Answer : (a)
Reason :
Year Profit (Rs.) Weight Product
1999-2000 42,364 1 42,364
2000-01 43,456 2 86,912
2001-02 53,126 3 1,59,378
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2001-02 53,126 3 1,59,378
2002-03 56,789 4 2,27,156
2003-04 62,354 5 3,11,770
15 8,27,580
Average profit = Rs.8,27,580 / 15 = Rs.55,172
39. Answer : (a)
Reason : Share premium is received along with the application money and the share premium once received
cannot be reversed. Hence, the share premium received on 1,00,000 shares at the rate of Rs.2 per share
is un affected on account of forfeiture of shares.
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40. Answer : (c)
Reason : Amount transferred to capital reserve is Rs.800.
Working Note:
Particulars Rs.
Amount received on 200 shares on forfeiture(200 x Rs.5) 1,000
Less: Amount of discount allowed on 200 shares which were reissued (200 x Re-1.) 200
Amount to be transferred to Capital Reserve 800
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41. Answer : (b)
Reason : Dr. Cash account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d. 50,000 By Preference shareholders
(Rs.3,00,000 x 110%)
3,30,000
To Investments 2,00,000 By Balance c/d. 25,000
To Equity shares
(including premium)
1,05,000
3,55,000 355,000
No. of equity shares = Rs.1,05,000 / Rs.105 = 1000 shares.
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42. Answer : (b)
Reason : The shares were issued at a discount of 10% i.e. they were issued for Rs.90 per share.
Ramya failed to pay the final call of Rs.30. Hence she 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
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43. Answer : (d)
Reason : As per the Companies Amendment Act, 1988, only preference shares, which are redeemable within 20
years, can be issued
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44. Answer : (c)
Reason :
Particulars Rs. Rs.
Land and building 3,60,000
Plant and machinery (Rs.2,70,000 × Rs.90%) 2,43,000
Furniture 1,80,000
Inventories 90,000
Sundry Debtors (Rs.60,000 × 95%) 57,000
Loans and advances 75,000
Cash 10,000
Bank 35,000
Less: 10,50,000
Sundry creditors 50,000
Short term loan 80,000 1,30,000
Net assets 9,20,000
Value of share =
Rs.9, 20,000 Rs.18.40
50,000
=
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45. Answer : (b)
Reason : In case of issue of debentures at discount and redeemable at a premium, discount on issue of debentures
a/c should be debited with the amount of discount, loss on issue of debentures a/c should be debited with
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the amount of premium payable on redemption and Bank account should be debited with actual amount
received. Corresponding credit should be given to debentures a/c with face value of debentures and
premium on redemption of debentures a/c with amount of premium. Hence the entry is
Rs. Rs.
Bank a/c Dr. 1,80,000
Discount on issue of debentures a/c Dr. 20,000
Loss on issue of debentures a/c Dr. 10,000
To 12% Debentures a/c 2,00,000
To Premium on redemption of debentures 10,000
46. Answer : (e)
Reason : Forfeited shares account = Forfeited shares x Amount paid by the shareholder
= 60 x (Rs.6 + 3 – 2 = Rs.7) = 420
No.of forfeited reissued shares = 36 shares
(60x60%) @ Rs.7 = Rs.252
Credit balance in the share forfeiture account = Rs.420 – Rs.252 = Rs.168.
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47. Answer : (c)
Reason : Cute Ltd.
Intrinsic Value of Shares
(Rs.)
50,000 equity shares @ Rs.10 each 5,00,000
2,000, 8% preference shares @ Rs.100 each 2,00,000
Reserves and surplus 30,000
External liabilities 1,20,000
Sundry creditors 60,000
Total liabilities 9,10,000
(Rs.)
Total assets 9,10,000
Less : Fictitious assets (10,000)
(preliminary expenses)
Sundry creditors (60,000)
Extenral liabilities (1,20,000)
Preference shares (2,00,000)
Net assets available for equity shareholders 5,20,000
Intrinsic value of shares
=
Net assets availabe for equityshareholders
Number of equityshares
=
Rs.5,20,000
50,000 = Rs.10.40.
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48. Answer : (a)
Reason : Present share capital Rs.50,00,000
Rights issue Rs.50,00,000 x
2
5 Rs.20,00,000
Total Share Capital Rs.70,00,000
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49. Answer : (d)
Reason : The journal entry on forfeiture of share is
Particulars Dr. Cr.
(Rs.) (Rs.)
Share Capital A/c. (300 × Rs.10) Dr. 3,000
To Share First Call A/c. (300 × Rs.2) 600
To Share Second and Final Call A/c. (300 × Rs.3) 900
To Shares Forfeited A/c. (300 × Rs.5) 1,500
(Being the forfeiture of 300 equity shares of Ramesh on
Bank A/c. (300 × Rs.9) Dr. 2,700
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Bank A/c. (300 × Rs.9) Dr. 2,700
Shares forfeited A/c. (300 × Rs.1) Dr. 300
To Share Capital A/c. (300 × Rs.10) 3,000
(Being the re-issue of 300 shares @ Rs.9 per share and
discounted amount of Re.1 per share is to be transferred
from share forfeiture a/c)
Shares forfeited A/c. Dr. 1,200
To Capital Reserve A/c. 1,200
(Being the profit on re-issue of forfeited shares transferred
to Capital Reserve)
50. 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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51. Answer : (c)
Reason : Total amount received on forfeited shares =Rs.2500(10-2) =Rs.20,000
Reissue of shares @Rs.7 on fully paid =2500 x Rs.7 =Rs17,500
Shortfall on reissue =2500 x Rs3 =Rs.7,500
Balance in share forfeiture a/c after adjusting for shortfall =Rs.(20,000-7,500) =Rs.12,500.
Transfer to capital reserve =Rs.12,500.
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52. Answer : (e)
Reason : Profit on revaluation of machinery = Rs.2,00,000.
Share of minority group of S Ltd. = 25%
Share of profit on revaluation = 25% of Rs.2,00,000
Rs.2,00,000 Rs.50,000.
100
25 × =
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53. Answer : (b)
Reason : The post-acquisition profits of subsidiary company are the Revenue profits for consolidation of balance
sheet of holding company and its subsidiary company.
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54. Answer: (a)
Reason: Half of the stock remained unsold
= Rs.20,000/2 = Rs.10,000
= Profit percentage =
Rs.5, 000 1
RS.20, 000 4
=
= Unrealised profit share = Rs.10,000
1
4
× ×
80%
= Rs.2,000
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55. Answer : (a)
Reason:
800
1, 000 =
4 Holding Company
5
? ?
? ?
? ?
Minority Interest = (10,000 × 1/5) = 2,000.
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56. 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.
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57. Answer: (a)
Reason: Profit and Loss Appropriation Account
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Particulars Rs. Particulars Rs.
To Net loss 12,71,733 By Balance b/d 1,29,000
To Proposed dividend Equity 4,00,000 By Dividend equalization
.reserve
3,91,000
Preference
1,20,000 By Balance C/d. 12,71,733
Total 17,91,733 Total 17,91,733
Amount to be transferred from dividend equalization reserve is Rs.3,91,000
58. Answer : (d)
Reason : No dividends an paid on call in advance nor on calls in arrar Dividend = 12% on Rs. 12,00,000 = Rs.
1,44,000
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59. Answer : (a)
Reason : Outstanding salaries is the amount payable during a particular period which is not yet paid. It is Personal
Account representing salaries due to employees. It is a representative personal account
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60. Answer : (b)
Reason : The surplus arising on a professional revaluation of fixed asset is a capital reserve.
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61. Answer : (d)
Reason : A company’s system of maintaining books of accounts must be on the accrual basis and according to the
double entry system of accounting. The systems in other alternatives are no systems at all or not
recognized under the Act. Thus, alternative (d) is the correct answer.
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62. Answer : (a)
Reason: A shareholder wants to review the revenues and expenses of a company. The financial statement the
investor would consult is the Income statement. (a) is the correct answer.
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63. Answer : (c)
Reason : The opening balance of retained earnings i.e. profit and loss appropriation account is Rs.25,000 and the
profit earned during the year is Rs.50,000 thus total retained earnings is Rs.75,000 and the closing
balance is Rs.55,000. Thus, the amount of dividends paid is Rs.20,000.
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64. Answer : (a)
Reason : Net value added is derived by deducting depreciation from the gross value added and not vice versa.
Thus the statement in alternative (a) is false. The value added is not the most relevant concept and the
statement forms part of social responsibility reporting (b). It is arrived at by deducting only the cost of
bought in materials and services (c). It measures the value of increase in resources (d). The approaches
adopted are additive approach and subtractive approach in computing value added (e). Thus, the
alternatives (b), (c), (d) and (e) are true.
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65. Answer : (d)
Reason: Depreciation charged to date
Cost
Rs.
Written down Value
Rs.
Depreciation
Rs.
Land 2,00,000 2,00,000 -
Building 4,00,000 3,50,000 50,000
Plant and machinery 7,00,000 5,25,000 1,75,000
Furniture 62,500 50,000 12,500
13,62,500 11,25,000 2,37,500
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66. Answer : (a)
Reason: The annual interest cost which is payable half yearly on a twenty-year, 6 %, Rs.10,000 debentures that
are issued at Rs.10,200 is Rs.10,000 x 6% =Rs.600.
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67. Answer : (e)
Reason : Dr. Machinery account Cr.
Date Particulars Rs. Particulars Rs.
1-04-03 To Opening balance 85,000 1-10-03 By Bank (sale) 50,000
1-07-03 To Bank 90,000 31-3-04 By Depreciation 15,250
1-10-03 To Profit and loss a/c 31-3-04 By Closing balance 2,01,750
1-01-04 To Bank 80,000
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1-01-04 To Bank 80,000
2,67,000 2,67,000
Depreciation calculation:
Particulars Rs.
On machinery purchased on 1-7-03 (Rs.90,000 x 10% x 9/12) 6,750
On machinery sold (40,000 x 10% x 6/12) 2,000
On machinery purchased on 1-1-04 (Rs.80,000 x 10% x 3/12 ) 2,000
On balance machinery (Rs,85,000 – Rs.40,000) x 10% 4,500
15,250
68. 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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69. Answer : (c)
Reason : According to the ‘purchase of Super-Profit Method’ of valuing goodwill, goodwill is the product of the
super profit and the number of years’ purchase and For calculating the amount of goodwill by the super
profit method, it is necessary that the fair value of the capital employed should be determined. These
two statements are true. Hence, the answer is (c ).
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70. Answer : (e )
Reason : The three columns on each side of the three columnar cash book represent Real accounts, Personal
accounts and Nominal accounts
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71. 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.
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72. Answer : (d)
Reason : The increase in equity or net assets from major or central transactions or activities of a business entity is
from net profit. Capital is the investment made by the owner and not the increase from major activities
of the business. Gross profit is subject to deduction of many expenses. Net worth is the net assets of an
entity. Cash on hand cannot be termed as increase in equity.
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73. Answer : (a)
Reason : Balance sheet can be used to assess the liquidity of a company. The profit and loss account shows the
profit or loss of the company but does not help in assessing the liquidity of the company. The profit and
loss appropriation account gives the details of appropriations and the retained earnings. The bank
reconciliation statement is prepared only to reconcile the differences in bank balance as per cashbook
and pass book. The manufacturing account shows the cost of goods produced. Hence the answer is (a).
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74. Answer : (b)
Reason : The frequently used valuation bases in accounting are Historical Cost, Current cost, Realizable value
and present value
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75. Answer : (d)
Reason : Cash book is a special journal in which all cash transactions are recorded directly. The cash book
resembles a ledger with the debit and credit sides, and the balance represents the cash on hand at the end
of the accounting period. Hence it serves the purpose of ledger. Cash account is not opened when a cash,
book is maintained. Purchases book, sales book, bills receivables book and journal proper are the books
of original entry and they do not serve the purpose of ledger.
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76. Answer : (d )
Reason : Bank reconciliation statement is a statement showing the causes for differences between the balances of
cashbook and pass book
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77. Answer : (a)
Reason : The value of goods given as charity will be debited to charity account and credited to purchase account
.The debit balance in charity account will be transferred to P&L a/c.
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Reason : Prepaid expenses is shown on the debit side of a Trial Balance. >
79. Answer : (e)
Reason : Closing stock is valued at cost price or market price whichever is lower. It is not valued at cost price,
replacement cost, market price or realisable value.
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