2006 ICFAI University M.B.A Suggested Answers with Examiner's Feedback Question paper
Suggested Answers with Examiner's Feedback
VII. Other external liabilities are Rs.1,20,000.
VIII. Preliminary Expenses Rs.10,000.
The intrinsic value per equity share is
(a) Rs.14,60 (b) Rs.10.60 (c) Rs.10.40 (d) Rs.14.40 (e)
Rs.18.00.
(2 marks)
66. Which of the following statements is/are false?
I. An equity share always carries the voting right.
II. In case of equity shares, the dividend is paid at a fixed rate during the life of a company.
III. The share premium received on issue of shares cannot be utilized in writing off the preliminary
expenses of the company.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (I) and (III) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
67. Which of the following statements is true?
(a) Right shares means the shares which are offered by a company to the existing shareholders
(b) The price of the right shares is always above the market price of the shares
(c) Right shares are those shares which are offered by the company by converting the partly paid
shares into fully paid shares
(d) Right shares are those shares which are offered by diectors of the company to their friends and
relatives at lower prices
(e) The expenses on issue of right shares is always high.
(1 mark)
< Answer >
68. Discount on issue of debentures is
(a) Revenue loss
(b) Capital loss to be written off in the year of issue
(c) Capital loss to be written off over the tenure of the debentures
(d) Capital loss to be written off over a period of time as decided by the management
(e) Capital loss to be written off over a period of 10 years.
(1 mark)
< Answer >
69. Earning per equity share equals
(a) Sales divided by shareholders' equity
(b) Net income divided by average shareholders' equity
(c) Net income divided by ending shareholders' equity
(d) Sales divided by average shareholders' equity
(e) Net income divided by opening share holders’ equity.
(1 mark)
< Answer >
70. Aryan Ltd. acquired 2,000 equity shares of Dravidan Ltd. on April 01,2004 for a price of Rs.3,00,000.
Dravidan Ltd. made a net profit of Rs.80,000 during the year 2004-05. Dravidan Ltd. issued bonus
shares of one for every five shares held out of the post-acquisition profits earned during the year 2004-
05. The share of Aryan Ltd. in the pre-acquisition profits of Dravidan Ltd. is Rs.56,000.
The share capital of Dravidan Ltd. is Rs.2,50,000 of Rs.100 each
The cost of control shown in the Consolidated Balance Sheet is
(a) Rs.4,000 (goodwill) (b) Rs.4,000 (capital reserve)
(c) Rs.44,000 (goodwill) (d) Rs.15,200(goodwill)
(e) Rs.55,200 (goodwill).
(2 marks)
< Answer >
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Suggested Answers
Financial Accounting (MB131): January 2006
71. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2005.
H Limited has acquired the shares on the closing date of the Balance Sheet.
The Minority interest shown in the consolidated Balance Sheet is
(a) Rs.2,000 (b) Rs.2,500 (c)
Rs.5,000
(d) Rs.3,000 (e) Insufficient data.
(1 mark)
H S H S
Share Capital @ Rs.10
each 20,000 10,000
Shares in S. Ltd. 800
Shares 8,000
S. Liabilities 10,000 5,000 Other Assets 22,000 15,000
30,000 15,000 30,000 15,000
< Answer >
72. According schedule VI of the Companies Act, the item Loans and Advances from Subsidiaries against
mortgage of properties should appear under which of the following heads of Balance Sheet of a Parent
company?
(a) Secured Loans
(b) Unsecured Loans
(c) Investments in subsidiaries
(d) Current Liabilities
(e) Will be eliminated under mutual indebtedness.
(1 mark)
< Answer >
73. When does a dividend become a liability?
(a) On the date of declaration (b) On the date of record
(c) On the payment date (d) On the date of incorporation
(e) On the date of liquidation.
(1 mark)
< Answer >
1. Answer : (d)
Reason : Present value is the discounted value of all future inflows an asset is expected to generate.
2. Answer : (b)
Reason : Accounting Standard 16 defines a qualifying asset as an asset that takes a long time to get ready for intended
use or sale
3. Answer: (a)
Reason: Total of all current assets = Rs. 3,00,000/-
Total of current assets excluding stock
= Sundry Debtors + Bills Receivable + Cash & Bank Balance
= 30,500 + 25,000 + 30,000 = Rs. 85,500
Value of closing stock = Rs. 3,00,000 – Rs. 85,500 = Rs. 2,14,500
4. Answer : (c)
Reason : Management accounting is the branch of accounting which primarily deals with processing and presenting
data for internal users. (c) is the correct answer.
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5. Answer : (e)
Reason : Methods of depreciation ,valuation of inventories, treatment of Goodwill and treatment of contingent
liabilities differ from enterprise to enterprise
6. Answer : (c)
Reason : Research and Development cost cannot directly be attributed to a specific work. Site labor cost, cost of
moving plant and equipment to and from a site , supervision cost and materials used can be related to specific
contract.
7. Answer : (d)
Reason : Bank Reconciliation Statement as on December 31, 2005
Rs. Rs.
Bank overdraft per the cash book 1,62,000
Add : Cheque for Rs.50,000 deposited but
collection as per bank statement Rs.49,960 i.e.
bank charges 40
Cheque dishonoured as per the bank statement 5,300
Bill for Rs.80,000 discounted for Rs.70,960
dishonoured by the bank, noting charges being
Rs.150 80,150 85,490
2,47,490
Less : Cheque deposited but not recorded in
the cash book 7,000
Bills collected directly by the bank 35,000
Bank charges recorded twice in the cash book 250 42,250
Bank overdraft as per the pass book (Dr.) 2,05,240
8. 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.
9. Answer : (e)
Reason :
Particulars Rs.
Closing stock 1,00,000
Add : Cost of goods sold 3,40,000
4,40,000
Less : Opening stock 1,20,000
Goods purchased 3,20,000
10. Answer : (e)
Reason :
Note:
Particulars Rs.
Opening sundry creditors 80,000
Add : Purchase during the year (Note) 8,90,000
9,70,000
Less : Closing sundry creditors 1,00,000
Cash paid 8,70,000
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Rs.
Cost of Goods sold 9,00,000
Add: Closing stock 50,000
9,50,000
Less: Opening stock 60,000
Purchases 8,90,000
11. Answer : (d)
Reason :
Particulars Rs.
Opening balance of sundry debtors 37,000
Add : Credit sales 6,75,000
7,12,000
Less : Closing balance of Sundry
debtors
60,000
6,52,000
Less : Discount allowed 2,800
Cash collected from sundry debtors 6,49,200
12. Answer : (a)
Reason : Carriage inward expense is related to the carrying cost of material purchased. If it is incurred for carrying
new assets, it should be capitalized to the assets value. Carrying cost relating to sales of products, return
outwards and return of unsold goods will not be treated as carriage inward expenses. Hence, (a) is correct
13. Answer : (c)
Reason : The process of transferring entries from journal to ledger is known as posting. Hence the answer is (c). The
process of recording the transaction in the book of original entry is journalizing. Taking over the balance in
nominal accounts to profit and loss account is transferring. The allocation of profit to reserves is known as
appropriation. There is no term called ledgerizing.
14. Answer : (b)
Reason : A credit balance in a bank account denotes a current liability. (b) is the correct answer.
15. Answer : (d)
Reason : Commission paid is an expense and should show a debit balance
16. Answer : (c)
Reason : The term “imprest system” is used in relation to petty cash book. (c) is the correct answer.
17. Answer : (d)
Reason : Paid to Krishna by cheque for purchases Rs.10000- the correct journal entry is to debit Krishna’s a/c and
credit bank a/c. All the other journal entries are correctly passed.
18. 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 2,72,900
Add : Interest on investments (less taken) 6,000
Less : Sundry creditors (excess taken) 4,000
Less : Advertisement expenses (wrongly taken) 15,000
Total of trial balance (credit side) 2,59,900
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19. Answer : (a)
Reason : Profit and loss account is an income statement which depicts all incomes/gains and expenses/losses during an
accounting period. Drawings are neither an income nor an expense to be recorded in profit and loss account.
Thus, (a) is the correct answer. The items in other alternatives are either expenses or accrued expenses or
probable expenses for which provision is to be created and probable income of discount on sundry creditors.
The depreciation, bad debts and provision for doubtful debts and accrued expenses appear in the profit and
loss account and provision for income i.e. provision for discount on sundry creditors. Hence, (a) is the correct
answer.
20. Answer : (b)
Reason : Books of Ramu Enterprises
Dr. Trading Account for the period ending March 31, 2005 Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 27,000 By Sales :
To Purchases Cash 20,000
Cash 70,000 Credit 1,40,000
Credit 20,000 1,60,000
90,000 (–) Returns
inward
3,000 1,57,000
(–) Goods lost 2,000 By Closing
stock
40,000
(–) Returns outward 2,000 86,000
To Wages 5,000
(+) Outstanding as on March
31, 2005 700
5,700
(–) Outstanding as on April 01,
2004
500 5,200
To Carriage inward 1,000
To Gas, water, fuel 2,000
To Gross Profit 75,800
1,97,000 1,97,000
By Gross
profit
75,800
Carriage outward 1,000
Printing and stationery 600
Salaries paid 2,000
Less outstanding on 1.4.2004 400
1,600
Add outstanding on 31.3.2005 300
1,900
Net Profit 72,300
75,800 75,800
21. Answer : (c)
Reason : The formula for passing adjusting entry in respect of bad & doubtful debt is bad debt written off plus
required provision minus old provision. Required provision @5% on 110000=5500 plus bad debt
Rs.1000=6500. The old provision is Rs.8500.The excess of provision already made can be reversed by
crediting Rs.2000 to the Profit & Loss A/c.
22. Answer : (d)
Reason : The cost of goods sold at a gross sale of 25% = Rs.4,80,000 x 100 / 75 = Rs.6,40,000
Opening stock + Purchases = Cost of goods sold + Closing stock
= Rs.3,50,000 = Rs.6,40,000 + Rs.60,000 = Rs.3,50,000
Opening stock Rs.3,50,000. (d) is the correct answer.
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23. Answer : ( c)
Reason : If the profit is 25% of the cost price then it is 20% of the sales price. Suppose the cost price is Rs.100, profit
is Rs.25 and sales price is Rs.125. Profit in percentage is 25/125=20% of sales price
24. 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.
25. Answer : (c)
Reason : Deduct Rs.6000 from the value of closing stock; Debit Rs.2000 to P&L A/c and show Rs.4000 as claim
receivables on the asset side of B/S –To estimate the actual stock held, value of stock destroyed in fire to be
deducted. As against the loss of Rs.6000 claim admitted is only Rs.4000.The difference of Rs.2000 to be
treated as a loss and taken to P&L A/c. As the claim amount is receivable it is to be taken on the asset side of
B/s
26. Answer : (b)
Reason : Dr. Trading and profit and loss account for the year ended March 31, 2005 Cr.
Balance sheet as on March 31, 2005
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
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
27. Answer : (b)
Reason : Income received in advance is a liability and shown on the liability side. All other statements viz, prepaid
expenses shown on asset side, income earned but not received shown on asset side, income accrued but not
due shown on asset side and outstanding liabilities for expenses shown on liability side are true.
28. Answer : (c )
Reason : Debenture issued is a long term liability.
29. Answer : (d)
Reason : Markdown means selling price being lowered below the original selling price. Selling price below the
original selling price cannot be mark-up, markup cancellation, net mark-up or net markdown. Hence (d) is
correct.
30. Answer : (c)
Reason : Under, Sum of Digits method of depreciation, depreciation is calculated on the basis of formula n(n+1)/2. (c)
is the correct answer.
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31. Answer: (c)
Reason: Amount (Rs.)
Cost of the machinery on 1.4.2002 3,50,000
Less :depreciation for 2002-03 at 10% 35,000
W.D.V. on 31.3.2003 3,15,000
Less : depreciation for 2003-04 31,500
2,83,500
Less : depreciation for 2004-05 28,350
2,55,150
Total depreciation provided Rs.(3,50,000 – 2,55,150) 94,850
Less : excess depreciation provided credited 10,850
Total depreciation provided 84,000
Depreciation per annum (84,000/3) = 28,000
Rate of depreciation =
= = 8%
Annual depreciation
x100
Cost
28, 000
x100
3, 50, 000
32. Answer : (b)
Reason : 1st year on Rs50000@20%=Rs.10000.
2nd year on Rs40000@20%=Rs8000.
3rd year on Rs.32000@20%=Rs.6400.
33. Answer : (d)
Reason : The value of inventory far in excess of the normal requirement of a firm is shown under non-current asset
34. Answer : (a)
Reason : Those agricultural produces for which Govt.support price exist, revenue is recognized at the time of harvest
35. Answer : (a)
Reason : Net value added is derived by deducting depreciation from the gross value added and not vice versa. Thus
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.
36. 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.
37. Answer : (a)
Reason : In terms of cost concept the value of an asset is to be determined on the basis of acquisition cost. Valuation
of machinery at market value is in violation of cost concept unless the machine is actually sold, realizable
value will give only a hypothetical figure. Market value is highly subjective because to know the value of the
asset one has to chase the uncertain future. The other concepts matching concept (b) deals with matching
costs with revenue, Realization concept (c) deals with recognition of income at various levels of production,
Periodicity concept (d) explains how the accounting information is to be reported at regular intervals to foster
comparability, Business entity concept (e) explains the owner is different from the business entity. Thus, the
concepts (b), (c), (d), and (e) do not explain how the fixed assets are to be recorded.
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38. Answer : (b)
Reason :
Date
Purchases Issues Balance
Quantity
(Kg)
Rate
per kg.
(Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate
per
kg.
(Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate
per
kg.
(Rs.)
Amount
(Rs.)
1-12-05 500 22.80 11,400
2-12-05 400 24 9,600 900 23.33 21,000
10-12-
05
600 25 15,000 1,500 24.00 36000
25-12-
05
1,000 24 24000 500 24.00 12,000
39. Answer : (c)
Reason : All but realizable value method are accepted methods for the calculation of depreciation expenditure.
40. Answer : (c )
Reason : Average debtors = (4500+5000)/2 = 4750
Credit sales =22000 Amount of daily credit sales=22000/365
Average collection period = (4750x365)/22000 = 79 days
41. Answer : (a)
Reason :
Useful life – 4 years
Particulars Rs.
Original cost of asset 1,00,000
Less : Depreciation 20% 1st year 20,000
80,000
Less : Depreciation 20% 2nd year 16,000
64,000
Less : Depreciation 20% 3rd year 12,800
51,200
Less : Depreciation 20% 4th year 10,240
40,960
42. Answer : (e)
Reason :
FIFO LIFO
Receipt Issue Balance Receipt Issue Balance
1.12.2005 150?20=3000 1.12.2005 150?20=3000
3.12.2005 100?20=2000 50?20=1000 3.12.2005 100?20=2000 50?20=1000
4.12.2005 200?25=5000 50?20=1000 4.12.2005 200?25=5000 50?20=1000
200?25=5000 200?25=5000
10.12.2005 50?20=1000 10.12.2005 150?25=3750 50?20=1000
100?25=2500 100?25=2500 50?25=1250
14.12.2005 100?22=2200 100?22=2200 14.12.2005 100?22=2200 50?20=1000
15.12.2005 100?25=2500 100?22=2200 50?25=1250
21.12.2005 300?30=9000 100?22=2200 100?22=2200
300?30=9000 15.12.2005 100?22=2200 50?20=1000
25.12.2005 100?22=2200 50?25=1250
100?30=3000 200?30=6000 21.12.2005 300?30=9000 50?20=1000
26.12.2005 150?40=6000 200?30=6000 50?25=1250
150?40=6000 300?30=9000
28.12.2005 200?30=6000 150?40=6000 25.12.2005 200?30=6000 50?20=1000
50?25=1250
100?30=3000
26.12.2005 150?40=6000 50?20=1000
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Value of closing stock as per FIFO = 6,000
Value of closing stock as per LIFO = 3,750
2,250
50?25=1250
100?30=3000
28.12.2005 150?40=6000 150?40=6000
50?20=1000
50?25=1250
50?30=1500
43. Answer : (e )
Reason : Retail Inventory is not an accepted method of valuation of inventory
44. Answer : (e)
Reason : Unexpired insurance or prepaid insurance must be shown on the assets side of the balance sheet, because it is
an asset. It cannot be shown on the liabilities side of the balance sheet. It cannot be debited to trading a/c. and
profit & loss a/c. Also it cannot be credited to profit & loss a/c. Hence (e) is true.
45. Answer : (d)
Reason : Stock turnover ratio = Cost of sales / Average inventory.
Cost of sales = Sales less gross profit
=Rs. 10,00,000 less 20% of 10,00,000 = Rs.8,00,000
Average inventory = Rs.1,40,000 + Rs.1,80,000 / 2 = Rs.1,60,000
Stock turnover ratio = Rs.8,00,000 / Rs.1,60,000 = 5 times .
46. Answer : (c)
Reason : The debt to equity ratio is a solvency test that assesses the ability to meet both short and long-term
obligations from operations. The quick ratio, current ratio and accounts receivable turnover ratios are all tests
of liquidity which focus on the ability to meet current or short-term obligations. The focus of liquidity ratios
is on sufficiency of current assets or the turnover of those current assets in order to pay current liabilities.
47. Answer : (c)
Reason : Absolute liquidity ratio = Absolute liquid assets / liquid liabilities
Absolute liquid assets in the above is Cash and bank = Rs.1,00,000.
Liquid liabilities is creditors = Rs.1,00,000.
Therefore absolute liquidity ratio = Rs.1,00,000 / Rs.1,00,000 = 1: 1
48. Answer : (b)
Reason :
Profit for the year 2004-2005 2,30,000
Add: Rent (not relevant if the owner of the premises operates the
business)
1,20,000
Adjusted maintainable profits 3,50,000
Capital employed by Dinakar 20,00,000
Add: Value of premises 4,00,000
Total capital employed 24,00,000
Normal profit (12% of Rs.24,00,000) 2,88,000
Super profits (Rs.3,50,000 – Rs.2,88,000) 62,000
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49. Answer : (d)
Reason :
Average Profit =
Normal Profit = Rs.12,50,000 ??5% = Rs.62,500
Super Profit = Rs.72,000- Rs.62,500 = Rs.9,500
Goodwill = Rs.9,500 ??5 years = Rs.47,500
Rs.72,000 Rs.75,000 Rs.60,000 Rs.72,000 Rs.81,000
Rs.72,000
5
???????
?
50. Answer : (a)
Reason :
Average profit = Rs.8,27,580 / 15 = Rs.55,172
Year Profit (Rs.) Weight Product
2000-2001 42,364 1 42,364
2001-2002 43,456 2 86,912
2002-2003 53,126 3 1,59,378
2003-2004 56,789 4 2,27,156
2004-2005 62,354 5 3,11,770
15 8,27,580
51. Answer : (b)
Reason : The costs incurred in promotion of sales of existing products is not connected with the work of Research and
Development and cannot be identified as R & D Costs. The other costs are related to the work of research
and can be attributed as R & D expenses – material cost incurred in connection with Research work (a),
Testing costs incurred in search of finding alternatives (c), costs incurred in modification of design of a
process (d) and depreciation of fixed assets that are used in connection with research work (e).
52. Answer : (c)
Reason :
Particulars Rs. Rs.
Total Purchase price 22,50,000
Less :
Cash at bank 23,750
Cash on hand 12,250
Accounts receivable 80,000
Other identifiable assets 18,50,000
19,66,000
Goodwill 2,84,000
53. Answer : (a)
Reason : The discount on reissue of forfeited shares should not exceed the amount forfeited, since the discount is
written off as a charge against the share forfeiture account.
Mr. Arun has paid Rs.60 (Rs.85 – Rs.25) per share = Rs.60 ??1,000 = Rs.60,000
The maximum discount on reissue should not exceed Rs.60,000
Hence, the minimum amount to be collected = Rs.1,00,000 – Rs.60,000 = Rs.40,000.
54. Answer : (b)
Reason : VIBGYR Ltd.
Workings:
Note 1 Bank Account
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Amount transferred to capital redemption reserve account.
Where redemption of preference shares in effected without corresponding issue of shares if implies it is
made out of distributable profits, the gap created to the extent is transferred the capital redemption reserve
account.
Rs. Rs.
To Balance 2,00,000 By Preference share holders
(Rs.8,00,000 To Investments Account 4,00,000 ??Rs.1.10) 8,80,000
To Equity shares By Balance account. 50,000
27,500 shares ??Rs.10
Rs.2,75,000
Premium of Rs.2 per share Rs.
55,000
3,30,000
9,30,000 9,30,000
Face value of preference shares Rs.8,00,000
Less: Face value of shares – 27,500 ??10 (funds available by way
of fresh equity issue)
Rs.2,75,000
Rs.5,25,000
55. Answer : (d)
Reason : The underwriting commission should not exceed 2.5 % of the issue price in case of debentures.
Issue price of the debentures is Rs. 10 x 115% = Rs.11.5
Hence the maximum commission payable to Mr. Wright is 38,000 x Rs.11.5 x 2.5%= Rs.10,925
56. Answer : (c)
Reason : Value of share as per intrinsic value method =
Value of share as per yield method
=
Value of share as per fair value method = (Rs.150+Rs.125) / 2 =Rs.137.50
Net assets Rs.120, 00, 000
Rs.150
No. of shares 80, 000
???
Rate of dividend 15%
Value of share Rs.100 Rs.125
Normal dividend 12%
???????
57. Answer : (b)
Reason : Calculation of amount received on allotment
Rs.
Amount due on allotment 1,00,000
Less : Already received 8,000
92,000
Less : Amount not received on 800
shares :
If allotted 5 shares applied 6
If allotted 800 shares applied 960
Surplus money on application (160 ??2) = 320
Amount of allotment due = 800 ??5 = 4,000
Less : Already received 320 3,680
88,320
58. Answer : (b)
Reason : Amount of share Premium = 1,80,000 ??Rs.2 = Rs.3,60,000.
As Mr. Santosh paid the share premium, the share premium account will not be reversed when the shares are
forfeited
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59. Answer : (b)
Reason : Rights issue is the issue of shares to the existing shareholders. Hence (a) is true. As the number of shares to
which the existing shareholders are entitled is clearly specified, there is no chance of over-subscription.
When there is no over-subscription, the pro-rata allotment does not arise. It is a false statement and hence (b)
is the answer. The price of the rights issue is much less than the existing market price as the rights issue is a
preferential issue only to the shareholders. The flotation cost of the rights issue is low as the number of
subscribers is limited and there is no need of underwriting the issue. The accounting entries for rights issue
are the same as those required for an issue of shares to the public
60. Answer : (b)
Reason : Dr. Cash account Cr.
No. of equity shares = Rs.1,05,000 / Rs.105 = 1000 shares.
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
61. Answer : (b)
Reason :
Particulars Amit Bhoumick Chandini Total
Shares underwritten 4,000 8,000 12,000 24,000
Less: unmarked
applications
(in the ratio 1:2:3)
1,650 3,300 4,950 9,900
2,350 4,700 7,050 14,100
Less: Marked applications 3,000 4,000 5,500 12,500
(650) 700 1,550 1,600
Less: Surplus of Amit’s
share (in the ration 2:3) 650 260 390 Nil
Final liability Nil 440 1,160 1,600
62. Answer : (a)
Reason: The declaration of a bonus issue will (a) have no effect on total stockholders' equity. The declaration of a
stock dividend will have no effect on total assets, total liabilities, or total stockholders' equity.
63. Answer : (a)
Reason : Amount paid by Z (excluding premium) = 300 x 5 = Rs.1,500
??Balance in forfeited shares account = Rs.1,500
Less: Discount allowed on reissue (300 x 1) = Rs. 300
Amount to be transferred to capital reserve = Rs.1,200
Share premium of Rs.1,000/- on forfeited shares should not be reversed as the amount is already received.
64. Answer : (e)
Reason : The balance in the shares forfeited account after re-issue of shares forfeited shares will be shown as a credit
to capital reserve. Alternative (e) is the correct answer.
65. Answer : (c)
Reason : Cute Ltd.
Intrinsic Value of Shares
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Intrinsic value of shares
=
= = Rs.10.40.
(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
Net assets availabe for equityshareholders
Number of equityshares
Rs.5,20,000
50,000
66. Answer : (e)
Reason : The equity shareholders get the dividend, depending on the income the company made and there is no fixed
amount and the share premium received on issue of shares can be utilized in writing off the preliminary
expenses of the company. Hence, alternative II and III are not correct and the answer is (e).
67. Answer : (a)
Reason : Right shares means the shares which are offered by a company to the existing shareholders.
68. Answer : (c)
Reason : Capital loss to be written off over the tenure of the debentures.
69. Answer : (b)
Reason: Return on equity is measured by dividing net income by average shareholders' equity, and not sales divided
by shareholders' equity.
70. Answer : (a)
Reason: Cost of investments Rs.3,00,000
Less: Share of capital profit Rs. 56,000
Face value of shares (including bonus shares of 400) Rs.2,40,000 Rs.2,96,000
Cost of control – Goodwill Rs.4,000.
71. Answer : (a)
Reason: =
Minority Interest = (10,000 ??1/5) = 2,000.
800
1, 000
4
Holding Company
5
_ _
_ _
_ _
72. Answer : (a)
Reason : According schedule VI of the Companies Act, the item Loans and Advances from Subsidiaries against
mortgage of properties should appear under (a) Secured Loans of Balance Sheet of a Parent company and
will not be eliminated since it is not a Consolidated Balance Sheet.
73. Answer : (a)
Reason : A dividend becomes a liability on the date of declaration and alternative (a) is the correct answer.
becomes liability since the date of declaration and other dates have no relevance.
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